Thrifts Show Signs of Stability As New Loan Origination Activity Declines

by devteam May 25th, 2010 | Share

The Office of Thrift Supervision (OTS) said Monday that the industryrnit regulates appears to be stabilizing based on profits announced for the firstrnquarter of 2010. Thrift institutions earned $1.82 billion during that period, arnthree-fold increase over the $442 million in net earnings in the fourth quarterrnof 2009.  This is the third consecutivernquarter in which the thrifts posted a profit and is a dramatic improvement overrnthe first quarter of 2009 when the thrifts showed a $1.62 billion loss. 

The term “thrift” generally refers to savings and loan institutions, credit unions, and savings banks.

The improvement inrnearnings was primarily due to higher gains on the sale of assets heldfor sale,rnthe lower loan loss provisions, and to noninterest expenses whichdecreasedrnfrom 2.89 percent in the prior quarter even though they were up from2.57rnpercent year-over-year. These improvements were partially offset bylower gainsrnon financial assets carried at fair value and taxes which increased to0.43rnpercent of average assets from 0.25 percent the previous quarter and0.18rnpercent a year ago.

The profits represented 0.77 percent of the average assetsrn(ROA) of the industry.  The Q4 and Q1rn2009 figures represented a 0.19 percent and a negative 0.53 percent ROArnrespectively.  The median ROA was 0.41rnpercent, up from 0.36 percent in the first quarter of 2009 and 0.31 percent inrnthe prior quarter.  Return on averagernequity (ROE) was 7.09 percent compared to 5.69 percent in the prior quarter andrn1.76 percent one year earlier.

In addition to the stated profits, the industry put $2.7rnbillion or 1.15 percent of average assets into loan loss reserves.  This was a decrease in terms of thernpercentage of average assets put aside, down from 1.70 percent last quarter andrn1.91 percent one year ago, but still boosted the reserves to levels at or nearrnrecord highs.  OTS said that the higher-than-averagernlevels of loss provisioning are due to high unemployment and persistentrndeclines in home prices and said that the need for upcoming provisions willrndepend largely on trends in these two factors and in the commercial real estaternmarkets.

The OTS announcement stressed that many analysts arernincreasingly focusing attention on “core” or operating earnings whichrnexclude volatile or one-time occurrences such as branch sale gains orrnacquisition charges and provisions for loan losses.  Operating earnings in the first quarter werern1.72 percent of average assets compared to 1.70 percent for 2009 and 1.29rnpercent for 2008.  OTS said, “Therncombination of solid capital, bolstered loan loss reserves, and solid stablernoperating earnings will help the industry weather the economic and housingrnmarket distress facing the nation.

Troubled assets held by the thrifts fell to 3.27 percent ofrnassets from 3.29 percent in the previous quarter and 3.35 percent in Q1,rn2009.  According to OTS, this ratio isrnsimilar to the ratio in 1990-91 when thrifts were failing by the hundreds.  However, it said, the composition of troubledrnassets – non-current loans and repossessed assets – is much different.  65 percent of the troubled assets are 1 to 4rnfamily mortgages, 27 percent are commercial real estate loans, and thernremainder are nonmortgage loans.  In thernearlier period 68 percent of troubled assets were commercial real estate and 23rnpercent were residential mortgages.

Repossessed assets increased 18 basis points from thernprevious quarter to 0.52 percent of assets. rnNoncurrent 1-4 family loans were 5.16 percent of all 1-4 family loans atrnthe end of the quarter compared to 5.15 percent a year earlier and 5.13 percentrnin Q4.  Noncurrent consumer loans wererndown to 1.41 percent of all such loans from 1.78 percent a year earlier andrntroubled nonresidential mortgages increased to 3.44 percent from 2.03 percent.

Net interest margin improved to 305 basis points from 300rnbasis points in the prior quarter and 294 a year earlier.  Total fee income including mortgage loanrnservicing fee income was 1.30 percent of average assets, up from 1.05 percentrnin the fourth quarter but down from 1.40 percent a year earlier.

Total mortgage originations in the industry were downrnsubstantially from both of the previous quarters.  Originations including multifamily andrncommercial loans totaled $32.4 billion during the quarter compared to $96.1rnbillion a year earlier and $40.7 billion in Q4. rnResidential mortgages were also down substantially from $88.1 billion inrnQ1 2009 and $34.3 billion in Q4 to $27.2 billion in the most recent period. Refinancingrnaccounted for 51 percent of originations during the quarter compared to 45rnpercent in the previous quarter and 55 percent a year earlier.

Industry assets decreased by 22 percent over the year torn$950 billion from $1.22 trillion with 34.8 percent of these assets invested inrn1-4 family mortgages compared to 43.2 percent a year earlier.  Deposits and escrows fell by 11 percent overrnthe year to $667 billion from $752 billion and Federal Home Loan Bank advancesrnwere down from 15.9 percent one year ago to 9.0 percent of total assets.  OTS said that capital measures for thernindustry continue to be “strong, stable and well in excess of minimumrnrequirements.  Equity capital at the endrnof the first quarter was 11.02 percent of assets, up from 9.80 percent one yearrnearlier.  At the end of the firstrnquarter, 97.2 percent of the industry exceeded well-capitalized standards andrn16 thrifts were less than adequately capitalized.”

The number of problem thrifts rose to 50 at the end of thernfirst quarter from 43 with composite examination rates of 4 or 5 at the end ofrn2009.

“The health of the thrift industry is improving but werncannot say the industry has fully recovered from the financial crisis,”said OTS Acting Director John Bowman. “Until America gets back to fullrnemployment and more families are able to pay their monthly mortgages on time,rnthe thrift industry will continue to face significant challenges.”

At the end of the first quarter OTS was supervising 757rnthrifts with total assets of $948.8 billion and 442 holding companies with $4.0rntrillion in U.S. domiciled consolidated assets. rnThose holding companies owned 402 thrifts with total assets of $728rnbillion.  The financial reform act passedrnby the Senate last week calls for the elimination of OTS.

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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