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1999 Annual Report

Operations of the Corporation – The Year in Review



Overview
line

 FDIC representatives answer customers’ questions after financial institution failures. Here, the FDIC’s Rickie McCullough meets with depositors of the failed First National Bank of Keystone, Keystone, WV

In 1999, the U.S. economy marked its ninth year of a remarkably strong economic expansion, which contributed to record profits for the banking industry. Insured commercial banks posted record earnings for the eighth consecutive year, while insured savings institutions recorded their third consecutive year of record earnings.
Commercial banks earned $71.7 billion in 1999, an increase of $9.9 billion (16.0 percent) over their 1998 results. The industry’s return on assets (ROA) rose to a record-high 1.31 percent, from 1.19 percent in 1998. The previous record for full-year ROA was 1.23 percent, set in 1997. Banks’ return on equity (ROE) rose to 15.34 percent, equaling the all-time high first reached in 1993. Much of the earnings improvement occurred at the largest banks, due to continued strength in noninterest income and slower growth in noninterest expenses. Profitability declined at smaller banks, reflecting narrower net interest margins. Overall asset-quality indicators remained favorable; both the percentage of loans charged off and the percentage of loans that were noncurrent (past due 90 days or more or in nonaccrual status) at year-end were lower than a year earlier. This improvement was made possible by lower losses on credit card loans, which outweighed a rise in losses on commercial and industrial loans.

Insured savings institutions earned $10.9 billion in 1999, a $736 million (7.3 percent) increase over 1998. The average ROA was 1.00 percent, about the same as the 1.01 percent that thrifts registered in 1998. The gap in performance between the largest savings institutions and their smaller counterparts widened in 1999. At thrifts with more than $5 billion in assets, the average ROA was 1.06 percent, up from 1.04 percent in 1998. At savings institutions with less than $5 billion in assets, the average ROA declined from 0.96 percent to 0.93 percent.

The FDIC administers two deposit insurance funds, the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF), and manages the FSLIC Resolution Fund (FRF), which fulfills the obligations of the former Federal Savings and Loan Insurance Corporation (FSLIC). As a result of positive conditions, deposit insurance assessment rates remained unchanged from 1998 for both deposit insurance funds, ranging from 0 to 27 cents annually per $100 of assessable deposits. Under this assessment rate schedule, 93.7 percent of BIF-member institutions and 91.6 percent of SAIF-member institutions were in the lowest risk-assessment rate category and paid no deposit insurance assessments for the first semiannual assessment period of 2000.

At year-end 1999, the BIF had a balance of $29.4 billion, representing a loss of $198 million for the year. This was the first year-end loss reported since 1991 and was primarily attributable to insurance losses recognized in 1999. During the year, BIF-insured deposits grew by 0.76 percent, yielding a reserve ratio of 1.36 percent of insured deposits at year-end 1999. The reserve ratio at year-end 1998 was slightly higher, at 1.38 percent. Seven BIF-insured institutions failed in 1999 with total assets at failure of $1.4 billion and total estimated insurance losses of $838.4 million. The contingent liability for anticipated failure of BIF-insured institutions as of December 31, 1999, was $307.0 million compared to $32.0 million at year-end 1998.

The SAIF ended 1999 with a fund balance of $10.3 billion, a 4.5 percent increase over the year-end 1998 balance of $9.8 billion. Estimated insured deposits increased by 0.34 percent in 1999. The reserve ratio grew from 1.39 percent of insured deposits at year-end 1998 to 1.45 percent. Only one SAIF-insured institution failed in 1999 with total assets at failure of $63.0 million and estimated insurance losses of $1.3 million. The contingent liabilities for anticipated failure of SAIF-insured institutions as of December 31, 1999 and 1998, were $56.0 million and $31.0 million, respectively. On January 1, 1999, a Special Reserve was established within the SAIF, as required by the Deposit Insurance Funds Act of 1996. The SAIF Special Reserve was mandated as a result of the federal budget process and did not address any deposit-insurance issues. The reserve was funded with $978 million, the amount by which the SAIF exceeded the Designated Reserve Ratio of 1.25 percent. The segregation of these funds into the special reserve was eliminated on November 12, 1999, with the enactment of the Gramm-Leach-Bliley Act.

