Chastened savings industry emerges from recession

Until 1981, profits were a way of life at Golden West Financial Corporation, a savings and loan holding company based in Oakland, Calif. Conservatively run by the husband-wife team of Herbert and Marion Sandler, who serve as chairman and president, respectively, Golden West ran up a record of over 14 years (57 quarters) of uninterrupted earnings growth.

But then the problems that hit the entire US savings and loan industry - rising interest rates, portfolios laden with low-interest mortgages, and legal confinement to a moribund housing industry - caught up with Golden West. The company, which has offices in three states, lost money for the next several quarters, until the fourth quarter of 1982.

Now prospects for another long run of profits ''look very good,'' Mrs. Sandler said at a conference on S&Ls here.

Indeed, prospects for a complete recovery for most of the S&L industry are quite good. But - like industries that produce automobiles, steel, and appliances - this one is changing rapidly. When recovery does come, it will be smaller and quite different from the way it entered the recession.

It will also be a much-chastened industry, one that has had to learn some bitter lessons about pricing services, about long-term loans, and about trying to predict the future of interest rates.

As Herbert Sandler told the conference: ''I'm not going to try and predict the direction of interest rates. What I do know is that they will continue to go up and down. And we have to exist in that environment.''

The most important lesson S&Ls are learning is that they must reduce the fixed-interest share of their portfolios and correct what has been a mismatch in maturities: books full of low-yielding long-term loans and higher-cost short-term deposits. One way S&Ls are correcting this is to make as many variable-rate loans as they can.

''Some [S&Ls] are changing 2 percent of their total loans per month to variable-rate form,'' notes Jonathan C. Gray, financial analyst with Sanford C. Bernstein & Co., a brokerage firm. Within two years he expects such loans to make up as much as 70 percent of total loans in the industry.

Given this change, along with a sustained period of lower interest rates and increased powers, Mr. Gray says, ''the financial Dunkirk of the past three years is unlikely ever to be repeated.''

The S&Ls must also learn to deal carefully with the expanded powers given them in recent years. Among other things, S&Ls can now pay whatever interest they like on certain deposits; they are gradually being allowed into the commercial lending business; and they can write more adjustable-mortgage loans.

The introduction of insured ''money market'' accounts that permit S&Ls to pay competitive interest rates was responsible for deposit inflows of $43.4 billion in their first five months of existence. This compares with outflows of $43.7 billion in the previous 21 months, according to the US League of Savings Institutions.

Despite the potential for quick infusions of cash, most S&Ls will probably be careful about using their new powers, says Sandra Johnigan, co-chairman of the national thrift group at Arthur Young & Co., the accounting firm. ''They've learned their lessons from the past few years,'' she says.

There is, however, another group of S&Ls, she adds, that ''are so happy to see interest rates falling, they are not behaving much better than they did before.'' These institutions will not be in any real trouble, she says, as long as short-term interest rates (such as those paid on deposits) stay below long-term rates (such as those charged on mortgages). But if short-term rates shoot up again, there could be more S&L failures and mergers.

Already, Mr. Gray says, the S&L industry is 20 percent smaller than it was three years ago, because of the still continuing wave of failures and mergers.

The S&Ls that survive, industry executives and observers say, will be the ones that aggressively restructure themselves and their mortgage portfolios. At Home Savings of America, a Los Angeles subsidiary of H.F. Ahmanson & Co., a bank holding firm, the entire mortgage portfolio is being altered, says Richard H. Diehl, Home Savings president.

Whenever possible, Mr. Diehl says, low-interest loans are being sold on the ''secondary market'' to outside investors, while the only new mortgages being written are of the adjustable variety. The bank has two types of adjustable mortgages, currently carrying a rate of about 111/2 percent and a ''cap'' of five percentage points, meaning an 111/2 percent mortgage would not go over 161/ 2 percent throughout its term. Home Savings is currently writing about $300 million in mortgages a month, all adjustable.

''We only want to make loans that we would want to keep in our portfolio,'' Mr. Diehl said. ''Then the secondary market will want them.'' Even though Home Savings could keep these loans on its books, he explained, most are sold in the secondary market, another source of profits.

The reviving housing market is a major factor in the improved outlook for S&Ls, Mr. Diehl said. But another factor is the large number of ''creative financing'' mortgages, including ''balloon'' loans that were written two or three years ago. ''Many of these loans are coming due now,'' he said, and have to be refinanced. Fortunately for the homeowners, the hope that interest rates would drop has come to pass, and they are able to take out new, more affordable mortgages.

There is also an unleashing of pent-up demand for housing that was held back in the 1980-82 period and is now keeping bank and S&L mortgage offices humming. During that time of deep recession, housing starts averaged 1.1 million a year, compared to an estimated ''intrinsic'' or built-in annual demand of over 2 million units.

Another path to survival and profits is the pooling of resources. In Illinois , for instance, 43 S&Ls last week announced the formation of the Savings and Loan Network, a consortium designed to let smaller S&Ls compete in the new deregulated environment with larger S&Ls and money-center banks. For example, S&Ls in the new network will pool their mortgages for sale on the secondary market.

Other S&Ls have formed alliances to share marketing services, computers, and automatic-teller networks.

While consortiums, balance-sheet restructuring, commercial loans, and money market accounts all provide short-term relief, they are also designed as long-term protection against another run-up in interest rates. If interest rates shoot up again, it becomes more costly for S&Ls to obtain the money they need to make loans. The longer these rates stay down, the more time S&Ls will have to use their new powers and products to protect themselves. Mr. Gray sees interest rates holding steady or falling slightly through 1985.

That should be enough time, Ms. Johnigan of Arthur Young & Co. believes. ''I'm very optimistic for (S&Ls) if rates stay down for an extended period of time. They need the breathing room to get themselves back into shape.''