CHAPTER 16 THRIFT INSTITUTIONS AND FINANCE COMPANIES Copyright© 2012 John Wiley & Sons, Inc

CHAPTER 16

THRIFT INSTITUTIONS AND FINANCE COMPANIES

Copyright© 2012 John Wiley & Sons, Inc.

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Institutions Covered

Thrift Institutions• Savings Associations (or S&Ls)• Savings Banks• Credit Unions

Finance Companies


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Historical Origins of Thrifts

Mutual Savings Banks were developed in the 1800s because commercial banks did not serve the needs of small savers.

Eventually Mutual Savings Banks invested most of their deposits in mortgage loans.

Mutual Savings and Loan Associations and Building Societies were also started in the 1800s by groups of people who pooled their savings so that each would eventually be able to acquire a house.


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Recent History of Thrifts

Stockholder owned savings and loan associations were relatively uncommon until the late 1970s and 1980s when pressure to attract more capital encouraged many S&Ls to convert to stock form.

Stock S&Ls outnumber mutual S&Ls today.

Assets of stock S&Ls are many times as large as the assets of mutual S&Ls.


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Exhibit 16.3A: Number of Savings Institutions


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Exhibit 16.3B: Assets of Savings Institutions


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Thrift Crisis of the 1980s

Classic model of thrift management involved a negative maturity gap:

Short-to-medium term fixed-rate savings deposits financing andMedium-to-long-term fixed-rate mortgages.

Thus the sharp interest rate increases of the early 1980s decimated the industry.

The problem was compounded by unsound lending practices and other forms of mismanagement.


9Copyright© 2012 John Wiley & Sons, Inc.


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Regulation of Savings Institutions

Savings bank regulators—Federal regulator: Office of Thrift Supervision->OCCInsurer: FDIC

Savings association (S&L) regulators—Federal regulator: OTS->OCCInsurer: FDIC

State regulators also charter and supervise thrifts

Federal Home Loan Banks: 12 regional Federal Home Loan Banks empowered to borrow in capital markets and make loans (called “advances”) to thrifts in their regions.


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Assets of Thrifts

Residential mortgages still main asset because of tax break.

Other loan types more well-represented now than in past because of deregulation.

Liquidity management comparable to commercial banks.

“OREO”—Other Real Estate Owned—acquired in foreclosures.


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Liabilities of Thrifts

Deposits are key, but deposit types are much more varied today.

Advances from FHLB are most important non-deposit sources of funds.

Fed funds present but less important as either source or use compared to banks.


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Capital Accounts, Standards & Terms analogous to banks

Tier 1/ Tier 2

Risk-weighting of assets

Minimum ratios

Thrift capital has risen sharply since 1989



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Income, Expenses, & Performance

Structure of income statement comparable to banks

Net Interest Margin about 3% deposit rates have fallen more rapidly than mortgage ratesinstitutions take much less interest rate risk than they used to

Provision for loan losses reflects sounder lending practices.

Industry ROAA averages around 1.2%; ROAE around 13%.





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Credit Unions

Mutual institutions organized much like a club with each member (share owner) having a vote to elect the board of directors.

Membership requires a common bond (e.g., same employer, church, trade association).

Credit Union assets have grown steadily in recent years.


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Crucial differences from other depository institutions

Always and strictly mutually owned; organized like clubs.

Common-bond membership/exemption from antitrust constraints. Most common bonds are occupational.Others are associational/fraternal or residential.

Not-for-profit and therefore tax-exempt.

Expected to concentrate on smaller consumer loans.


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Credit Union Regulation

Regulated by the National Credit Union Administration (NCUA).

Deposits are insured by the National Credit Union Share Insurance Fund (NCUSIF).

Liquidity is provided by the Credit Liquidity Facility (CLF).


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Credit Union Assets

Credit union member loans constitute bulk of CU assets.

Other assets include cash and investments.


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Credit Union Liabilities

Regular share accounts are like savings accounts.

Share certificates are time deposits like CDs, and have become a more important source of funds.

Share drafts are CU interest-bearing checking accounts.

Net worth includes reserves and undivided earnings.


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Credit Union Developments

Small credit unions are merging or liquidating.Credit unions are adopting new technologies, especially larger credit unions.Funds flows are becoming increasingly coordinated.Corporate central credit unions - correspondent banking for credit unions.Powerful trade associations/lobbying groups: CUNA and NAFCU.


Trends in Credit Unions


Selected Ratios for Credit Unions, Dec. 31, 2009


Credit Union Assets, Dec. 31, 2009


Credit Union Liabilities, Dec. 31, 2009


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Finance Companies

Lenders to businesses and consumers who are higher risk borrowers.Highly leveraged; borrowing funds from banks and the open market.Most larger finance companies are now subsidiaries of bank and financial holding companies.Many "non-bank" banks or consumer banks are similar to finance companies.Finance companies are diverse and adaptive to changing needs.


Types of Finance Companies

Captive sales finance companies help finance goods sold by their parent companies.

The largest finance companies are sales finance companies that are captives of major retailers and auto manufacturers that help finance sales of their parents’ goods.

Other large finance companies are large factoring finance companies.

Consumer finance companies are independent lenders that largely make personal loans to consumers.


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Finance Company Assets

Investment securities, real assets, cash, and deposits represent a small percent of assets.Consumer receivables (loans):

Personal loans;Automobile credit;Mobile home credit;Revolving Consumer Installment Credit;Other Consumer Installment Credit.

Real Estate Lending (second mortgages) is the fastest growing area of finance company lending.


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Finance Company Assets, cont.

Business credit -- area of growth in recent years:Wholesale paper -- loans to finance inventories. "Floor plan" is a type of wholesale paper.Retail paper -- purchase of consumer sales (loan) contracts from retailers.Lease paper -- leasing business equipment and consumer durables.Commercial accounts receivable financing.Factoring -- the purchase of accounts receivables.


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Liabilities and Net Worth

Net worth: highly leveragedNet worth level directly related to riskiness of loan portfolio

Debt:Bank debt

Commercial paper

Transfer credit from parent companies

Long-term debt when rates are low


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Regulation of Finance Companies

Consumer protection more than safety and soundness

Interest rate ceilings on loans, but phased out in most states

Debt collection practices

Branching, chartering, and merger restrictions

Truth-in-lending (Regulation Z)

Bankruptcy protections


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Finance Company Developments

Securitization

Shift toward business credit

Shift toward second mortgage lending

Growth of leasing

Growth of home equity credit lines

Decline in small finance companies


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CHAPTER 16 THRIFT INSTITUTIONS AND FINANCE COMPANIES Copyright© 2012 John Wiley & Sons, Inc