Savings institutions - Industry Overview

The savings industry has moved from losses to profitability, but credit quality continues to hamper the industry. Problem loans remain historically high, suggesting that difficulties are not entirely behind an industry that has undergone significant shrinkage in the number of institutions.

The savings industry's profitability continues to be held down by losses associated with credit-quality problems. "Bad" loans written off at Savings Association Insurance Fund-insured thrifts during the first quarter of 1992 were one-half percent of total assets--still quite high in historical perspective. Other indicators also suggest that such problems are not entirely behind the industry. For instance, thrifts reported almost 2 percent of total loans were delinquent at the end of the quarter, including nearly 12 percent of construction and land loans.

Lingering earnings problems have made it difficult for thrifts--which have been more thinly capitalized, on average, than commercial banks--to strengthen their capital positions. However, as troubled institutions are closed and many private-sector thrifts address their problems, capital ratios are continuing to improve. The average ratio of tangible capital to total assets for existing thrifts increased to 5.2 percent at the end of the first quarter of 1992, from 4.2 percent a year earlier and 3.5 percent in March 1990.

The savings industry, for purposes of this chapter, includes Federal- and state-chartered firms engaged in deposit banking or closely related functions, including fiduciary activities, and lending activities that are primarily associated with home mortgages under the following Standard Industrial Classification (SIC) categories: Federal and state chartered mutual savings banks; savings institutions, federally chartered; savings institutions, not federally chartered (6035, 6036).

For answers to questions regarding data collection procedures, the use of sources and references, and the SIC system, see "How to Get the Most Out of This Book" on page 1. For other topics related to this chapter, see chapters 5 (Construction), 7 (Construction Materials), 45 (Commercial Banking), 47 (Credit Unions), 48 (Mutual Funds), and 49 (Securities Firms).

The thrift industry currently includes about 2,000 saving institutions insured by the Savings Association Insurance Fund (SAIF) and about 400 savings banks insured by the Bank Insurance Fund (BIF). These institutions hold approximately $850 billion and $235 billion of assets, respectively, at the time of this writing. The industry arguably has entered the final stage of its longstanding consolidation. During the year ending in the first quarter of 1992, 219 thrifts that were in operation a year earlier were either transferred to the Resolution Trust Corporation (RTC), merged, or converted into another type of financial institution. Private sector savings and loans decreased by 10 percent, and operating savings banks were down by 6 percent.

As failed thrifts fell by the wayside, the savings industry generally has been characterized by stronger, healthier institutions. In the first quarter of 1992, the remaining private sector thrifts earned $1.6 billion. This was the fifth consecutive profitable quarter for the industry. However, a sizable number of these thrifts continue to be plagued by low profitability and inadequate capital. Many also continue to be under pressure to downsize in order to meet capital requirements. Overall assets held by SAIF-insured thrifts fell to $858 billion in the first quarter of 1992-down 10.5 percent from a year earlier. Over the same period, tangible capital for the industry grew from $40.5 billion to $45 billion.

The financial condition of the institutions still operating outside of government control varies greatly. This diversity can be illustrated by comparing performance among the four classifications based on the overall health of institutions that the Office of Thrift Supervision uses to analyze industry trends,

Seventy Percent of Assets in Healthiest Thrifts

The healthiest four-fifths of SAIF-insured thrifts--Group I and Group II--have above-average earnings and capital levels. (These groups hold more than 70 percent of the assets of privately controlled thrifts.) During the first quarter of 1992, Group I institutions reported a net income of $772 million, which translated into an average return on assets (ROA) of 1.03 percent. Group II earned $303 million with an average return on assets of 0.91 percent. Taken together, these thrifts reported a $514 million increase in their net income from first quarter 1991 to first quarter 1992. The average ratio of tangible capital to total assets was 7.1 percent for Group I and 5.4 percent for Group II at the end of the first quarter of 1991.

Despite a highly favorable interest rate environment, the remaining 400 SAIF-insured thrifts continue to experience difficulties. Group III, which includes about 350 thrifts holding 17 percent of the industry's assets, had a net income of $115 million (average ROA of 0.21 percent) in the first quarter of 1992, $58 million higher than in the first quarter of 1991. Tangible capital averaged 3.3 percent of total assets. Twenty percent were unprofitable during the first quarter of 1992.

The remaining 54 institutions classified Group IV as of this writing are targeted for transfer to the RTC. They had an average ROA during the first quarter of 1992 of 0. 18 percent, which was boosted by total gains due to asset sales of $172 million. Their tangible capital ratio was negative. The highest concentration of Group IV thrifts at the end of 1991 was in Virginia with seven, followed by Florida, Illinois, and Texas, with five each.

Despite the large number of troubled savings associations still operating outside of government control, industry-wide statistics show that--in the aggregate--SAIF-insured, private-sector thrifts improved profitability during the first quarter of 1992. The figure nearly equaled total profits for the entire year of 1991. Moreover, the percentage of unprofitable thrifts fell to 7 percent, from 15 percent in March 1991 and from 23 percent in March 1990. The average return on assets in the first quarter of 1992 was 0.74 percent-up from 0.25 percent a year earlier.

Overall, net income after taxes--bolstered by the most favorable interest rate spreads since the 1970's--rose from 627 million for the 2,283 SAIF-insured savings institutions in the first quarter of 1991 to $1,588 million for the 2,064 savings institutions still operating outside government control, a year later. The same 2,064 thrifts reporting those profits had an aggregate net income of $792 million during the first quarter of 1991 (Figure 46-1).

