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e Corporation ' r t 1 9 9 5 WWW. protecting America's savings The Federal Deposit Insurance Corporation (F D IC ) is the independent deposit insurance agency created by Congress to maintain stability and public confidence in the nation’s banking system. In its unique role as deposit insurer o f banks and savings associations, and in cooperation with the other federal and state regulatory agencies, the FDIC promotes the safety and soundness o f insured depository institutions and the U.S. financial system by identifying, monitoring, and addressing risks to the deposit insurance funds. The FDIC promotes public understanding and sound public policies by providing financial and econom ic information and analyses. It m inimizes disruptive effects from the failure o f banks and savings associations. It assures fairness in the sale o f financial products and the provision o f financial services. The FDIC’s long and continuing tradition o f public service is supported and sustained by a highly skilled and diverse w orkforce that responds rapidly and successfully to changes in the financial environment. FDIC Federal Deposit Insurance Corporation Office of the Chairman Washington, DC 20429 September 11, 1996 Sirs, In accordance with the provisions of section 17(a) o f the Federal Deposit Insurance Act, the Federal Deposit Insurance Corporation is pleased to submit its Annual Report for the calendar year 1995. Sincerely, Chairman The President o f the U.S. Senate The Speaker o f the U.S. House of Representatives Table of Contents C D T -------- O verview 2 4 6 9 12 14 Chairman’s Statement Highlights Condition o f the FDIC’s Funds The State o f the Banking and Thrift Industries Board o f Directors Organization Chart/Officials Operations of the Corporation 17 25 27 29 51 57 42 45 65 77 Supervision and Enforcement Failed Institutions Consumer Protection Activities Significant Court Cases Internal Operations Regulations and Legislation Regulations Adopted and Proposed Significant Legislation Enacted Financial Statements Bank Insurance Fund (B IF) Savings Association Insurance Fund (SAIF) FSLIC Resolution Fund S tatistical Tables 107 108 109 110 111 111 111 Number and Deposits o f Banks Closed, 1934-95 Recoveries and Losses on Disbursements-BIF, 1934-95 Income and Expenses-BIF, 1933-95 Insured Deposits and the BIF, 1934-95 BIF-lnsured Banks Closed During 1995 Income and Expenses-SAIF, 1989-95 Insured Deposits and the SAIF, 1989-95 115 116 118 For M ore Inform ation Sources o f Information Regional Offices M ajor Speeches and Testimony Chairman's Statement 2 Much has changed since Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation’s banking system, but banking today continues to rest on public confidence, and public confidence, in turn, rests on a strong deposit insurance system. During 1995, the extraordinary profitability o f the commercial banking industry translated into declining numbers o f problem and failed banks. The favorable environment gave the Federal Deposit Insurance Corporation the opportunity to refine its operations, both as a bank super visor and as a deposit insurer, to reinforce the foundation it provides for public confidence. By striving for greater productivity and enhanced performance, by basing decisions on rigorous analysis that included weighing the costs and benefits o f our actions, and by relying on upto-date management concepts and technology, the FDIC moved toward managing itself the way that a business operates. Our intent in all our actions is to strengthen the deposit insurance system, both directly or indirectly. Our efforts would not have been possible had not the banking industry returned to health from the crisis o f the late 1980s and early 1990s. In the fourth con secutive year o f record earnings, commercial banks reported $48.8 billion in 1995, or a return on assets o f 1.17 percent. Only six comm ercial banks failed, the fewest since 1977. The Bank Insurance Fund (B IF ) fully recapitalized at mid-year, with $1.5 billion in insurance over payments refunded to members. As a result o f recapitalization o f the fund, the condition o f the industry, and the commitment o f the FDIC to reward well-run institutions and to give w eaker institutions an incentive to improve, the FDIC Board of Directors reduced BIF insurance premiums for the best-rated institutions to four cents per $100 o f domestic deposits from 23 cents per $100, and, then, at year-end, to the minimum required by law o f $2,000 annu ally. M ore than nine-out-of-10 commercial banks w ere in the best-rated category. The banking industry deserved enormous credit for rebuilding itself and rebuilding the fund, and these premium reductions in turn contributed to further improve ments in the industry. In 1995, the BIF was in the strongest position it had experi enced since 1971, the last time bank deposit insurance exceeded 1.25 percent o f insured deposits. M eanwhile, the Savings Association Insurance Fund (SAIF) remained significantly undercapitalized. At the end o f 1995, the SAIF held 47 cents for each $100 o f insured deposits barely a third o f the $1.25 required by statute. An under capitalized SAIF jeopardized the confidence that the FDIC has spent six decades building. Much effort was devoted to designing, developing and advancing a solution to the SAIF problem, a solution that would benefit every FDIC-insured institution by strengthening the deposit insurance system and that would at last close the books on the savings and loan crisis o f the 1980s. The strong economy and contin ued profitability of the commercial banking industry in 1995 allowed the FDIC to look ahead and to become m ore anticipatory than reactive. In April 1995, the FDIC Board o f Directors approved the first corporate-wide strategic plan in our 61-year history, a plan that emphasizes identifying and addressing potential problems within the financial industry that may cause losses to the insurance funds. The strategic plan w ill guide the agency in developing and evaluating our policies and programs for the remainder o f the decade. During 1995, it generated approximately 150 projects under a corporate-wide operating plan intended to position the FDIC on a business footing w hile dealing with em erging risks. One o f those projects was to define the number o f people w e w ill need to operate the organization once w e have liquidated the remaining assets from the bank and thrift failures o f the late 1980s and early 1990s and instituted managerial reforms to make the organization m ore efficient. At year-end, the Corporation had 9,789 employees, a 16 percent reduction from 1994. With the absorption o f employees from the Besolution Trust Corporation as required by law - the number o f Corporation staff rose to 11,856 as o f January 1, 1996. According to current analyses, w e expect to reduce the number o f staff positions to between 6,000 and 7,000 within the next three years. No one welcomes these painful reductions, which affect people w ho have devoted years o f service to the FDIC and the nation, but a voluntary buyout program in 1995 gave employees an opportunity to receive a cash payment to help them transition to other careers or to retirement. The extremely positive response to the offer - 940 employees accepted the buyout - w ill in all likelihood reduce the scope o f future reductions in force. FDIC Chairman Ricki Heifer The strategic plan set out the direction the FDIC is headed and the operating plan established how the agency w ill advance. To help identify and address potential problems in the finan cial system, w e are leveraging a remarkable resource - a treasury o f historical and current data on the banking industry. The FDIC and our sister bank and thrift regulatory agencies generate data on the banking and thrift industries as a by-product of regulatory and monetary policy functions. Historically, however, w e have all found it difficult to bridge the gap that separates the macro perspective o f economics from the micro perspective o f bank examinations. A ll the regulators have had difficulty translating this data into directions that examiners can use in institutions with differing levels and types o f risk exposures. We at the FDIC are bridging that gap in a number o f ways. As a first step, the Division o f Insurance was created. This new division identifies, analyzes, and disseminates information on current and em erging risks to the insurance funds, thereby helping the FDIC keep banks open and operating safely and soundly. It works closely with our examiners, economists, financial analysts and other FDIC staff, as w ell as with the same types o f analysts at the other regulatory agencies and in the private sector, to monitor, assess and address risks in the banking system. It w ill be sending economic and analytical information to banks to help bank management address trends or weaknesses before Ihey become problems. We also began an underwriting survey o f our examiners to benchmark the level o f - and trends in - credit risk to provide an early warning system of problems. Further, w e began looking back at the 1980s and early 1990s to learn in a systematic way what caused nearly 1,500 bank fail ures. We are also looking at how those failures w ere resolved. The focus o f this effort is a study that w ill give us an analytical base on which to rely in predict ing and dealing with bank problems in the future. We also began developing a new, improved model on bank failure rates that takes econom ic factors into account. In terms o f regulatory burden, leveraging our statistical and analytical resources helps exam iners focus their efforts on the real risks that an institution poses. This w ill increase the effectiveness o f examinations, and allow examiners to stay on site only as long as necessary to address the specific risks that individual institutions present. To the same ends, we are also leveraging technology. In 1995, for example, w e began develop ing an automated examination package that w ill let us do a significant amount o f analysis off-site. This package w ill improve the quality o f supervi sion, w hile holding down FDIC operating costs. It w ill permit us to do an even better job in examinations, w hile requiring us to be on-site for a shorter time. Examiners w ill have to spend less time traveling away from home. Through leveraging tech nology, w e aim to cut our on-site safety-and-soundness examination time - as w ell as our compliance and Community Reinvestment Act examination time - by 25 percent over the next year, w hile at the same time im proving the quality o f examinations. In leveraging data and tech nology, and in communicating m ore effectively with financial institutions, w e are headed toward a diagnostic approach to bank examinations - a combina tion o f observ ation with factual findings from our analytical and technological innovations. It w ill provide a structured framework for discussing specific strengths, weaknesses, and possible improvements with the manage ment and boards o f directors o f financial institutions. The result w ill be a m ore effective and accurate assessment o f an institution’s ability to identify, measure, monitor and control its risks. In enhancing the ways that we do business, w e are assuring that Americans continue to enjoy the security that the deposit insurance system creates. For three genera tions o f Americans, federal deposit insurance - with the full faith and credit backing o f the U.S. government - has provided a reason for unconditional faith in the banking system. It is a certainty in an uncertain world. The FDIC w ill continue to make sure that faith in the banking system is justified. Ricki Heifer Chairman Highlights 4 January 51___________________ April 1 August 8_______________________ The FDIC Board proposed cuts in Bank Insurance Fund (B IF) assessment rates for nearly all BIF-insured institutions in recognition o f the health of the banking industry and the increased strength o f the fund. The Board proposed no change in insurance rates for the Savings Association Insurance Fund (SAIF) at this time (see Page 6). The FDIC began a system to invoice and collect deposit insur ance premiums electronically. The new arrangement w ill make the process o f calculating and collecting insurance assess ments m ore efficient and less burdensome (see Page 8). The FDIC Board voted to reduce premiums paid by institutions insured by the Bank Insurance Fund. The average rate dropped to 4.4 cents per $100 o f assess able deposits, from 23.2 cents per $100. The rate reduction and a $1.5 billion refund w ere made possible because, at the end of May, the BIF reached its mandat ed reserve level o f $1.25 for every $100 o f insured deposits (see Page 6). The Board did not reduce assessment rates for the Savings Association Insurance Fund, which remained seriously undercapitalized (see Page 7). April 24 The FDIC reported that com m er cial banks earned $44.6 billion during 1994, marking the third consecutive year o f record profits (see Page 9). For the first time in the agency’s 61-year history, the Board approved a corporate-wide strategic plan. M ajor goals center on identifying and addressing risks to the insurance funds and im proving communications with the public (see Page 31). March 21_______________________ May 17_________________________ The agency adopted a formal appeals process for material supervisory determinations made by FDIC examiners and regional supervisory officials. Institutions may appeal determinations in areas including examination ratings, the adequacy o f loan loss reserve provisions, and possible violations o f law or regulations (see Page 20). The FDIC announced a reorgani zation that included the creation o f a Division o f Insurance to identify risks to the insurance funds (see Page 1T). The agency also established an Office o f the Ombudsman to respond to questions or concerns about the FDIC (see Page 20) and a Division o f Administration (see Page 31). March 15_______________________ March 24 July 28 The FDIC announced a program to survey bankers for suggestions to improve the quality o f safety and soundness examinations. Approximately 3,500 FDICsupervised institutions that w ill undergo examinations within a one-year period w ill be asked about the appropriateness of examination procedures, the quality o f the examination team and the usefulness o f the examination report (see Page 20). The last two FDIC-insured bank closings o f 1995 occurred, bring ing the total for the year to six, the lowest number since six banks failed in 1977 (see Page 23). October 12 Chairman Heifer announced a review o f all FDIC regulations and policies, with the aim o f eliminating or reducing require ments that are not essential. The FDIC w ill be w orking with the other banking agencies to elim i nate differences among regula tions and guidelines they have in common (see Page 21). Novem ber 2_________________ Federal and state banking regulators, including the FDIC, ordered the termination o f the U.S. operations o f The Daiwa Bank, Limited, Osaka, Japan. Daiwa had been concealing m ajor securities losses from regulators and the public (see Page 22). Novem ber 9 Faced with a declining workload from bank failures, llie FDIC announced a program to reduce staffing levels by offering many career employees incentives to retire or seek other employment voluntarily (see Page 31). Selected Statistics Bank Insurance Fund Dollars Decem ber 22__________________ Mississippi banking commission er Joseph H. Neely is confirmed by the U.S. Senate to be a m em ber o f the FDIC Board of Directors. He was sworn in on January 29, 1996. This marked the first time since August 1992 that all five Board positions w ere fllfed (see Page 31). For the year ended December 31 1995 i 1994 1993 Financial Results Revenue Operating Expenses Insurance Losses and Expenses Net Income Insurance Fund Balance Fund as a Percentage of Insured Deposits November 14________________ For the second time in 1995, the FDIC reduced insurance premiums for BIF-insured institutions. A projected 93.5 percent w ill pay the statutory minimum o f $2,000 per year for insurance (see Page 6). The Board decided not to lower rates for the SAIF because that fund remained seriously under capitalized (see Page 7). in M i l l i o n s $ 4,089 471 12 3,606 $ 25,454 1.30% $ 6,467 423 (2,682) 8,726 $ 21,848 1.15% $ $ 6,431 388 (7,179) 13,222 13,122 0.69% Selected Statistics 10,243 Total BIF-Member Institutions* 151 Problem Institutions %20,160 Total Assets of Problem Institutions Institution Failures Assisted Banking Organizations Total Assets of Failed and Assisted Institutions $ 753 Number of Active Failed Institution Receiverships 590 10,758 264 $ 42,213 13 11,291 472 $ 269,201 41 $ 1,392 802 $ $ 1,215 3,539 877 Savings Association Insurance Fund Financial Results Revenue Operating Expenses Insurance Losses and Expenses Net Income Insurance Fund Balance Fund as a Percentage of Insured Deposits $ 1,140 40 J321) 1,421 $ 3,358 0.47% 20 $ 414 781 1.937 0.28% $ 924 30 17 877 1,156 0.17% Selected Statistics Total SAIF-Member Institutions" 1,727 Problem Institutions 42 $ 10,862 Total Assets of Problem Institutions Institution Failures* Total Assets of Failed Institutions* 456 Number of Active Failed Institution Receiverships Decem ber 51 The Resofution Trust Corporation (RTC), which was created to manage and sell failed savings associations since 1989, officiaify closed on this day. All remaining assets and liabilities w ere trans ferred to the FSLIC Resolution Fund, which is managed by the FDIC (see Page 26). 