Thrift industry retains its character despite predictions to the contrary.

WASHINGTON -- Claims that the "lines have blurred" between banks and thrifts appear to be premature.

Though the nation's largest thrift trade group calls itself the Savings and Community Bankers Association, savings and loans still look a lot different from community banks, according to an American Banker study of the thrift industry conducted by Ferguson & Co., Irving, Tex.

Despite the many bold projections made a few years ago that the salvation of the thrift industry would be to become more like commercial banks, the industry has not changed its lending patterns.

Greater Mortgage Exposure

Rather than diversifying their loan portfolios with consumer and small-business lending, thrifts as a whole have actually increased their exposure to the home lending market over the past few years.

Even on the liability side, though thrifts have narrowed the margins, they still pay slightly more for deposits than commercial banks. Exact figures on the industry's progress in attracting transaction accounts is not yet available.

"We have a long way to go before thrifts are melded into the banking industry," said Henry Peltz, an independent thrift consultant based in Ardsley-on-Hudson, N.Y.

Benefits of Diversification

Though thrifts are mandated to retain 65% of their assets in housing-related loans, they have good reason to diversify their balance sheets: to lessen their exposure to interest rate fluctuations, and, as a competitive measure, to provide a full menu of products and services to consumers.

"From the taxpayer's point of view, greater diversity in thrifts should minimize the possibility of another bailout," said Alden Toevs, managing vice president at First Manhattan Consulting Group.

Thrift-Like Profile for Banks

Earnings and capital levels at the nation's thrifts have improved to near-bank levels. Some thrifts have even made significant strides into consumer lending and have a tracted checking and transaction accounts.

In some respects banks have actually become more like thrifts.

"Increasingly, commercial banks are beginning to look like thrifts," acting Office of Thrift Supervision director Jonathan L. Fiechter in an interview last week.

Indeed, since the thrift reform law was enacted in 1989, more than 1,700 banks have become members of the Federal Home Loan Bank System.

In addition, thrifts and community banks appear to agree on a surprising number of political issues, ranging from opposition to changes in deposit insurance, to the perceived regulatory burden of the Community Reinvestment Act.

Group Welcomes S&Ls

"Increasingly, there are more and more issues where we are singing from the same hymnal," said Kenneth Guenther, executive director of the Independent Bankers Association of America. The trade group's board last month voted to give thrifts full membership in the IBAA.

But a close look at the industry's balance sheet shows that thrifts have a long way to go before they become more like banks.

Consumer loans at the nation's thrifts actually shrank from 4.62% of total assets in 1990 to 4.3% of assets at the end of the first quarter of 1993, according to the Ferguson data. Though consumer loans also declined within the banking industry, they still accounted for more than 20% of bank assets.

Business Loans Down

And commercial loans held by the thrift industry shrank from 2.14% of total assets in 1990, to 0.75% of assets during the first quarter. Banks had 22% of their assets in commercial loans at March 31.

What's more, thrifts have increased their securities holdings by a third over the same time period. Holdings of mortgage derivatives alone were up 157%, from $15.3 billion in 1990 to $39.5 billion at the first quarter.

"They have ignored many lending possibilities and have instead elected to lower their cost of funds and play the securities game out on the yield curve," said Charles Hebert a consultant at Ferguson & Co.

Increased competition and regulation, a lack of expertise in making non-housing-related loans, and a low interest rate environment that made it difficult to resist traditional home lending have hindered the thrift industry's move into consumer and commercial lending.

Reluctant to Change

"With the regulatory climate thrifts have been under the past four years, they have been hesitant to branch out and do things they hadn't done before," said Mr. Hebert.

But regulators say they have actually encouraged thrifts to actively seek out opportunities in small-business and consumer lending. In fact, the Office of Thrift Supervision is asking Congress to give its member institutions the same lending powers enjoyed by state-regulated savings banks.

