A number of significant events occurred in 1994.

• On March 14, the accounting firm of Deloitte & Touche agreed to pay $75.2 million to the FDIC and $236.8 million to the RTC to settle claims based on alleged accounting and auditing failures at banks and savings associations, resolving 18 pending suits.


• On March 17, the FDIC sold $762 million in performing commercial real estate loans in its first securitized loan offering.
  
• March 31 marked the end of the first quarter since 1978 with no bank failures.
  
• On July 7, the FDIC placed The Meriden Trust and Safe Deposit Company, Meriden, Connecticut, in receivership using the FDIC’s self-appointment power authority for the first time.
  
• On August 9, KPMG Peat Marwick, LLP, an accounting firm, agreed to pay $58.5 million to the FDIC and $128 million to the RTC to settle claims based on alleged accounting and auditing failures at banks and savings associations, resolving seven pending suits.
  
• On October 7, Ricki Tigert (who became Ricki Helfer later that same year) was sworn in as the 16th chairman of the FDIC, and Andrew C. Hove, Jr., was sworn in for a second term as vice chairman. Ms. Tigert was the first woman ever to head a federal banking agency. Before her appointment, Ms. Tigert had been a partner in the Washington office of the law firm of Gibson, Dunn, and Crutcher, specializing in banking and finance. From 1985 to 1992, she was the chief international lawyer for the Board of Governors of the Federal Reserve System.
  
• On November 7, a special task force was created to analyze and make recommendations regarding the risks posed to banks by derivatives and other investment products.
  
• On November 9, the FDIC began developing a five-year strategic plan.

In 1994, the U.S. economy continued to grow at a moderate pace with Gross Domestic Product, increasing at a rate of 3.5 percent.^17-1 Employment growth increased from 1.4 percent in 1993 to 2.4 percent in 1994 while the unemployment rate fell to 6.1 percent from 6.9 percent in 1993.^17-2 Interest rates increased but remained low with the discount rate at 3.6 percent and the 30-year mortgage rate at 8.4 percent.^17-3 The inflation rate continued to decline and was at 2.3 percent, which was about 7 percent lower than inflation rates in the early 1980s.^17-4 Real estate markets continued to fare well. Home sales were up 3.3 percent for the year, and housing starts were up 13.1 percent. The office vacancy rate declined for the third year in a row to 15.3 percent, which was the lowest level in 10 years.^17-5
The Southwest banking industry continued to recover, and for the first time since 1981 there was not a bank failure in the region. Nonperforming assets relative to total assets continued to fall and were the same as the national level. Net charge-offs on loans and leases as a percentage of assets also continued to decrease and fell below the U.S. banking industry level. For the second year in a row, total loans and leases relative to total assets increased, but remained below the national level. Those increases included total real estate loans, commercial real estate loans, and the first increase in the Commercial and Industrial (C&I) loan ratio in 10 years. The Southwest economy was healthy, as was most of the country. The increase in loan activity in the region proved that expansion was resuming and the Southwest had recovered from the economic crisis in the 1980s.

Total loans and leases in the Northeast remained steady, although above national levels, at almost 62 percent of assets. Total real estate loans, relative to assets, were more than 20 percent above national levels and commercial real estate loans were at 12 percent of assets. C&I loans continued to decrease relative to assets and fell further below the rest of the U.S. The health of the banking industry in the region was improving, but not quite back to levels attained around the country. The return on assets for the region’s banks increased for the fourth year in a row to 0.8 percent. Nonperforming assets and net charge-offs on loans, both as percentages of total assets, continued to fall. There were four failures in the region in 1994, accounting for $15 million in estimated losses, only 10 percent of total U.S. failure costs. In addition, only 6 percent of all Northeast banks were considered problem banks.

California was experiencing the end of its economic downturn of the early 1990s. In 1994, there was a slight increase in construction employment in California, but defense-related employment continued to decrease and fell below 500,000.^17-6 Over the 38-month recession, California had lost 25 percent of its aerospace high tech employment, 21.5 percent of its construction employment, and 14 percent of its manufacturing employment. C&I loans and total loans and leases, as percentages of assets, continued to decline for the state. Office vacancy rates in the state were declining, but Los Angeles and San Diego still had rates above the national level.^17-7 Completions in the commercial real estate market were virtually nonexistent.^17-8

The recession, while affecting the earnings of the California banking sector, was relatively mild in terms of bank failures. In 1994, eight banks failed in the state. Declining interest rates assisted in cushioning the impact of the recession on the number of bank failures. The three remaining Big Four were able to withstand the pressures of the recession through diversification of statewide operations. On the other hand, community banks and recently chartered banks that pursued aggressive real estate lending strategies were more affected by the recession. The bank performance ratios for the three remaining Big Four banks were excellent, while the performance of the smaller banks continued to lag. Bank of America, First Interstate, and Wells Fargo Bank posted an average return on assets of 1.25, which was well above the national level compared to the 23 basis point return on assets of the entire California banking industry. The number of problem banks in the state remained high at 21 percent of the total number of banks in California. Nonperforming assets continued to fall, but Southern California’s level was still more than 4 percent of assets compared to the national median of 1.2. Net charge-offs on loans and leases as a percentage of assets began to decline although they still remained higher than the national median.