1,844 54 $ 30,630 $ 65,162 137 $ 6,132 1,929 10 0 r * Commercial banks and savings institutions. Does not include U.S. branches of foreign banks. * Commercial banks and savings institutions. Does not include Resolution Trust Corporation (RTC) conservatorships. A No SAIF- insured institutions that failed were the financial responsibility of the SAIF. The RTC was responsible for the resolution and related costs of SAIF -insured institutions that failed before July 1,1995. The SAIF is responsible for resolutions thereafter. T This represents the receivership for Heartland Federal Savings and Loan Association, Ponca City, Oklahoma, which was closed on October 8,1993. Although this is a SAIF receivership, any financial burden will be borne by the FSLIC Resolution Fund (FRF). The number of active failed thrift receiverships for the FRF was: 62 in 1995; 76 in 1994; and 83 in 1993. Condition of the FDIC's Funds For m ore information about the BIF, SAIF and FRF, see the financial statements that begin on Page 45. The FDIC administers two deposit insurance funds, the Bank Insurance Fund (B IF) and the Savings Association Insurance Fund (SAIF), along with a third fund fulfilling the obligations o f the form er Federal Savings and Loan Insurance Corporation (F S LIC ) and called the FSLIC Resolution Fund (FRF). An overview o f the funds follows. Fund B alance 1991-1995 (year-end)_________________ ■ Savings A ssociation Insurance Fund ■ Bank Insurance Fund 1991 1992 1993 $ billio n s 25 20 15 10 Bank Insurance Fund With the continuing recovery o f the banking industry and institutions’ earnings at record levels, 1995 was another positive year for the BIF. After dipping to a record year-end low in 1991 (a negative $7 billion) follow ing record numbers o f bank failures, the BIF grew7to a record high of $25.5 billion at the close o f 1995. That balance represented a 17 percent increase from the year-end 1994 balance o f $21.8 billion. The previous year-end high was $18.3 billion in 1987. The BIF’s growth in 1995 con sisted prim arily o f assessment revenue ($2.9 billion) and interest earned on investments in U.S. Treasury obligations ($1.1 billion). Minimal bank failures allowed the BIF to retain and invest this cash. Only six banks with $753 million in assets and $104 million in estimated losses to the BIF failed during 1995. The estimated loss figure is the lowest since 11 banks failed in 1980 at a loss o f $30.6 million. The BIF reached its designated reserve ratio o f 1.25 percent of insured deposits, as mandated by law, on May 31,1995. Based on the recapitalization, the FDIC Board approved a reduction in m i f i r -5 -10 Note: More details appear in the tables in the back of this Annual Report. BIF assessment rates for the semiannual assessment period beginning July 1, 1995. The rates w ere lowered to a range o f four cents to 31 cents per $100 o f assessable deposits. The previous range was 23 cents to 31 cents per $100. The Board revised the rate schedule a second time in 1995, paring rates again in November. This m ove followed the Board’s regular semiannual review o f assessment rates to ensure that funds are maintained at an appropriate level. For the sem i annual period beginning January 1, 1996, the highest-rated institutions (93.5 percent o f BIFinsured institutions) w ill pay the statutory annual minimum of $2,000 for deposit insurance. Rates for all other institutions w ill drop to a range o f three cents to 27 cents per $100 of assessable deposits. Under the new assessment schedule, the average annual assessment rate for BIF-insured institutions was expected to decline to approximately 0.3 cents per $100 in the first h alf o f 1996, from 4.4 cents per $100 in the second half o f 1995. The projected rate w ould be the lowest in the m ore than 60-year history o f federal deposit insur ance for banks. The lowest average annual assessment rate for banks previously was 3.13 cents per $100 in both 1962 and 1963, including assessment credits. Cash and investments in U.S. Treasury obligations, the main components o f the BIF’s total assets, jumped to 81 percent o f the fund’s total assets at yearend 1995 from 62 percent at year-end 1994. Cash and invest ments at year-end w ere 30 times the BIF’s total liabilities. Insurance Fund Reserve Ratios 1991-1995 (year-end) Percent of Insured Deposits___________________________________ ■ Savings A ssociation Insurance Fund ■ Bank Insurance Fund Insured deposit amounts are estimates. More details appear in the tables in the back of this Annual Report. Savings Association Insurance Fund The SAIF, which the FDIC administers to protect depositors o f thrift institutions, grew to a balance o f $3.4 billion at year-end 1995. That balance represented a 73 percent increase over the $1.9 billion at year-end 1994. The SAIF’s reserves amounted to 47 cents for every $100 o f insured deposits, up from 28 cents per $100 at year-end 1994. The SAIF’s designated reserve ratio is far below the 1.25 percent o f insured deposits mandated by law. Based on industry deposit levels at yearend 1995, the SAIF would require an additional $5.5 billion to reach that mandated level. Since 1993, each SAIF-insured institution has paid an assessment rate o f between 23 and 31 cents per $100 o f assessable deposits, depending on risk classification. The assessment rate averaged approximately 23 cents per $100 o f assessable deposits in 1995. These rates w ill continue until the SAIF reaches its designated reserve ratio o f 1.25 percent o f insured deposits. The SAIF’s growth has been slow for several reasons. One factor was the diversion o f $7.7 billion o f SAIF assessments from 1989 through 1995 to pay for the fed eral cleanup o f the thrift industry. From 1989 through 1992, nearly all assessment income was used to pay various cleanup costs, including interest on bonds issued by the Financing Corporation (FICO ). Since then, nearly half o f the SAIF’s assessment income was used for the FICO bond interest payments. Interest pay ments are required until the FICO bonds mature in the years 2017 through 2019. A disparity between what B1Fand SAIF-insured institutions pay for deposit insurance unfolded with the Board’s decision to cut BIF assessment rates when the BIF recapitalized in May 1995. By law, the Board must set pre miums for each fund separately based on the circumstances fac ing each fund. The prospect o f continued, significant disparities in premiums for identical insur ance coverage has given SAIFinsured institutions a strong econom ic incentive to move deposits to BIF-insured affiliates or to rely less on deposits as a funding source. Many variables make it difficult to predict accurately w hen the SAIF w ill be fully capitalized, but that date is probably several years away. At year-end, FDIC staff was exploring the agency’s options under the law, the differ ent assessment rates for the two insurance funds, and the likely effects on the thrift industry o f the rate disparity. Legislative proposals also w ere under consideration that would fully capitalize the SAIF in the near term. On July 1,1995, the SAIF became responsible for handling failing thrift institutions from the Resolution Trust Corporation (RTC). No thrift failures occurred in 1995 after the SAIF assumed this responsibility. FSLIC Resolution Fund_______ The FRF was established by law in 1989 to assume the remaining assets and obligations o f the for m er FSLIC arising from thrift failures prior to January 1, 1989. Congress placed this new fund under the management o f the FDIC. To w ind up the FRF’s resolution activity, Congress allocated $827 million in appropriated funds in fiscal year 1995, which are avail able to Ibe FRF throughout its remaining life. The FRF uses appropriated funds only w hen funds generated from collections o f failed thrift assets and other internal sources are insufficient. The FRF received $165 million o f this appropriation on Novem ber 1, 1995. The remain ing $662 m illion is available for future use as needed. All RTC assets and obligations w ere transferred to the FRF on January 1, 1996, as required by law. As manager o f the FRF, the FDIC w ill sell the remaining assets and settle the obligations o f the RTC as it has been doing for the activities inherited from the FSLIC. The FRF’s primary focus w ill be disposing o f the approximately $7.7 billion of assets in liquidation remaining from failed thrift institutions, managing the assets set aside to pay claims arising from credit enhancements on securitized assets, and repaying the RTC’s debt from the Federal Financing Bank. Internally generated funds are expected to be sufficient to complete the RTC’s mission without additional use of taxpayer funds. Electronic Collection o f Assessments________________ The FDIC in 1995 began to invoice and collect deposit insur ance premiums electronically. Under a new rule adopted in December 1994 and effective April 1, 1995, the FDIC calculated assessments for each institution and initiated an electronic debit through the Automated Clearing House Network to collect the premium. The new process reduced the regulatory burden on institutions and automated a system that was labor-intensive. With the new method, the FDIC experienced an error rate o f less than 0.1 per cent, a significant improvement over the error rate o f eight to 13 percent under the previous manual, paper-based system. The new process proved its value further in September 1995 when the FDIC used it to refund $1.5 billion to BIF-insured insti tutions within 10 days o f the recapitalization announcement. W.W.Reid W illia m A, Longbrake, Deputy to the Chairman and CFO, w as a key architect o f Chairman Heifer's strategy to refocus the FDIC's attention from closing failed banks to ensuring th a t they operate s a fe ly ., The State of the Banking and Thrift Industries 9 Insured commercial banks and savings institutions reported record profits in 1995, continuing a four-year trend o f strong earn ings performance. Commercial banks’ earnings set a new record for the fourth year in a row. The improvement in bank earnings was made possible by strong loan growth and healthy net interest margins. Profits at savings institutions surpassed the indus try’s previous record, set in 1993; average return on assets (ROA) reached the highest level since 1962. Thrifts’ earnings were boosted by improved asset quali ty and by the absence o f restruc turing charges at large institu tions. Both industries improved their balance sheets in 1995 as capital levels rose and troubled assets declined. The follow ing is an overview o f conditions in these two industries. Commercial Banks____________ Com m ercial banks earned $48.8 billion in 1995, an increase o f $4.2 billion or 9.4 percent over the previous record level reached in 1994. Almost 97 per cent reported positive earnings, with 68 percent reporting higher earnings than in 1994. The industry’s average ROA rose to 1.17 percent, from 1.15 percent in 1994. This marked the third consecutive year that the average ROA at commercial banks was above one percent and more than doubled the ROA o f 0.48 percent in 1990. ROA in 1993 exceeded one percent for the first time in FDIC history. Net interest income in 1995 o f $154.2 billion was $7.7 billion higher than in 1994, even though net interest margins w ere slightly narrower. The improvement was due to strong loan growth. Annual Return on Assets (ROA) FD IC -lnsured Institutions 1934-1995 ■ C om m ercial Banks ■ Savings In stitu tio n s 1934 40 45 50 55 60 65 70 75 80 85 90 95 Savings institution data not available prior to 1947. Total loans at commercial banks increased by $244.5 billion (10.4 percent) in 1995 - the largest annual dollar increase ever reported and the largest percentage growth registered since 1984. Real estate loans accounted for the largest share o f the increase in total credit, grow ing by $82.3 billion. Noninterest revenue o f $82.4 bil lion was $6.2 billion higher than in 1994, reflecting strong growth in fee income. Sales o f securities held for investment netted banks $545 million in gains in 1995, a vast improvement over 1994 when securities sales resulted in $571 million in net losses. Low er deposit insurance prem i ums, made possible by the recap italization o f the Bank Insurance Fund (B IF) at the end o f May, reduced banks’ operating costs in the second half o f the year by approximately $2.5 billion. Despite the bright earnings picture, banks experienced some problems with loan quality, especially in the consumer area. Banks’ provisions for future loan losses w ere $1.6 billion higher than in 1994, an increase o f 14.5 percent. This is the first annual increase in industry loanloss provisions since 1991. Net loan charge-offs also increased by $920 million (8.2 percent) due to rising losses on consumer loans. Levels o f noncurrent loans (those 90 days or m ore past due or no longer accruing interest incom e) fell for the fifth consecu tive year. However, the net decline in non current loans of $328 million, or 1.1 percent, was much smaller in 1995 than in any o f the previous four years. The number o f insured com m er cial banks reporting financial results at year-end 1995 fell below 10,000 for the first time since the start o f the FDIC. After reaching a peak o f 14,496 at the end o f 1984, the number o f commercial banks declined by almost one-third to 9,941 at year-end 1995. The decline was due prim arily to mergers. Num ber of FDIC-lnsured "Problem " Institutions by Fund M em bership 1991-1995 (year-end)_____________________________ ■ Savings A ssociation Insurance Fund (SAIF) M em bers ■ Bank Insurance Fund (BIF) M em bers Only six insured com m ercial banks failed in 1995, the small est number since 1977. The number o f banks on the FD IC ’s “problem list” declined to 144 during the year, from 247 at the end o f 1994. Assets o f prob lem banks fell by one-half, to $17 billion from $33 billion. (Inform ation about problem institutions by fund membership, not by financial institution type, appears in the charts on Pages 10 and 11.) 1992 1991 1 S In stitu tio n to ta l 1400 1200 1 non I uuu E !■ s 1 ■1 i i ■ i s1 1 I 1 IP ® ® ® ® * ® i 0 Savings Institutions_______ Savings institutions earned a record $7.6 billion in 1995, a $1.2-billion increase from their 1994 earnings and a $783 million increase over their previous record set in 1993. 1995 ■ 600 200 1994 ■ 800 400 1993 i 1991 1992 1993 1994 1995 Total SAIF Members* Problem Institutions Percent of Total 2,177 337 15.5 2,039 207 10.2 1,929 100 5.2 1,844 54 2.9 1,727 42 2.4 Total BIF Members * Problem Institutions Percent of Total 12,305 1,089 8.9 11,813 856 7.2 11,291 472 4.2 10,758 264 2.5 10,243 151 1.5 * Commercial banks and savings institutions. Does not include Resolution Trust Corporation conservatorships. The average return on assets was 0.78 percent, the highest annual ROA reported since 1962. Most o f the increase in earnings came at large institutions, w here prof its have been held down in recent years by credit losses. A $1.4-billion reduction in non interest expenses, reflecting few er restructuring charges at large institutions, was a major contributor to the earnings improvement. Although earnings w ere up significantly industry-wide, only 47 percent o f thrifts reported higher earnings in 1995. The main problem for many institu tions was a decline in net interest income at smaller thrifts. ■ Commercial banks and savings institutions. Does not include insured branches of foreign banks. Thrifts received relatively little benefit from the reduction in BIF deposit insurance premiums, as three-quarters o f all deposits at savings institutions are insured by the Savings Association Insurance Fund (SAIF). Unlike the BIF, the SAIF remains undercapitalized, and there was no reduction in SAIF deposit insurance premiums in 1995. Noninterest incom e o f $7.1 billion was almost $1 billion higher than in 1994, primarily due to gains from asset sales. The reduced noninterest expense and higher noninterest income, combined with a $371-million decline in loan-loss provisions, helped offset a $1.6-billion decline in net interest income. Total assets increased for the second consecutive year, follow ing five years o f shrinkage. Assets grew by $17.2 billion (1.7 percent), after increasing by $7.7 billion in 1994. Much o f the growth occurred in holdings o f home mortgage loans, which increased by $9.8 billion (2.1 percent). There also was growth in more liquid assets, such as cash, deposits with other institutions, and overnight lending. Geoffrey L. Wade Research Director William R. Watson (left) speaks with a foreign journalist about U.S. banking conditions. Assets of FDIC-lnsured "Problem " Institutions by Fund M em bership 1991-1995 (year-end) ■ Savings Association Insurance Fund (SAIF) Members ■ Bank Insurance Fund (BIF) Members 1991 1992 1993 1994 1995 1993 __________ 1994 1995 $65 269 $11 20 $ billions 1050 900 750 600 1 450 300 MM # ■ 150 0 1 ---1 ■ 1 1 1 II 1 1 1 II__ 1__ __ 1 ($ billions)________ Total Assets of Problem Institutions SAIF Members BIF Members I 1991 1992 $ 209 610 $128 464 Deposits increased by $4.7 billion and other borrowings increased by $4.1 billion, which helped to fund the $17.2 billion increase in assets. Most o f the increase in deposits occurred during the first half o f 1995, when asset growth was strongest. Deposits declined during the second half o f the year, when thrifts switched back to other borrow ings and asset growth slowed considerably. Equity capital continued to rise throughout the year, increasing by $6.1 billion and reducing thrifts’ needs for deposits to fund asset growth. At year-end 1995, equity capital reached 8.39 percent o f assets - the highest level since 1951. $31 42 The number o f insured savings institutions declined by 123 in 1995, due to acquisitions by comm ercial banks, conversions to commercial bank charters and mergers within the thrift indus try. Only two savings institutions (both SAIF m embers) failed in 1995, the fewest since 1975. The number o f “problem” institutions fell to 49 from 71 during the year, and their assets declined by more than half, to $14 billion from $39 billion. (Information about problem institutions by fund membership, not by financial institution type, appears in the charts on Pages 10 and 11.) Board of Directors 1 12 Iticki H eller Ms. Heifer became the 16th Chairman o f the Federal Deposit Insurance Corporation on October 7, 1994, and the first woman to head a federal banking agency. Before her appointment by President Clinton, Ms. Heifer had been a partner in the Washington office o f the law firm o f Gibson, Dunn & Crutcher specializing in banking and finance. Ms. Heifer has held positions in all branches o f the federal government. From 1985 to 1992, she was the chief international lawyer for the Board o f Governors o f the Federal Reserve System. Prior to working at the Federal Reserve Board, she served nearly two years as Senior Counsel for international finance at the U.S. Treasury Department. From 1978 to 1979 she was Counsel to the Judiciary Committee of the U.S. Senate. FDIC Board o f Directors (le ft to right): Eugene A. Ludwig Ricki Heifer A nd rew C. Hove. Jr. Jonathan L. Fiechter Born in North Carolina and raised in Tennessee, Ms. Heifer graduated magna cum laude from Vanderbilt University with a B.A. and from the University o f North Carolina with an M.A. She clerked for U.S. Court of Appeals Judge John M inor Wisdom after graduating with honors from the University o f Chicago Law School