"We are looking at legislation to expand thrifts' small-business lending authority," Mr. Fiechter of the OTS said. Specifically, the regulatory agency is studying the provisions for increased commercial lending powers included in a community development banking bill sponsored by Rep. Floyd Flake, D-N.Y.

Competitive Aid

Though Mr. Fiechter is confident in the industry's ability to manage it's asset-liability mix, he said increased small-business lending powers would help thrifts compete with other financial institutions.

"We focus on making certain our thrifts have the ability to, say, revitalize an area of the inner city by making housing loans as well as loans to the flower shop or dry cleaners," said Mr. Fiechter.

Indeed, many thrifts find themselves offering consumer and commercial loan products -- often for the first time -- in an era. of keen competition from banks and other financial services providers.

"Everybody is in the market for consumer loans. The competition is tough," said Robert H. Trewhella, chief executive of First Federal Savings and Loan, Harrisburg, Pa., a large consumer lender. The $225 million-asset thrift's consumer loan portfolio has dropped from 35% of total assets in 1990 to 28% at the first quarter.

A Tough Marketplace

Even large thrifts with sophisticated marketing expertise and consumer lending experience have found the realities of the marketplace to be harsh. Great Western Financial Corp., a major thrift, just last week sold its $220 million credit card portfolio.

Chief executive James F. Montgomery said Great Western couldn't compete with massive credit card processors, and it "has not been possible for us to achieve the economies of scale this business demands today."

After taking a beating in the depressed commercial realty market of the late '80s, thrifts have been reluctant to rush into unfamiliar markets.

"Every time thrifts as a group have tried to diversify, they have tended to step on their own feet," said Mr. Toevs.

Many thrifts, because they lack experience in making commercial loans, are simply too timid to enter the fray.

Big Commitment

"It is a little frightening making the kind of philosophical and dollar commitment you need to change a thrift" to become a business lender, said James G. Zafris, president of Danvers Savings Bank, Danvers, Mass.

"You can't do it by just dipping your toe into the water," said Mr. Zafris, whose $230 million-asset bank has 12% of its assets in commercial loans and expects to earn more than $1 million in fee income from Small Business Administration lending alone this year.

Industry experts say that thrifts have actually increased their share of consumer loans, but that many of the loans were folded into mortgages as part of the recent spate of refinancings, and therefore do not show up on balance sheets.

Shift Not Always Apparent

"The numbers probably mask the shift in emphasis to consumer banking because many thrifts have rolled consumer loans into into mortgage loans during the refinancing boom," said Robert Davis, director of economics and research at SCBA, the thrift trade group.

Thrift executives also point to the rush of banks joining the Home Loan Bank System and the increase in mortgage loans made by consumer banks as evidence that the traditional domain of savings and loans is simply a good business.

But bankers say much of the increase in banks' mortgage lending stems from consumer demand for refinancings in the low interest rate environment of the past few years, and may not necessarily represent a long-term strategic shift.

Common Enemies

While mortgage loans increased from 38% of assets to 42% of assets from 1990 to the first quarter of this year at U.S. banks, thrifts still deployed a much larger 59% of their assets into home loans, according to the Ferguson data.

In the end, the largest convergence of banks and thrifts may ultimately be in the political and social arenas as, for example, small banks and thrifts unite in opposition to interstate branching, increased regulation, and movements to reform deposit insurance.

"We are coming together on key political issues that determine the future of the industry," said Mr. Guenther.

The Community Bankers Association of Illinois, for example, recently agreed to allow thrifts membership, and the Pennsylvania trade group representing community bankers early this year merged with the former Pennsylvania Savings and Loan League.

And in the eyes of most consumers, there appears to be little difference between thrifts and banks, notwithstanding the differences in their balance sheets.

"As far as the public is concerned there is only one deposit insurance fund now -- the FDIC," said Mr. Montgomery of Great Western.

Or as Howe Barnes Investments analyst Linda Stromberg quipped: "As far as the public is concerned, there is only one deposit insurance fund -- taxpayers."

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER