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Eleventh District Savings and Loans Outperform Industry Nationwide by Kenneth J

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Eleventh District Savings and Loans Outperform Industry Nationwide by Kenneth J Eleventh District Savings and Loans Outperform Industry Nationwide By Kenneth J. Robinson hile the larger banking industry and Consumer Protection Act of 2010 number of institutions has declined. At the grabbed most of the attention, U.S. introduced a number of changes to the thrift end of 2011, the nation had 1,067 thrifts savings and loans (S&Ls) also felt industry. Specifically, the law abolished with assets of $1.1 trillion, and 6,278 banks W the strain of the recent financial the OTS, transferring supervision over S&L with assets of $12.6 trillion. crisis. Major institutions such as Countrywide holding companies (SLHCs) to the Federal Savings and loans have their origins in Financial and Washington Mutual failed. Reserve. The new regulatory structure was a the public-policy goal of encouraging home- Thrifts, as S&Ls are also called, became response to concerns about thrift losses and ownership at a time when banks didn’t lend a particular source of concern at the onset questions about the efficacy of regulatory money for residential mortgages. The first of the downturn. The industry experienced efforts.2 S&L was established in Pennsylvania in 1831. “disproportionate losses during the financial Since the financial crisis, the S&L in- Thrifts were originally organized by groups of crisis,” according to a 2010 congressional dustry has recovered in the Eleventh Federal people wishing to buy their own homes but study on the housing and financial industry Reserve District and across the nation. In lacking sufficient resources to do so. Group collapse.1 Citing figures from the Federal fact, like banks in the district, thrifts here are members pooled their savings, lending Deposit Insurance Corp. (FDIC), which outperforming their counterparts nationally. money back to a few members to finance guarantees the safety of deposits at U.S. banks This likely reflects the relative health of the home purchases. As the loans were repaid, and thrifts, the study noted that 95 percent regional economy.3 funds were lent to other members. of failed-institution assets in 2008 were at- States initially oversaw the thrift tributable to thrifts regulated at the time by What’s Different About Thrifts? industry, but the federal government later the federal Office of Thrift Supervision (OTS). Thrifts are generally smaller than assumed a role similar to the one it plays in The failed-asset figure was 73 percent from banks—in quantity and size. The number the dual banking system of state and federally 2008 to April 2010, “even though the agency of S&Ls peaked at 3,677 in 1986, when as- chartered banks. Federal regulation of sav- supervised only 12 percent of all bank and sets totaled $1 trillion; commercial banks ings and loans began with the Federal Home thrift assets at the beginning of this period,” reached a high of 14,470 in 1984, when Loan Bank Act of 1932. It established the the study said. assets totaled $2.5 trillion.4 These kinds Federal Home Loan Bank system to provide a The Dodd–Frank Wall Street Reform of differences have persisted even as the source of liquidity to the industry. The Home Owners’ Loan Act of 1933 authorized Home Loan Banks to charter and regulate federal Chart Thrift Failures Soar in 1980s savings and loans. The National Housing Act 1 of 1934 created the Federal Savings and Loan Insurance Corp. (FSLIC), the savings-and- U.S. institutions Texas institutions loan counterpart to the FDIC, to insure thrift 350 100 deposits. 90 300 U.S. failures Reflecting their role in housing finance, Texas failures 80 thrifts historically concentrated more on 250 70 mortgage lending than banks did, though that focus has shifted somewhat over time. 60 200 In 1985, mortgage loans accounted for 43 50 percent of thrift assets, compared with 7 per- 150 40 cent at commercial banks. At year-end 2011, 100 30 mortgages accounted for 32 percent of assets 20 at thrifts, versus 16 percent at banks. 50 The relatively greater concentration of 10 mortgage lending, however, made savings 0 0 ’80 ’84 ’88 ’92 ’96 ’00 ’04 ’08 ’12 institutions vulnerable to interest rate in- creases and housing price declines. During NOTE: Includes failures and assisted transactions; failures are through June 15, 2012. times of stress, thrift failures have moved SOURCE: Federal Deposit Insurance Corp. higher (Chart 1). 10 Southwest Economy • Federal Reserve Bank of Dallas • Third Quarter 2012 industries. However, with the onset of finan- institution. A total of 126 holding companies Chart Thrift Profitability Stronger cial turmoil in 2007–09, thrift failures again nationally filed regulatory statements for first 2 in District than U.S. increased. While the total was substantially quarter 2012, reporting consolidated assets lower in the recent crisis than in the prior of $959 billion.7 Of those holdings, 58 percent Return on average assets (percent) downturn, the industry was also significantly were in thrift subsidiaries. 