Earnings of FSLIC-insured institutions: first half, 1983

Earings of FSLIC-Insured Institutions: First Half, 1983

The first half of 1983 was characterized by a further improvement in earnings of FSLIC-insured institutions. As a result, the majority of the industry returned to profitability for the first time since the second half of 1980 and the combined six-month income of these institutions was the largest since the last half of 1979. Contributing most to the recent turnaround was a record reduction in the cost of funds to thrift institutions resulting from a continued decline in short-term market interest rates.

Despite the improved overall industry performance, however, 38 percent of all FSLIC-insured institutions were still in the red during the first half of the year. Moreover, because of an increase in market interest rates since spring, the industry cost of funds increased by 15 to 20 basis points. As a consequence, the industry was moderately less profitable in the third quarter than it was in the first half of 1983, according to preliminary data. This demonstrates the fragility of the thrift recovery and the vulnerability of the industry to upward interest rate movements.

FSLIC-insured institutions (savings and loan associations and savings banks)1 had a net after-tax income of $1.1 billion during January-June 1983. In contrast, these institutions had experienced a net after-tax loss of $1.0 billion during the second half of 1982 and a $3.3 billion loss in the opening six months of 1982. The most recent prior period of profitability was the second half of 1980, when after-tax income amounted to $0.3 billion; in each six-month period of 1979, industry income had totaled $1.8 billion. The annualized rate of return on assets was 0.30 percent in the first half of 1983, compared with -0.29 percent during the prior six months and -1.01 percent during the year-ago period. Return on assets had been 0.10 percent in the second half of 1980 and 0.65 percent in the last six months of 1979.

1 Prior to 1983, substantially all FSLIC-insured institutions were savings and loan associations. Currently, nearly all FSLIC-insured savings banks were formerly FSLIC-insured savings and loan associations. Thus, the current information is a logical extension of the previously published data.

The average cost of funds to FSLIC-insured institutions declined by a record 146 basis points from 11.27 percent during July-December 1982 to 9.81 percent in the opening six months of last year, the lowest level since the second half of 1980. The most recent decline was considerably larger than the reductions during each of the previous two semi-annual periods. This reflected a further and significant decline in short-term market interest rates. Also contributing to the larger decline was another increase in the already substantial proportion of deposits that are short-term and market-priced. The cost of deposits to thrifts averaged 9.68 percent during the first half of 1983, the lowest level since July-December 1980. The 140 basis point decline was a record reduction and more than six times as large as the decline during the previous semi-annual period. The average cost of borrowings decreased 163 basis points to 10.66 percent, a 2 1/2-year low.

Operating expense, in contrast, rose further during the first half of 1983. The operating expense-to-average assets ratio increased from 1.59 percent during the final six months of 1982 to a new high of 1.66 percent in the opening half of last year. Increases in both employee compensation and miscellaneous operating expenses contributed to the most recent rise.

Gross operating income also increased during the opening six months of 1983, but proportionally less than the rise in assets. Consequently, the operating income-to-average assets ratio declined from 10.89 percent during the second half of 1982 to 10.81 percent in the first six months of 1983. The downturn was due to the general decline in market interest rates since September 1982. The drop in interest rates did stimulate demand for mortgage loans, and both interest and fee income on mortgage loans increased. The average mortgage portfolio yield rose from 10.94 percent to 11.04 percent. The 10 basis point increase, however, was considerably smaller than the rise in yield during late 1982 when market interest rates were much higher. Additionally, there was another sizable increase in mortgage-backed securities income reflecting the substantial buildup in holdings which began in late 1982.

Gross Operating Income

Gross operating income of FSLIC-insured institutions totaled $38.9 billion in the first half of 1983. This was $2.3 billion greater than gross income during the prior six months and the largest period-to-period increase in two years. In relative terms, the six percent increase during early 1983 was up from the rise during the prior semi-annual period, a twelve year low, but still historically low.

