Savings institutions - Industry Overview

US Industrial Outlook, Annual, 1993 by Jeanine M. Rossi, James L. Freund

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.