The most important problem was the increased stress on the Bank Insurance Fund (BIF), which suffered a third consecutive year of decline, ending the year with a balance of only $4 billion, or about 21 cents per every $100 of insured deposits. According to its 1991 audit of the BIF’s financial statement for 1990, the General Accounting Office concluded as follows: “Given the minimum level of identifiable exposure facing the Fund from bank failures likely to occur in 1991, we believe that the Fund in all likelihood will be insolvent by December 31, 1991.^13-1

Economic/Banking Conditions

In 1990, the Gross Domestic Product (GDP) growth rate slipped as the Persian Gulf War started. Over the year there was only minimal growth in GDP, 1.3 percent.^13-2 Employment growth slipped to 1.2 percent while the unemployment rate rose to 5.6 percent.^13-3 Inflation also increased slightly to 4.4 percent.^13-4 Interest rates remained constant with the discount rate at 7 percent and the 30-year mortgage rate at 10.1 percent.^13-5 The office vacancy rate continued to increase and was at 18.5 percent. Decreases in home sales and housing starts also indicated a weakening real estate market. Sales were down 6.3 percent, and starts were down 13.3 percent for the year.^13-6
Bank failures in the Southwest dropped to 120, though still accounting for more than 70 percent of all failures for the year. The regional economy outperformed GDP as the economy was beginning to become healthy 1 again.^13-7 Lending was still tightening in all areas, and commercial real estate loans, at 6.8 percent of assets, and Commercial and Industrial loans, at 7.8 percent of assets, fell below the national medians of 7 percent and 8 percent of assets, respectively. Total loans and leases in the region were only 45 percent of assets, while the national median was at 55 percent.

Agricultural banking continued to recover, with bank failures falling to 7.1 percent of all bank failures. Nonperforming agricultural bank loans also dropped to 2.6 percent of all loans, down from the 6.7 percent peak in 1986. The share of CAMEL 4 and 5 rated agricultural banks also improved to 15.5 percent of all troubled banks, the lowest in the period between 1980 and 1990.

Banking problems were beginning to shift to the Northeast and to California. In the Northeast, real estate values were falling as the market was collapsing and residential and commercial vacancy rates were rising.^13-8 New York City’s office market was overbuilt, and its housing market was weakening.^13-9 The condominium market, notably Connecticut’s, was overflowing with some areas having more than a two-year supply.^13-10 That collapse of the real estate market was felt by the banking industry in the region. Forty percent of all banks in the Northeast reported negative income for 1990, and median return on assets for Northeastern banks was at a low 0.2 percent and was falling as the national median was rising to 0.7 percent. Nonperforming assets peaked at 5 percent of assets, and nonperforming loans were more than 8 percent of all loans. There were 16 failures in the region, including Seamen’s Bank for Savings, New York City, New York with assets totaling $2.4 billion and an estimated loss of $189 million to the BIF.

California was experiencing its worst downturn since the Great Depression, slipping into a 38-month recession. Real estate values in the “hot” coastal markets had fallen 10 percent to 20 percent in the past 12 months.^13-11 Rent rates in Los Angeles also were declining. Despite the overbuilt real estate markets in the state, especially in southern California, total real estate loans continued to rise to about 39 percent of assets, and commercial real estate loans, as a percentage of total assets, were almost 20 percent higher than the U.S. median. California’s employment figures peaked and the state had an unemployment level of 5 percent, which was still below the national rate.^13-12 The “Big Four” continued to fare well, due in part to their diversified activity throughout the state. The average return on assets for those four banks was at 1.1 percent, more than 50 basis points above the national average for all banks.

The number of banks chartered in the year declined to 168 institutions. During 1990, the number of problem commercial banks and saving banks insured by the FDIC declined, but the volume of assets in those institutions increased dramatically. Thus, while there were 1,046 problem banks at the end of 1990, compared to 1,109 at the end of 1989, the banks on the problem list had $408.8 billion in assets, up from $235.5 billion the previous year. Key indicators of asset quality showed that 1990 was more troublesome than 1989 for commercial banks, especially banks with large commercial real estate and construction and development loan portfolios. By the end of 1990, 2.9 percent of all commercial banking assets were classified as troubled (loans 90 days or more past due, nonaccrual loans, and other real estate owned); that was the highest level since banks began reporting detailed information on troubled assets in 1982. The banking industry’s inventory of troubled assets increased by $23.5 billion in 1990, significantly higher than the previous year’s $8.2 billion increase. Net charge-offs rose to a record $29 billion, compared with the previous high of $23 billion in 1989.