and serving as Associate Editor o f the Law Review. She is a member o f the American Law Institute, the Council on Foreign Relations, and the Visiting Committee o f the University o f Chicago Law School. She is past Chairman o f the Committee on International Banking and Finance o f the American Bar Association. Ms. Heifer’s various civic activities include serving as a member o f the beard o f directors o f the Girl Scouts o f the USA. Andrew C. Hove. Jr. Eugene A. Ludwig:________ Jonathan L. Fieeliter Mr. Hove was appointed for a second term as Vice Chairman o f the FDIC in 1994. He served as Acting Chairman from August 1992 until the confirmation o f Ricki Heifer as the Chairman in October 1994. Prior to his first appointment as Vice Chairman in 1990, Mr. Hove was Chairman and Chief Executive Officer of the Minden Exchange Bank & Trust Company, Minden, Nebraska, where he served in every department during his 30 years with the bank. Mr. Ludw ig became the 27th Comptroller o f the Currency on April 5, 1993. As the Comptroller, Mr. Ludw ig also serves as an FDIC Board member. Mr. Fiechter has been Acting Director o f the Office o f Thrift Supervision (O TS) since December 1992 and has spent the past 25 years in government service. As Acting Director o f the OTS, Mr. Fiechter also serves as an FDIC Board member. Also involved in local government, Mr. Hove was elected Mayor o f Minden from 1974 until 1982 and was Minden’s Treasurer from 1962 until 1974. Other civic activities included President o f the Minden Chamber o f Commerce, President o f the South Platte United Chambers o f Commerce and positions associated with the University o f Nebraska. Mr. Hove also was active in the Nebraska Rankers Association and the American Bankers Association. Mr. Hove earned his B.S. degree at the University o f NebraskaLincoln. He also is a graduate o f the University o f WisconsinMadison Graduate School of Banking. After serving as a U.S. naval officer and naval aviator from 1956-60, Mr. Hove was in the Nebraska National Guard until 1963. Prior to becoming Comptroller, Mr. Ludw ig had been with the law firm o f Covington and Burling in Washington, DC, since 1973, w here he specialized in intellectual property law, banking and international trade. He became a partner in 1981. Mr. Ludw ig earned his B.A. magna cum laude from Haverford College in Pennsylvania. He also received a Keasbey scholarship to attend Oxford University, w here he earned a B.A. and M.A. Mr. Ludw ig holds an LL.R. from Yale University, w here he served as Editor o f the Yale Law Journal and Chairman o f Yale Legislative Services. Prior to becoming Acting Director o f the OTS, Mr. Fiechter was one o f two Deputy Directors o f the agency. In that capacity, he was responsible for overseeing the OTS’s Washington, DC, operations and the closing o f nonviable thrifts. Mr. Fiechter came to the OTS in 1987 from the Office o f the Comptroller o f the Currency, which he joined in 1978. At the OCC, Mr. Fiechter served as Deputy Comptroller in charge o f research. Mr. Fiechter began his govern ment service in 1971 in the Office o f the Secretary at the U.S. Treasury Department, working on issues related to international finance, Treasury debt policy and financial institu tions reform. A graduate o f Rockford College, Rockford, Illinois, Mr. Fiechter has done graduate w ork in economics at the University o f Virginia. On December 22, 1995, the U.S. Senate confirmed Mississippi banking commissioner Joseph H. Neely to be a member o f the F D IC Board. He was sworn in on January 29, 1996. Organization Chart (as of December 31,1995) Board of Directors Ricki Heifer Andrew C. Hove, Jr. Eugene A. Ludwig Jonathan L. Fiechter Office of the Chairman Ricki Heifer Chairman Inspector General Legal Division James A. Renick Acting Inspector General W illia m F. Kroener, III General Counsel Deputy to the Chairman for Finance and Chief Financial Officer Deputy to the: Chairman and Chief Operatiing Officer Deputy to the Chairman lor Policy W illiam A. Longbrake Dennis F. Geer Leslie A. W oolley Division of Insurance Division of Administration Division of Compliance and Consumer Affairs Office of Corporate Communications Arthur J. M urton Director Jane Sartori Director Paul L. Sachtleben Director Alan J. W hitney Director Division of Resolutions Division of Information Resources Management Division of Research and Statistics Office of the Ombudsman Gail L. Patelunas Acting Director Donald C. Demitros Director W illiam R. Watson Director Carmen J. Sullivan Ombudsman Division of Depositor and Asset Services Division of Supervision Office of Equal Opportunity Office of Legislative Affairs John F. Bovenzi Director Nicholas J. Ketcha Jr. Director Johnnie B. Booker Director Alice C. Goodman Director Division of Finance Office of Executive Secretary Steven A. Seelig Director Jerry L. Langley Executive Secretary ■ M Supervision and Enforcement More information about FDIC enforcement cases appears in the Significant Court Cases chapter o f this Annual Report. In 1995, the banking industry had its fourth consecutive year o f record profits, with nearly 97 percent o f all commercial banks reporting positive earnings and two-thirds having higher earnings than in 1994. The favor able earnings, plus high levels o f capital and declining troubled assets, resulted in few er bank failures and problem institutions. During this relatively calm period, the FDIC initiated a number o f projects aimed at redesigning the supervisory process, im proving communication with the industry and reducing regulatory burden. New Initiatives in Supervision and Risk Assessment____ The FDIC at year-end 1995 was the primary federal regulator of 6,041 state-chartered banks that are not members o f the Federal Reserve System and 593 statechartered savings banks. The FDIC also has back-up supervi sory responsibility for insurance purposes over the remaining 5,336 federally insured banks and savings associations. The Division o f Supervision (DOS) leads the FD IC’s supervisory efforts in conjunction with other Divisions and Offices. The DOS process for examining and supervising institutions includes on-site examinations and off-site analyses to detect poor risk management or exces sive risk-taking by an institution before losses occur. As part o f Chairman Heifer’s emphasis on shifting the agency’s focus from resolving bank failures to w ork ing to help banks remain open and operating safely, the FDIC in 1995 worked to develop a more dynamic approach that combines traditional examination methods with new initiatives. FDIC Exam inations 1993-1995 1995 1994 1993 3,931 386 11 3 9J 4,439 375 255 92 523 4,340 5,684 Consumer and Civil Rights Trust Departments Data Processing Facilities 3.218 294 6 4 6 3,528 3,148 657 1,671 3,528 684 1,882 3,749 782 1,910 Total 9,004 One o f the major steps taken by the FDIC in 1995 was the creation in June o f a new Division o f Insurance (D O I) that w ill analyze risks to the deposit insurance funds from a more comprehensive perspective than in the past. The new Division w ill identify and monitor em erg ing and existing risks by drawing on a w ide variety o f sources o f information, including other FDIC Divisions, other bank regulatory agencies, other government economic statistics and analyses and data from the private sector. DOI w ifi analyze information from the unique perspective o f the deposit insurer and translate the results into guidance for examiners and financiai anaiysts, senior FDfC managers, bankers and others w ho monitor banking trends. DOI also w ill manage the agency’s risk-related premium system, whereby well-capitalized and well-managed institutions are charged considerably iess for deposit insurance than institu tions that are undercapitaiized and exhibit other weaknesses. bank faiiures o f the f980s and the early 1990s and the effective ness o f early w arning signals, methods o f preventing failures and actions to limit insurance losses at failed institutions. The study w ill be the subject o f an FDfC-sponsored symposium with academic and other nonFDIC participants scheduled for January 1997. Safety and Soundness: State Nonmember Banks Savings Banks National Banks State Member Banks Savings Associations Subtotal The FD IC’s Division o f Research and Statistics (DRS), in coopera tion with other divisions and offices, began a m ajor study of 10,434 1 DRS and DOI staff afso began work on an effort to improve the faiiure projection process at the FDfC by anafyzing the influence o f regional and national econom ic trends on bank performance. This effort is consistent with the FD IC’s goal o f becom ing m ore proactive in the identification o f em erging risks. In order to expand the FD IC ’s early warning system for potential ioan probfems, FDIC examiners began completing an “under w riting standards” questionnaire after each examination. The answers reflect an examiner’s view o f an institution’s ability to identify, measure, monitor and control credit risks in various types o f lending. This process is designed to help the FDIC monitor em erging risks in the banking system, identify troublesome underwriting trends across the country and direct supervisory efforts. The results o f the questionnaires are expect ed to be released semiannually. To improve the structure and consistency o f the examination process, “decision flow charts” are being developed for examin ers to use for each major risk area. These decision charts for credit risk, interest rate risk, operational risk and other risks w ill outline a diagnostic process that involves a graduated approach to examinations based on the level o f risk at each institution. These decision flow charts are being designed to aid examiners at critical junctures in their inquiry and decision making process. These enhanced examination procedures are expected to be used in 1996. To prepare for full-scale interstate banking in 1997 and in an effort to centralize supervision o f affiliated institutions, the FDIC is reorganizing its examination operations to create “case man agers” in its regional offices. Each manager w ill become the authority on a given banking organization and w ill be respon sible for preparing its risk analy sis regardless o f its regional or geographic boundaries. Through this process, an individual bank ing organization’s unique risk profile w ill be better assessed and coordinated w ith other bank ing agencies. The case manager system also is expected to improve communication between the FDIC and banks operating in m ore than one region o f the country. DOS continued to develop and train specialists in em erging risk areas, including capital markets investments-such as derivatives R is k -R e la te d Premiums_______________________________________________ The following tables show the number and percentage of institutions insured by the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF), according to their risk classification as of December 31,1995. Each institution is categorized based on its capitalization and a safety and soundness rating (A, B or C) as determined by on-site examinations and off-site reviews. Assessment rates shown represent average full-year rates per $100 of assessable deposits. Assessment rates for the BIF from January 1,1995, to May 31,1995, were the same as SAIF rates. From June 1,1995, to December 31,1995, rates for the BIF ranged from a low of four cents to a high of 31 cents per $100 of assessable deposits. BIF Supervisory Groups A W e ll Capitalized: Assessment rate Number of institutions A dequately C apitalized: Assessment rate Number of institutions U ndercapitalized: Assessment rate Number of institutions B C $0.12 9,646 (93.5%) $0.15 431 (4.2%) $0.24 92 (0.9%) $0.15 75 (0.7%) $0.20 22 (0.2%) $0.29 32 (0.3%) $0.20 3 (0.0%) $0.29 0 (0.0%) $0.31 17(0.2% ) $0.23 2,288 (90.5%) $0.26 139 (5.5%) $0.29 20 (0.8%) $0.26 27(1.1% ) $0.29 21 (0.8%) $0.30 27(1.1% ) $0.29 0 (0.0%) $0.30 0 (0.0%) $0.31 6 (0.2%) SAIF Supervisory Groups W e ll Capitalized: Assessment rate Number of institutions A dequately Capitalized: Assessment rate Number of institutions Undercapitalized: Assessment rate Number of institutions Note: BIF data exclude 39 insured branches of foreign banks and include 75 SAIF-member "Oakar" institutions that hold BIF-insured deposits that are also included in the SAIF table. SAIF data include 801 BIF-member Oakar institutions that also hold SAIF-insured deposits that are also included in the BIF table. and the sales o f mutual funds and other nondeposit investment products. The FDIC also estab lished a task force on electronic banking and chairs an intera gency w orking group on the subject. These groups w ere created in 1995 to analyze many o f the issues presented by new and em erging technologies, including “smart cards” that can handle complex banking transactions and banks conducting business on the Internet. These efforts ensure proper coordination among the regulatory agencies and help the FDIC address issues that are crit ical to its own functions, such as deposit insurance coverage, insolvency and settlement risk, and consumer protection. The FDIC also has established examiner training programs to expand knowledge o f electronic banking issues. In 1995, the FDIC began expand ing and strengthening its ability to assess risks inherent in inter national banking. W hile the agency has personnel with extensive international banking knowledge, this program w ill centralize the expertise into a core group in DOS to ensure greater coordination in assessing the nature and impact o f these risks. This risk-assessment program w ill include activities o f U.S. banks abroad and foreign banks in the U.S. In addition, the FDIC continued working with other U.S. and for eign regulators to develop a more coordinated supervisory strategy to respond to risks in internation al banking. For example, the FDIC, along with other U.S. bank regulators, developed a program to uniformly analyze and rate foreign banking organizations that have a U.S. presence. The FDIC formed a task force to study how the Riegle-Neal Interstate Banking and Branching Efficiency Act o f 1994 would affect the banking industry and the FDIC. The law autho rized interstate banking and branching to U.S. and foreign banks in 1997. The task force has been looking at the adequacy of off-site supervisory information, the effect o f interstate banking on staffing, examination procedures, the insurance funds and other issues. Also, in conjunction with other regulators, the FDIC joined in a State-Federal W orking Group on Interstate Supervision. Other members o f the group include the Federal Reserve System and state regulators, under the spon sorship o f the Conference o f State Bank Supervisors. The w orking group’s purpose is to m inimize FDIC A p p licatio n s 1993-1995 1995 146 1994 106 1993 89 145 1 Deposit Insurance 103 3 89 0 2,135 1,715 1,224 2,135 1,224 911 0 1,713 1,017 696 2 1,223 786 437 1 Approved Denied New Branches Approved Branches Remote Service Facilities Denied Mergers 419 451 326 419 0 451 0 326 0 1,092 1,364 1,772 1,086 86 1,000 6 2 4 1,357 127 1,230 7 1 6 1,759 99 1,660 13 1 12 46 50 56 45 1 50 0 56 0 3 10 7 3 0 10 0 7 0 30 42 68 29 1 42 0 64 4 Approved Denied Requests for Consent to Serve* Approved Section Section Denied Section Section 19 32 19 32 Notices of Change in Control Letters of Intent Not to Disapprove Disapproved Conversions of Insurance Coverage* Approved Denied Brokered Deposit Waivers Approved Denied Savings Association Activities 0 State Bank Activities/Investments* Approved Denied 7 6 0 0 Approved Denied 7 0 6 0 367 118 583 366 1 118 0 581 2 24 14 - Conversions of Mutual Institutions7 Non-Objection Objection 24 0^ 9 5 - - * Under Section 19 of the Federal Deposit Insurance Act, an insured institution must receive FDIC approval before employing a person convicted of dishonesty or breach of trust. Under Section 32, the FDIC must approve any change of directors or senior executive officers at a state nonmember bank that has been chartered less than two years, has undergone a change of control within two years, is not in compliance with capital requirements, or otherwise is in a troubled condition. ■ Applications to convert from the SAIF to the BIF or vice versa. A Section 24 of the FDI Act in general precludes an insured state bank from engaging in an activity not permissible for a national bank and requires notices be filed with the FDIC. T A new requirement in 1994 for banks to provide such notice. A prototype created by St. Louis exam iner | Debra M ille r w as instrum ental in the developm ent of the ALERT system of o ff-site loan analysis. 