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Mr. Smith. That is right. They are subject to the existing regulations. If they come in and get insurance, they have to meet the reserve requirements of the regulations.

Senator ELLENDER. And that is what, now?

Mr. Smith. If their reserves are at a certain point-I believe it is 15 percent-of their earnings, then up to another point, it drops to 10 percent. Then, when they get reserves, say, to 10 or 12 percent, further allocations to reserves are not required.

Senator ALLOTT. Why do we not put a specific statement of these requirements in the record, Mr. Chairman?

Senator ELLENDER. Could you do that?
Mr. HORNE. Yes.
(The information follows:)

REGULATIONS DEALING WITH FEDERAL INSURANCE RESERVE The principal provisions of regulations dealing with the Federal insurance reserve are summarized below:

A. DURING FISCAL YEAR IN WHICH INSURED

1. Insurance Regulation 563.12.There shall be credited to the Federal insurance reserve account an amoumt at least equal to 310 of 1 percent of all insurable accounts as of the date of the latest financial statement or report in support of the application for insurance for that fractional part of the fiscal year, calculated to the nearest month, in which insurance has been in force.

2. Reserve Agreements with Insurance Corporation.-If the institution has entered into any agreement with the Insurance Corporation regarding the maintenance of or credits to reserve accounts, the requirements of such agreement must be met. Such agreements provide for the transfer of an amount equal to 15 percent of net income during any period when reserves and surplus are less than 5 percent of withdrawable accounts.

B. AFTER THE FISCAL YEAR IN WHICH INSURED

1. Reserve Agreements with Insurance Corporation.-If the institution has entered into any agreement with the Insurance Corporation regarding the maintenance of or credits to reserve accounts, the requirements of such agreement must be met until the second anniversary of insurance of accounts. After such anniversary date, the institution must comply only with the requirements of Insurance Regulation 563.13.

2. Insurance Regulation 563.13.-Paragraph (a) requires an insured institution to maintain its Federal insurance reserve account and its net worth at particular levels, on a semiannual basis, depending upon the length of time the institution has been insured. Each requirement is explained separately, as follows:

(1) Federal Insurance Reserve: After the closing of the books on the closing dates both preceding and following an anniversary of the date of insurance of accounts, the Federal insurance reserve shall be at least equal to the percentage of total savings accounts on each such closing date as stated below: Anniversary:

Percentage Anniversary-Continued Percentage 20.

12th.

3, 00 3d.

. 75
13th.

3. 25 4th. 1. 00 14th.

3. 50 5th. 1. 25 15th.

3. 75 6th.

16th

4. 00 7th.

1. 75
17th.

4. 25 Sth 2. 00 18th

4. 50 9th 2. 2.5 19th

4. 75 10th 2. 50 20th and thereafter.

5. 00 11th.

2. 75

. 50

1. 50

(2) Net worth: After the closing of the books on the closing dates both preceding and following an anniversary of the date of insurance of accounts, net worth shall be at least equal to the Federal insurance reserve minimum level requirement at such closing plus 20 percent of scheduled items.

Paragraph (b) requires an insured institution to make semiannual credits to its Federal insurance reserve account depending upon the institution's size, the length of time its accounts have been insured, the ratio of its adjusted net worth to its specified assets, and its growth during the semiannual period.

Institutions having an adjusted net worth of at least 12 percent of specified assets are not required to make any credit under paragraph (b).

Institutions having an adjusted net worth less than 12 percent of but at least equal to 8 percent of specified assets are required by paragraph (b) to transfer from net income, undivided profits, or earned surplus, to Federal insurance reserve an amount equal to 10 percent of net income.

Institutions having an adjusted net worth less than 8 percent of specified assets are required by paragraph (b) to increase net worth (exclusive of undivided profits and earned surplus) at the beginning of the semiannual period, less any losses on loans or investments charged to reserves during the period, by the amount shown in the following table. Such increase must be accomplished by transfer from net income, undivided profits, or earned surplus to Federal insurance

1. Institutions insured less than 20 years Category

Amount of required increase equal to (a) Specified assets less than $25 10 percent of net income.

million. (b) Specified assets at least $25 but 10 percent of net income, or 5 percent of not more than $50 million. growth in specified assets, whichever is

greater. (C) Specified assets more than $50 10 percent of net income, or 6 percent million.

of growth in specified assets, whichever is greater.

reserve.

