The news about the thrift industry may seem all bad. But there still are many thrifts doing just fine by conducting business the old-fashioned way: Making safe residential home mortgage loans. No high-risk real estate. No foreign loans. No unscrupulous activities.
Is your thrift one of the safe ones? It may pay to find out. While the government still insures your deposits up to $100,000, a thrift failure could lower your interest rate. If nothing else, it makes good sense to know whether the people you deal with really care about your money.
You need to look at four major areas: capital, earnings, assets and management. All are easy to examine through information that is readily available -- usually at your branch office.
Capital is the most important indicator. The government sets minimum standards in three areas: core, tangible and risk-based capital.
Core and tangible capital indicate the level of money the thrift has set aside to protect its loan portfolio. The core capital is basically the stockholders' equity and the institution's retained earnings.
The government says that core capital should be at least 3 percent of assets. Tangible capital, the basic cash available as a last resort against losses, should measure at least 1.5 percent of assets.
Risk-based capital is the most important measurement of the three. It takes into consideration the possibility, no matter how remote, of default on every asset in the thrift's portfolio and assigns a level of capital to protect it. The government says a conservatively run thrift will have risk-based capital of a minimum of 6.4 percent of assets (by year-end it must be 7.2 percent). The higher your institution's percentage, the safer its investments.
Here's an example. When American Savings of Stockton, Calif. was purchased by the Robert M. Bass Group in 1988, the Texas investor injected $350 million into the failed institution, the most by any private investor at the time. Subsequently, the owners have reinvested profits to build a strong capital base. As a result, the institution now is one of the nation's best capitalized thrifts, says Mario Antoci, the thrift's chairman.
"Having sufficient capital, we believe, is essential to maintaining depositor confidence," says Antoci.
Earnings are another key factor. Put simply, is the thrift making money? In this environment, thrifts with low-risk assets and low administrative expenses still can bring profits to the bottom line. The best run institutions have general and administrative expenses in the range of 1.5 percent to 2 percent of assets.
If your thrift has invested in risky commercial loans with one hand, while spending depositors' money on a fleet of airplanes and lavish parties with the other, the chances are there isn't going to be much left for the bottom line. You may not want to be a depositor in that institution -- and you certainly don't want to own the stock. Check the earnings every quarter. Most thrifts have financial statements in their branches and the financial results of publicly held companies are published in major newspapers.
Strong risk-based capital is a good indicator of the quality of a thrift's assets, but it also makes sense to examine the composition of the portfolio. Thrifts are required to have 70 percent of their assets in one-to-four family home mortgages or similar quality investments.
The success of your institution may rest ultimately with the quality of its management. The good news about the shakeout in the thrift industry is that the managers who have weathered the storm are probably the best in the financial services industry. Who's running your thrift? How long have they been in business? Are they highly regarded as leaders in the industry?
One final business indicator: If your thrift has bonds outstanding, the debt may be rated by one of the major rating agencies like Standard & Poor's or Moody's. If so, is the debt of "investment grade" with a low risk of default or is it "speculative grade"?
The decision on where to bank generally is based on such factors as convenience, level of service, interest rates and contributions to the community (for example, does the thrift make home loans available in the communities where its depositors live and work?). But it doesn't hurt to test the financial pulse of your thrift from time to time.
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