Savings banks in particular were hit hard in 1990. An aggregate net loss of $2.5 billion was reported by the 456 FDIC insured state and federally chartered savings banks, more than three times the $773 million lost by savings banks in 1989. Most of those institutions were in the Northeast, and losses were attributed to continuing difficulties in commercial and residential real estate markets in New England and other Northeastern states.

During 1989 and 1990, troubled assets at BIF insured savings banks increased from 1.51 percent of total assets to 5.04 percent of total assets. Savings banks in New England lost nearly 19 percent of equity capital in 1990 due to large provisions for loan loss reserves. Those reserves more than quadrupled from $790 million in 1988 to $3.5 billion in 1990. By the end of 1990, 34 savings banks were on the problem bank list compared to only 17 at the end of 1989. In addition, there were 446 Savings Association Insurance Fund (SAIF) insured savings banks with combined assets of $231 billion on the FDIC’s problem list by the end of 1990.

Table 13-2 shows the number and total assets of FDIC insured institutions, as well as their profitability as of the end of 1990.

The FDIC resolved a total of 168 failed banks in 1990, a decrease from the 206 failures in 1989. Total assets of failed banks also declined to about $16.9 billion in 1990, down from $28.9 billion in 1989. A total of ten FDIC insured savings banks failed in 1990, more than in the previous seven years combined.

Of the 168 bank failures in 1990, 148 were purchase and assumption (P&A) transactions, including 43 whole bank deals. Of the remaining 20 bank failures, 8 were resolved by payoffs and 12 through insured deposit transfers (IDTs) to other institutions.

Two of the more significant closings in 1990 were in New York City.

• On April 18, 1990, the Office of Thrift Supervision (OTS) closed one of the largest savings banks in New York City, The Seamen’s Bank for Savings, founded in 1829. Chase Manhattan Bank assumed the deposits. The Seamen’s Bank had assets of $3.3 billion, and insured deposits totaled about $2.1 billion.



• On November 9, 1990, the Office of the Comptroller of the Currency closed Freedom National Bank of New York, New York City, New York, one of the largest minority-owned banks in the country. The FDIC paid off deposits in Freedom National Bank of New York, which had about $101 million in total deposits and $110 million in assets.

• Part 327 was amended to increase the deposit insurance assessment paid by BIF insured banks from 12 cents per $100 of insured deposits to 19.5 cents per $100, effective January 1, 1991;



• Part 303 was amended to require state chartered savings associations to (1) follow the same investment limitations applicable to federally chartered associations; (2) divest equity investments not specifically permitted under FIRREA; and (3) prohibit the acquisition of, and require divestiture of, junk bonds;



• Part 323 was added pursuant to FIRREA as follows: to (1) require an appraisal on real estate transactions valued at greater than $50,000; and (2) set minimum standards for performing appraisals.
  

**

In 1990, BIF dropped dramatically to $4 billion, down from $13.2 billion a year earlier. FDIC staff grew significantly in 1990, particularly in the Division of Liquidation, Legal Division, and Division of Supervision. Total staff, not including 4,899 at the RTC, had increased to 14,348 by the end of 1990, a 40.8 percent increase over the 10,187 employees at the end of 1989. Division of Supervision staff grew to 3,400, up from 2,903 in 1989. Division of Liquidation staff at the end of 1990 was 6,311, up from 4,141 at the end of 1989. Total staffing including 4,899 RTC employees equaled 19,247. Chart 13-2 shows the staffing levels for the past five years.

The FDIC restructured its regional liquidation operations in 1990, establishing new consolidated field offices in San Antonio,

The Rhode Island Share and Deposit Indemnity Corporation (RISDIC), created in 1969 to insure deposits at state chartered credit unions, collapsed in December of 1990. Problems at the following member institutions led to the failure of RISDIC:

• Jefferson Loan and Investment Company suffered losses on lease investments purchased from two firms that had since failed;



• Heritage Loan and Investment Company’s loan portfolio suffered substantial losses and its president was charged with embezzling $13 million;



• Marquette Credit Union had a negative net worth of $30 million;



• Davisville Credit Union had a negative net worth of $18 million; and



• Rhode Island Central Credit Union had a negative net worth of $19 million and suffered a major run in December of 1990.

*Thrifts placed into the ARP program are included for clarity, although they were never placed into the conservatorship program. Back to table
**Includes two institutions which were P&A transactions, but were neither in conservatorship nor in ARP. Back to table
***Losses for all resolutions occurring in this calendar year have been updated through 12/31/95. The loss amounts are routinely adjusted with updated information from new appraisals and asset sales, which ultimately affect projected recoveries. Back to table

Source: RTC, 1990 Annual Report and Reports from FDIC Division of Research and Statistics.

Notable Events

The RTC’s first full year of operation was 1990. Having started operations on August 9, 1989, the RTC faced numerous challenges. In his book, Full Faith and Credit, FDIC Chairman Seidman recalled: “We thought that the size of the problem involved somewhere around 350 to 400 insolvent institutions, with $200 billion in assets. Most would simply have to be taken over and liquidated.”^13-15 By the end of 1995, the RTC had closed 747 institutions with a total book value in assets of $402.6 billion; in 1990 alone 315 institutions with $136.2 billion in assets were closed.

Significant events for the RTC in 1990 included the following:

• Peoples Heritage Savings & Loan Association, Salina, Kansas, became the first thrift resolved using a branch breakup method;



• The RTC signed an agreement with the Federal Financing Bank to provide for future quarterly borrowings for working capital;



• Gibraltar Savings, F.A., in Simi Valley, California, with $6.8 billion in assets, was resolved;



• CenTrust Federal Savings Bank, a $6.7 billion thrift in Miami, Florida, was resolved;



• The Accelerated Resolution Program (explained later in this chapter) was announced, and the first four transactions were completed;



• The RTC published an initial $3.7 billion “junk bond” inventory list;



• A program was announced to market hard-to-sell commercial assets in large packages of up to $500 million; and



• The RTC National Sales Center opened in Washington D.C.

At the beginning of 1990, the RTC had 281 thrifts to manage in its conservatorship program. During the year, 207 additional thrifts were placed into conservatorship, and 315 thrifts were resolved (including 6 institutions which had never been placed into conservatorship), leaving 179 thrifts in conservatorship at the end of the year. The 315 resolved thrifts contained 2,362 banking offices located in 42 states.

The RTC conducted 172 P&A transactions involving $77.8 billion in deposits. Premiums paid by acquirers in the P&A transactions totaled $1.25 billion. Premiums paid for deposit portfolios ranged from 1 percent to more than 8 percent of the failed institution’s core deposits; the average premium was 2 percent.

There were 96 IDTs in 1990, or about 30 percent of all resolution transactions, involving $13.5 billion in deposits. The IDT method generally was used for smaller institutions, but five thrifts with deposits over $500 million each were resolved in that manner. For the 268 total transactions in which a deposit payoff was avoided, the total estimated savings when compared with the cost of a deposit payoff was $1.4 billion.

Payoffs were conducted for 47 thrifts, or 14.9 percent of all resolutions, in 1990. Total assets at the time of resolution were $4.7 billion. Sixty percent of the payoffs occurred in just three states: Texas, Louisiana, and New Mexico.

Losses per transaction type are shown in Table 13-6 and Table 13-7 shows conservatorships and receiverships at year-end 1990.

In 1990, there were 315 resolutions with total deposits of $87.2 billion in 10,213,526 deposit accounts. Of that total, there were 47 payoff transactions with $5 billion in total deposits in 298,538 deposit accounts.

Of the 352 insured thrift failures since the RTC began operations in August of 1989, 179 were P&A transactions, 51 were payoff transactions, and 122 were IDTs.

Asset Disposition

At the beginning of 1990, the RTC had $112.9 billion in assets in liquidation. Assets acquired during the year through conservatorships, other resolved institutions, and putbacks or repurchases totaled $162.1 billion. Losses and collections totaled $128.3 billion for the year. By the end of 1990, the RTC’s total for assets in all receiverships and conservatorships was $146.7 billion. Of that total, $59.3 billion were receivership assets.

FIRREA required the RTC to utilize the services of private-sector companies in managing and disposing of assets whenever possible. That was accomplished through the use of interim service agreements, Standard Asset Management and Disposition Agreements (SAMDAs), and other contracting activities. Primarily through those programs, private sector firms were managing $36 billion or 62 percent of the total assets in receivership at the end of the year. Series I SAMDA contractors had $28 billion of that amount.

dd

By necessity, the RTC operated at a record-setting pace in establishing an organization that quickly had more assets than any financial institution in the country. From its initial staff of a few hundred FDIC employees, the RTC grew to nearly 5,000 by the end of 1990. During that time, the RTC established a network of four regional offices: Atlanta, Georgia; Dallas, Texas; Denver, Colorado; and Kansas City, Missouri. It also established 14 consolidated offices and 14 sales centers.