II. Institutions insured 20 years or more

Category

Amount of required increase equal to (a) Specified assets $10 million or 10 percent of net income.

less. (6) Specified assets more than $10 10 percent of net income, or 6 percent of million.

growth in specified assets, whichever is

greater. Excess credits (the amount by which eligible credits to the Federal insurance reserve made subsequent to December 31, 1963 exceed applicable required credits) may be used to meet credit requirements of paragraph (b) of the regulation.

Limitations on Payment of Dividends or Interest (paragraph (c) of Insurance Regulation 563.13).-If an institution fails to credit to the Federal insurance reserve the amount required to maintain minimum levels or fails to make any required semiannual credit to the Federal insurance reserve, it must obtain the approval of the Insurance Corporation before declaring, advertising, or paying dividends (including dividends on permanent, reserve, or guaranty stock) or interest in the semiannual period subsequent to the immediately succeeding semiannual period.

If an institution which fails to meet its reserve requirements in one semiannual period credits to its Federal insurance reserve in the immediately succeeding semiannual period, an amount equal to the total deficiency in required credits plus the required credits for such period, the approval of the Insurance Corporation is not required before declaring, advertising, or paying dividends or interest.

INTEREST Rates Paid On Savings Senator ELLENDER. I asked that because with this increase in rates of interest, every now and then you see some of these loan associations offering as much as 6, 6% percent.

Mr. HORNE. You mean charging that to the borrower?

Senator ELLENDER. Not charging it, but paying it for money on deposit.

Mr. HORNE. You mean they pay that?

Senator ELLENDER. Yes. I am just wondering how in the world they can create a sufficient reserve so as to meet the future contingencies.

Mr. HORNE. Well, you are putting your finger on, really, a very touchy, very significant point. One of the problems that has existed, one of our problems is created by the fact that some of the associations—and this is taking place in the commerical banking field, tooare paying so much money for savings, and lending at a high rate, in order to take care of all expenses.

Senator ELLENDER. That is what I am aiming at.

Mr. HORNE. I know, sir. And this has resulted in some of them in the past having made marginal, unsound loans. This has been a reason why we have problems today in the industry.

However, so far as the amount of money that is being paid today for savings is concerned, I don't think that any association has paid much above 54 percent. Most of the associations are paying around 42 percent for their savings.

They do have certificate plans wherein they may go up to as high as 5 percent in the Federal home loan bank system without being cut off from credit. They also have, and have had for years, a socalled bonus plan, wherein, if an association wants to, it can pay for 3-year money up to a half percent in addition to that which it pays on regular passbook savings.

INSURANCE APPLICATIONS DISAPPROVED Senator ELLENDER. Tell me, to what extent have you recently refused applications in contrast to the last 2 or 3 years?

Mr. Smith. What percentage we have refused?

Senator ELLENDER. Yes. In other words, has the rate of disapproval been on the increase because of the situation we are now discussing?

Mr. Smith. Yes, sir; it is on the increase.

The number approved has been rather static but the ratio of disapprovals has been going up. Of course, the question of need is harder to establish, and that is why the number of disapprovals is increasing

Senator ELLENDER. I would imagine that there would be a decided increase in view of the fact that there is so much competition for money.

Mr. Smith. That is right.

Senator ELLENDER. There are so many higher rates. A company with small reserves is at a great disadvantage to these old companies.

Mr. Smith. That is exactly right.

Mr. HORNE. I don't know how permanent this trend may be but in calendar year 1965, Mr. Chairman, we insured 41 applications by State-chartered associations for Federal insurance. Through March of this year we have only insured four. This would give you some idea of the number we are insuring as compared to the number of applications.

Senator ELLENDER. Off the record.
(Discussion off the record.)
Senator ELLENDER. You may proceed.

PREVENTION OF DEFAULT Mr. HORNE. It may be appropriate at this time to explain briefly the circumstances under which the Federal Savings and Loan Insurance Corporation becomes involved in the purchase of assets and other actions to protect the interests of the saver and of the Government.

The FSLIC may become financially involved with an insured institution through efforts to prevent a default or by payment of insurance in the event of a default. Prevention of default may take the form of a loan, a contribution, or a purchase of assets.

