Finally Off the Critical List

By John Greenwald

Lower interest rates give ailing thrifts a badly needed lift

"We're making money for the first time since June of 1981. It's so wonderful to look through rose-colored glasses again."

That kind of talk, coming in this case from Melissa Keleher, vice president of Home Federal Savings & Loan Association in San Diego (assets: $6 million), has not been heard much around the thrift industry during the past three years. Caught in a squeeze between high interest rates and longterm, fixed-interest mortgages, thrift institutions became candidates for the endangered-species list. The number of thrifts has shrunk nearly 20% since 1979, as failing institutions have been merged into stronger ones (see chart). As a whole, the thrifts lost $8.9 billion in 1981 and 1982. Says James Carter, a banking analyst at Merrill Lynch: "If the hemorrhaging of the thrifts had continued at last year's pace, their equity would have been drained away in three or four years."

Now, thanks to lower interest rates and a flood of new deposits, the thrift industry is beginning to revive. San Diego's Home Federal, for example, lost $33.9 million in 1982, but it had a $4.4 million profit in the first quarter, and the outlook for the rest of the year is good.

Wall Street has become enthusiastic about the industry, which consists of both S and Ls and savings banks. Prices of some S-and-L stocks have more than tripled in the past year. The big gainers include a pair of Beverly Hills thrifts: Great Western Financial Corp. (assets: $12.8 billion), whose shares have climbed 172% since May, and First Charter Financial Corp. (assets: $9.4 billion), up 233% during the same period.

The new financial supermarkets, meanwhile, have been eyeing thrifts as possible additions to their growing line of services. Merrill Lynch and Shearson/ American Express are each in the process of buying a thrift. Stockholders of Newport Balboa Savings Association (assets: $65.2 million) in Southern California are selling the S and L to ITT Financial Corp. for $13.5 million, or $65 a share. The deal, which is subject to regulatory approval, would be a bonanza for Newport Balboa owners, who paid $12.50 a share when the stock was first issued in 1978.

The recent drop in interest rates has been the biggest single reason for the resurgence of the thrifts. As a result of that decline, the institutions are now able to attract deposit money with much lower interest rates. A year ago, they had to offer 12% or more interest on certificates of deposit to compete with the popular money-market funds. Now they are paying an average of only 8.5% on their own money-market accounts, which they have been offering since last December.

While cash was flowing out of S and Ls at a steady rate last year, it is currently flowing in. Some $142 billion has gone into the new money-market accounts. In addition, some $12 billion in Individual Retirement Account funds has been deposited in the thrifts in the past six months.

The thrifts have been using their new cash to fuel the housing recovery and improve their operating results in the process. Savings and loans made $21.6 billion in mortgages during the first quarter, compared with $9.3 billion a year ago. That lending helped the S and Ls increase their net worth by an estimated $1.9 billion during the period. Says Howard Kane, deputy chief economist for the U.S. League of Savings Institutions, an industry trade group: "The thrifts are heading back to profitability, if they're not already there."

With their financial foundation a little more secure, some adventurous S and Ls are starting to branch out beyond mortgages and look for new places to put their money. Western Savings & Loan of Phoenix (assets: $2.6 billion), Arizona's largest thrift, has assembled a nationwide group of S and Ls that plans to pool its cash and pump more than $1.5 billion into commercial loans to corporate borrowers. Such lending is permitted under the 1982 Depository Institutions Act, which lets thrifts make a wide range of loans that had previously been off-limits.

One of the most aggressive thrift institutions is Goldome, known as the Buffalo Savings Bank until last February. In a three-month period ending in March 1982, its assets surged from $3 billion to $9 billion, making it the second biggest savings bank in the U.S. Architect of the expansion is Ross Kenzie, a former Merrill Lynch executive vice president who became president of the Buffalo Savings Bank in 1979. Says Kenzie: "At this bank, there is a bias toward action." Goldome's acquisitions include three failing thrifts that the Federal Deposit Insurance Corp., the Government's watchdog for the banking industry, was trying to save. The largest was the New York Bank for Savings (assets: $3.4 billion).

Some industry observers are beginning to fear that too many thrifts may be forgetting the painful lessons of the recession. Lenders are once again making longterm, fixed-rate mortgages, for example, to take advantage of the spread between the relatively high interest rates on mortgages and the lower interest that depositors get. Says Saul B. Klaman, president of the National Association of Mutual Savings Banks: "A policy of making and holding such loans in volume amounts to playing Russian roulette with interest rates and the future of the institution."

Thus, while the thrifts are doing better, many moneymen are still cautious about the long-term prognosis. Concedes Ted Ingersoll, executive vice president of Columbia Savings & Loan Association (assets: $1.4 billion) in Denver: "No matter how bright and innovative we are, we're at the mercy of interest rates. If they turn against us, we're in trouble again." The patient may now be off the critical list, in other words, but he is not yet Out of danger.

--By John Greenwald. Reported by Russell Leavitt/Los Angeles and Frederick Ungeheuer/New York

With reporting by Russell Leavitt, Frederick Ungeheuer This file is automatically generated by a robot program, so viewer discretion is required.