Selected Statistics

Bank Insurance Fund (BIF)

(Dollars in Millions) For the year ended December 31

1999

1998

1997

Financial Results
Revenue $

1,816

$

2,000

$

1,616

Operating Expenses

730

698

605

Insurance Losses and Expenses

1,192

(6)

(428)

Net Income

(106)

1,309

1,438

Comprehensive Income*

(198)

1,319

1,438

Insurance Fund Balance $

29,414

$

29,612

$

28,293

Fund as a Percentage of Insured Deposits

1.36 %

1.38 %

1.38%

Selected Statistics

Total BIF-Member Institutions +

8,832

9,031

9,403

Problem Institutions

66

68

73

Total Assets of Problem Institutions $

4,000

$

5,000

$

5,000

Institution Failures

7

3

1

Total Assets of Current Year Failed Institutions $

1,424

$

370

$

26

Number of Active Failed Institution Receiverships

101

219

302

Savings Association Insurance Fund (SAIF)

(Dollars in Millions

For the year ended December 31

1999

1998

1997

Financial Results
Revenue $

601

$

584

$

550

Operating Expenses

93

85

72

Insurance Losses and Expenses

31

32

(2)

Net Income

477

467

480

Comprehensive Income*

441

472

480

Insurance Fund Balance $

10,281

$

9,840

$

9,368

Fund as a Percentage of Insured Deposits

1.45%

1.39%

1.36%

Selected Statistics

Total SAIF-Member Institutions **

1,388

1,430

1,519

Problem Institutions

13

16

19

Total Assets of Problem Institutions $

6,000

$

6,000

$

2,000

Institution Failures

1

0

0

Total Assets of Current Year Failed Institutions $

63

$

0

$

0

Number of Active Failed Institution Receiverships

3

2

2

*   Comprehensive Income is added to conform with SFAS No. 130, "Comprehensive Income."
+  Commercial banks and savings institutions. Does not include 20 U.S. branches of foreign banks.
** Savings institutions and commercial banks.


 

The FRF consists of two distinct pools of assets and liabilities. One pool, composed of the assets and liabilities of the FSLIC, transferred to the FRF when the FSLIC was dissolved on August 9, 1989 (FRF-FSLIC). The other pool, composed of the assets and liabilities of the Resolution Trust Corporation (RTC), transferred to the FRF on January 1, 1996 (FRF-RTC). The assets of one pool are not available to satisfy obligations of the other. As of December 31, 1999, the FRF-FSLIC had resolution equity of $2.2 billion, and the FRF-RTC had resolution equity of $4.4 billion.

Eight institutions insured by the FDIC were closed during 1999. Seven of those institutions were insured by the BIF and one was insured by the SAIF. These failed entities had combined assets of approximately $1.5 billion. The First National Bank of Keystone, Keystone, WV, accounted for $1.0 billion of the total assets.

For the eight failures in 1999, approximately $1.4 billion of deposits in 69,000 accounts were protected by FDIC insurance.

During 1999, the FDIC disposed of $1.6 billion in retained assets, which resulted in a net reduction of the book value of assets in liquidation from $2.4 billion at year-end 1998 to $2.0 billion at year-end 1999, a decline of 17 percent. In addition to assets in liquidation, the FDIC was managing approximately $5.2 billion in assets not in liquidation, a reduction of $1.5 billion during the year. A total of 469 real estate properties were sold for a total of $66.8 million, and 16,976 loans and other assets were sold for a total of $204.2 million.

During the year, the FDIC terminated 363 receiverships. The FDIC was administering 448 receivership estates at the end of 1999.

 

Emerging Trends line
Despite the apparently strong condition of the economy and the banking system in 1999, the FDIC continued to monitor a number of emerging trends.

The first trend, an area of concern, is household and business debt levels. Spending by households and businesses is growing faster than cash income, resulting in rapidly increasing indebtedness. Further, recent growth in business indebtedness raises concerns about commercial credit quality. After expanding at the fastest growth rate in more than a decade during 1998, the commercial and industrial (C&I) loan portfolios at insured depository institutions continued to grow rapidly in 1999. Evidence of weakening corporate credit quality began to appear during 1999, and the federal banking regulators have

Chairman Tanoue appeared on live network television to withdraw cash from an ATM, showing it was business as usual for bank customer on January 1, 2000.

Chairman Tanoue appeared on live network television to withdraw cash from an ATM, showing it was business as usual for bank customers on January 1, 2000.

publicly expressed their concerns about the quantity and quality of commercial credit risk in the system. Despite starting from very low levels, net C&I loan charge-offs for all insured institutions totaled $3.6 billion during 1999 – a 51 percent increase over 1998. Moreover, results from the annual interagency review of large commercial credits – the Shared National Credit (SNC) Program – noted a sharp rise in criticized loans, albeit from historical lows. At the same time, corporate bond defaults and negative credit rating revisions during 1999 reached levels not seen since the early 1990s. These signs of moderate deterioration in commercial credit quality have been experienced during a particularly strong economic environment, leading to questions about how much further credit quality might deteriorate in the event of a moderate to severe recession.

Second, intense competition in banking is driving business strategies. Evidence also suggests that, to maintain loan growth and meet funding needs, institutions are pursuing asset-liability structures with higher levels of interest rate risk. Innovations and cost-cutting initiatives used by insured institutions to counter competitive pressures may introduce new risks associated with complex accounting valuations, weakening internal controls, and the need for more intensive loan servicing.