The result of such rehabilitative efforts may be the continuation of the institution under present or new management, merger with or bulk sale of assets to an existing institution, or voluntary liquidation of the institution with full payment to all savers. Prevention of default would usually be less expensive to the Corporation than payment of insurance on default.

CONTRIBUTIONS TO INSURED ASSOCIATIONS

a

Senator ALLOTT. Now, Mr. Chairman, I would like to ask a question on the previous page.

Senator ELLENDER. Yes.

Senator ALLOTT. Where you say "may take the form of * * * contribution" under what circumstances would you contribute to these savings and loan institutions?

Mr. HORNE. Mr. Worthy, do you wish to respond to that?

Mr. Worthy. Well, 406(f) provides the authority for that. In many of the cases that the corporation has had, we have been able to determine that if you make a contribution to make the association whole, it is actually less expensive than going through a receivership and paying out accounts, and that sort of thing. Contribution has generally been used only in mutual institutions.

In some mergers we have made a standby agreement to cover losses which is in the form of a contribution. But our money is paid out only after the stockholders have had their equity wiped out. In other words, we don't put any of our money in prior to the stockholders' money being utilized for losses. We wipe out the reserves in a mutual institution before we put in money, too.

But actually, in the majority of the 55 or 56 cases that the Insurance Corporation has been involved in, we have used the contribution technique.

Mr. HORNE. We might also say that in the case of contributions, the association has reached the position where it requires a contribution, requires new management or directors, or something of that sort

Senator ALLOTT. Let us follow this through, Mr. Horne. Suppose that x association gets itself into a position, through improvident loans and repossessions, et cetera, that it cannot pay the interest on these savings accounts, nor can it meet its obligations to pay the savings accounts.

Now, your obligation under FSLIC is to hold the investors harmless from losses in the company, but you have no obligation to the company as such, do you?

Mr. HORNE. No, sir.
Mr. WORTHY. No, sir.

Senator Allott. So that the contribution, if you have the x association that got in this position, through any one of several causes, a contribution in cash does not fulfill, in the first instance the obligation to the saving investor, but some reap the benefit of that contribution in cash. I am a little bit concerned about this.

Mr. HORNE. I don't think it operates that way, sir.

Mr. WORTHY. Sir, we would make a contribution only if we could determine that the contribution was not more expensive, or is less expensive, than a receivership would be. Quite often we can do that, because the receivership is inherently an expensive procedure, when you have to go through the courts, and so forth.

Now, the benefit to the shareholder—that is, the saver—is that if the institution in which he had his money is preserved, generally he has no loss of dividends, which loss he would likely have in the event of a receivership, because more than likely the last dividend prior to default, would probably have been passed.

NUMBER OF CONTRIBUTIONS IN 1966 Senator Allott. How many contributions of this nature have you made in the past year and what would be the total amount?

Mr. WORTHY. In the last year? Senator ALLOTT. Yes. Well, say, during 1966 so far? Mr. Worthy. During 1966, so far, we have made only one contribution. It was a standby contribution. We have actually not expended any money under it yet. This was to facilitate a merger and we agreed to cover the losses of a mutual institution so that it could merge with another institution. Our estimate of the contribution in this case is in the neighborhood of $6 million.

Now, had we, instead of making a contribution, gone in and paid out insurance, we would have immediately expended about $45 million and we estimate that the losses would have been $2 or $3 million greater, because we would have had to dispose of the assets through our liquidation unit. We would have had to set up a liquidation unit, and there is a certain stigma attached to property disposed of in that manner.

Senator ALLOTT. Now, let us take the case of contingent commitments which you have made. You say you have contributed about $6 million to a mutual organization in a merger plan, and you did not say that the merged organization was a mutual. Was it private? Mr. WORTHY. It was a stock association.

Senator ALLOTT. So, no matter how you cut it, your contribution of $6 million to a certain extent inures to the benefit of the new merged corporation which is privately owned.

Mr. WORTHY. No, sir; it only offsets the losses which have already been incurred; losses that they brought under their own tent, so to speak.

Mr. GREENEBAUM. This continues as a liability. It may be a contribution but it is a liability of the surviving association.

Senator ALLOTT. It continues as a liability?
Mr. Worthy. The contribution is not a liability, no.

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