2 smaller. Slightly more than 1,000 thrifts remained at the end of 2011, reflecting the Performance Measures 1.5 Eleventh District failure since 2007 of 71 S&Ls with assets of In contrast to circumstances in the 1 $594 billion. 1980s, Eleventh District thrifts have outper- Dodd–Frank specifically addresses the formed S&Ls nationwide during the recent .5 U.S. thrift industry in Title III, which abolished crisis. This comparatively strong showing the OTS, effective July 21, 2011. While the has also occurred among district banks.8 The 0 thrift charter was left intact, the regulatory relative strength of regional thrifts is evident and rulemaking authorities of the OTS were in key performance measures. –.5 transferred to the Federal Reserve, the Of- Thrift profitability as calculated by –1 fice of the Comptroller of the Currency (an return on assets declined sharply both independent agency within the Treasury) regionally and nationally beginning in 2007 as –1.5 and the FDIC. The Federal Reserve assumed the housing bust hit and the ensuing financial ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 responsibility for S&L holding companies crisis spread (Chart 2). NOTE: Data are through March 31, 2012, annualized. and their nondepository subsidiaries, while S&Ls suffered losses in 2008 but began SOURCES: Thrift Financial Report, Office of Thrift Supervision; Report of Condition and Income, Federal the Comptroller of the Currency gained recovering in 2009. District thrifts earned an Financial Institutions Examination Council. oversight of federally chartered savings asso- annualized return on assets of 1.5 percent ciations. The FDIC assumed the OTS’s duties in first quarter 2012, compared with the When rates began rising rapidly in the over state-chartered savings associations. On national performance of 0.98 percent. The late 1970s, many S&Ls suffered extensive the July 21 transfer date, the Federal Reserve biggest contributor to profitability was net losses. Their earning assets tended to be in became responsible for about 430 SLHCs, 23 interest income, or the difference between long-term, mostly fixed-rate mortgages, but of them based in the Eleventh District. One interest earned on loans and interest paid on because they held mostly short-term depos- is the largest Texas-based financial institu- deposits (Chart 3). This component was more its, their cost of funds increased dramatically tion—USAA of San Antonio. important to profitability for regional than when interest rates rose. When housing S&L holding companies, like their national thrifts. prices nationally turned sharply downward banking counterparts, can engage in activi- Noninterest income, or what is some- in the recent crisis, thrifts again suffered ties other than taking deposits and making times referred to as fee income, was also losses as mortgage defaults mounted. loans. These include insurance and broker/ a relatively more important contributor to While particularly vulnerable to interest dealer services. For most SLHCs, however, the regional thrift profitability. Noninterest ex- rate and housing price movements, thrifts main line of business is the underlying thrift pense, including salaries and benefits, was have faced other economic stressors. Begin- ning in the early 1980s, thrift woes were tied to factors that included the shock of an Chart Net Interest Income a Key Profitability Component oil-price collapse in energy-rich Texas. The (Percent of average assets, annualized) regional economy fell into recession, deeply 3 impacting residential and commercial real Net interest income estate. In 1988, more than 40 percent of thrift failures nationwide occurred in Texas. Noninterest income S&L difficulties spread to other parts Provision expense of the country, ultimately bankrupting the FSLIC and forcing taxpayers to cover liabili- Noninterest expense ties estimated at as much as $124 billion.5 Gains on securities U.S. In response, Congress passed the Financial Eleventh District Institutions Reform, Recovery, and Enforce- Taxes ment Act of 1989 to restructure the industry Extraordinary items, net and establish the Office of Thrift Supervi- sion. Simultaneously, commercial banking Net income suffered from its own problems, in Texas and –4 –3 –2 –1 0 1 2 3 4 5 elsewhere.6 The 1990s and early 2000s were NOTE: Data are as of March 31, 2012. relatively tranquil for the thrift and banking SOURCE: Report of Condition and Income, Federal Financial Institutions Examination Council. Southwest Economy • Federal Reserve Bank of Dallas • Third Quarter 2012 11 and a lower concentration of consumer Chart Bulk of Thrift Lending Is in Mortgages loans. 4 The S&L industry’s overall real estate loan portfolio tends to resemble that of Percent of loans community banks (those with less than 100 $10 billion in assets). Nationally, real estate 90 lending accounted for 78 percent of all 80 loans at thrifts, compared with 68 percent 70 at community banks.
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