Yields and Spreads

The recent increase in the SAIF-insured institutions' earnings reflect a sharp decline in the cost of funds relative to the yield thrifts earn on mortgage portfolios (Figure 46-2). This development stemmed from falling rates of interest and an unusually steep yield curve. During the first quarter of 1992, SAIF-insured thrifts had a cost of funds of 3.9 percent, down 216 basis points from a year earlier. During the same period, the mortgage portfolio yield declined just 40 basis points to 7.8 percent. This 390 basis point spread is the highest since the early 1970's.

Balance Sheet Developments

As troubled institutions have closed, the thrift industry's share of the mortgage market has declined. Moreover, even the remaining private-sector, SAIF-insured savings associations have lost market share recently, with holdings of home and multi-family mortgages each down 1 percent in the year ending March 31, 1992. Commercial real estate mortgages on the books of savings associations declined 10 percent during the same period. These recent cutbacks likely are part of an effort of many institutions to down-size in order to improve their capital positions. The weakness in commercial real estate lending also may reflect the higher risk-based capital requirements assessed on such assets rather than on residential mortgages and other assets.

Nonetheless, mortgages are still the backbone of savings associations' portfolios. Sixty percent of their assets were home-mortgage-related assets at the end of the first quarter of 1991; another 13 percent were in multifamily and commercial real estate loans.

On the liability side of the balance sheet, retail direct customer deposits continue to be the mainstay of the thrift industry, comprising 80 percent of their liabilities. Nonetheless, SAIF-insured, private-sector thrifts held almost $60 billion less deposits in March 31, 1992 than a year earlier, and $275 billion less than the peak levels of late 1988. As the industry has contracted, it has cut back on other sources of funds more aggressively than direct customer deposits. "Broker deposits," which are deposits of individuals and businesses placed through an intermediary to earn higher interest rates, fell from 2.9 percent to 1.7 percent of total deposits in the year ending in the first quarter of 1991. These "broker" accounts are now restricted by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). Borrowing from the Federal Home Loan Bank System also was down 24 percent during the same period.

Mutual Savings Banks Post Profit

The more than 400 mutual savings banks currently insured by the Bank Insurance Fund also are experiencing difficulties. BIF-insured savings institutions earned $176 million in the first quarter of 1992--the first quarterly profit since March 1989. Most of the improvement is due to the resolution of the most troubled institutions. Twenty-seven percent of all BIF-insured savings institutions lost money during the first quarter of 1992. Most of these institutions were in New England, where aggressive entry into commercial real estate markets hurt many savings banks subsequent to their conversion to stock charters in the mid-1980's. Average first-quarter return on assets for the 321 institutions in New England was 0.21 percent, compared with 0.27 percent for the 99 savings banks in the remainder of the Northeast and with 1.43 percent in the 15 institutions elsewhere in the country.

Savings banks, like other thrifts, are contracting as an industry, with total assets down 8.3 percent in the year ending in March 1992. (The industry's capital-to-asset ratio was 7.1 percent at the end of the first quarter. The comparable figure a year earlier was 6.6 percent.)

Outlook for 1993

Looking beyond the numerous closings of troubled thrifts during the past several years, the performance of this industry in 1993 is likely to depend more on the health of existing institutions than on how many institutions are closed. In particular, the interest rate environment will significantly influence the health of existing institutions. Any upward movement of rates or flattening of the unusually steep yield curve experienced through much of 1992 will work to the industry's disadvantage. A general pickup in the economy, conversely, would help thrifts by generating demand for residential mortgage loans and improving the prospect for the industry's problem assets.

Long-Term Prospects

After the thrift industry--along with most other financial intermediaries--works through its current credit quality problems, its future role in the financial services industry will depend upon the profitability of originating, holding, and servicing home mortgages and related products. A new regulatory environment in which capital requirements are higher and are correlated with the risk of the institution's investments will put an emphasis on providing stockholders--and potential stockholders--a stable and acceptable rate of return. Whether that can be achieved, in turn, depends on the ability of surviving thrifts to efficiently compete in increasingly open mortgage markets. The size and character of the industry will be determined by whether savings institutions are successful as providers of community-oriented financial services, as players in nationwide mortgage markets, or as both.--Jeanine M. Rossi and James L. Freund, Federal Deposit Insurance Corporation, (202) 898-3960, September 1992.

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Additional References

1992 US. Industrial Outlook, U.S. Department of Commerce, International Trade Administration, U.S. Government Printing Office, Superintendent of Documents, Washington, DC 20402-9325. Telephone: (202) 783-3238. S/N003-009-00562-1, $32. FDIC Quarterly Banking Profile, First Quarter, 1992. [Available from] Federal Deposit Insurance Corporation, Office of Corporate Communications, 550 17th St. NW, Washington, DC 20429. Telephone: (202) 898-6996. Office of Thrift Supervision Quarterly Earnings Statement, Press Release 92-78. Office of Thrift Supervision, 1700 G St. NW, Washington DC 20552. Telephone: (202) 906-6677. American Banker, Volumes CLVI-CLVII, various issues, One State Street Plaza, New York, NY 10004. Telephone: (212) 943-6700. White, Lawrence J., The S&L Debacle, 1991, Oxford University Press, 200 Madison Ave., New York, NY 10016.

COPYRIGHT 1993 U.S. Department of Commerce
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