FDIC Shows 27% Drop in COs

Commercial bank earnings fell just short of a new record in the second quarter of 1999, according to preliminary data from the FDIC. Industry profitability remained strong, especially in banks’ domestic operations. Commercial banks earned $17.0 billion during the three months from April through June. Bank earnings were $1.0 billion lower than the record quarterly total of $18.0 billion in the first quarter, but were still the second-highest quarterly earnings ever reported by the industry.

“It may have not been the very best quarter ever, but as a bank regulator and insurer – who has to address problems and pay for bank failures – the FDIC welcomed it as the second best,” said Donna Tanoue, FDIC Chairman. Compared to the second quarter of 1998, industry earnings were up by $854 million (5.3 percent). For the first six months of 1999, commercial bank earnings totaled $34.9 billion, a $2.9 billion (9.1 percent) improvement over the same period in 1998.

Second-quarter results for the 8,675 commercial banks and 1,652 savings institutions that are insured by the FDIC are contained in the agency’s latest Quarterly Banking Profile, which is based on quarterly reports of condition and income filed by FDIC-insured institutions. The latest Profile analyzes trends in bank and thrift performance during the second quarter and for the first half of 1999. Highlights follow.

Commercial Banks

The decline in bank earnings from the first quarter was primarily attributable to higher expenses at one large institution that was acquired during the second quarter. Noninterest expenses were $1.2 billion (2.4 percent) higher than in the first quarter, and all but $52 million of the increase was caused by merger-related expenses at that one institution.

Industry earnings also were held down by lower income from international operations and lower trading revenue. Net income from international operations totaled $1.6 billion, down $742 million from the first quarter and $450 million less than a year earlier. Income from trading activities fell to $2.2 billion in the second quarter, from a record $3.6 billion in the first quarter. In the second quarter of 1998, banks’ trading activities generated $2.5 billion in revenue. Earnings strength was evident in fee income, which rose by $1.4 billion (9.0 percent) from the first quarter. Fee income was up by $3.4 billion (26.8 percent) from a year ago. Earnings also benefited from lower expenses for loan losses. Banks set aside $4.9 billion in provisions for future loan losses; that amount is $490 million (9.0 percent) less than in the previous quarter and $172 million (3.4 percent) less than in the second quarter of 1998.

The industry’s annualized return on assets (ROA), a fundamental yardstick of industry profitability, was 1.25 percent in the second quarter. That ROA is the same as a year ago, but down from 1.32 percent in the first quarter of 1999. The second quarter of 1999 marks the 26th consecutive quarter — dating back to the first quarter of 1993 — that the industry’s ROA has been above one percent. Almost two out of every three banks — 63.6 percent — reported an ROA of one percent or higher in the second quarter.

Asset-quality indicators showed signs of improvement during the quarter. In addition to the decline in provisions for loan losses, both noncurrent loans and net loan charge-offs improved. Net charge-offs totaled $4.6 billion, down $424 million (8.5) percent from the first quarter and $197 million (4.1 percent) lower than in the second quarter of 1998. Noncurrent loans (those 90 days or more past due or in nonaccrual status ) fell by $1.1 billion (3.3 percent), but ended the quarter $2.1 billion (7.1 percent) higher than a year earlier. The percentage of loans that were noncurrent fell from 0.99 percent to 0.94 percent, matching the all-time lows reached in the second and third quarters of last year.

The greatest improvement in asset quality occurred in consumer loans, especially credit cards. Net charge-offs on credit cards were $545 million (20.4 percent) lower than in the first quarter and $769 million (26.5 percent) less than a year ago. Loans to commercial and industrial borrowers were the only major exception to the trend of improving asset quality. Net charge-offs on loans to commercial and industrial borrowers were up by $269 million (26.6 percent) from the first quarter, and were $554 million (76.0 percent) higher than a year ago. Noncurrent commercial and industrial loans increased by $217 million (2.1 percent) during the quarter, and were up by $2.3 billion (29.2 percent) in the past 12 months.

Total assets of commercial banks rose by $58.0 billion during the quarter, following a seasonal decline of $31.5 billion in the first quarter. Through the first six months of 1999, industry assets have grown by only $26.5 billion, or 0.5 percent. Real estate loans increased by $26.9 billion (2.0 percent) in the second quarter, loans to depository institutions rose by $13.5 billion (13.0 percent), and commercial and industrial loans grew by $14.3 billion (1.6 percent). The quarterly increase in commercial loans was the smallest since the third quarter of 1997.

The number of insured commercial banks declined by 46 during the second quarter. One bank failed and 103 banks were merged into other institutions. There were 55 new banks added during the quarter. Six savings institutions converted to commercial bank charters, one commercial bank converted to a thrift charter, and two banks voluntarily liquidated. The number of commercial banks on the FDIC’s “Problem List” declined from 64 to 62 during the quarter.

