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REMARKS m MUTUAL SAVINGS BASES BY THOMAS H, NORWOOD DELIVERED BEFORE THE CONFERENCE OF SUPERVISING AND REVIEW EXAMINERS OF THE FEDERAL DEPOSIT INSURANCE CORPORATION WASHINGTON, D. C. APRIL 23, 1946. * * * * lütbrarç sfdeRAL d e po sit in su r an c e ^ c o r p o r a t io n - 1 - We axe here in terested in mutual savings hanks as hanks o f deposit fo r two p rin cip a l reasons, f i r s t , the risks the Corporation already has in the presen tly insured mutuals and, secondly, the p o t e n t ia lit ie s involved in uninsured mutuals and savings and loan associations contemplating conversion to mutuals. I t i s in the lig h t o f our experience with the mutuals that we judge the prospects o f the future in sim ilar in s titu tio n s . I t w i l l he my purpose to h ig h lig h t, as best I can, in a very b r i e f manner the background upon which, i t seems to me, we must operate. At the outset i t seems f i t t i n g to sta te that th is paper i s not in tended as a b r ie f fo r or against mutual savings banks as p referred insurable risks. In the darker days preceding the Banking Holiday the mutuals were out spoken and p o s itiv e that th e ir in s titu tio n s represented le s s o f a ris k from an insurance poin t o f view than did the commercial banks. Whatever the argument or the evidence advanced at that time we do know that the Federal Deposit Insurance Law gave cognizance to p o ssib le d ifferen ces between mutuals and commercials by provid in g authority fo r the creation o f a separate Fund fo r Mutuals with the stip u la tion that the assessment rate could be lowered at the d isc retio n o f the Board below the 1/12 o f banks. Vf> applicable to commercial A separate Fund fo r Mutuals was opened and operated from July 1, 1934 to August 22, 1935 but was not reopened or established th e rea fter as a per manent plan. A sizeab le exodus from membership in the Corporation was ma,de on Juno 30, 1934 headed by the mutuals in Bov; York state but those and others have returned to the fo ld and wc now have a membership o f 192 as contrasted to the a ll-tim e high o f 214 as o f January 1* 1934. There appears to be no present desire to create a ‘separate Fund fo r Mutuals and l i t t l e i s being said ju st nov; as to c ith e r the ris k status or the p re fe rre d assessment ra te . 2 In a “broad and gonoral way, c o m e rc iá is and mutuals arc a lik e in two respects, namely, that they both require an operating c a p ita l or_,.surplus cushion consistent with the ris k in the assets and an investment program, synchronized w ith the denosit behavior« Prom a narrower but more nearly operational p oin t o f view , mutual savings banks are unlike the commercials p rin c ip a lly in ownership, in deposit type, and behavior, and, in some le s s e r degree, in statutory lim ita tio n s on investments,» Nevertheless, lik e or u nlike, whether you have stockholders or depositors mutually contributing the c a p ita l, neither type o f bank can successfully operate without a ca p ita l cushion commensurate with the ris k in the assets; and, surely n either type o f bank would in vest i t s assets wholly without regard to the nature and character o f i t s deposit l i a b i l i t i e s . Both o f these types o f banking in s titu tio n s require a balanced fin a n c ia l set-up. Both types are equally s e n sitive to , and are influenced by, p u blic opinion. Now le t * s got down to some s p e c ific fa c ts which we face in mutual savings banks. In the 192 insured mutuals we have two^thirds o f a l l the deposits o f the 532 mutual savings banks in. the country. The aggregate deposits in mutuals approximate the t o t a l deposits o f a l l the s ix thousand odd insured nonmember State banks, or $17 b i l l i o n . Insured mutuals w i l l average s lig h t ly more than $50 m illio n against s lig h t ly le s s than $3 m illio n fo r commercial nonmember insured banks. A l l mutual savings banks but fi f t e e n l i e in the in d u stria l Northeastern States, or from Pittsburgh to Maine, They are loca ted in seventeen states With th irteen states having some members in the Corporation. Massachusetts has the la