Lending activity in California, though slowing, continued to outperform the rest of the country. Although they were above national levels, C&I loans, relative to assets in the state, continued to decrease to 11.8 percent, while total real estate loan and commercial total real estate loan ratios increased to 39.9 percent and 27 percent, respectively. The number of new housing permits remained steady, and median home prices leveled off just below $200,000, well above the national level of $109,400.^17-9

Despite California’s problems, the U.S. banking industry had experienced an almost complete turnaround from the massive problems of the previous decade. In 1994, insured commercial banks reported a record net income of $44.7 billion, an increase of 3.7 percent over 1993 earnings. More than 96 percent of all commercial banks were profitable in 1994, due mainly to higher net interest income and lower provisions for future loan losses. The number of insured commercial banks fell to 10,451 at the end of 1994, for a net reduction of 507 banks. Mergers and consolidations accounted for a reduction of approximately 550 banks. Only 50 new bank charters were issued, the fewest charters since 1943. The number of Bank Insurance Fund (BIF) member banks on the FDIC’s problem list declined for the third consecutive year, shrinking to 247 commercial and 17 savings banks. Those 264 banks had assets of $42 billion at the end of the year. In addition, there were 54 Savings Association Insurance Fund (SAIF) insured savings banks with combined assets of $31 billion on the FDIC’s problem list by the end of 1994.

At the end of 1994, there were 2,1521^17-10 savings banks insured by the FDIC. Those savings banks held assets of just over $1 trillion, which was 20 percent of all assets of FDIC insured financial institutions. Although there was a $1.9 billion decline in provisions for future loan losses, that improvement was offset by a $1.7 billion drop in net interest income of savings banks. One of every four large thrifts with assets greater than $5 billion lost money in 1994, although more than 93 percent of all savings banks reported a net profit.

Table 17-2 shows the number and total assets of FDIC insured institutions, as well as their profitability as of the end of 1994.

Only 13 commercial and savings banks with $1.5 billion in assets were closed in 1994. That was the smallest number of failures since 1981 when only 10 banks failed. Eight of the 13 failures in 1994 were in California. There were no instances of assistance to open banks in 1994.

In each of the 13 commercial and savings banks that failed in 1994, the FDIC arranged a purchase and assumption (P&A) transaction under which some or all of the deposits were assumed by another institution, avoiding any payoff of insured deposits. However, in eight of the 13 failures, only insured deposits passed to the assuming bank. Therefore, depositors received less than 100 cents on each dollar above the $100,000 insured amount, although further distributions were projected. In all, $8.3 million in advance dividend payments were made to uninsured depositors in 1994. Estimated losses to BIF for those 13 banks were $139 million at the time of resolution, or 9.93 percent of the total assets in those institutions. A more recent estimate of losses is shown in Table 17-3.

Table 17-3

• Standardizing bank real estate appraisal rules with other regulators by increasing the threshold to $250,000 from $100,000 (raised from $50,000 to $100,000 in 1991) for loans that require an appraisal;-
  
• Requiring advance notice of an institution’s conversion from mutual to stock ownership;
  
• Requiring foreign banks to obtain approval from the FDIC and the Federal Reserve Board for an insured state branch to engage in or to continue an activity not permissible for a federally licensed branch of a foreign bank; and
  
• Amending risk-based capital standards by recognizing the risk-reducing benefits of qualifying bilateral netting contracts.
  

In the 13 banks that failed or were assisted in 1994, deposits totaled $1.4 billion in 144,742 deposit accounts. Dividends paid on all active receiverships totaled $7.2 billion in 1994.

Of the 2,121 insured bank resolutions^17-11 since the FDIC began operations in 1934, 1,237 were P&A transactions and 202 were whole bank deals. Deposit payoff transactions accounted for 603 cases, of which 176 were insured deposit transfers (IDTs). There were also 79 open bank assistance (OBA) transactions.

Total disbursements by the FDIC since January 1, 1934, amounted to $103.5 billion. Of that amount, the FDIC recovered $67 billion for a net loss of $36.5 billion.

Asset Disposition

At the beginning of 1994, the FDIC held $28 billion in assets from failed institutions. That included $25.2 billion in BIF assets, $2.7 billion in FSLIC Resolution Funds (FRF) assets, and $72 million in assets from SAIF-insured institutions. During the year, the FDIC acquired an additional $1.9 billion in assets from 13 bank failures. Another $695 million was repurchased from FRF institutions. The FDIC collected $6.7 billion during the year, and the ending balance for assets in liquidation was $16.7 billion, a reduction of $11.3 billion. Of the $16.7 billion, $14.9 billion was assets in liquidation for BIF, $1.8 billion for FRF, and $15 million for SAIF.

During 1994, the FDIC sold or otherwise disposed of a large amount of its asset inventory from failed institutions. Real estate properties sold for a total of $1.2 billion, yielding a recovery of 91 percent of average appraised value. In addition, the FDIC sold $762 million of performing commercial mortgage loans through securitization, providing purchasers a partial guarantee backed by BIF to cover credit losses. More than 63,780 loans and other assets totaling $4.6 billion in book value were sold through asset marketing efforts, with net sales proceeds during 1994 representing 101 percent of appraised value.

The FDIC’s Affordable Housing Program received $7 million in Congressional appropriations in 1994 and assisted qualified buyers with the purchase of 681 one-to-four family properties. In addition, ten multi-family properties consisting of 286 units were sold through the program to nonprofit organizations and public agencies that provide rental housing to low income households. Table 17-4 shows the FDIC’s assets in liquidation and Chart 17-1 shows the asset mix.