Savings Institutions

Insured savings institutions reported $2.9 billion in net income in the second quarter. Those earnings are the second-highest quarterly total ever reported by the thrift industry, exceeded only by the $3.0 billion earned in the third quarter of 1998. Earnings were $180 million (6.7 percent) higher than in the first quarter and $54 million (1.9 percent) more than thrifts earned in the second quarter of 1998.

Strong growth in noninterest income and lower expenses for future loan losses were two of the main sources of earnings improvement. The industry’s ROA in the second quarter was 1.03 percent, an improvement from the 0.98 percent average of the first quarter, but below the 1.09 percent average in the second quarter of 1998. Larger thrifts enjoyed stronger profitability than smaller institutions; only 29 percent of all savings institutions had second-quarter ROAs above one percent.

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SCF Signs Up 15 More

The Smart Card Forum, a multi-industry organization working to accelerate the widespread acceptance and application of smart card technology, Tuesday announced that 15 new leading technology companies have joined the growing ranks of the Forum as Principal and Auditing Members. The addition of these newest members contributes to the continued record growth rate the organization has experienced since last fall. The new members include:

Principal Members:

* MCI Worldcom – [www.wcom.com][1] * Oberthur Smart Cards USA – [www.oberthurusa.com][2] * Wachovia Bank – [www.wachovia.com][3] Auditing Members:

* Collective Dynamics – [www.coldyn.com][4] * Dyncom – [www.d-c.com][5] * Entandem – [www.entandem.com][6] * K-Vell Consulting – [www.k-vell.com][7] * LaserCard Systems – [www.lasercard.com][8] * Logicon – [www.logicon.com][9] * Maosco – [www.moltus.com][10] * PaySys International – [www.paysys.com][11] * Racal Security and Payments – [www.racal.com][12] * SiVault, Inc. * Litton/TASC – [www.tasc.com][13] * Litronic – [www.litronic.com][14] “We are excited to see our 1999-2000 year start off with such a great addition to our member roster,” said SCF President and CEO Donna Farmer. “It is fulfilling to see these security and payment systems innovators participate with our other members in utilizing the wide range of information and resources that are available through the Forum. These new members are joining the nearly 200 companies from many different industries that make up the Forum, which will help us fulfill our goals of advancing smart card technology to have a more prominent role in the Internet economy.”

Each Principal Member is entitled to privileged access to The Smart Card Forum Consumer Research, other Forum sponsored research and documents, along with attendance at the Quarterly Meetings and work groups, Smart Card Forum Educational Institute programs, and the Annual Meetings.

* MCI Worldcom is a global business telecommunications company. Operating in more than 65 countries, the company is a premier provider of facilities-based and fully integrated local, long distance, international and Internet services. The common shares of MCI WorldCom stock trade on the Nasdaq National Market (U.S.) under the symbol WCOM.

* Oberthur Smart Cards USA is the North American division of Oberthur Smart Cards, France’s leading manufacturer of bank cards, Europe’s largest producer (over 80 Million microprocessor cards manufactured to date) and the world leader in micro-processor transaction cards.

* Wachovia Corporation is a leading bank holding company with Wachovia Bank, N.A., its principal subsidiary. At June 30, 1999, Wachovia had

$67 billion in assets and ranked 16th among U.S. banking firms. Additionally, Wachovia had total trust assets of approximately $133.8 billion under administration, including about $41.3 billion under discretionary investment management. Wachovia Bank, N.A. has more than 700 offices and 1,300 ATMs in Florida, Georgia, North Carolina, South Carolina and Virginia. Wachovia also is a leading corporate bank with business relationships in 50 states and global activity in 40 countries.

About The Smart Card Forum

The Smart Card Forum is a non-profit, multi-industry organization of nearly 200 members working to accelerate the widespread acceptance of multiple application smart card technology by bringing together, in an open forum, leading users and technologists from both the public and private sectors. The Smart Card Forum is the leading organization for education and awareness of topical issues associated with the use and adoption of smart card systems. The Smart Card Forum also operates the Smart Card Forum Educational Institute, the industry-leading course dedicated to providing smart card education that has set the standard in the industry. The curriculum is based on leading edge educational models and methodologies utilizing experienced instructors who are experts in the smart card industry. For more information about The Smart Card Forum, log on to the organization’s Web site at [www.smartcardforum.org][15].