rg e s t number o f mutuals and the second la rg e s t in amount and none o f these i s insured by P .D .I.C , Mutual savings banks are prim a rily t h r i f t in s titu tio n s with an average de p o sit account approximating $1,000 and the depositors numbering 17 m illio n . Our stake in the insured mutual savings hanks, and th e ir d ep ositors1 depen dence upon us, nay he illu s t r a t e d hy the fa c t that on October 10, 1945, 93$ o f a ll th e ir deposits was insured w hile in the instance o f the insured commercial hanks the coverage was 43$, I think i t is o f more than passing in te re s t to note the deposit behavior o f the mutual system as a whole. Since the tin e o f the C iv il War and through 1945 there have been only seven years in which the aggregate volume o f savings deposits in the States o f New York and Massachusetts (which embrace two-thirds o f the to ta l deposits in mutuals) have re g istered a decline over the previous year and in no one o f these years did the decline exceed 5$. For the country as a whole the record i s even b e tte r . Over the same period there have been only four years (1877, 1878, 1933, and 1934) in which the aggregate has declined at a l l - and mind you - these computations also include the deposits o f the suspended banks in the reductions. Such s t a b ilit y must surely be a favorable and rather all-im portant fa c to r in the process o f investments. Reasonable deposit growth i s also as d esirable as s t a b ilit y * As to the growth, ju st p r io r to war a c t iv it ie s , the record i s not as good. In the ten years from 1934 through 1943 the aggregate growth in deposits o f the mutuals in New York was approximately 20$ or an equivalent o f the d iv i dends or in te re s t cred ited to the accounts. In Massachusetts the ra te o f growth was equal to one-half o f the dividends or in te re s t cred ited » or 10$ fo r the ten-year period . This la ck o f growth caused consternation and le d some to think that maybe the cause o f t h r i f t and the need fo r the s t r i c t l y - 4 - mutual savings "bank had passed* But th is was not fo r long as deposits started to expand in 1943 and the system again has taken on the prosperous a ttitu d e la s t known to them in the booming 1920* s and 1945 was the banner year o f the 130 years o f the system with deposit aggregates enlarged by 15$« The fa c t i s that th is p resen tly rapid growth i s a cause o f concern to us fo r several reasons* One reason i s that these in s titu tio n s were origin ated and conceived as small banks with very lim ite d deposit p o te n tia li t ie s and with a very minimum o f i n i t i a l ca p ita l contributed by able and a lt r u is t ic c itiz e n s and no other p rovision i s made fo r subsequent ca p ita l augmentation except from earnings* This l a t t e r lim ita tio n may not be so serious i f deposit expansion i s reasonably steady and o f moderate proportion^ I t i s fortu nate» or p ossib ly a c re d it to management or to the statutory re-» quirements as to c a p ita l augmentation from earnings» that these old in s t it u tion s la id aside s i z a b l e increments to ca p ita l during th e ir more stable and, apparently * prosperous period* As to the younger mutual s or those now con templating organization the lack o f c a p ita l or a b ilit y to accumulate i t ex cept from earnings i s a d e fin it e hazard which management and ourselves must face* Our p rin cip a l and present Capital problems fo r the newly organized or converting in s titu tio n s l i e in the low i n i t i a l statutory requirements.