20 conflicts and duplication among state and federal regulators in the supervision o f state-chartered banks that operate in more than one state. In addition, the group is working toward shared technologies and common application forms. An interagency w orking group operating under the Federal Financial Institutions Examination Council (FFIE C ) continued its w ork on revising the Uniform Financial Institutions Rating System, comm only called the “ CAMEL” system. The FFIEC adopted the C A M E L system on Novem ber 13, 1979, and it has proven to be an effective tool to uniformly evaluate the sound ness o f financiai institutions and to identify institutions requiring special attention. The current review was prompted by changes in the banking industry and in the agencies’ policies and proce dures since 1979. M ajor revisions being considered include an explicit reference to the quality o f risk management, the identifi cation o f risk elements within each component o f the CAM EL system, and a new aspect covering interest rate risk. DOS, in conjunction with the Division o f Information Resources Management, continued to develop automated examination software packages that allow examiners to do a significant amount o f analysis off-site, there by m inim izing examiner time spent in an on-site review o f an institution’s risks. An automated examination pack age called the A LE R T System was field-tested in late 1995 and in use in May 1996. A LERT provides examiners the ability to collect loan data from institutions electronically, load the information into an application and select loans for off-site review. ALERT is the first step in an effort to automate much o f the examina tion and anaiytical process. The goal o f these undertakings is to m axim ize efficiency, m inim ize burden and enhance the riskassessment process. Finally, DOS is expanding examiner access to internal and external databases to enhance pre-examination planning and off-site analysis in an effort to reduce supervisory burden. DOS has set a goal o f reducing total examination hours by 10 percent and the time spent in the institu tion by 25 percent. _ Improved Communication _ The FDIC emphasizes the need for clear communication with bankers, including the sharing o f economic and analytical expertise that can assist banks and thrifts in identifying, mea suring and controlling risks. The FDIC in 1995 also made changes to become more responsive to the industry’s view s toward the supervisory process. As required by the Riegle Community Development and Regulatory Improvement Act o f 1994, the FDIC created an Office o f the Ombudsman that w ill be an independent, neutral source o f assistance to the banking community, the public and FDIC employees. Its mission is to assist in the impartial and prompt resolution o f complaints against the FDIC, to gather information that ensures the FD IC ’s regula tions and procedures are clear and up-to-date, and to address other concerns or questions about the agency. Pursuant to the same law, the FDIC established an appeals process for decisions and conclu sions made by FDIC examiners and regional supervisory officials. An appeals committee in the Washington headquarters w ill consider and decide an appeal and notify the institution o f its decision within 60 days. The committee is comprised o f the Vice Chairman o f the FDIC, the Director o f DOS, the Director o f the Division o f Compliance and Consumer Affairs (DCA), the General Counsel and the Ombudsman. Institutions may appeal a variety o f material supervisory determinations, including examination ratings. Guidelines contain provisions designed to protect institutions from possible retaliation as a result o f filing an appeal. In March, DOS began asking bankers to complete a question naire to solicit opinions and suggestions on how to improve the quality and efficiency o f the examination process. Most o f the approximately 3,500 FDICsupervised comm ercial banks and savings banks examined within a one-year period w ill be asked to complete a three-page questionnaire on such matters as the appropriateness o f exami nation procedures, the quality o f the examination team and the usefulness o f the examination report. In addition, the FDIC began to use the Internet to accept public comment on proposed regula tions. The FDIC also began to explore the use o f the Internet to permit electronic submission of applications and to make avail able supervisory materials, such as examination manuals and notices o f final and proposed regulations. Reduced Regulatory Burden A variety o f laws and regulations affecting banks in the areas o f safety and soundness, crime detection and consumer protection have imposed significant costs on insured banks and thrifts (as compared to other competitors). In order to reduce these costs, the FDIC in 1995 intensified its efforts to eliminate excess regulatory burden. Congress, for example, required the FDIC and other bank and thrift supervisors to review all regulations and policy statements. The Office o f the Executive Secretary led these efforts in cooperation with other Divisions and Offices. (In 1996, new Board mem ber Joseph H. N eely began to direct these efforts and the new Office o f Policy Development took a leading role.) The FDIC also worked with other federal banking agencies to review com mon regulations, written policies and guidelines, with the goal o f working toward uniformity. Begulations are being tested as to whether they are necessary to ensure a safe and sound banking system, enhance the functioning o f the marketplace, or implement public policy related to consumer protection. Com pliance, Enforcem ent and Other Related Legal Actions 1993-1995 Sect 8a Termination of Insurance * Voluntary Termination of Insurance Involuntary Termination of Insurance Notices to Primary Regulator Notices of Hearing* Final Order Terminating Insurance" Sect 8p Termination of Insurance (no deposits) Sect 8q Termination of Insurance (deposits assumed) Sect 8b Cease-and-Desist Orders Notices of Charges Issued Orders Issued W ith Notices of Charges" Orders Issued Without Notice of Charges Section 8 (c) Temporary Orders" Sect 8e Removal/Prohibition of Director or Officer Notices of Intention to Remove/Prohibit Orders Issued With Notice" Orders Issued Without Notice Sect 8g Suspension/Removal When Charged With Crime Civil Money Penalties Issued Sect 5e Cross-Guaranty Assessments/Waivers Notices of Assessment of Liability Waivers Issued Sect 7 j Notices Disapproving Acquisition/Control Sect 19 Denials of Service After Criminal Conviction Denials of Requests to Serve Issued Final Orders Issued After Hearing" Sect 32 Notices Disapproving of Officer or Director1 Notices of Disapproval Issued Final Rulings Issued After Appeal" Regulation Z Requests for Relief from Reimbursement7 Orders Denying Requests for Relief Orders Granting Relief Issued Other Actions Not Listed Above Total Number of Actions Initiated by the FDIC In response to the examination questionnaire mentioned previ ously, DOS and DCA also took steps to identify areas o f the examination process that can be streamlined. For example, DOS examiners w ill provide banks with a minimum two-week notice before an upcoming examination, w hile on-site examination hours w ill be reduced by shifting certain examination functions outside o f the bank. Also, the questionnaire asks bankers if they would prefer to have safetyand-soundness examinations 1995 7 1994 5 1993 5 7 2 1 0 0 1 3 1 1 4 2 2 1 16 29 2 9 42 11 8 78 2 3 27 1 1 7 41 0 11 8 67 2 42 50 64 7 20 35 17 23 33 20 23 44 1 9 0 0 10 1 2 15 i 6 0 0 0 1 2 4 1 2 0 1 0 1 2 0 1 1 1 0 4 5 11 4 0 5 0 11 3 5 3 10 5 0 3 0 10 0 9 16 17 126 144 228 • The FDIC can order the termination of deposit insurance under Section 8a for reasons that include unsafe or unsound conditions, unsafe or unsound practices, and violations of laws. After initial notice, most matters are resolved through the correction of problems or the closing of the institution. ■ These orders generally do not signify the start of compliance/enforcement proceedings and therefore are not included in totals for actions initiated. A Linder Section 32, the FDIC must approve any change of directors or senior executive officers at a state nonmember bank that has been chartered less than two years, has undergone a change of control within two years, is not in compliance with capital requirements, or otherwise is in a troubled condition. T Regulation Z, which implements the Truth in Lending Act, requires accurate disclosures to consumers of interest rates and finance charges. Institutions that fail to comply may be ordered to reimburse customers. Note: Detailed information about the full range of FDIC enforcement actions, penalties, criminal referrals, lawsuits and related measures is contained in the annual "Section 918 Report to Congress,” which is available from the FDIC. Frank Gresock separate from or in conjunction with other examinations. Approximately two-thirds o f the respondents wanted to have various examinations at the same time. DCA is increasing offsite, pre-examination analysis in order to m inim ize the burden associated with on-site examinations. Enforceinent Actions The number o f enforcement actions initiated in 1995 totaled 126, compared to 144 in 1994 and 228 in 1993 (see table on Page 21). This is indicative o f continued improvement and prosperity in the industry. Another sign o f the improved conditions in the industry is that in 1995 the FDIC initiated no “prompt corrective actions,” such as early-intervention authorized by a 1991 law w hen an insured institution’s capital condition is eroding. One m ajor enforcement case in 1995 involved The Daiwa Bank, Limited, Osaka, Japan. In September, Daiwa disclosed approximately $1.1 billion in securities trading losses at its N ew York City branch, after having concealed those losses from regulators. The FDIC, the Federal Reserve Board, and the N ew York State Banking Department issued joint ceaseand-desist orders against Daiwa and its insured New York subsidiary, Daiwa Bank Trust Company (D aiwa Trust), to control securities trading. These government agencies also began an investigation o f Daiwa’s N ew York City branch and Daiwa Trust. Soon there after, Daiwa disclosed that Daiwa Trust had lost $97 m illion from trading activities from 1984 through 1987. At the direction o f senior management, Daiwa concealed the losses from regula tors and the public. In November, Daiwa was ordered by its federal and state bank regulators to close its U.S. banking operations. The N ew York State Banking Department also ordered Daiwa Trust to cease its operations, w hile the FDIC terminated its deposit insurance. Daiwa subse quently pled guilty to assorted federal crimes and paid a line o f $340 million. Failed Institutions More information about failed institutions appears in the financial statements and statistical tables in the back o f this Annual Report, The success of the FDIC’s mission in protecting the depositors o f insured banks and savings asso ciations is demonstrated by the fact that no depositor has ever suffered a loss o f insured funds from the closing o f an FDICinsured institution. The FDIC protects depositors by managing two insurance funds-the Bank Insurance Fund (B IF ) and the Savings Association Insurance Fund (SAIF). The FDIC assumed responsibility for resolving SAIFinsured institutions from the Resolution Trust Corporation (RTC) on July 1, 1995. The RTC was established by Congress in August 1989 to resolve hundreds o f troubled savings associations. In addition to operating two insurance funds, the FDIC manages the assets and liabilities o f the form er Federal Savings and Loan Insurance Corporation (FSLIC). The assets and liabilities o f the form er FSLIC are managed through the FSLIC Resolution Fund (FRF). In most cases, a depository institution is closed by its chartering authority w hen it fails to meet prescribed capital requirements or is insolvent. The FDIC works closely with all chartering authorities in dealing with institutions in danger o f failing. The Division o f Resolutions (D O R ) is responsible for resolving a failed institution using the least-costly alternative. DOR works with other FDIC Divisions to gather data about the failing institution, estimate the potential loss from a liquida tion, solicit and evaluate bids from potential acquirers and recommend the least-costly resolution to the FD IC’s Board o f Directors. Failed Banks 1994--1995 California Connecticut Hawaii Massachusetts Missouri Total Assets remaining after a failure are liquidated by the Division o f Depositor and Asset Services (DAS) in an orderly fashion. The proceeds are used to pay, to the extent possible, uninsured depos itors and any remaining creditors, including the repayment o f the insurance funds. The Legal Division assists DOR and DAS with these duties and, when appropriate, pursues legal action against individuals whose misconduct caused losses to an insured institution. Protecting Depositors During 1995, the FDIC resolved six BIF-insured institutions with total assets o f $753 million, down from 13 failures in 1994 with $1.4 billion in assets. The size o f bank failures in 1995 was the lowest since 1980, when failedbank assets totaled $236.2 million. This also was the lowest number o f failures since 1977, w hen there w ere also six failures, and substantially below the record 206 failures in 1989. The FDIC resolved all six failures during the year through Purchase and Assumption (P& A) transactions w here the insured deposits as w ell as some assets o f the failed bank w ere acquired by another institution. Depositors with balances above the $100,000 insurance limit at the time of closing w ill receive a pro rata 1995 4 1 1 0 0 1994 6 13 8 2 0 2 1 share o f the proceeds from the liquidation o f the institution. There w ere no failures o f SAIFinsured institutions after the FDIC became responsible for them on July 1, 1995, although two savings institutions failed earlier in the year and were resolved by the RTC. The FDIC may make an “advance dividend” payment to uninsured depositors soon after a bank’s closing. The advance dividend is based on the estimat ed recoveries from liquidating the failed bank’s assets. The FDIC made advance payments o f $12.3 m illion to uninsured depositors in 1995. An advance dividend is not generally paid in cases w here the value o f the failed institution’s assets cannot be reasonably determined. Advance payments w ere made to uninsured depositors in all six failures in 1995 and ranged from 48 to 70 percent o f unin sured depositor claims. W here appropriate, as assets are liquidated, DAS makes sub sequent dividend payments to uninsured depositors and general creditors o f failed banks, including payments to the FDIC as a creditor for advancing funds for insured deposits at the time o f bank failures. Dividend pay ments during 1995 totaled $3.9 billion for bank failures from that year and previous years. Resolution Strategies The FDIC uses several strategies to achieve the least-costly resolu tion o f a failing institution. The most frequently used resolution strategy is the P&A transaction, described previously. Typically, acquirers pay a premium for a failed bank’s deposits and certain assets, prim arily performing loans. The least desirable option is a payout o f insured deposits and the subsequent liquidation o f assets. This option was last used on Novem ber 5, 1993. The FDIC also may provide “shared equity” in a resolution, through some form o f preferred stock or debt, to help an acquir ing institution capitalize its new assets. These capital instruments are typically issued at riskadjusted rates and are structured with incentives for early redemp tion. Both the BIF and the FRF own these securities, and DOR is responsible for their manage ment and eventual disposition. In 1995, the FDIC realized $9.5 m illion from one previous resolution transaction. The FDIC did not provide any capital assistance in 1995. At year-end 1995, DOR was man aging 40 assistance agreements dating back to 1977. O f these, 12 involved open bank assistance, 20 involved loss-sharing agree ments with 13 different acquir ers, two w ere limited partnership agreements and the remaining six comprised other types o f assistance. These assistance agreements cover $4.3 billion in assets owned by acquiring institutions. In addition, at the close o f the RTC on December 31, 1995, DOR assumed responsibility for ten interim capital assistance agree ments between the RTC and m inority-owned institutions that acquired thrifts from the RTC. A separate discussion o f the FSLIC Resolution Fund assistance agreements, also managed by DOR, appears on the next page. • 2,687 real estate properties, which w ere sold for a total o f $573.3 million, yielded a recovery o f 94.3 percent o f the average appraised value. • Over 23,750 loans and other assets, totaling $2 billion in book value, w ere sold in sealed-bid offerings and other asset marketing events. Net sales proceeds represent ed 97.7 percent o f the appraised value. Asset Disposition_____________ When an insured institution is closed, the FDIC is appointed receiver to administer the failed institution’s deposits and assets. As o f December 31, 1995, DAS was responsible for managing 653 active receiverships (590 for the BIF, 62 for the FRF and one for the SAIF). During 1995, the FDIC terminated 231 receiverships. The FD IC’s ability to provide incentives for healthy institutions to assume deposits and purchase assets o f failed banks allows a portion o f assets to be returned to the private sector immediately. The remaining assets are retained by the FDIC for later sale, loan workouts or other disposition. During the year, the FD IC’s efforts to dispose o f assets at the time of closing resulted in approximately 27 percent o f the assets o f the six failed banks remaining in the private sector (about $203 million out o f $753 million total). The FDIC retained the remaining 73 percent, or $550 million. During 1995, DAS successfully settled, sold or otherwise resolved a significant portion o f its asset inventory from failed institutions as follows: • The FDIC reduced the book value o f assets in liquidation 38.4 percent during the year, to $10.3 billion from $16.7 billion. Net collections for all funds totaled about $4.5 billion. Affordable 1 on sing;___________ 1 The congressional appropriation o f $15 million for affordable housing for fiscal year 1995 was reduced to approximately $3.7 m illion in July 1995. Notwithstanding the reduction in funds, the FDIC was able to help qualified buyers purchase 412 single-family properties during the fiscal year. In addition, eight multifamily properties containing 225 units w ere sold to nonprofit organizations and public agencies. Notable trans actions included the following: • Two multifamily properties containing a total o f 15 units w ere sold on June 13 to the Comm unity D evelopm ent Corporation of Fitchburg, MA, for $7,500. Eight units w ill be set aside for low-incom e tenants. • On Martin Luther King’s birthday (January 16, 1995), the 83-unit Copley Gardens was dedicated in a ceremony with Rep. Barney Frank (D -M A ) in Rockland, MA. The South Shore Housing Development Corporation, a nonprofit housing group, had purchased it from the FDIC for $950,000. On October 1 - three months before the RTC closed - the RTC and FDIC affordable housing programs form ally merged. The FDIC w ill sell the remaining RTC affordable housing. Professional Liability Recoveries_____________________ The FD IC ’s Legal Division and DAS work together to identify claims against directors and officers, accountants, appraisers, attorneys and other professionals w ho may have contributed to the failure o f insured financial institutions. The Corporation investigates the circumstances surrounding the failure o f every institution and, w here appro priate, sends criminal referrals to the Department o f Justice. The FDIC also w ill pursue administrative enforcement actions and professional liability proceedings. During 1995, the Legal Division and DAS recovered $252 million from professional liability settlements or judgments. At year-end 1995, the FD IC ’s caseload included investigations and lawsuits involving 147 institu tions. This caseload is expected to increase in 1996 as the FDIC assumes responsibility for RTC-related cases that are still pending. The Legal Division’s criminal restitution unit tracked and coordinated m ore