Largest S&Ls See Asset Quality Slide

Savings and loan associations, or "thrifts," have been a major focus during the mortgage crisis, since most of them concentrate on home mortgage lending. Two of the largest players in the mortgage industry, Washington Mutual(WM Quote) and Countrywide Financial (CFC Quote) are thrift holding companies.

Over the past 20 years, the number of thrift charters has declined -- a result of hundreds of failures during the S&L crisis of the late 80s and early 90s, as well as industry consolidation and the conversion of some thrifts to commercial banks. While there were over 3,000 thrifts before the S&L crisis, there were 826 as of Dec. 31, 2007.

The following is a list of the 20 largest S&Ls, comparing their levels of problem assets as of Dec. 31, with the previous quarter and previous year. The highlighted institutions are the ones with major asset quality concerns.

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IndyMac Bank, FSB (held by IndyMac Bancorp, Inc. (IMB Quote)), had the highest ratio of nonperforming loans to core capital and reserves for the group, at 57.32% as of year-end.

Please click here for a detailed discussion on IndyMac's asset quality and reserve coverage.

One of the institutions we have mentioned repeatedly over the past year was World Savings Bank of Oakland, Calif. This institution was acquired by Wachovia(WB Quote) in October 2006, as part of its purchase of Golden West Financial. During the fourth quarter of 2007, Wachovia changed the name of World Savings to Wachovia Mortgage, FSB, and shifted some of the institution's assets to other charters.

Of course, an institution's ratio of nonperforming assets to total assets can indicate problems, but it doesn't tell the whole story.

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Looking at the ratio of nonperforming loans to core capital and loan loss reserves, it is clear that while the entire group remains well capitalized under regulatory guidelines, the seven highlighted institutions have a pretty high level of capital exposure.

An institution needs to maintain a leverage ratio of at least 5% and a risk-based capital ratio of 10% to be considered well-capitalized.

Washington Mutual Bank saw its level of nonperforming assets climb to 2.25% of total assets as of Dec. 31, from 1.72% the previous quarter and 0.92% at the end of 2006. Loan loss reserves covered 40.49% of nonperforming loans. As you can see on the second table, provisions for loan loss reserves during 2007 totaled $3.1 billion, keeping well ahead of net charge-offs, which totaled $2.3 billion.

While Washington Mutual expects higher charge-offs in 2008, it pointed out in its fourth quarter releases and conference call that 44% of its total 2007 charge-offs came from its subprime portfolio. The subprime portfolio totaled $18.6 billion, or 7.4% of total loans. Since the institution no longer originates subprime mortgages, this portfolio is running off, and shrank 7% in 2007. Washington Mutual also reported that prime home equity loans comprised 26% of 2007 charge-offs, but that home equity losses declined during the second half of the year.