 

Liquidation Highlights 1997-1999
Dollars in billions
1999 1998 1997
Total Failed Banks 7 3 1
Assets of Failed Banks $ 1.42 $ .37 $ .03
Total Failed Savings Associations 1 0 0
Assets of Failed Savings Associations $ .06 $ 0 $ 0
Net Collections from Assets in Liquidation* $ .98 $ 3.55 $ 3.57
Total Assets in Liquidation* $ 1.98 $ 2.38 $ 4.12
Net Collections from Assets Not in Liquidation* $ .21 $ .38 $ .48
Total Assets Not in Liquidation* $ 5.20 $ 6.71 $ 8.17

* Also includes assets from thrifts resolved by the FSLIC and the RTC.

Third, the economy and the banking system are vulnerable to sudden shocks from financial market instability. The 1990s were marked by recurring, and perhaps more frequent, episodes of financial market turbulence. At the request of the Department of the Treasury, FDIC Chairman Tanoue represents the United States on the Financial Stability Forum’s Study Group on Deposit Insurance. The Financial Stability Forum was established by the Bank for International Settlements to examine issues relating to global financial stability.

 

Chairman Tanoue with Financial Stability Forum's Study Group on Deposit Insurance at their first meeting in Ottawa, Cananda, in December 1999

Chairman Tanoue (center) joins other members of the
Financial Stability Forum's Study Group on Deposit Insurance at their first meeting in Ottawa, Canada, in December 1999.
Fourth, for most of the 1990s, banking industry asset growth has outstripped growth in deposits, creating greater reliance on more expensive and less stable market-based sources of funding. Each quarter, the FDIC publishes a Regional Outlook that provides analysis and discussion of national and regional trends that may affect the risk exposure of insured depository institutions. The third quarter 1999 edition of the Regional Outlook included a special analysis of these funding trends and the challenges they pose for community institutions.

Fifth, and finally, after the announcement of several mergers between several of the largest U.S. banks, the FDIC created an internal task force in July 1998 to identify and to address issues that might arise in resolving the failure of one of the largest banks.

 

 

Year 2000line


During 1999, the FDIC took an aggressive approach to supervising federally insured financial institutions to assure readiness for the Year 2000 (Y2K) date conversion and, as important, engaged in an extensive program of Y2K public education and outreach.

Throughout the year, the FDIC’s Division of Supervision (DOS) examiners, with assistance from state bank regulators, performed comprehensive on-site Y2K readiness assessments of FDIC-supervised financial institutions and their service providers, as well as software vendors that the FDIC is responsible for examining. Year 2000 readiness efforts were assessed "satisfactory," "needs improvement," or "unsatisfactory." All service providers and software vendors examined by the FDIC were assessed "satisfactory" by the end of the third quarter. And on December 13, 1999, FDIC Chairman Donna Tanoue announced to the public that every FDIC-insured financial institution in the nation had achieved a satisfactory assessment. The industry was prepared for the Year 2000 rollover.

The FDIC – along with the other federal and state regulatory agencies – set up supervisory programs to monitor the transition of financial institutions, service providers and software vendors into the Year 2000 during the key period of October 1, 1999, through the century date change. Each financial institution, service provider and software vendor was contacted at least once from October 1 through December 31, 1999; again from January 1-3, 2000; and again from January 4-5, 2000.

To assure public confidence, FDIC senior officials participated in hundreds of Y2K outreach events, and were interviewed by The Wall Street Journal, The Washington Post, USA Today and other news venues. During the year, the Y2K issue of FDIC Consumer News was one of the most popular publications offered by the Consumer Information Center, which distributed more than 500,000 copies to the public. Throughout the fall, Chairman Tanoue traveled the country holding press conferences in major cities and personally appearing on network television news programs. On September 11, 1999, syndicated columnist Ann Landers published a Year 2000 letter from Chairman Tanoue and included the FDIC toll-free Y2K information number. Approximately 1,200 newspapers carried the column. In mid-November, Gallup reported that nine out of ten U.S. bank customers believed their banks were ready for the Year 2000.

Throughout the day on January 1, Chairman Tanoue appeared on NBC and CNN, withdrawing money from an automated teller machine, illustrating that it was business as usual for banking – and it was. Banks reported no significant Y2K problems. Public confidence held.