è the presen tly la rg e deposit • p o te n tia litie s » and the lim ite d source o f ca p ita l augmentation. We have l i t t l e doubt btife that we are being, and w i l l be, faced with applications fo r insurance f o r proposed mutual savings banks because o f these very fa cto rs* Converting Federal savings and loan associations are cases in p oin t and provide the problems now faced s p e c ific a lly by B i l l Funsten where conversions o f such associations to insured mutual sayings banks are in contemplation. There have been no mutual savings banks - 5 - organized in New York since 1929 and the la t e s t one that I know o f was organized in Oregon in 1931* However, the present movement among savings and loan associations presents keen p o s s ib ilit ie s o f chartering mutual savings hanks through conversions. In these conversions and in newly organizing mutual savings hanks we are faced with im plications which we can solve only in the lig h t o f our experience with e x is tin g and insured mutual savings hanks. I want to emphasize rig h t here that the subject o f c a p ita l adequacy i s ju st as hard a nut to crack in respect to mutuals as i t is in respect to the com m ercials. I f we could he assured the same s t a b ilit y and growth o f deposits that p reva iled in the ea rly years o f the system and a continuing prepon derance o f good mortgage loans, with the p r e v a ilin g statutory requirements fo r ca p ita l augmentation from earnings, we might he reasonably s a tis fie d with the old and moderate i n i t i a l c a p ita l requirements* However, few o f these ch a ra c te ris tic s or a ttrib u tes can ho assured in the newly organizing mutuals and we must fa ce the fa c t -that the operations o f most o f these in s titu tio n s have changed appreciably in recent years. Changing circum stances, accordingly, prescribe d iffe r e n t ru les. In respect to current operating earnings we fin d that the r a t io to average assets approximates 1$ fo r the mutual system or about 50$ la rg e r than that fo r the commercials. The proportion ris e s and f a l l s with the volume o f re a l estate mortgage loans which have boon the tra d itio n a l in vestments* A mortgage p o r t fo lio approximating tw o-thirds o f the assets i s usually accompanied with a net current operating earnings ra tio o f about 1,50$ which d eclin es to about or le s s o f the assets. ^ of 1$ when mortgages constitu te a quarter S tartin g with stable deposits i t is no wonder that we fin d these banks In vestin g in long-term c re d its bearing higher in te re s t rates and, accordingly, producing la rg e r gross income. U n til 1930 strong earnings produced la rg e r dividends fo r the do-* p o sito rs in mutualsf provided sizeable loss-ah sorbing power? and created regular ca p ita l increments. Since 1930 i t has been necessary to gradually reduce dividends to depositors to the present a ll-tim e low in order to maintain the loss-absorbing power o f earnings and to prevent rather d ra stic invasions of c a p ita l. These a ll-tim e lows are indicated in the ra te o f 1i$ in the case of the Manhattan mutuals and 1$ fo r a l l mutuals in New Jersey. There is l i t t l e question in my mind but that the st abl e deco si ts_, the b e tte r than average c a p ita l funds and stronger than average earnings. ~ a^-^ normally a ttrib u tes - have had the e ff e c t , unfortunately, o f d iv e rtin g at tention from the true q u a lity o f the assets. As you w i l l see in a minute the Condition o f these banks gen erally would l i k e l y have suffered a sad p lig h t in the ten years from 1934 through 1943 had not these three fa c to rs been as dependable as they were. You w i l l remember that I stated in the beginning that I was to cover the bare h igh ligh ts o f the situ ation in respect to our presen tly insured mutual savings banks and some o f the im plications which could be drawn there from in respect to prosp ective members. I promise to cut the most outstanding pictu re - that o f assets - to the bone. When the squeeze o f 1929—1930 began, the mutual savings banks had s lig h tly b e tte r than 60$ o f th e ir assets in re a l estate mortgages and another 15$ in ra ilro a d s e c u ritie s , Today the composition o f the assets i s roughly 30$ in mortgages, 60$ in Governments and p r a c tic a lly no r a i l s . What that squeeze has cost the system and the depositors may be gleaned from the fa c t - 7~ that lo sses have "been such as to e n ta il p r a c tic a lly a l l operating and a l l non-operating income fo r the la s t f i f t e e n years and n ecessitated the re d u o tion in dividends from 4J$ to 1,68$ as a present average. The gross o f losses, already taken, exceeds the amount o f to ta l ca p ita l as at the beginn ing o f th is period. Asset