[1]: http://www.wcom.com/
[2]: http://www.oberthurusa.com/
[3]: http://www.wachovia.com/
[4]: http://www.coldyn.com/
[5]: http://www.d-c.com/
[6]: http://www.entandem.com/
[7]: http://www.k-vell.com/
[8]: http://www.lasercard.com/
[9]: http://www.logicon.com/
[10]: http://www.moltus.com/
[11]: http://www.paysys.com/
[12]: http://www.racal.com/
[13]: http://www.tasc.com/
[14]: http://www.litronic.com/
[15]: http://www.smartcardforum.org/

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Over 50 Card

The demographic segmentation of the bank credit card industry is picking up steam following yesterday’s announcement that First USA and The Reader’s Digest Association have signed a co-branded credit card agreement. The deal will enable First USA to market a credit card to Reader’s Digest customer database of approximately 50 million names. The Reader’s Digest database is heavily weighted with consumers in the 50+ age group. The magazine says its strength among graying consumers with disposable income, and the range of interests that encourages them to obtain and use consumer credit vehicles, will be a boon for First USA. The initiative is the latest of three marketing relationships for financial services announced by Reader’s Digest. Last week, the company announced partnerships with Torchmark Corp. in the USA and Canada, and American International Group in 26 other nations for the marketing of various insurance products to Reader’s Digest customers. Ironically the October issue of Reader’s Digest features an article about ‘Credit Card Tricks’ in which First USA is cited as an example for playing games with interest rates and late fees.

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Head Market

The magnetic-card-reader and card-reader-head markets are expected to increase by 25-30% over the next 3 years, based on a new study by Peripheral Research. The ‘1999 Card Reader Head Market and Technology’ report, due out next month, projects the card-reader-magnetic-head markets will increase from a yearly 14 million units per year today, to 18 million units per year in 2002. Peripheral says these market increases are being driven by technology and new applications. In the future consumers will see the use of more smart cards for interactive use, and a new generation of high capacity cards storing 5-10 Megabytes of data. Although the growth rate has been slow, all of the suppliers of these head products are experiencing active markets. These markets are all benefiting from the advances in the hard-disk and tape products.

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ATM Scrip Takes Off

Brea, CA-based UtiliSource Corp. said Monday it expects to have 4,000 ‘ATM Scrip’ terminals in U.S. retail stores by the end of this year. At the end of the year 2000, the company projects it will have placed 10,000 of the terminals at retail merchants nationwide. The ATM scrip terminal works like an ATM cash machine except the cardholder receives an authorized scrip coupon instead of cash. Customers then use the scrip to pay for items at the cash register and receive change in cash. The merchant’s account is credited electronically for the scrip amount. The customer pays a small transaction fee for the service and the merchant receives a fee for each transaction. Yesterday, UtiliSource announced a program to provide ATM Scrip terminals to Allied Domecq franchises across the USA. Allied Domecq is one of the world’s largest international spirits and global food services businesses with 8,000 franchises worldwide. In the USA alone, the company has 6,500 franchises, including Baskin-Robbins Ice Cream, Dunkin’ Donuts and Togo’s sandwich stores.

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Switch-A-Roo

Paymentech said yesterday it did the formerly impossible by switching 52,000 retail locations to Paymentech Network Services in one day, earlier this month. The terminal conversion utilized a hot cut approach that enabled all POS devices to be automatically switched to Paymentech’s on-line and back end systems. Paymentech instantly converted 17,000 locations to its proprietary front-end POS network. This group, along with 35,000 more merchants, also began processing on the merchant accounting platform provided by First Data Merchant Services Corporation under a processing agreement previously announced with Paymentech. The conversion consisted of the remainder of the merchant portfolio that Paymentech earlier acquired from Mellon Bank and the former portfolio of First Chicago NBD. Bank One consolidated the merchant processing businesses it owns by combining the operations of the former alliance between Bank One and First Data, Banc One Payment Services L.L.C., into Paymentech. Paymentech annually processes approximately 2.5 billion bankcard transactions and $75 billion in credit card sales volume.

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Metris Collections SVP

Doug Mayblum, a 25-year veteran of the financial services industry, has joined Metris Companies as senior vice president-collections.

Mayblum joins Metris from Citicorp, where he most recently served as vice president/process head, credit and risk operations for Europe, Middle East, and Africa. Earlier with Citicorp he served as vice president/director of Citibank operations.

“The background Doug brings to this position is a good complement to our already strong senior management team,” said Metris President and CEO Ronald N. Zebeck. “Doug adds the depth and experience that will help us continue our growth plans.”

Said Mayblum: “This is a very exciting opportunity. I believe my experience can help strengthen the solid base that Metris enjoys, and I look forward to working with a very capable management team.”

Mayblum is a graduate of the University of South Carolina. Mayblum relocated to our Metris Baltimore site from Waterloo, Belgium.

