Were the savings and loan industry to be psychoanalyzed these days, chances are excellent that the diagnosis would be acute schizophrenia.
"Never before has there been such a gap between the strong and weak," says Allan Bortel, a financial analyst at Shearson Lehman Bros.
"It's going to be a weird year," says Herschel Rosenthal, a savings and loan executive in Miami.
The reason for these observations is the fact that the once-homogeneous S&L industry is awash in both profits and problems. The result is a potpourri of good and bad news that has been even the most seasoned S&L watchers groping for generalizations.
"I'm still trying to figure out how to put the picture together," says Dennis Jacobe, research director for the U.S. League of Savings Institutions, a Chicago-based trade group.
Industry boosters say the profits are evidence that happy days are here again. S&Ls have already made more money in the first half of 1985 than in all of 1984 and the outlook for the rest of the year and beyond is just as good if interest rates stay stable.
But doubters fret that the problems are more serious than ever.
More Poor-Quality Loans
Problems with poor-quality loans have jumped so alarmingly in recent months that many question whether the Federal Savings & Loan Insurance Corp., the industry insurance fund known as FSLIC that protects deposits up to $100,000, will survive. Some even worry that the industry itself may already be in the grip of a slow death dance that will end when S&Ls are absorbed by the commercial banking industry.
What everyone does agree on is that the comfortable old order, where the industry struggled or thrived largely as a group, is gone for good, a casualty of deregulation.
Under the new order, the fat cats are getting fatter, the frail are about to expire and the rest are in limbo. As First Nationwide Savings Chairman Anthony Frank put it, there are the "haves, the could-be-agains and the never-will-bes."
Industry experts and analysts estimate that 15% of all S&Ls are robust today, while another 25% are either insolvent or close to it. The other 60% could go either way, depending upon their loan problems and interest rates.
So severe are the differences that while Federal Home Loan Bank Board boasts that S&Ls are making more money than ever, the Congressional Budget Office warns in its mid-year report that S&Ls are being "besieged by the increasingly poor quality" of their loan portfolios.
Both agencies are correct.
The nation's 3,200 FSLIC-insured S&Ls earned $1.4 billion from April through June, their best quarter in six years, and analysts expect profits for the entire year to be as high as $6 billion. That would shatter the old record of $3.92 billion earned in 1978.
Most Should Profit
The U.S League of Savings Institutions estimates that 90% of the nation's S&Ls should make money in the second half of 1985 if interest rates don't jump sharply. A year ago, that figure stood at about 65%.
"There's an incredible earnings rebound going on right now," says Sal Serrantino, an industry consultant in Santa Monica.
Equally valid is the problem-loan concern. Regulators at the Federal Home Loan Bank Board, who oversee almost all the nation's federally insured savings and loans, now say that bad loans, not high interest rates, are their most formidable challenge.
Billions of dollars in commercial and residential development loans--mostly for condominiums and office buildings--have gone into default due to poor underwriting and a sharp slowdown in inflation that has dampened real estate activity.
The FSLIC, an arm of the Federal Home Loan Bank Board, in turn has the job of cleaning up the loans once the S&Ls have expired, a costly task that takes years. (That asset portfolio is estimated at about $2.3 billion.)
Last year, the FSLIC fund fell more than 7% to $5.96 billion--its steepest drop ever--and many are predicting the accelerating problems in 1985 mean that it is only a matter of time before the agency is absorbed by the better capitalized Federal Deposit Insurance Corp.
Merger Highly Likely
The possibility of a FSLIC-FDIC merger, which would have to be approved by Congress, is "very high," concedes one S&L regulator. (The FDIC insures accounts at most commercial banks and a small number of Eastern savings banks.)
"If the FSLIC can't keep up with its responsibilities," said Robert Mueller, president of Morristown, N.J.-based Carteret Savings, "and they don't seem to be able to, pressure is going to continue to mount for this kind of consolidation,"
The latest official figures show that at the end of 1984, almost 900 S&Ls failed to meet federal regulatory standards, which require an S&L's net worth be kept at a level that is roughly equivalent to 3% of total assets. About 71 of those S&Ls actually had a negative net worth, meaning that their liabilities exceeded their assets.