than 3,000 new criminal referrals made by regulators and institutions during 1995. O f these, 36 involved closed institutions. Also during 1995, the FDIC as receiver collected $7.6 m illion in court-ordered restitution from individuals convicted o f bank fraud. Liquidation H ighlights 1993-1995 Dollars in b i l l i o n s Total Failed Banks* Assets of Failed Banks* Net Collections" Total Assets in Liquidation (year-end)* 1995 6 0.8 $ 4.5 $ $ 10.3 1994 $ $ $ 13 1.4 8.5 16.7 1993 $ $ $ 41 3.5 12.5 28.0 • Excludes open bank assistance transactions. The 1993 items exclude one SAIF-insured failure resolved by the Resolution Trust Corporation. ■ Includes assets from failed banks and from failed thrifts formerly insured by the Federal Savings and Loan Insurance Corporation. These assets are serviced by the FDIC as well as by asset management contractors and national servicers. FSLIC Resolution Fund The FDIC, through the FRF, is responsible for managing assistance agreements the form er FSLIC entered into prior to August 9, 1989. The last agree ment is scheduled to terminate in December 1998. The FRF, which receives federally appropriated funds, was allocated $827 million, o f which $662 million was available at the end o f the year. DOR is responsible for managing FRF’s assistance agreements, which include “covered assets” (those w here acquirers w ere guaranteed against loss and/or guaranteed a certain yield). During the year, DOR reduced the number o f agreements it managed to seven from 11. Three o f these assistance agreements w ere terminated through negoti ation before their contracted termination dates. These “early terminations” are expected to yield a cost savings o f $10.6 million, primarily involv ing a September 1988 assistance agreement with Guaranty Federal Bank, F.S.B., Dallas, and an August 1988 assistance agreement with American Federal Bank, F.S.B., Dallas. A settlement also was reached in a lawsuit involving FD IC’s managem ent o f a FSLIC assistance agreem ent with Bluebonnet Savings Bank, F.S.B., Dallas, Texas. In June 1991, Bluebonnet, FSB Corporation and James M. Fail filed suit in the U.S. District Court in Dallas against the FDIC and the Office o f Thrift Supervision. The lawsuit asserted that the FDIC, as manager o f the FRF, breached the terms o f the FSLIC assistance agreement. In August 1995, the lawsuit was settled. The FRF made a total payment o f $77.5 million to Bluebonnet to settle all matters and to provide for an early termination o f the assistance agreement. Covered assets w ere reduced to $108 million from $1.0 billion through sales and other adjust ments. In addition, DOR is administering 30 terminated FRF agreements that have outstanding issues and 45 agreements that only require the monitoring and collection o f tax benefits due to the FRF beyond the contractual termination o f the agreements. Approximately $279 million in tax benefits w ere reafized by the FRF in 1995. W hile DOR manages the FRF agreements and covered assets, DAS is responsible for liquidating FRF assets and liabilities. At year-end 1995, the FRF portfolio o f assets in liquidation had a book value o f $1.5 billion, down from $1.8 billion at the end of 1994, despite the purchase of $534 million o f assets during 1995 related to the early ter minations. FRF net liquidation collections totaled $634 million in 1995. On January 1, 1996, the FD IC’s FRF received from the RTC its remaining $14 billion o f corporate assets and $11 billion o f corpo rate liabilities. RTC receivership assets included $7.7 billion (book value) o f assets in liquidation and $12.7 billion (book value) in other assets and cash reserves from the RTC’s securitization sales. The FDIC expects to recover $14 billion from these receivership assets to cover the $11 billion in corporate liabilities assumed. The FRF w ill continue until all o f its assets are sold or liquidated and all o f its liabilities are satis fied. Any funds remaining w ill revert to the U.S. Treasury. W. W. Reid Chairman Heifer discussed the new strategic plan-the first in the agency’s history—at an April videotaping for employees. Consumer Protection Activities 27 In addition to protecting failedbank depositors, the FDIC has a strong consumer protection responsibility in other areas. These efforts include enforcing compliance with consumer protection and civil rights laws, and helping to educate bankers and consumers on topics such as community reinvestment, fair lending and deposit insurance. Highlights for 1995 follow. Implementation o f the final regu lation w ill occur during a two-year period that began July 1, 1995. Small institutions began to be evaluated under the new stream lined standards for performance on January 1, 1996. Large institu tions began collecting data for the new tests on January 1, 1996, but the first reports are not due until March 1, 1997. Institutions received free software in December o f 1995 to assist them in collecting the CRA loan data. CRA Reform___________________ The FDIC continued working with the other federal bank and thrift regulatory agencies on revising regulations relating to the Community Reinvestment Act (CRA), a 1977 law that encourages banks and thrifts to meet the credit needs o f their communities. After issuing pro posed changes to the regulations in 1993 and 1994 - on which the agencies collectively received almost 14,000 comment letters a final rule was approved in April 1995. After the final rule was issued, the FDIC continued to w ork with the other federal bank and thrift regulatory agencies to apply the new standards consistently. Uniform interagency CRA examination procedures and performance evaluations were issued in December 1995. In addition, under the auspices of the Federal Financial Institutions Examination Council, the agencies conducted joint CRA training sessions attended by more than 1,200 examiners and other personnel. The revised CRA regulation emphasizes evaluations o f an institution based on actual lending, investment and service. The new regulation promotes consistency in evaluations, and eliminates unnecessary record keeping and reporting require ments without compromising effective enforcement. In general, the new regulation establishes different performance tests for different types o f institutions large institutions, small institu tions, and w holesale and limitedpurpose institutions. Also, an institution may opt to be assessed under an agency-approved “strate gic plan” that has been designed by the institution, issued for public comment and is based on measurable performance goals. The duties o f the Division o f Compliance and Consumer Affairs (D CA) include examining FDIC-supervised banks for compliance with consumer protection laws. DCA conducted 3,148 such examinations in 1995. As a result o f these or previous examinations, 328 banks reim bursed nearly $2.3 million to consumers during 1995 for viola tions o f the Truth in Lending Act regarding incorrect disclosures. That law requires accurate disclosures o f interest rates and finance charges so that loan applicants can comparison-shop for a mortgage or other consumer loan. During 1995, DCA continued its efforts to improve the quality and effectiveness o f the compliance examination. To identify and address the concerns o f the banking industry, DCA surveyed 784 FDIC-supervised banks to determine how institutions view ed the quality o f the exami nation. By year-end, DCA began implementing improvements in the examination process that reflected survey findings. Among the most important changes was the adoption o f extensive pre-examination planning aimed at narrowing the focus o f the compliance examination and reducing the time examiners spend in a bank. A new manual outlining the compliance examination from pre-examination planning to report preparation was being developed for distribution in 1996. Additionally, DCA began testing new software that w ill assist examiners in evaluating lending performance by provid ing ready access to census, loan and other data. Compliance Examinations Community Outreach One o f the many ways the FDIC promotes compliance with fair lending laws is by meeting with bankers, community and consumer groups, government officials and citizens to exchange information about CRA and fair lending. Examples o f community outreach activities conducted by DCA during 1995 include a focus group held in Mississippi to iden tify roadblocks to rural lending, banker training sessions in Kansas and Texas on fair lending and fair housing, and seminars in California with community groups and tribal representatives on lending to Native Americans. DCA in 1995 also emphasized programs intended to overcome obstacles to lending for minorityowned small businesses. For example, the Division sponsored meetings in South Carolina with bankers, local government officials, small business owners and representatives o f communi ty organizations to discuss issues such as fending discrimination and changes to CRA reguiations o f interest to small businesses. Similar forums and activities were conducted in several locations nationwide. Deposit Insurance Training DCA and the FD IC ’s Legai Division sponsored deposit insurance training seminars for bankers in 11 cities during 1995. As the staff o f an insured institu tion generaliy is a customer’s first source o f information about FDIC deposit insurance, the seminars were aimed at educating bank employees on w hat deposit insurance does and does not cover, and how to explain coverage accurately and clearly to consumers. Topics addressed at the FDIC seminars included the most common reasons w hy deposits are not insured. A guide to uninsured investment products, such as mutual funds, also was provided. Each participant received a handbook containing a comprehensive description o f the deposit insurance rules, and other materials that institu tions can use to develop and conduct their own training programs. DCA, in conjunction with the Legal Division, also began developing a video based on the seminars. Responses to Consumer Complaints and Inquiries DCA maintains a toll-free telephone hotline to handle inquiries from the public [1-800-934-FDfC (3342) or 202-942-3100 in the Washington, DC, area]. The service aiso accommodates telecommunications devices for the deaf (1-800-925-4618 or 202-942-3147). More than 48,000 telephones calls w ere received by DCA’s Washington headquarters and eight regional offices in 1995. As in the past, the vast majority o f the calls dealt with deposit insurance. However, other significant categories of caffs involved generai information about bank operations and consumer protection laws, the use o f Home Mortgage Disclosure Act reports in detecting possible lending discrimination, and truth-in-lending rules that ensure borrowers have adequate infor mation about a loan’s costs and terms. The number o f calls received during 1995 was some what lower than the 55,000 calls in 1994, which may be due to the continuing decline in the number o f bank failures. DCA also responded to approxi mately 5,800 written consumer complaints and inquiries during the year. Significant categories included lending discrimination, protections against inaccurate or misleading information in credit files, deposit insurance coverage and other matters relating to deposit services. In addition, the FD IC’s Office o f Legisfative Affairs (O L A ) coordinated w ith other Divisions and Offices on responses to approximately 1,400 written inquiries from members of Congress. Most o f these inquiries w ere on behalf o f constituents wanting to know about FDIC policies and practices. Many inquiries received by O LA raised consumer-related issues such as financial institution compliance with consumer protection laws, questions about deposit insurance coverage, and bank and thrift dis putes with individual consumers over services and prices. In a related development, the agency in 1995 created an Office o f the Ombudsman to respond to questions, concerns or com plaints about the FDIC from consumers, bankers and other members o f the public. On-Line Consumer Inform ation___________________ In February 1995, the FDIC unveiled its W orld W ide Web page on the Internet (http://www.fdic.gov), thus providing the public with ready access to FDIC consumer information, press reieases and statistics on banking. Consumer information on the FD fC ’s Internet web-site includes selected articles and fact sheets on deposit insurance coverage, an explanation o f the FD IC ’s procedures for paying deposit insurance w hen an institution fails, and the text o f two consumer brochures {Your Insured Deposit, a summary o f the FDIC’s deposit insurance rules, and Insured o r N o t Insured, a guide to what bank products are and are not insured by the FDIC). Consumers now can send mes sages to DCA via the Internet to get answers to specific questions about deposit insurance, fair lending rules and other consumer protections (Internet address: consumer@fdic.gov). Significant Court Cases The FD IC’s wide-ranging legal activities include matters relating to the supervision o f FDICinsured institutions, the resolu tion o f failed institutions, the liquidation o f assets, and the pursuit o f liability claims against failed bank officers, directors and professionals. In 1995, the Legal Division, w orking closely w ith other Divisions and Offices, was involved in several noteworthy court cases. Most involved failed institutions and the “cross guaranty” authority o f the FDIC to recover all or part o f its failed-bank costs from commonly controlled subsidiaries o f a holding company. (O ’M elveny and Myers v. FDIC), the D. C. Circuit found that the Supreme Court held that new and comprehensive legislation replaced common law doctrines such as D ’Oench Duhme. The FDIC disagreed with the D.C. Circuit’s decision and continued to litigate D ’Oench cases within FDIC guidelines outside o f the D.C. Circuit. (On May 8, 1996, in Motorcity v. FDIC, the U.S. Court o f Appeals for the Eleventh Circuit in Atlanta, Georgia, expressly rejected the D.C. Circuit’s holding and found that the D ’Oench Duhme doctrine was not displaced by FIRREA.) First City Bancorporation____ D ’Oench Duhme In 1942, in D’Oench, Duhme & Co. v. FDIC, the U.S. Supreme Court established a broad rule protecting the FDIC against any arrangements, including verbal or secret agreements, that are likely to mislead bank examiners in their review o f a bank’s records, even if there was no intent to deceive. Since then, the FDIC has relied on the so-called D ’Oench Duhme doctrine and its statutory counterpart to ensure that the true financial condition o f an institution can be accurately assessed from its records. This is essential to supervising open institutions and resolving failing ones. However, in a 1995 decision, the U.S. Court o f Appeals for the District o f Columbia Circuit (Murphy v. FDIC) held that the Financial Institutions Reform, Recovery, and Enforcement Act o f 1989 (FIR R E A ) replaced the D’Oench Duhme doctrine. Citing a June 1994 Supreme Court ruling A global settlement reached in 1995 released the FDIC from all claims made by First City Rancorporation o f Texas, Houston, in a case involving a series o f transactions. In 1988, the FDIC provided significant assistance to the banking sub sidiaries o f First City, to enable the banks to maintain solvency. On October 30, 1992, the Office o f the Comptroller o f the Currency closed First City’s Houston operation and the Texas Banking Commissioner closed its Dallas subsidiary. Later that same day, chartering authorities closed the holding company’s 18 other bank subsidiaries after the FDIC exercised its authority to seek reimbursement for its losses on the Houston and Dallas banks. The FD IC’s use o f this “cross guaranty” authority, granted by FIRREA, rendered the 18 banks insolvent. In 1995, First City filed suit against the FDIC, contesting a portion o f the open-bank assis tance agreement from 1988 and the FD IC ’s right to assess First City’s 18 subsidiaries in 1992. In June and July o f 1995, a global settlement was reached, with the approval o f a Dallas bankruptcy court, releasing the FDIC from all claims and liabilities. The settlement, which involved no cost to the Bank Insurance Fund, enabled claimants against the bankrupt holding company to receive early distributions o f m ore than $300 million in assets held by the FDIC in its receivership capacity. Meriden Trust and Safe Deposit Com pany_______ In 1992, the FDIC assessed Meriden Trust and Safe Deposit Company o f Meriden, Connecticut, for a $152 million loss from the failure o f its affiliate, Central Bank o f Meriden. Cenvest, Inc., the holding company that owned the two banks, challenged the FD IC’s decision. Th e U.S. District Court in Connecticut ruled in favor o f the FDIC in June o f 1994, confirming its authority to levy the cross guaranty assessment. Then, in July o f 1994, the FDIC closed Meriden Trust, marking the first time the FDIC closed an insured institution and appointed itself as receiver under powers granted by Congress in 1991 (in contrast to being appointed receiver by the chartering authority). The bank reopened as an FD ICowned “bridge bank” and was sold in Novem ber o f 1994 for $7.8 million. Cenvest appealed the District Court’s decision, but on August 2, 1995, the U.S. Court o f Appeals for the Second Circuit in New York City upheld the District Court’s ruling in favor o f the FDIC. Maine National Bank The FDIC levied a cross-guaranty assessment against M aine National Bank, Portland, Maine, for the 1991 failure o f its affiliate, Bank o f N ew England, N.A., Boston. The assessment rendered Maine National insolvent, and the chartering authority closed it in 1991. The trustee o f the banks’ holding company contested the FD IC’s assessment in court, arguing that it was a taking of property without just compensa tion in violation o f the Fifth Amendment. The U.S. Court o f Federal Claims in Washington, D.C., ruled in favor o f the trustee, finding that there was a taking of property without compensation. The FDIC appealed the Court’s decision. On Novem ber 13, 1995, the U.S. Court o f Appeals for the Federal Circuit in Washington, D.C., in a unanimous opinion, reversed the earlier decision. It upheld the FD IC’s cross-guaranty assessment power and rejected the trial court’s conclusion that such authority is a radical depar ture from the common law principle o f limited corporate liability. On December 28, 1995, the trustee filed a petition for rehearing before the Federal Circuit. As o f year-end, a decision