Compliance, Enforcement and Other Related Legal Actions 1997-1999
1999 1998 1997
Total Number of Actions Initiated by the FDIC 111 143 127
Termination of Insurance
Involuntary Termination
Sec. 8a For Violations, Unsafe/Unsound Practices or Condition

0

0

0

Voluntary Termination
Sec.8a By Order Upon Request 0 0 0
Sec.8p No Deposits 3 5 6
Sec.8q Deposits Assumed 9 4 7
Sec. 8b Cease-and-Desist Actions
Notices of Charges Issued 5 2 3
Consent Orders 19 21 15
Sec. 8e Removal/Prohibition of Director or Officer
Notices of Intention to Remove/Prohibit 4 2 11
Consent Orders 22 15 33
Sec. 8g Suspension/Removal When Charged With Crime   3 0 1
Civil Money Penalties Issued
Sec.7a Call Report Penalties 15 41 24
Sec.8i Civil Money Penalties 20 35 10
Sec. 10c Orders of Investigation 4 6 6
Sec. 19 Denials of Service After Criminal Conviction 3 3 1
Sec. 32 Notices Disapproving Officer or Director   1 0 0
Truth in Lending Act Reimbursement Actions
Denials of Requests for Relief 1 1 3
Grants of Relief 0 0 0
Banks Making Reimbursement l 134 161 139
Suspicious Activity Reports
(Both Open and Closed Institutions)
l 

22,015

20,229 20,385
Other Actions Not Listed

2

8 7
l These actions do not constitute the initiation of a formal enforcement action and, therefore, are not included in the total number of actions initiated.

 

 

FDIC Applications 1997-1999

1999

1998

1997
Deposit Insurance

295

296

238

Approved

295

296

238

Denied

0

0 0

New Branches

1,346

1,450 1,436
Approved

1,346

1,450 1,435
Denied

0

0 1
Mergers

341

390 419

Approved

341

390 419

Denied

0

0 0
Requests for Consent to Serve l 210 304 261

Approved

207 289 258

Section 19

42 145 76

Section 32

165 154 182
Denied 3 5 3
Section 19 1 3 2
Section 32 2 2 1
Notices of Change in Control 31 34 28
Letters of Intent Not to Disapprove 31 34 28

Disapproved

0 0 0
Brokered Deposit Waivers 16 10 17
Approved 16 9 17
Denied 0 1 0
Savings Association Activities n 83 0 2
Approved 83 0 2
Denied 0 0 0
State Bank Activities/Investments * 24 23 46
Approved 24 23 46
Denied 0 0 0
Conversions of Mutual Institutions 16 30 15
Non-Objection 15 30 15
Objection 1 0 0
 

l Under Section 19 of the Federal Deposit Insurance Act, an insured institution must receive FDIC approval before employing a person convicted of dishonesty or breach of trust. Under Section 32, the FDIC must approve any change of directors or senior executive officers at a state nonmember bank that is not in compliance with capital requirements or is otherwise in troubled condition.

n Amendments to Part 303 of FDIC Rules and Regulations changed FDIC oversight responsibility in October 1998.

* Section 24 of the FDI Act, in general, precludes an insured state bank from engaging in an activity not permissible for a national bank and requires notices to be filed with the FDIC.

 

 

FDIC Examinations 1997-1999

1999

1998

1997

Safety and Soundness:

State Nonmember Banks

2,289

2,170

2,515

Savings Banks

241

221

224

National Banks

3

1

6

State Member Banks

7

6

0

Savings Associations

0

1

4

Subtotal

2,540

2,399

2,749

Compliance/CRA

2,368

1,989

1,990

Trust Departments

452

542

552

Data Processing Facilities

1,446

1,335

1,514

Total

6,806

6,265

6,805

The Gramm-Leach-Billey Actline

In 1999, Congress passed financial modernization legislation directly affecting depository institutions and the FDIC, and appropriations legislation for the FSLIC Resolution Fund and the Office of Inspector General (OIG).

The Gramm-Leach-Bliley Act is financial modernization legislation signed by President Clinton on November 12, 1999. The Act (Public Law 106-102) repeals Sections 20 and 32 of the Banking Act of 1933 (Glass-Steagall Act) and amends the Bank Holding Company Act of 1956 to allow affiliations between insured depository institutions and any "financial" company, including securities and insurance firms, in new types of bank holding companies known as financial holding companies. The Gramm-Leach-Bliley Act also allows certain financial activities permitted by financial holding companies to be carried out through bank subsidiaries, subject to safeguards and restrictions.

The new law also protects the deposit insurance funds and the federal banking agencies from certain claims brought in bankruptcy for return of capital infusions made to a failing depository institution at the direction of a federal banking agency. The FDIC and the other federal banking agencies are also required to write regulations on privacy, fair credit reporting, insurance products offered by banks, and disclosure of agreements related to the Community Reinvestment Act (CRA); establish a consumer complaints mechanism for violations of rules related to insurance; and establish recordkeeping requirements related to certain securities activities conducted by banks. In addition, the FDIC is required to implement and enforce other new legal provisions, including those related to privacy and pretext calling (obtaining customer information under false pretenses).

 

 


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