Intangible Assets, the Loan Portfolio and Deposit Mixes of Stock Savings & Loans.

SYNOPSIS: This paper examines the use of the purchase method of accounting by stock savings and loan associations, the resulting recognition of intangible assets, and the influence of these intangibles on manager investing decisions and deposit-taking activities. Through periodic amortization, intangible assets can reduce earnings and capital ratios. Such negative earnings pressures can motivate managers to invest in riskier assets with higher returns to offset reduced earnings. Brokered deposits (deposit liabilities originated by money brokers) offer a funding source for these higher risk investment activities. This study investigates the cross-firm relation between intangible assets and the loan portfolio mixes of stock thrifts to determine if stock savings institutions with intangibles possess riskier asset mixes than thrifts without intangibles. The relationship between intangible assets and brokered deposits is also examined to discover if stock savings and loans with intangibles are more likely to rely on brokered deposits as a funding source than thrifts without intangibles. Nearly 50 percent of all stock institutions had recorded intangibles at June 1988. Results of the study indicate that thrifts with intangibles are associated with higher levels of credit risk and are more likely to use brokered deposits than institutions without intangibles. Additionally, the study provides evidence that charter, institution size, and tangible capital levels are also determinants of credit (default) and liquidity risk. This study provides auditors with an increased understanding of how credit risk is related to the existence of intangible assets. Auditors can use intangibles as an indicator of increased risk when performing internal control evaluations of a firm. If intangible assets and their related accounting rules create negative earnings pressures that motivate managers to take increased credit and liquidity risk in order to meet minimum capital requirements,...