was still pending. Doolin Security Sayings Bank, FSB In May, the U.S. Court of Appeals for the Fourth Circuit in Richmond, Virginia, affirmed the 1994 decision o f the FDIC Board to terminate deposit insur ance for Doolin Security Savings Bank, FSB, N ew Martinsville, West Virginia. Doolin had disput ed its deposit insurance premium and withheld a portion o f its payment to the FDIC. The FDIC initiated insurance termination proceedings against the bank. Doolin later petitioned the U.S. Supreme Court to review the matter, but the petition was denied on Novem ber 13, 1995. Thus, Doolin was required to pay its delinquent deposit insurance premiums. The case is considered significant in terms o f supporting the FD IC ’s risk-related insurance premium system, which went into effect in 1993. Throughout the dispute, the FDIC maintained deposit insurance coverage at the bank for the benefit o f Doolin’s customers. Meritor Savmgsjtank In April 1994, a major share holder in Meritor Savings Bank, Philadelphia, and other assorted shareholders filed suit against the FDIC, alleging that the Commonwealth o f Pennsylvania and the FDIC conspired to close M eritor in 1992. The sharehold ers also alleged that the FDIC had mismanaged the receivership estate. In February 1995, the U.S. District Court for the Eastern District o f Pennsylvania, sitting in Philadelphia, dismissed all counts o f the complaint against the FDIC as receiver and in its corporate capacity. The case is significant because the Court concluded that the shareholders did not have a right to an accounting from the FDIC for the receivership’s actions beyond the information the statute requires the receiver ship to make available to other parts o f the government. Internal Operations A main focus o f the FDIC in 1995 was conducting a thorough review o f the Corporation’s mission and operations as the workload from failed banks continued to decline and as Resolution Trust Corporation (RTC) employees and functions transferred to the FDIC. This review emphasized key goals o f Chairman Heifer, including shifting the focus from an agency that resolves bank failures to one that actively works to keep insti tutions open and operating. This shift w ill require enhancing and building upon many o f the functions the FDIC has long performed. Also, on December 22, 1995, the U.S. Senate confirmed Joseph H. Neely as a member o f the Board o f Directors. Mr. Neely, a form er Mississippi banking commissioner, was nominated by President Clinton on July 14. (He was sworn in on January 29, 1996.) Mr. N eely’s confirm ation marked the first time since August 1992 that all live Board positions w ere filled. specific short-term objectives and projects to achieve the long-term goals set out in the strategic plan. Initially, the agency established 151 projects, o f which approxi mately 30 w ere completed as o f year-end 1995. FDIC staff w ill add projects to the plan in 1996 as needed. In May, Chairman H eifer announced significant organiza tional changes to help achieve the goals o f the strategic plan. These changes included the creation of a Division o f Insurance (see Page 17), an Office o f the Ombudsman (see Page 20), a Division o f Administration (D O A) and an Office o f Policy Development (OPD). Emphasis on Efficiency and Running the FDIC Like a Business ______________ DOA consolidates functions of three separate offices for person nel management, corporate services and staff training. DOA’s early initiatives included a new performance-management sys tem that encourages employees to take an active part in estab lishing the criteria for their performance evaluation. OPD w ill coordinate policy develop ment among all FDIC Divisions and Offices, evaluate the policy implications o f regufatory and legislative proposals, and formulate corporate positions on em erging issues. In setting a new direction for the agency, the FDIC launched several initiatives. In April, the Board approved a strategic plan to guide the Corporation through the end o f the decade. It is the first formal, corporate-wide strategic plan in the FD IC’s 61-year history. M ajor goals center on identifying and addressing risks to the insurance funds and im proving communications with the public. To carry out the strategic plan, staff developed a corporate-w ide operating plan that focuses on The Office o f fnspector General (O IG ) continued to conduct audits, investigations and other activities that improved corporate economy and efficiency w hile preventing fraud and abuse. The Inspector General, w ho is appointed by the President and confirmed by the Senate, keeps the Board o f Directors and Congress apprised o f potential waste, fraud and abuse or other serious problems in FDIC programs and operations. During 1995, the OIG issued reports identifying $18.8 million in potential cost recoveries and savings that Corporation management agreed to pursue. The OIG presented a total o f 126 audit reports to the Board of Directors, resulting in im prove ments across the Corporation. In addition, the OIG helped obtain 12 convictions or guilty pleas and made 103 referrals to the Department o f Justice, the FBI and other federal agencies during the year. These investi gations resulted in the recovery and restitution o f more than $1 million to the Corporation. Am ong the many other examples o f efforts to increase efficiency at the FDIC is the continued work to make banking statistics avail able on the Internet. Various reports, which can be down loaded and incorporated into spreadsheet applications, allow for easier use and updating, and significantly reduce the FD IC’s printing costs. Staffing and Budget Reductions____________________ At year-end, the FDIC had 9,789 employees, down approximately 16 percent from year-end 1994 and 37 percent below the peak level in the second quarter o f 1993. These figures reflect the continuing decline in agency workload from bank failures. In Novem ber 1995, senior management announced a twophased buyout program for career FDIC and RTC employees with incentives either to retire or voluntarily resign. Employees in the first phase w ere eligible to leave by year-end, and m ore than 300 accepted. Eligible employees who accepted the second phase Num ber of O ffic ia ls and Employees of the FDIC 1994-1995 (year-end) Washington Total Executive Offices*" Division of Supervision* Division of Depositor and Asset Services Legal Division Division of Compliance and Consumer Affairs'1 Division of Finance Division of Information Resources Management Division of Research and Statistics Division of Resolutions Office of Inspector General Office of Personnel Management" Office of Equal Opportunity Office of Corporate Services" Office of the OmbudsmanT Division of Insurance0 Division of Administration’ Subtotal-FDIC Resolution Trust Corporation0 Total Regional/Field 1994 178 3,369 3,796 1,531 398 692 548 60 253 192 196 31 383 N /A N /A N /A 1995 96 149 129 435 40 279 352 51 81 149 N/A 28 N/A 3 1 386 9,789 2.067 11,627 5,899 11,856 17,526 1995 96 3,055 2,623 1,298 463 629 499 51 233 149 n /a 34 n/a 66 1 592 1994 169 159 79 434 24 311 382 60 74 192 185 31 209 N /A N /A N /A 1995 0 2,906 2,494 863 423 350 147 0 152 0 N/A 6 N/A 63 0 206 1994 9 3,210 3,717 1,097 373 381 166 0 179 0 11 0 174 N/A N/A N/A 2,179 1,072 2,309 1,649 7,610 995 9,318 4,250 3,251 3,958 8,605 13,568 * For 1994, Executive Offices include the Offices of the Chairman, Vice Chairman, Director (Appointive), Executive Secretary, Corporate Communications, Legislative Affairs, and Training and Educational Services. The 1995 number also includes the Chief financial Officer, Chief Operating Officer and the Deputy for Policy but omits the Office of Training and Educational Services. ■ In May 1995, the FDIC announced the merger of the Offices of Personnel Management, Corporate Services, and Training and Educational Services (the latter formerly part of the Executive Offices) into a new Division of Administration. A In August 1994, the FDIC announced the merger of the former Office of Consumer Affairs and the compliance examination function from the Division of Supervision into a new Division of Compliance and Consumer Affairs. T In May 1995, the FDIC began staffing the new Office of the Ombudsman. a The only employee in the new Division of Insurance in 1995 was its director, named on October 30. ° The RTC staffing totals include employees who were organizationally transferred from the RTC to the FDIC in Spring/Summer 1995, but who continued to work exclusively on RTC functions throughout 1995. The RTC totals also include certain FDIC employees in Chicago who were dedicated to RTC functions early in 1995, and who worked exclusively on these RTC functions for the balance of 1995. o f the buyout began leaving during the first quarter o f 1996 and w ill continue leaving through the third quarter o f 1997. For both phases, 940 employees accepted the buyout offer. The buyout program was intended to lessen the scope o f a reductionin-force (R IF ), which under federal law and FDIC policy cannot take place until 1997. By offering a buyout in 1995, the Corporation estimated it w ill save $129 million compared to waiting until 1997 to conduct a wide-scale RIF. Throughout 1996, the FDIC w ill evaluate additional voluntary staff reduc tions in an effort to minim ize the effect o f a possible RIF. Approximately 1,200 temporary staff appointments expire in 1996. The FDIC assisted personnel affected by the downsizing effort by conducting numerous training seminars and job fairs and establishing Outplacement Resource Centers both in the field and in Washington. As a result o f efforts to stream line, consolidate and reduce its operations, FDIC spending dropped to $1.37 billion in 1995, which was 23 percent below the previous level and eight percent below the amount budgeted for the year. As D irector o f the n e w D ivision o f Adm inistration, Jane Sartori had major responsibility for integrating RTC personnel and functions into the FDIC. FDIC-RTC Transition The FDIC successfully completed the integration o f RTC personnel and operations into the FDIC in conjunction with the close o f the RTC on December 31, 1995. The joint FDIC/RTC Transition Task Force, which had the statutory mission o f planning for and over seeing the transition, coordinated this effort. Approximately 1,300 permanent RTC employees w ere reassigned to the FDIC during 1995, bringing the total number o f permanent RTC employees absorbed by the FDIC over the past four years to about 2,100. An additional 764 temporary RTC employees also w ere transferred to the FDIC at the end o f 1995, prim arily to assist with the completion o f the substantial volum e o f residual RTC work. This included respon sibility for the management and disposition o f the remaining RTC assets and liabilities (see Page 26). The task force also completed extensive reviews o f FDIC and RTC automated systems and other significant operational differences between the two corporations. These reviews were the basis for recommendations to the FDIC on the best systems and practices to be used for future FDIC work. At year-end, the FDIC had implemented, or was in the process o f implement ing, each o f the best practice and system recommendations made by the task force. Regulations Adopted and Proposed Note: Publication dates refer to w hen an item appeared in the Federal Register. Final Rules Deposit Insurance Disclosures____________________ The FDIC amended Part 330 of its regulations to require insured institutions to disclose to admin istrators o f certain retirement and other employee benefit plan accounts whether their funds qualify for “pass-through” deposit insurance coverage. Among the types o f accounts affected are 401(k) retirement accounts, Keogh plan accounts, and corporate pension and profit-sharing plan accounts. Generally, “pass through” insurance means that each participant in the plan, rather than the total account balance, is individually insured up to $100,000. The new rule also makes technical amendments to Part 330 involving joint accounts, accounts where an insured institution is acting in a fiduciary capacity, and commingled funds o f a bankruptcy estate. The “pass-through” revisions became effective on July 1, 1995, while the technical amendments went into effect on March 13, 1995. Approved: January 31, 1995 Published: February 9, 1995 Deferred Tax Assets The FDIC amended Part 325 o f its regulations by revising its capital standards to establish a limit on the amount o f deferred tax assets an FDIC-supervised bank may include in T ier 1 capital for risk-based and leverage capital purposes. Deferred tax assets are assets that reflect, for financial reporting purposes, the amounts that w ill be realized as reductions o f future taxes or as future receivables from a taxing authority. The effective date of the final rule was April 1, 1995. Approved: January 31, 1995 Published: February 13, 1995 Standards for Safety and Soundness To comply with Section 132 of the FDIC Improvement Act o f 1991, the FDIC, together with the other federal bank and thrift regulatory agencies, amended Parts 303, 308 and 364 o f its regulations to establish deadlines for submitting and reviewing safety and soundness compliance plans. The agencies also adopted interagency guidelines establish ing standards for safety and soundness, which appear as an appendix to each agency’s final rule. The effective date o f the final rule was August 9, 1995. Approved: M arch 21, 1995 Published: July 10, 1995 Assets Transferred with Low Levels o f Recourse The FDIC amended Part 325 o f its regulations to limit the amount o f risk-based capital that FDIC-supervised banks must maintain for low-level “recourse” transactions. Recourse involves the retention o f any risk o f loss by an institution in connection with an asset or pool o f assets it transfers to some other party. The final rule, which became effective on April 27, 1995, im ple ments Section 350 o f the Riegle Community Development and Regulatory Improvement Act of 1994 and corrects an inconsisten cy in the FDIC’s risk-based capital standards. Approved: M arch 21, 1995 Published: March 28, 1995 Community Reinvestment Act The FDIC amended Part 345 of its regulations implementing the Community Reinvestment Act, w hile the other federal bank and thrift regulators approved paral lel rules. The new regulation replaces the 12 assessment factors in the old rule with a more performance-based process to determine whether financial institutions are meeting the credit needs o f their communities. The new rule also establishes dif ferent tests for large and small institutions, as w ell as for retail and wholesale or limited purpose banks. It also gives all institu tions the option o f being evaluat ed on the basis o f a “strategic plan” designed by each institu tion. The rule also reduces regu latory burdens, particularly for small institutions. The final rule w ill be phased in over a two-year period that began July 1, 1995. Approved: A p ril 24, 1995 Published: M ay 4, 1995 FDIC veteran econom ist A rthur J. M urton w as chosen D irector o f th e new Division o f Insurance, w hich w ill identify potential risks to the insurance funds. Final Rules Interest Rale Risk The FDIC, acting jointly with the Federal Reserve Board and the Office o f the Comptroller o f the Currency, amended its risk-based capital standards (Part 325) to include a bank’s exposure to changes in interest rates as a factor in evaluating the institution's capital adequacy. The final rule, which became effective on September 1, 1995, implements Section 305 o f the FDIC Im provem ent Act o f 1991. Approved: June 27, 1995 Published: August 2, 1995 Assessment Rales lor the Rank Insurance Fund The FDIC amended Part 327 o f its regulations to reduce the insurance premiums for the Bank Insurance Fund (BIF). The rule establishes a new assessment rate range o f four to 31 cents per $100 o f assessable deposits, depending on each institution’s risk classification. The previous range was 23 to 31 cents per $100. In addition, the rule amends the assessment schedule to w iden the rate spread to 27 cents per $100, from eight cents per $100. The rule also established a procedure for adjusting the rate schedule if necessary to maintain the BIF’s designated reserve ratio o f 1.25 o f total estimated insured deposits. The effective date o f the rule is September 15, 1995. The FDIC Board reduced the BIF rate again on Novem ber 14, 1995 (see the next page). Approved: August 8, 1995 Published: August 16, 1995 Assessment Rates for the Savings Association Insurance Collections and Calculations Insurance Fund_______ The FDIC amended Part 327 of its regulations to change the pay ment date for the first quarterly assessment payment for the first semiannual period in each year. This first quarterly payment now w ill be due the first business day after January 1, rather than by December 30 o f the previous year. This change eliminates a possible fifih assessment pay ment in 1995 that would have been required for institutions using the cash-basis method o f accounting. The rule also allows prepayment o f premiums as well as doubling o f invoice payments (except the January payment) with advance notice to the FDIC. Additionally, the rule changes the way interest rates on assessment underpayments and overpay ments are calculated, and short ens the timetable for announcing changes in the assessment rate from 45 to 15 days prior to the invoice date. The effective date o f the final rule was September 29, 1995, except for the change to the calculation o f interest rates, which became effective October 30, 1995. The FDIC Board voted to retain the existing assessment rate schedule for the Savings Association Insurance Fund (SAIF). The effect o f this final rule is that institutions whose deposits are subject to assess ment by the SAIF w ill pay higher assessment rates than BIFinsured institutions. The Board noted in its rulemaking that the SAIF remains seriously under capitalized. The SAIF assessment rate w ill continue to range from 23 to 31 cents per $100 o f assess able deposits, depending on risk classification. This rule became effective on September 15, 1995. The Board also voted on Novem ber 14, 1995, to maintain this same rate (see the next page). Approved: August 8, 1995 Published: August 16, 1995 Derivative Contracts The FDIC amended Part 325 of its regulations to revise the riskbased capital calculations used to determine the potential future exposure o f derivative contracts. Under the final rule, the “conver sion