LOW interest rates have given many savings and loan associations a new lease on life. Analysts say the industry must make wise use of the windfall.
"The current favorable interest-rate climate is only temporary; therefore, it is important that the industry act now to position itself for long-term profitability," Con Rusling, president of Sheshunoff Information Services Inc., said recently in releasing an assessment of the nation's thrift industry.
The industry, which specializes in making home-mortgage loans, has dwindled from 3,200 institutions in 1987 to 2,100 today. It is not clear how much further this shrinkage will go.
The answer to that question has significant implications for American taxpayers, who have already shelled out an estimated $84 billion to bail out 22 million depositors in 650 failed institutions.
While some observers say the end of the bailout is in sight, others say there is a long way yet to go.
Falling short-term interest rates have created a wider spread between the rates thrifts pay depositors and the rates they receive from borrowers, boosting S&L profits.
Citing these attractive interest-rate "spreads," the Congressional Budget Office earlier this month lowered its estimate of the total cost of the savings and loan bailout to $135 billion over the 1989-98 period, about $20 billion less than its previous estimate. The numbers do not include payment of interest.
But Dan Brumbaugh, an economist and author of a new book, "The Future of American Banking," predicts that hundreds more thrifts will fail. He says federal regulators have been consistently "denying and understating the size of the problem."
When the interest-rate spreads narrow, he says, many thrifts that had reaped narrow profits in this unusually favorable interest-rate climate will go under, and the taxpayer rescue of depositors will continue.
To William Ferguson, president of Ferguson & Co., which monitors the bank and thrift industries, such concerns are overblown.
"Sure, there are some more failures to go," Mr. Ferguson acknowledges. But he says the industry has been building up its capital base, which can act as a cushion against loan losses.
In the early 1980s, savings and loans were hit hard by rising interest rates, which forced them to boost payments to depositors while income from their fixed-rate mortgage loans held steady.
Ferguson says the risk to thrifts today is much lower than in the early 1980s. Since 1982, adjustable-rate mortgages, which change with prevailing interest rates, have become increasingly common. So has "securitization," by which loans are sold to a third party that packages them as an investment security; the investors bear the interest-rate risk.
Also, economists do not expect the Federal Reserve to push interest rates higher in the near term, given the slow economy and lack of inflationary pressures. This helps thrifts keep their interest payments to depositors down.
A recent fall in long-term interest rates, however, may squeeze spreads at the top end as the yield on home loans drops, says Thomas O'Donnell, a mortgage finance analyst with Prudential Securities Inc.
Mr. O'Donnell foresees the industry shakeout continuing, with mergers and failures bringing the industry down to 1,400 or 1,500 institutions in five years.
Despite the industry's challenges, he says "this can be a good business," provided that thrifts focus on high asset quality (making loans that won't go bad), maintaining a strong capital base, and keeping costs down.
"Thrifts that never strayed [from these fundamentals] ... in the 1980s are, generally speaking, in the best shape today," O'Donnell says.
In New England and California, for example, where many institutions have faced large losses from a slumping real estate market, thrifts like Golden West and Boston Bancorp, the holding company for South Boston Savings Bank, have succeeded in keeping asset quality high.
For other thrifts, the real estate downturn has been less forgiving. In July the federal government seized HomeFed Bank of San Diego - the largest thrift to be closed to date.