Interest income from mortgage loans and contracts edged up $0.4 billion to $25.8 billion in the six months ending in June 1983. In contrast, mortgage interest income had declined during the second half of 1982 for the first time on record as a result of swaps of mortgages for mortgage-backed securities. Discounts on mortgage loans purchased amounted to $0.7 billion in the first half of the year, slightly less than the recordsetting amount during the prior six months when loan swapping activity was at an all time high. The increase in total mortgage income, including interest and discounts, was proportionally larger than the increase in average mortgage balances for the period. Consequently, the average mortgage yield increased 10 basis points to 11.04 percent in the first half of last year, a new high. The most recent increase, however, was considerably smaller than the record rise in yield of 53 basis points during late 1982, when market interest rates were much higher.

Interest income from mortgage-backed securities increased substantially further during the first half of 1983, reflecting the sizable acquisition of such securities, particularly around year-end 1982. Such interest income totaled a record $3.6 billion during January-June 1983. This was $0.9 billion (35.6 percent) greater than in the previous six months.

Loan fee income also accelerated sharply during the opening half of the year, reflecting the 80 percent increase in mortgage lending activity from the second half of 1982 to the opening six months of 1983. Fee income was a record $1.4 billion, up from $1.0 billion during July-December 1982.

Interest income on investment securities rose $0.2 billion to total $4.3 billion, reflecting the net effect of continued growth in holdings being partially offset by the further decline in market interest rates earned on these investments during the period. Interest income from nonmortgage loans and miscellaneous other operating income each increased $0.1 billion, the former to $1.4 billion and the latter to $1.6 billion.

Operating Expenses

Operating expenses of FSLIC-insured institutions increased $0.6 billion to $6.0 billion in the first half of 1983. The rise, in both absolute and relative terms, virtually equalled the increase during the previous six months. Moreover, it outpaced growth in assets. Consequently, the annualized operating expenses-to-average assets ratio rose from 1.59 percent during the second half of 1982 to a new high of 1.66 percent in early 1983.

Contributing to the increase in operating expenses were a $0.3 billion rise in employee compensation expense and a $0.4 billion increase in miscellaneous operating expenses. Office occupancy expenses inched up, while advertising expenses dipped slightly.

Cost of Funds

Insured institutions had interest expenses on deposits and borrowings of $33.4 billion in the first half of 1983, $1.9 billion less than such costs during the prior six months, and the first semi-annual decline since such data were first collected in 1965. The reduction in interest costs reflected the continued decline in short-term market interest rates, which was quickly translated into cost reductions because of the sizable portion of deposits and borrowings that are short-term and market priced. The dollar cost reduction coincided with an 8.6 percent increase in the average amount of deposits and borrowings outstanding. Consequently, the cost of funds of the industry declined from 11.27 percent in the second half of 1982 to 9.81 percent during January-June 1983.

Interest paid on deposits decreased $0.7 billion (2.5 percent) to $28.6 billion during the opening six months of the year. In contrast, average deposit balances increased $61.3 billion (11.6 percent). The result was a 140 basis point decline in the cost of deposits to thrifts to 9.68 percent in January-June 1983.

Interest expenses on borrowed money also declined by $1.2 billion, or 20 percent, during early 1983. The smaller outlay reflected both an eight percent decline in average borrowings outstanding and a decline in rates paid. The average cost of Federal Home Loan Bank advances decreased 141 basis points to 11.71 percent, and the average rate paid on all other borrowings, including retail repurchase agreements, declined 208 basis points to 8.58 percent.

Non-Operating Income and Expense

Net non-operating income declined $0.5 billion to total $1.8 billion in the opening half of 1983, but remained large by historical standards. Both gross non-operating income and gross non-operating expense decreased during January-June 1983, with income declining by a greater amount than expenses. Activity relating to loan sales continued to dominate non-operating results.

Income Taxes

FSLIC-insured institutions paid a total of $0.3 billion in income taxes during January-June 1983. In contrast, the industry had received income tax refunds/credits in each of the previous four semi-annual periods.

Table: Income and Expense of FSLIC-Insured Institutions

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