OPERATIONS OF THE INSURANCE CORPORATION

With the growth in private capital of institutions already insured and the increase in number of insured associations, the potential liability of the Corporation rose from $1,400,000,000 on June 30, 1938, to $1,725,000,000 on June 30, 1939. These figures represent the aggregate amount of all insured share accounts (up to $5,000) and the total creditor obligations of all insured institutions. It is inconceivable that the potential liability should all become real, since this could be occasioned only by the failure of every association with no recovery from any asset. Experience has proved that under any but the most abnormal conditions, savings and loan failures are relatively few, and that in the event of failure, a substantial return from the assets may be safely anticipated. On June 30, 1939, the combined net assets of insured associations exceeded the total potential liability of the Corporation by more than $600,000,000.

Against the potential liability, resources of the Corporation on June 30, 1939, totaled $119,400,262, or $1 for each $14 of potential liability. In addition to its capital stock of $100,000,000 provided by Congress and subscribed for by the Home Owners' Loan Corporation, the Insurance Corporation on June 30, 1939, had a surplus of $2,439,857, a reserve fund as provided by law in the amount of $3,843,487, and a special reserve for contingencies of $12,000,000. As in prior years, all income above expenses was placed in the reserves of the Corporation, and contributions for the settlement of insurance cases were deducted from the reserves.

The capital of the Corporation is invested in Government-guaranteed bonds of the Home Owners' Loan Corporation. Reserve funds are invested primarily in United States Treasury bonds, with the remainder in Home Owners' Loan Corporation bonds and in obligations of the Reconstruction Finance Corporation and the Commodity Credit Corporation.

The Corporation operates on the principle of mutual insurance. Each insured institution pays an annual insurance premium of % of 1 percent of the total of its insurable accounts plus all creditor obligations. The annual payment approximates 11 cents for each $100 of assets of the institution.

The premium income of the Corporation during the fiscal year 1939 totaled $2,291,893 as compared with $1,881,450 during the preceding fiscal year. As a fair contribution to the already accumulated reserves of the Corporation, the institutions which were newly insured during the fiscal year 1939 paid an admission fee equal to 4 cents for each $100 of the aggregate amount of all accounts of an insurable type and

creditor liabilities. Admission fees aggregated $45,353 as against $65,927 in the preceding year.

During the fiscal year 1939, interest earned on investments totaled $3,367,432 as compared with $3,262,774 in the preceding year. Including miscellaneous items, the aggregate income of the Corporation during the year was $5,729,377, an increase of $519,121 over the preceding period. Administrative expenses were $213,122, including $69,197 for services rendered to the Corporation by the Federal Home Loan Bank Board; and nonadministrative expenses, representing in the main expenses for travel, special examinations, attorneys' fees, and other expenses in connection with settlement cases, totaled $9,873. This compares with total expenses, administrative and nonadministrative, of $192,848 in the preceding fiscal-year period.

Exhibits 44, 45, and 46 present detailed statements of financial condition and of income and expense during the fiscal year 1939.

On June 30, 1939, the Corporation's personnel numbered 39 as compared to 41 one year before. This decrease was due to internal adjustments with the Federal Home Loan Bank Board and does not reflect any reduction in work load. In addition to its own staff, the Corporation has available the facilities of the general service divisions under the Federal Home Loan Bank Board, the members of which also act as trustees of the Corporation. In return for these services the Corporation shares in the general expenses of the Bank Board as indicated above. This arrangement has helped to keep administrative expenses of the Insurance Corporation at the lowest possible level.

OPERATIONS OF INSURED ASSOCIATIONS

The value of insurance of accounts to home-financing institutions is reflected in the substantial progress of insured savings and loan associations. In general terms, this progress is revealed in Chart XXXIII showingt he trend of "entering assets" and "present assets" of insured associations from the beginning of operations to June 30, 1939. The dotted line on the chart represents the assets as of the date at which insurance was granted; the addition of these entering assets yields a cumulative total at the end of each month. The solid line represents the total amount of assets of insured associations at the end of each month. The spread between the two lines indicates the gain in assets of insured institutions after insurance of accounts was obtained.