recon ditionin g has been reasonably w ell completed in respect to the holdings o f r a i l s and other real estate owned although the aggregate o f these approximates $100 m illio n . However, th is amount i s small in contrast to the $13/4 b i l l i o n o f remaining fix e d and substandard assets as r e fle c te d in our la t e s t reports o f examination. These c la s s ifie d assets are almost e x c lu sively mortgages and predominately p o te n tia l other re a l estate. The to ta l o f adversely c la s s ifie d assets in the insured mutuals approximates nine times the amount o f the to ta l o f c la s s ifie d assets o f a l l the six thousand odd insured nonmember commercial banks in the country. The commercials started house cleaning sooner and have made an excellen t record. The mutuals started la t e r , have reconditioned a l o t o f assets s a t is fa c t o r ily , p a rtic u la rly s e c u ritie s , and now have l e f t a volume o f c la s s ific a tio n I I which i s 50$ la rg e r than the aggregate o f sim ilar c la s s i fic a tio n s in the seven thousand odd insured nonnember commercials when the Corporation started, - - and th is in only 192 insured mutual savings banks. Most s ig n ific a n t i s the fa c t that these conditions have cono about in banks with stable dep osits, b e tte r than average earnings, and presumably adequate c a p ita l. On the face o f i t - th is is not a very encouraging outlook to say the le a s t . But re a l estate experiences cycles* and as a re s u lt, we are now worrying gen erally about the present and an ticip ated in fla tio n in the allowable ^value0. Tho fig u re s I ju st quoted represent appraisals la r g e ly - 8 - in •’problem’* mutuals examined in 1944 and 1945. We haven*t ye t assembled the data on a l l these hanks as the report o f the f i r s t f i e l d examination on the la s t o f the 121 becoming members on July 1, 1943 was ju st received la s t week* Real estate in fla tio n probably h it New York City la t e r than most other places but i t has ’’gone to town1*. Whereas, sales r e a liz a tio n fo r in s titu tio n a lly owned re a l estate reached i t s low at 57,6$ o f assessed values in ea rly 1943, the la t e s t fig u re is 80,9$ or a 40$ gain predicated on th is one rela tio n s h ip . The reports coming to us from the more recent State examinations in dicate that th e ir appraisals have caught the fe v e r . Adjusted c a p ita l in some in stances has doubled between examinations and the aggregate o f fix e d and sub standard has been reduced by a h a lf in other instances - in both instances the major and c o n tro llin g fa c to r producing the change was the appraisal most o f the same assets are s t i l l present. I t took us ten years to record the depths o f d istress in the mortgages - can i t be p ossible that a true and fu ll rebound has occurred in ju st the la s t two years? I do not b e lie v e i t and, even i f X did, I would vote to hold back my enthusiasm in the c l a s s i f i cations, I f i t was lo g ic a l and d esirable to temper the c la s s ific a tio n o f other re a l esta te as we did in d eclin in g and d istress times, is i t not equally lo g ic a l and d esirable that we temper c la s s ific a tio n s conversely in a run-away market? I , p erson ally, b e lie v e to do otherwise i s to in v it e a recurrence o f the ”boom-and-bust” experience o f the 1920^ s. And, la s t but not le a s t , we should remember that the mortgages in these banks are not a l l ’’open” mortgages that can be revamped and reconditioned rig h t away. There w ill be a l l to many instances where the mortgagor w ill be the only one to re a liz e on some o f the present cream and v rill leave only blue s ilk to succor the mortgagee. While wo are in an upswing, we have a long way to go b e fo re 9 we are "back again in tho clea r on that la rg e group o f mortgage a,ssets originated p r in c ip a lly in another hoorn period o f twenty years ago. When we remember that p r a c tic a lly a l l o f these substandard mortgages origin ated p rio r to 1930 i t seems to me that an appraisal ya rd stick leaning toward tho pessim istic would pay b e tte r dividends to the mortgagor