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Banking & Finance
A N EIG H TH DISTRICT PERSPECTIVE
FALL 1985

Thrifts — Their Recent Performance
The thrift industry has recently shown signs of improvement
over its performance in the early 1980s. At that time, with
interest rates on short-term deposit liabilities higher than the
returns to long-term fixed rate mortgage assets, thrifts’
profitability slumped dramatically. However, as a result of
the general decline in interest rates since 1982 and the
corresponding increase in mortgage loan demand, the thrift
industry became profitable for the U.S. in 1983 and for the
District in 1984.
This issue analyzes balance sheet and income statement
data from FSLIC- and FDIC-insured thrift institutions (savings
and loans and savings banks) to document their performance
over the past five years and to assess the outlook for recovery
of the industry. This analysis is performed for institutions
in the Eighth Federal Reserve District as well as the nation,
using measures of capitalization and profitability that have
been adjusted to reflect generally accepted accounting
principles rather than regulatory accounting standards. This
distinction is important because, since 1982, the regulatory
accounting standards used by thrifts have overstated their
tangible net worth position.

Earnings

Chart 1
RETURN ON AVERAGE ADJUSTED EQUITY
ANNUAL DATA

PERCENT

all new mortgage issues.
Preliminary profitability data for 1985 are projected based
on earnings through the first quarter of the year. This
assumption may be conservative since market interest rates
have generally trended dow nw ard through the
second and third quarters of this year, leading one to expect
continued improvements in thrifts’ earnings.

One widely accepted measure of financial institutions’
earnings performance is the ratio of returns to total net worth.
Chart 1 plots this ratio on an adjusted basis (discussed later)
and indicates that thrift institutions in the District and the
Net Worth
U.S. suffered widespread losses in 1981 and 1982. These
losses occurred as market interest rates rose to histori­
Despite recent improvements in profitability, years of low
or negative earnings caused a serious deterioration in the
cally high levels and caused sharp increases in the cost
industry’s net worth position. Even putting the best light on
of funds. A significant decline in the cost of funds that occurred
in 1983 was the major factor contributing to
thrift capital—by using regulatory accounting
the improved earnings of thrift institutions.
standards — shows that for national data as
In some part, this revitalization since the severe
of March 1985, the industry had total capital
losses in 1981 and 1982 also has been due
of about $39 billion or only 3.8 percent of
total liabilities. District total capital at the
to the thrifts shifting to adjustable rate loans.
THE
These instruments cushion the interest rate
same time was about $1.2 billion, equivalent
FEDERAL
sensitivity of earnings of financial institutions.
to
3.5 percent of total liabilities. This recorded
RESERVE
IIAINK of
Since 1982, the use of adjustable rate
net worth position, however, weak as it is,
ST. IX>1 IS
does not fully reveal the extent of the industry ’s
mortgages (ARMs) has grown steadily, and
vulnerability. Both the national and
now account for more than half of



FALL 1985

FEDERAL RESERVE BANK OF ST. LOUIS

District figures reflect a sizable block of questionable asset
and equity classifications, the inclusion of which is not in
accordance with generally accepted accounting principles
(GAAP). These categories, which are deducted from total
reported net worth to provide more accurate measures of
capital and returns, are briefly discussed.

Chart 2
DISTRICT EQUITY TO TOTAL LIABILITIES
ANNUAL DATA

PERCENT

PERCENT

Net Worth Certificates (Income Capital Certificates)
In 1982, the Gam-St Germain Depository Institutions Act
authorized the FSLIC to acquire net worth certificates from
weak institutions which had realized declines in their equi­
ty position as a result of operating losses. The FSLIC
purchases these certificates and, in exchange, issues a
promissory note which can be used as an asset to satisfy
creditor claims in the case of insolvency. According to
GAAP, this figure should be excluded from net worth
calculations since the promissory note has book value
only in the event of an institution’s failure and forced
liquidation.
Appraised Equity Capital
The Federal Home Loan Bank Board authorized FSLICinsured institutions in 1982 to use another regulatory
addition to net worth — appraised equity capital. This
procedure allows an institution to book, as net worth, a one­
time adjustment reflecting the difference between the market
value and the book value of its capital assets (buildings and
land). Given the subjective nature of property valuation,
appraised equity capital is not accepted under GAAP because
the accounting profession does not recognize real property
appreciation until the property is actually sold.

the decline in net worth relative to total liabilities prevalent
from 1979 to 1982 appears to have leveled off for District
institutions. After adjusting for GAAP measures of capital,
chart 2 suggests that although sharp declines in the ratio
have been slowed, capitalization expressed as a percent of
liabilities continues to erode.
Factoring out questionable intangible assets and deducting
appraised equity capital and net worth certificates, one finds
tangible net worth nationally in March 1985 to be $29 billion
or 2.8 percent of total liabilities, rather than 3.8 percent
on an unadjusted basis.

Deferred Loss on Securities Sold
Deferral accounting, which is not permissible under
GAAP, allows thrifts to defer the recognition of losses on
the sale of existing loans and securities. Under this
procedure, thrift institutions can sell existing loans and
securities that have depreciated in value relative to their
recorded values. This depreciation is booked as an intangible
asset to be amortized over a specified period of years.