To provide an accurate account of the growth of associations insured by the Federal Savings and Loan Insurance Corporation, a special study has been made tracing over two years-from December 31, 1936, to December 31, 1938-the operations of associations that had been

insured up to December 31, 1936, eliminating the institutions insured after that date and those which were involved in mergers. The results of the study show that during the two-year period, the total assets of 1,383 identical associations increased by 28 percent. Their private repurchasable capital rose by 29 percent, and their firstmortgage holdings, by 40 percent.

Increase in selected balance sheet items of 1,383 identical insured savings and loan associations, Dec. 31, 1938, compared with Dec. 31, 1936

One of the causes of the success of savings and loan associations which have obtained insurance of accounts is the cumulative effect of insurance. A survey made for all associations insured up to the

close of 1936, grouped by year of insurance, evidences clearly that the benefits from insurance of accounts to the institutions themselves are intensified in proportion to the length of time during which insurance has been in force. These benefits are mainly reflected in larger numbers of investors and increased amounts of private share capital. Growth of private investments in all associations insured through Dec. 31, 1936, during the two-year period 1937-38

Those associations which had obtained insurance in 1936 showed a gain in private investors and private capital by about one-sixth during the two-year period under consideration. Those associations which received their insurance certificates in 1935 reported an increase by more than one-quarter during the same two-year period, and the associations insured in 1934 recorded the largest gain. All together, the 1,529 institutions included in this survey opened new accounts for more than a third of a million investors, and they increased their private share capital by approximately $260,000,000 during 1937 and 1938. Exhibit 47 shows the average increase in private repurchasable capital for these institutions, grouped by year of insurance and by Federal Home Loan Bank Districts.

Exhibits 30 and 31 present a summary of combined balance sheet items for Federal savings and loan associations as well as Statechartered insured associations, as of December 31, 1937, and December 31, 1938. At the close of 1938, private investments in all insured associations totaled close to $1,500,000,000, and Government investments aggregated $258,036,000. During the year, the ratio of Government investments to total resources of insured associations decreased from 14.3 to 12.1 percent, and the ratio of private investments to total resources increased from 68.0 to 70.6 percent-another reflection of the substantial flow of private money into insured associations.

With the growth in resources, insured savings and loan associations during the fiscal year 1939 were able to lend substantial amounts on mortgages. All together, the estimated volume of mortgage loans made by insured associations from July 1, 1938, to June 30, 1939, was $487,208,000, or approximately 56 percent of the total amount of

mortgage loans written by all savings and loan associations during that period.

INSURANCE AS A FACTOR IN REHABILITATION

Apart from its general effect on the restoration of confidence in homefinancing institutions, insurance of accounts has become an important factor in the rehabilitation of those savings and loan associations which-in consequence of the general financial crisis in the early Thirties required reorganization. As institutions which for some time are inactive become a drag on the sound associations in their respective communities, the rehabilitation efforts of the Federal Savings and Loan Insurance Corporation will ultimately enhance the stability and progress of the savings and loan industry as a whole.

Before the establishment of the Federal Savings and Loan Insurance Corporation, correction of unsound conditions of savings and loan associations by reorganization was seldom attempted. With a few exceptions, those associations which became impaired, or burdened with excessive real-estate holdings and other bad assets, had to go into voluntary or involuntary liquidation-a procedure which was costly and cumbersome, and generally produced unsatisfactory results for the members.

With the aid of insurance of accounts, savings and loan associations were able to undertake effective reorganization measures in a large number of cases. As soon as the advantages of insurance of accounts were understood by the general public, shareholders of associations which had become involved in financial difficulties of various kinds evidenced a willingness to support sound reorganization assuring normal operations.

From the beginning of operations through June 30, 1939, the Federal Savings and Loan Insurance Corporation has been instrumental in effecting reorganization with subsequent insurance of accounts in the case of 284 savings and loan associations, with aggregate assets of $338,636,000 prior to reorganization. Of this number, 177 associations underwent segregation of assets, 43 accomplished capital reorganization through write-down, and 64 strengthened their reserves by means of pledge of shares.

In general, segregation of assets has been used where the association is burdened with an excessive proportion of slow assets; write-down where there is a moderate amount of capital impairment coupled with an otherwise sound asset picture; and pledge of shares where too small a margin of free reserves is indicated without actual impairment of .capital.