Metris Companies Inc. is an information-based direct marketer of consumer credit products and fee-based services primarily to moderate-income consumers. Based in St. Louis Park, Minn., Metris also has operations in Phoenix, Ariz.; Jacksonville, Fla.; Champaign, Ill.; Baltimore, Md.; and Tulsa, Okla. It employs approximately 3,000 people.

Visit Metris on the Internet at [www.metriscompanies.com][1].

[1]: http://www.metriscompanies.com/

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ICL Hires MC Exec

ICL has appointed Caroline Marino as smart card business development director, North America, with responsibility for further growing sales in this strategic market for ICL.

Caroline brings a wealth of expertise with her, having joined ICL from Motorola where she was global business development director for the worldwide smart card solutions division.

Prior to this, Caroline spent 11 years at MasterCard International, joining at the inception of MasterCard’s Automated Point-of-sale Program and helping grow the business up to its sale to National Data Corporation.

“I am delighted to be joining ICL at such an important time as the company focuses on becoming the world’s number one supplier of smart card systems within the next two years,” Marino said.

“My initial priorities will be to further grow ICL’s relationship with the card associations, as well as building our business in the government and other markets.”

SmartCity(R)

SmartCity is ICL’s end-to-end, multi-application smart card system. Such a system is able to support electronic purse, credit and debit cards, loyalty cards, identity cards and many other applications.

Recognized as the world’s most advanced smart card system, SmartCity has been installed in more than 75 sites worldwide with 1.5 million cards in use every day. These sites include Fort Knox (US), Thames Valley University (UK), LukOil (Russia) and Siam Commercial Bank (Thailand).

About ICL

ICL is a global IT services company. It designs, builds and operates information systems and services for customers in the retail, finance, government, telecommunications, utilities and travel markets. The company has operations in over 40 countries and employs over 22,500 people.

Transformed from a manufacturer of computers, today ICL improves business performance and competitiveness through services focused on electronic business, enterprise applications and the implementation and outsourcing of IT infrastructure.

For the 12 months to March 31, 1999, the company’s revenues were $4,458.4 billion ((pound)2.735 billion) which generated a profit before tax and exceptional charges of $105.1 million ((pound)64.5 million). Headquartered in London, ICL is a wholly owned subsidiary of Fujitsu and plans to float on the London Stock Exchange in 2000.

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TNS Finishes TAS Migration

Transaction Network Services, Inc. announced Monday that it has completed the migration to its network of all transaction transport traffic acquired through its acquisition of assets from AT&T’s Transaction Access Service.

While the deal with AT&T was executed September 10, 1998, the actual migration of transactions from the TAS network to the TNS network began at the end of 1998 with the final traffic migrating in early September of this year. As a result, TNS more than doubled its Point-of-Service transaction volumes from about 240 million monthly transactions to over 550 million transactions per month.

“It took us nearly eight years to build out and grow a network capable of handling monthly transaction volumes of 240 million,” commented TNS executive vice president and general manager of TNS’ POS division Brian Bates. “We essentially duplicated that effort for the TAS migration in just under nine months. Our POS business has more than doubled in size in less than a year. We are extremely proud that we’ve been able to achieve such great success in such a short time.”

“We owe a great deal of thanks to all of our employees who worked so diligently to make this transition happen so quickly and smoothly,” added TNS president and CEO John J. McDonnell, Jr. “Their hard work and commitment are directly reflected in the quality service and network performance that make TNS a leader.”

Transaction Network Services, Inc. (TNS), headquartered in Reston, Virginia, provides data communications services for transaction-oriented applications. The company is listed on the New York Stock Exchange (NYSE) under the symbol TNI. Additional company information is available on the TNS website at [http://www.tnsi.com][1].

[1]: http://www.tnsi.com/

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E-Bills to Take Off

Boston-based The Yankee Group said yesterday that electronic bill presentment and payment (EBPP) is set to take off despite the consumers’ lack of awareness and fear of online security. The findings come from a series of special surveys on EBPP. Next month, Yankee will release the ‘1999 Technologically Advanced Family’ survey, that looks at the driving and delaying forces for adoption of EBPP. Earlier this year the Yankee Group discovered EBPP was a functioning technology that is only being implemented by the biller community, with consumers only showing minimal interest in using it. Since then, Yahoo! and CheckFree announced earlier this month they will push ‘Yahoo! BillPay!’ which enables consumers to pay recurring monthly bills at Yahoo!’s Web site, with CheckFree’s Genesis platform acting as the electronic payment engine in the back field. Also TransPoint went live with EBPP through MSN MoneyCentral this summer. Yankee believes both deals are significant developments to drive adoption of EBPP among USA consumers.

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