in th is period o f in fla tio n . The p resen tly a llo t t e d time fo rb id s that I discuss some the major problems we have faced in crea tin g o b jective and r e lia b le standards o f mortgage q u a lity and what we are attempting in the way o f in s titu tin g a program o f asset recon ditionin g. Some phases o f these matters may be dis cussed subsequently. At times 1 have heard the remark and opinion that the mutuals were “ s ittin g p r e t ty “ or that we had l i t t l e to fe a r because they had no dividends to pay on c a p ita l stock and therefore could not dissip a te earnings. That opinion sounds lo g ic a l but I ask i f asset d ilu tio n i s not one o f the worst, and most subtle, forms o f income d issip a tio n . The p rin cip a l problem o f the mutuals in 1946 a rise s from the asset d ilu tio n o f the la t e 19204s. Another possible dissip ation a rises in the fa c t that, the country over, mutuals pay on the average at le a s t \ of 1$ more in te re s t (o r dividends) on th e ir to ta l deposits than that paid by the commercials on th e ir time and savings deposits* Would we not consider i t an earnings dissip a tion in a commercial, i f that bank had fix e d and substandard assets in an amount two to fou r times the size o f i t s c a p ita l, say o f 5$, and such bank paid 10$ cash dividends? Contrary to the o rig in a l conception o f a mutual, 1 think, some savings banks may be using th e ir dividend rate with a view to acquiring or holding deposits, ^his is a bad time fo r any misuse o f such com petitive fa cto r and we night - 10 - remember that the Corporation to date has established no control over in te re s t or dividends paid by mutual savings banks* And, I might add that* i f and when wo do exercise some control over dividend or in te re s t payments by the mutual savings banks» we l i k e l y shall then be faced with the problem of ascertaining the degree o f asset d ilu tio n which i s p racticed fo r competitiv e purposes# I t seems to me that the control o f in te re s t payments on deposits has had a salutary e ffe c t upon bank operations but, I b e lie v e , wo must be aware that i t has been u t iliz e d in a period o f increasing deposits* Any le v e lin g o f f or decrease in deposits w i l l very l i k e l y be accompanied with com petitive pressures re su ltin g in the low ering o f asset quality# Con** t r o l o f any one angle o f banking c e rta in ly produces the p o s s ib ilit y o f greater strain on another angle, I w i l l close with these remarks: We are prone to c r i t i c i z e the mutuals fo r spreading th e ir asset recon ditionin g and lo s s absorption over so many years. I t is h igh ly p o ssib le that those very a ttrib u tes o f stable deposits, strong earnings and high c a p ita l, f o r which we s tr iv e , have been exploited and have had the e ff e c t , a l l too often* o f producing in these banks a complacent and s e lf - s a tis fie d management# Those banks which have u t iliz e d stable deposits, strong earnings and high c a p ita l as a ttrib u tes are strong and sound today* Those banks which have viewed these conditions with smugness s t i l l include a l o t o f unsoundness. You probably are not surprised to know that we have fo rty -fo u r o f these insured mutuals with deposits in excess o f $3,6 b i l l i o n which wo are now c la s s ify in g as "Problems", There are no "P o te n tia l P a y -o ffs " and I b e lie v e that p a y -o ffs in these mutuals can be avoided by good supervision employing the maximum o f pressures - 11 - to get asset recon ditionin g done in these tin es and additional reserves created constantly against those low-*grado assets which fo r any reason can not he fu lly returned to soundness ju s t now. As voluminous as are the substandard assets* I b e lie v e th e ir workout i s p o ssib le and qu ite l i k e l y provided we extend ourselves toward improving examination technique and toward ra isin g managerial sigh ts. Everywhere we are doing ju st these things now and I have high hopes that wo can produce a sounder outlook among th is old and sizea b le segment o f our banking structure*
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