factors” used in calculating potential future exposure w ill be changed to reflect the higher risks o f “ long dated” interest rate and exchange rate contracts. Conversion factors for derivative contracts related to equities, precious metals and other com modities w ill be revised to reflecl the volatility o f the underlying indices or prices. The final rule was effective October 1, 1995. Approved: August 25, 1995 Published: September 5, 1995 Approved: September 26, 1995 Published: September 29, 1995 Final Rules Claim s on OECD-Based Governm ents and Banks___ The FDIC amended Part 325 o f its regulations to modify the riskbased capital definition for claims on central governments and banks in countries that are members o f the Organization for Economic Cooperation and Development (OECD). Given that claims on OECD countries generally get favorable capital treatment, the new rule clarifies that the OECDbased group o f countries includes all countries that are members, regardless o f when they entered the OECD. The effective date o f the rule is April 6, 1996. Approved: December 20, 1995 For the second time this year, the FDIC Board voted to maintain existing assessment rates for the SAIF. Those rates range from 23 cents to 31 cents per $100 o f assessable deposits. SAIFinsured institutions w ill continue to pay higher rates than BIFinsured institutions because the SAIF remains seriously undercapitalized. Approved: November 14, 1995 Published: December 11, 1995 October 26, 1995 Published: Assessment Rates for the Savings Association Insurance Fund Assessment Rates Tor the Bank Insurance Fund For the second time this year, the FDIC Board voted to reduce the deposit insurance premiums paid by BIF-insured institutions. Assessment rates w ere lowered by four cents per $100 o f assess able deposits, starting in January o f 1996. Given the four cent reduction, the highest-rated institutions w ill pay the statutory annual minimum o f $2,000 for FDIC insurance. The assessment rate for the weakest institutions was reduced to 27 cents per $100, from 31 cents per $100. The average assessment rate is the lowest in the more than 60year history o f federal deposit insurance for banks. The rate reduction was made possible because o f the high balance in the BIF, the health o f the banking industry and the low projected losses to the fund. Approved: November 14, 1995 Published: December 11, 1995 Technical Amendments to the CRA Rules The FDIC, along with the other federal bank and thrift regula tors, amended Part 345 to make technical corrections to the Community Reinvestment Act regulations adopted by the FDIC on April 24. The amendments also clarify the transition rules. The technical amendments took effect January 1, 1996. Approved: December 13, 1995 Published: December 20, 1995 Qualified Financial Contracts The FDIC amended Part 360 o f its regulations to expand the definition o f “qualified financial contracts.” The definition now includes spot and other short-term foreign-exchange agreements and repurchase agreements on qualified foreign government securities. The effective date of the rule was December 27, 1995. Approved: December 19, 1995 Published: December 27, 1995 DCA consumer affairs specialists nationw ide, including M a rie tta M oore in W ashington, help bankers and th e ir custom ers understand FDIC rules. Interim Rules Proposed Rules Originated Mortgage Servicing Rights______________ Annual Audits and Reporting Requirements Standards for The FDIC, together with the other federal bank and thrift regufators, approved an interim rule amending Part 325 o f its regulations regarding capitaf limits on “originated mortgage servicing rights” held by FDICsupervised banks. These gener ally are servicing rights acquired when an institution originates mortgage loans and later selfs the loans but retains the rights to provide services for a fee. The effective date was August 1, 1995, although written comments w ere accepted until October 2, 1995. The FDIC proposed an amend ment to the Corporation’s annuai independent audit and reporting requirements (Part 363 o f its regufations) that would provide relief from duplicative reporting and audit committee requirements for certain sound, well-managed banks. The proposal would implement Section 314(a) o f the Riegle Community Development and Regulatory Improvement Act o f f994. The FDIC, joining the other federaf bank and thrift regulatory agencies, issued for public comment proposed guidelines for safety and soundness refating to asset quafity and earnings, f f adopted as final, the proposed rule would appear as an appendix to each agency’s final rule (in the FD IC’s case, Part 364). Approved: Published: February 15, 1995 August 1, 1995 Golden Parachutes Small Business Loans Sold with Recourse The FDIC approved an interim rule amending Part 325 of its regulations to reduce the m in imum capital levels FDIC-supervised institutions must maintain for certain small business loans and leases that are sold with recourse. The interim rufe, which became effective August 31, 1995, implements Section 208 o f the Riegle Comm unity Developm ent and Regulatory Improvement Act o f 1994. Written comments w ere received through October 30, 1995. Approved: August 25, 1995 Published: August 31, 1995 Approved: M arch 21, 1995 Published: July 10, 1995 January 31, 1995 July 21, 1995 Published: Approved: Safety and Soundness________ The FDIC issued for public comment a proposed amendment to Parts 303 and 359 o f its regulations that would provide guidance to insured state non m em ber banks on w hich “golden parachute” and indemnification payments w oufd be considered fegitimate and which woufd be considered abusive or improper. A golden parachute typically is a large payment made by an institution to a management official who resigns just before the institution is cfosed or sold. The proposal would implement Section 2523 o f the Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act o f f990. Although the FDIC first issued a proposal in this area in 1991, the agency decided to seek additional public comment given the passage o f time and several changes being considered in the second proposal. Approved: M arch 21, 1995 Published: M arch 29, 1995 Foreign Banks The FDIC issued for public comment proposed amendments to Part 346 o f its regulations intended to ensure that foreign banks do not receive an unfair competitive advantage over U.S. banks in domestic retail deposit-taking activities. The proposed amendments are required by Section 107 o f the Riegle-Neal Interstate Banking and Branching Efficiency Act o f 1994. Approved: June 27, 1995 Published: July 13, 1995 Proposed Rules Market Risk__________________ The FDIC, the Federal Reserve Board and the Office o f the Comptroller o f the Currency jointly issued for public comment a proposed rule that would establish a risk-based capital requirement for market risk in foreign exchange, commodity activities and in the trading of debt and equity instruments. The proposed rule would amend Part 525 o f the FDIC’s regulations. Approved: July 11, 1995 Published: July 25, 1995 Suspicious Activity Reporting The FDIC joined the other federal financial institution regulatory agencies in proposing to amend Part 555 o f its regula tions regarding the reporting o f known or suspected crimes. The proposal would update and clarify the reporting requirements, and implement a new referral process and a new interagency reporting form. The proposal is intended to meet the goals o f Section 303 o f the Riegle Community Development and Regulatory Improvement Act o f 1994. Approved: September 6, 1995 Published: September 14, 1995 Proposals W ith d ra w n Loans in Areas Having Special Flood Hazards Management Official Interlocks The FDIC joined the other federal regulators o f depository institutions and the Farm Credit Administration by proposing to expand current requirements for loans in areas having special flood hazards. The proposed amendments to Part 339 o f the FD IC’s regulations would implement the National Flood Insurance Reform Act o f 1994. One provision would establish new escrow requirements for flood insurance premiums. Another provision would authorize lenders to purchase insurance on beh alf o f the borrower, and pass the cost along to the borrower, i f the customer would not purchase the policy when requested. The FDIC withdrew proposed amendments from February of 1994 that would have permitted certain management interlocks under Part 348 o f the agency’s regulations. The proposal was withdrawn because the Riegle Community Development and Regulatory Improvement Act o f 1994 limited the FD IC ’s authority to create the exemption (see previous item). Approved: September 26, 1995 Published: October 18, 1995 Management Official Interlocks The four federal regulators of banks and thrifts jointly issued for public comment a proposed rule that would amend each agency’s regulations relating to management official interlocks (in the FD IC’s case, Part 348). With certain exceptions, the existing rules prohibit bank management officials from simultaneously serving in a sim ilar capacity w ith other financial institutions. The proposed rule reflects provisions o f the Riegle Community Development and Regulatory Improvement Act o f 1994 that restrict the agencies’ authority to permit certain interlocks. Approved: December 12, 1995 Published: December 29, 1995 Approved: January 31, 1995 Published: Februaryr 7, 1995 Deposit Liabilities The FDIC withdrew a proposed amendment to Part 354 o f its regulations issued in 1988 that would have expanded the defini tion o f the term “deposit.” The proposed rule was withdrawn because o f an FDIC policy statement recom mending that proposed rules be withdrawn if not acted upon within nine months. Approved: December 19, 1995 Published: December 27, 1995 Significant Legislation Enacted M ark S. Schm idt (right), Kansas City DOS Assistant Regional Director, w as tapped in late 1995 for a tem porary assignm ent on the s ta ff of House Banking Com m ittee Chairman Jim Leach (left). W h ile Congress enacted no major banking statutes in 1995, lawmakers approved measures addressing litigation under the Truth in Lending Act, paperwork burdens generated by government agencies, and spending for certain federal programs. Truth In Lending Congress enacted the Truth in Lending Act Amendments o f 1995 (P.L. 104-29) in response to a 1994 court ruling based on technical violations o f the Truth in Lending Act that resulted in a variety o f class action lawsuits against lenders. Key provisions clarify the calculation and disclosure of fees, such as mortgage brokerage fees. These changes are intended to give lenders m ore certainty about what information is to be disclosed and to provide consumers with m ore accurate and consistent disclosures. Other provisions raise the tolerance level for understatements of finance charges, to $100 from $ 10, before a penalty could be imposed. The new law also raises the statutory damages for individual violations o f the act, to $2,000 from $1,000. Paperwork Reduction________ The Paperwork Reduction Act o f 1995 (P.L. 104-13), enacted on May 22, 1995, reaffirms and strengthens the fundamental objective o f a 1980 law intended to m inim ize the federal paper w ork burdens imposed on the public. The new law sets annual govern ment-wide paperwork reduction goals and imposes significant new responsibilities on agencies to seek public comment on proposed changes in paperwork requirements and to clear new requirements through the Office o f Management and Budget. Appropriations On July 27, 1995, Congress enact ed a suppfemental appropriations bill (P.L. 104-19) that rescinded $11.3 million of the $15 m illion previously made available for the FD IC ’s Affordable Housing Program under the Federal Deposit Insurance Act. No addi tional funding for the Affordable Housing Program was enacted during the year. Bank Insurance Fund Federal Deposit Insurance Corporation 1 Bank Insurance Fund Statements of Financial Position Dollars in Thousands December 31 1995 1994 Assets Cash and cash equivalents (Note 3) $ Investment in U.S. Treasury obligations, net (Note 4) 531,308 $ 1,621,456 20,762,046 12,896,856 406,804 260,702 4,143,040 8,190,492 Investment in corporate owned assets, net (Note 6) 180,293 242,628 Property and buildings, net (Note 7) 151,740 155,079 Interest receivable on investments and other assets, net Receivables from bank resolutions, net (Note 5) Total Assets $ 26,175,231 $ 23,367,213 $ $ 256,197 Liabilities and the Fund Balance Accounts payable and other liabilities Liabilities incurred from bank resolutions (Note 8) 192,744 31,882 81,945 279,000 875,000 55,941 163,164 126,151 128,417 Litigation losses 35,815 14,708 Total Liabilities 721,533 1,519,431 25,453,698 21,847,782 $ 26,175,231 $ 23,367,213 Estimated Liabilities fo r : (Note 9) Anticipated failure o f insured institutions Assistance agreements Asset securitization guarantee Commitments and contingencies (Notes 14 and 15) Fund Balance Total Liabilities and the Fund Balance The accompanying notes are an integral part of these financial statements. Federal Deposit Insurance Corporation Bank Insurance Fund Statements o f Income and the Fund Balance For the Year Ended December 31 Dollars in Thousands 1995 1994 Revenue Assessments (Note 11) $ 2,906,943 $ 5,590,644 Interest on U.S. Treasury investments 1,068,395 521,473 Revenue from corporate owned assets 58,585 140,821 Other revenue 55,176 214,086 4,089,099 6,467,024 Operating expenses 470,625 423,196 Provision for insurance losses (Note 10) (33,167) Total Revenue Expenses and Losses Corporate owned asset expenses (2,873,419) 73,599 137,632 Interest and other insurance expenses (27,874) 53,493 Total Expenses and Losses 483,183 (2,259,098) 3,605,916 8,726,122 21,847,782 13,121,660 $ 25,453,698 $ 21,847,782 Net Income Fund Balance - Beginning Fund Balance - Ending The accompanying notes are an integral part of these financial statements. Bank Insurance Fund Federal Deposit Insurance Corporation 1 Bank Insurance Fund Statements o f Cash Flows Dollars in Thousands For the Year Ended December 31 1994 1995 Cash Flows from Operating Activities Cash provided from: Assessments $ 2,796,114 $ 5,709,912 875,226 Miscellaneous receipts 694,401 36,084 Recoveries from corporate owned assets 5,336,125 211,691 Recoveries from bank resolutions 458,606 5,059,751 Interest on U.S. Treasury investments 22,337 Cash used for: (442,101) 8,769,742 3,830,000 Net Cash Provided by Operating Activities (Note 17) (658) 6,757,146 Miscellaneous disbursements (173,601) (23,929) Disbursements for corporate owned assets (2,791,417) (159,299) Disbursements for bank resolutions (485,963) (1,596,391) Operating expenses 800,000 Cash Flows from Investing Activities Cash provided from: Maturity o f U.S. Treasury obligations Cash used for: Purchase o f U.S. Treasury obligations (11,675,925) (7,845,925) (7,631,525) (1,369) 0 (1,369) 0 (1,090,148) 1,138,217 1,621,456 Net Cash Used by Investing Activities (8,431,525) 483,239 Cash Flows from Financing Activities Cash used for: Repayments o f indebtedness incurred from bank resolutions Net Cash Used by Financing Activities Net (Decrease) Increase in Cash and Cash Equivalents Cash and Cash Equivalents - Beginning Cash and Cash Equivalents - Ending The accompanying notes are an integral part of these financial statements. $ 531,308 $ 1,621,456 Notes to the Financial Statements Bank Insurance Fund December 51,1995 and 1994 48 1. Legislative History and Operations of the Bank Insurance Fund Legislative History The U.S. Congress created the Federal Deposit Insurance Corporation (FD IC) through enactment o f the Banking Act o f 1933. The FDIC was created to restore and maintain public confidence in the nation’s banking system. More recently, the Financial Institutions Reform, Recovery, and Enforcement Act o f 1989 (FIRRE A) was enacted to reform, recapitalize and consolidate the federal deposit insurance system. The FIRREA created the Bank Insurance Fund (BIF), the Savings Association Insurance Fund (SA IF) and the FSLIC Resolution Fund (FRF). It also designated the FDIC as the administrator o f these three funds. A ll three funds are maintained separately to carry out their respective mandates. Pursuant to FIRREA, an active institution’s insurance fund membership and primary federal supervisor are generally determined by the institution’ s charter type. Deposits o f BIF-member institutions are mostly insured by the BIF; BIF members are predominantly commercial and savings banks supervised by the FDIC, the Office o f the Comptroller o f the Currency, or the Federal Reserve. Deposits o f SAIF-member institutions are mostly insured by the SAIF; SAIF members are predominantly thrifts supervised by the Office o f Thrift Supervision (OTS). The Oakar amendment to the Federal Deposit Insurance Act (FD I Act) allows BIF and SAIF members to acquire deposits insured by the other insurance fund without changing insurance fund coverage for the acquired deposits. The FRF is responsible for winding up the affairs o f the former Federal Savings and Loan Insurance Corporation (FSLIC). Other significant legislation includes the Omnibus Budget Reconciliation Act o f 1990 (1990 OBR Act) and the Federal Deposit Insurance Corporation Improvement Act o f 1991 (F D IC IA ). These acts made changes to the FDIC's assessment authority (see Note 11) and borrowing authority (see "Operations o f the BIF" in a following section). The F D IC IA also requires the FDIC to: 1) resolve troubled institutions in a manner that will result in the least possible cost to the deposit insurance funds; 2) provide a schedule for bringing the reserves in the insurance funds to 1.25 percent o f insured deposits; and 3) upon recapitalization, maintain the insurance funds at 1.25 percent o f insured deposits or a higher percentage as circumstances warrant. Recent Legislative Proposals Recent proposed legislation would, i f signed into law, affect the BIF in the following ways: 1) BIFmembers would be required to share the interest costs o f Financing Corporation (FICO ) debt on a proportional basis with SAIF-members; 2) i f the B IF’ s capitalization level exceeds the designated reserve ratio (currently 1.25 percent), FDIC would be required to refund such excess up to the amount o f the BIF-members’ most recent semi-annual assessment; and 3) if the thrift charter is eliminated by January 1, 1998, the BIF and the SAIF would be merged on that date. There would be a separate assessment to fund the BIF-members' share o f the FICO interest costs, and therefore such interest costs would not affect regular assessments or the fund balance. Legislative proposals are subject to change as part o f the normal legislative process; therefore, it is uncertain what provisions the proposed law, i f enacted, will ultimately include. The FICO, established under the Competitive Equality Banking Act o f 1987, is a mixed-ownership government corporation whose sole purpose was to function as a financing vehicle for the FSLIC. Operations of the BIF The primary purpose o f the BIF is to: 1) insure the deposits and protect the depositors o f BIF-insured banks and 2) finance the resolution o f failed banks, including managing and liquidating their assets. In addition, the FDIC, acting on behalf o f the BIF, examines state-chartered banks that are not members o f the Federal Reserve System and provides and monitors assistance to troubled banks. The BIF is primarily funded from the following sources: 1) BIF assessment premiums; 2) interest earned on investments in U.S. Treasury obligations; 3) income earned on and funds received from the management and disposition o f assets acquired from failed banks; and 4) U.S. Treasury and Federal Financing Bank (FFB) borrowings, if necessary. Bank Insurance Fund The 1990 OBR Act established the FDIC's authority to borrow working capital from the FFB on behalf o f the BIF and the SAIF. The FD ICIA increased the FDIC's authority to borrow for insurance losses from the U.S. Treasury, on behalf o f the BIF and the SAIF, from $5 billion to $30 billion. The FD IC IA also established a limitation on obligations that can be incurred by the BIF known as the maximum obligation limitation (M O L). Under the M O L, the BIF cannot incur any additional obligation i f its total obligations exceed the sum of: 1) the BIF's cash and cash equivalents; 2) 90 percent o f the fair market value o f the BIF's other assets; and 3) the total amount authorized to be borrowed from the U.S. Treasury, excluding FFB borrowings. For purposes o f calculating the M O L, the FDIC's total U.S. Treasury borrowing authority was allocated between the BIF and the SAIF based on the ratio o f each fund’ s insured deposits to total insured deposits. At December 31, 1995, the M O L for the BIF was $47 billion. 