Summary

Net Worth Under GAAP
To present a more realistic assessment of the industry’s
tangible equity position, the above three factors are deducted
from reported net worth before calculating capitalization
and profitability ratios. To demonstrate the effect of these
deductions, chart 2 plots the ratio of net worth to total
liabilities on both an adjusted and unadjusted basis for all
District thrifts since 1979. The chart indicates that,
according to accounting practices sanctioned by the FSLIC,

The large losses of the early 1980s depleted capital
positions, and many firms failed or were merged out of
existence. At the end of 1979, there were 352 thrifts in the
District and 4,039 in the U.S. By the end of 1984, these
numbers fell by 34 percent (to 231) in the District and 15
percent (to 3,424) in the U.S. The sharpest declines in the
number of thrift institutions followed the years of the largest
losses — 1981 and 1982.
Based on profitability measures, the thrift industry appears
to be in the midst of a recovery' after suffering severe losses
and a resulting “ shakeout” of many institutions early in
the 1980s. Despite this improvement in earnings, the
industry remains poorly capitalized with only a slight
increase in the capitalization ratio for thrifts in the nation
and a continuing decline for District thrifts as a whole.
—Lynn M. Barry and Kenneth C. Carraro

Banking & Finance—An Eighth District Perspective is a quarterly summary of banking & finance conditions in the area served
by the Federal Reserve Bank of St. Louis. Single subscriptions are available free of charge by writing: Research and Public
Information Department, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, Missouri 63166. Views expressed are
not necessarily official positions of the Federal Reserve System.__________________________________________________
2




FALL 1985

FEDERAL RESERVE BANK OF ST. LOUIS

EIGHTH DISTRICT BANKING DATA

LARGE WEEKLY REPORTING BANKS 1

Level
111/1985
($ millions)

Current
Quarter
11/1985111/1985

Rates of Change
Same Periods
Current
Previous Year
Year
11/1984111/1983111/1984111/1984
111/1984
111/1985

Selected Assets & Liabilities
Total Loans & Leases
Commercial Loans
Consumer Loans
Real Estate Loans
Loans to Financial Institutions
All Other Loans

$14,479
5,112
3,223
3,032
975
1,983

Total Securities
U.S. Treasury & Agency Securities
Other Securities
Total Deposits
Non-Transaction Balances
MMDAs
$100,000 CDs
Demand Deposits
Other Transaction Balances2

11.5%
3.9
6.1
18.8
43.6
13.3

19.3%
9.1
13.6
16.2
23.1
100.1

5.5%
-11.3
25.8
8.1
-20.8
-15.9

11.10/0
3.8
24.9
8.1
-1 4 .8
26.0

3,432
2,008
1,423

-2 .9
-3 .3
-2 .4

2.7
-1 .6
9.6

-3 .7
-9 .9
6.7

NA
NA
NA

17,234
10,723
2,204
3,506
4,995
1,434

-0 .9
-4 .3
15.8
-21.9
-2 .8
9.2

4.5
4.9
16.0
-3 .8
-0 .8
15.8

7.7
15.8
-6.1
28.3
-4 .6
-1.1

9.6
NA
2.6
26.1
2.0
NA

SMALL WEEKLY REPORTING BANKS 1

Level
111/1985
($ millions)

Current
Quarter
11/1985111/1985

Rates of Change
Current
Year
111/1984111/1985

Previous
Year
11/1984111/1984

Selected Assets & Liabilities
Total Loans & Leases
Commercial Loans
Consumer Loans
Real Estate Loans
All Other Loans
U.S. Treasury & Agency Securities
Other Securities
Total Deposits

$4,542
1,416
920
1,815
392

4.20/0
-9 .4
3.4
7.2
58.0

0.6
11.4
12.3
21.8

12.5%
3.4
19.5
32.8
-3 5 .5

8 .90/0

1,710

-0 .4

3.2

5.1

665

9.3

1.8

-6 .1

7,138

6.6

9.2

4.4

1 A sample of commercial banks with total assets greater than $750 million. Historical data have been revised to incorporate adjustment factors
that offset the cumulative effects of mergers and other changes involving weekly reporting banks during 1984. All data are not seasonally adjusted.
Rates of change are compounded annual rates.
2 Includes NOW, Super NOW, ATS and accounts permitting telephone or pre-authorized transfers.
3 A sample of commercial banks with total assets less than $300 million as of January 1984.




3

EIGHTH DISTRICT BANKING DATA
Bank Performance Ratios1
RATIOS

11/1985

11/1984

11/1983

Loans to Deposits
Large Banks4
Small Banks*

80.09%
59.99

74.94%
60.02

71.350/
57.59

1.53
1.15

1.34
1.07

1.52
1.02

4.13
4.92

4.03
4.61

6.41
4.56

0.26
0.35

0.19
0.22

0.20
0.30

Loan Loss Reserves to Total Loans
Large Banks
Small Banks

Delinquent Loans to Total Loans
Large Banks
Small Banks

Net Loan Losses to Total Loans
Large Banks
Small Banks

EIGHTH DISTRICT INTEREST RATES 6

September 1985
Super NOW
MMDAs
Time CDS
92 — 182 days
1 — 21/2 years
21/2 years and over

August 1985

July 1985

6.04%
6.91

6.04%
6.89

6.01%
6.92

7.44
8.39
8.84

7.48
8.34
8.79

7.55
8.43
8.80

4 All Eighth District banks with total assets greater than $750 million. Ratios are derived from Call Reports.
5 All Eighth District banks with total assets less than $300 million.
6 Average interest rates paid on new deposits by a sample of District commercial banks.




Year Ago
September 1984
7.63%
8.84
10.45
10.77
10.89


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102