2. Summary of Significant Accounting Policies General These financial statements pertain to the financial position, results o f operations and cash flows o f the BIF and are presented in accordance with generally accepted accounting principles (G A A P ). These statements do not include reporting for assets and liabilities o f closed banks for which the BIF acts as receiver or liquidating agent. Periodic and final accountability reports o f the BIF's activities as receiver or liquidating agent are furnished to courts, supervisory authorities and others as required. and closing banks. The BIF also records as an asset the amounts advanced for investment in corporate owned assets. Any related allowance for loss represents the difference between the funds advanced and/or obligations incurred and the expected repayment. The latter is based on the estimated cash recoveries from the assets o f assisted or failed banks, net o f all estimated liquidation costs. Estimated cash recoveries also include dividends and gains on sales from equity instruments acquired in resolution transactions. Use of Estimates The preparation o f the BIF’ s financial statements in conformity with generally accepted accounting principles requires FDIC management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Where it is reasonably possible that changes in estimates will cause a material change in the financial statements in the near term, the nature and extent o f such changes in estimates have been disclosed in the financial statement. Escrowed Funds from Resolution Transactions In various resolution transactions, the BIF paid the acquirer the difference between failed bank liabilities assumed and assets purchased, plus or minus any premium or discount. The BIF considered the amount o f the deduction for assets purchased to be funds held on behalf o f the receivership (an obligation). The funds remained in escrow and accrued interest until such time as the receivership used the funds to: 1) repurchase assets under asset putback options; 2) pay preferred and secured claims; 3) pay receivership expenses; or 4) pay dividends. U.S. Treasury Obligations Securities are intended to be held to maturity and are shown at book value. Book value is the face value o f securities plus the unamortized premium or less the unamortized discount. Amortizations are computed on a daily basis from the date o f acquisition to the date o f maturity. Interest is calculated on a daily basis and recorded monthly using the effective interest method. The FDIC policy o f holding escrowed funds was terminated during 1994. The BIF continues to pay the acquirer o f the failed bank the difference between liabilities assumed and assets purchased, plus or minus any premium or discount. The BIF then pays the receivership for the assets purchased by the assuming institution, plus or minus the premium or discount paid. Allowance for Losses on Receivables from Bank Resolutions and Investment in Corporate Owned Assets The BIF records as a receivable the amounts advanced and/or obligations incurred for assisting Litigation Losses The BIF accrues, as a charge to current period operations, an estimate o f probable losses from litigation against the BIF in both its corporate and receivership capacities. The FDIC's Legal Division recommends these estimates on a case-by-case basis. The litigation loss estimates related to receiverships are included in the allowance for losses for receivables from bank resolutions. Receivership Administration The FDIC is responsible for controlling and disposing o f the assets o f failed institutions in an orderly and efficient manner. The assets, and the claims against them, are accounted for separately to ensure that liquidation proceeds are distributed in accordance with applicable laws and regulations. Also, the income and expenses attributable to receiverships are accounted for as transactions of those receiverships. Liquidation expenses incurred by the BIF on behalf o f the receiverships are recovered from those receiverships. o f this pronouncement. These assets do not meet the definition o f a loan within the meaning o f the statement or are valued through alternative methods. Any assets subject to Statement No. 114 are immaterial either because o f insignificant book value or because any potential adjustment to the carrying value as a result o f applying Statement No. 114 would be immaterial. The FASB issued SFAS No. 118, “Accounting by Creditors for Impairment o f a Loan - Income Recognition and Disclosures, “in October 1994, to be adopted for fiscal years beginning after December 15, 1994". This statement is an amendment to SFAS No. 114 and was adopted by the FDIC this year. Cost Allocations Among Funds Certain operating expenses (including personnel, administrative and other indirect expenses) not directly charged to each fund under the FDIC's management are allocated on the basis o f the relative degree to which the operating expenses were incurred by the funds. The cost o f furniture, fixtures and equipment purchased by the FDIC on behalf o f the three funds under its administration is allocated among these funds on a pro rata basis. The BIF expenses its share o f these allocated costs at the time o f acquisition because o f their immaterial amounts. Other recent pronouncements issued by the FASB have been adopted or are either not applicable or not material to the financial statements. Postretirement Benefits Other Than Pensions The FDIC established an entity to provide the accounting and administration o f postretirement benefits on behalf of the BIF, the SAIF, the FRF and the Resolution Trust Corporation (RTC ). The BIF funds its liabilities for these benefits directly to the entity. The Washington, D .C., office buildings and the L. William Seidman Center in Arlington, Virginia, are depreciated on a straight-line basis over a 50-year estimated life. The San Francisco condominium offices are depreciated on a straight-line basis over a 35-year estimated life. Disclosure about Recent Financial Accounting Standards Board Pronouncements In May 1993, the Financial Accounting Standards Board (FASB) issued Statement o f Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment o f a Loan," to be adopted for fiscal years beginning after December 15, 1994. While FDIC adopted SFAS No. 114, most o f the BIF assets are specifically outside the scope Depreciation The FDIC has designated the BIF administrator o f facilities owned and used in its operations. Consequently, the BIF includes the cost o f these facilities in its financial statements and provides the necessary funding for them. The BIF charges other funds sharing the facilities a rental fee representing an allocated share o f its annual depreciation expense. Related Parties The nature o f related parties and a description o f related party transactions are disclosed throughout the financial statements and footnotes. Reclassifications Reclassifications have been made in the 1994 financial statements to conform to the presentation used in 1995. 3. Cash and Cash Equivalents The BIF considers cash equivalents to be short-term, highly liquid investments with original maturities o f three months or less. In 1995, cash restrictions included $10 million for health insurance payable and $274 thousand for funds held in trust. In 1994, cash restrictions included $7.4 million for health insurance payable and $737 thousand for funds held in trust. Bank Insurance Fund 1 4. Investment in U.S. Treasury Obligations, Net A ll cash received by the BIF is invested in U.S. Treasury obligations unless the cash is: 1) used to defray operating expenses; 2) used for outlays related to assistance to banks and liquidation activities; or 3) invested in cash equivalents. U.S. Treasury Obligations at December 31, 1995 Dollars in Thousands Maturity Description Yield at Purchase Book Value Market Value Face Value Less than one year (a) U.S. Treasury notes 5.53% $ 6,750,414 $ 6,765,086 $ 6,750,000 1-3 years U.S. Treasury notes 5.88% 12,318,436 12,441,422 12,350,000 3-5 years U.S. Treasury notes 5.59% 1,693,196 1,708,809 1,690,000 $ 20,762,046 Total $ 20,915,317 $ 20,790,000 (a) Includes a $400 million Treasury note which matured on Sunday, December 31, 1995. Settlement occurred on the next business day, January 2, 1996. U.S. Treasury Obligations at December 31, 1994 Dollars in Thousands Maturity Description Less than one year U.S. Treasury notes & bills 1-3 years U.S. Treasury notes U.S. Treasury notes 3-5 years Yield at Purchase Book Value 4.83% $ 3,821,758 $ 3,775,131 $ 3,830,000 5.37% 8,034,591 7,763,422 8,000,000 4.72% 1,040,507 945,562 1,000,000 $ 12,896,856 $ 12,484,115 $ 12,830,000 Total Market Value Face Value In 1995, the unamortized discount, net of unamortized premium, was $28 million. In 1994, the unamortized premium, net of unamortized discount, was $66.9 million. 5. Receivables from Bank Resolutions, Net The FDIC resolution process results in different types o f transactions depending on the unique facts and circumstances surrounding each failing or failed institution. Payments to prevent a failure are made to operating institutions when cost and other criteria are met. Such payments may facilitate a merger or allow a troubled institution to continue operations. Payments for institutions that fail are made to cover insured depositors' claims and represent a claim against the receiverships’ assets. The FDIC, as receiver for failed banks, engages in a variety o f strategies at the time o f failure to maximize the return from the sale or disposition o f assets and to minimize realized losses. A failed bank acquirer can purchase selected assets at the time o f resolution and assume full ownership, benefit and risk related to such assets. In certain cases, the receiver offers a period o f time when an acquirer can sell assets back to the receivership at a specified value (i.e., an asset "putback" option). The receiver can also enter into a loss-sharing arrangement with an acquirer whereby, for specified assets and in accordance with individual contract terms, the two parties share in credit losses and certain qualifying expenses. These arrangements typically direct that the receiver pay to the acquirer a specified percentage o f the losses triggered by the charge-off o f assets covered by the terms o f the loss-sharing agreement. The receiver absorbs the majority o f the losses incurred and shares in the acquirer's future recoveries o f previously charged-off assets. Failed bank assets also can be retained by the receiver to either be managed and disposed o f by FDIC liquidation staff or by contracted private-sector servicers with oversight from the FDIC. As stated in Note 2, the allowance for losses on receivables from bank resolutions represents the difference between amounts advanced and/or obligations incurred and the expected repayment. This is based upon the estimated cash recoveries from the management and disposition o f the assets o f the assisted or failed bank, net o f all estimated liquidation costs. As of December 31, 1995 and 1994, the BIF, in its receivership capacity, held assets with a book value of $10 billion and $18.3 billion, respectively. The estimated cash recoveries from the sale of these assets (excluding cash and miscellaneous receivables o f $2.1 billion in 1995 and $4.2 billion in 1994) are regularly evaluated, but remain subject to uncertainties because of changing economic conditions. These factors could affect the claimants' (including the BIF's) actual recoveries from the level currently estimated. Receivables from Bank Resolutions, Net Dollars in Thousands December 31 1994 1995 Assets from Open Bank Assistance: Redeemable preferred stock/warrants Subordinated debt instruments $ 23,500 $ 993,500 100,000 Notes receivable 119,500 3,222 22,037 29,761 29,773 0 Other open bank assistance 229,525 Deferred settlement Interest receivable 1,517 Allowance for losses (Note 10) (57,405) 1,921 (1,155,680) 100,595 240,576 1,525,295 1,528,443 Receivables from Closed Banks: Loans and related assets Resolution transactions 23,512,531 28,736,839 Capital instruments 25,000 25,000 Depositors' claims unpaid 10,339 Allowance for losses (Note 10) 13,561 4,042,445 Total (21,030,720) (22,353,927) 7,949,916 $4,143,040 $8,190,492 6. Investment in Corporate Owned Assets, Net The BIF acquires assets in certain troubled and failed bank cases by either purchasing an institution's assets outright or purchasing the assets under the terms specified in each resolution agreement. In addition, the BIF can purchase assets remaining in a receivership to facilitate termination. The majority o f corporate owned assets are real estate and mortgage loans. The BIF recognizes income and expenses on these assets. Income consists primarily o f the portion o f collections on performing mortgages related to interest earned. Expenses are recognized for administering the management and liquidation o f these assets. Bank Insurance Fund Investment in Corporate Owned Assets, Net December 31 Dollars in Thousands 1995 $ Investment in corporate owned assets Allowance for losses (Note 10) 1994 939,756 $ (659,676) (759,463) $ Total 180,293 902,304 $ 242,628 1 7. Property and Buildings, Net Dollars in Thousands December 31 1994 1995 Land 29,631 $ $ 29,631 Office buildings 151,442 151,442 Accumulated depreciation (29,333) (25,994) Total 151,740 $ $ 155,079 8. Liabilities Incurred from Bank Resolutions The FDIC can enter into different types o f resolution transactions depending on the unique facts and circumstances surrounding each failing or failed institution. The BIF can assume certain liabilities that require future payments over a specified period o f time. Liabilities Incurred from Bank Resolutions Dollars in Thousands December 31 1995 1994 0 $54,410 274 737 10,339 Escrowed funds from resolution transactions (Note 2) 13,561 $ Funds held in trust Depositors' claims unpaid Note indebtedness 0 1,389 21,269 11,848 $31,882 Interest payable/other liabilities Total $81,945 The BIF's liabilities of $32 million are considered current liabilities. 9. Estimated Liabilities for: Anticipated Failure of Insured Institutions The BIF records an estimated loss for banks that have not yet failed but have been identified by the regulatory process as likely (probable) to fail within the foreseeable future as a result o f regulatory insolvency (equity less than two percent o f assets). This includes banks that were solvent at year-end, but that have adverse financial trends and, absent some favorable event (such as obtaining additional capital or merging), are likely to fail in the future. The FDIC relies on this finding regarding regulatory insolvency as the determining factor in defining the existence o f the "accountable event" that triggers loss recognition under G AAP. The FDIC cannot predict the precise timing and cost o f bank failures. An estimated liability and a corresponding reduction in the fund balance are recorded in the period when the liability is deemed probable and reasonably estimable. It should be noted, however, that future assessment revenues will be available to the BIF to recover some or all o f these losses and that their amounts have not been reflected as a reduction in the losses. The estimated liabilities for anticipated failure of insured institutions as o f December 31, 1995 and 1994, were $279 million and $875 million, respective ly. The estimated liability is derived in part from estimates o f recoveries from the sale of the assets of these probable bank failures. As such, they are subject to the same uncertainties as those affecting the BIF's receivables from bank resolutions (see Note 5). This could affect the ultimate costs to the BIF from probable bank failures. The FDIC estimates that banks with combined assets o f approximately $2 billion may fail in 1996 and 1997, and the BIF has recognized a loss o f $279 million for those failures considered probable. The level o f bank failures during 1996 and 1997 may vary from this estimate with additional losses reasonably possible ranging up to $70 million. The further into the future projections o f bank failures are made, the greater the uncertainty o f banks failing and the magnitude o f the loss associated with those failures. The accuracy o f these estimates will largely depend on future economic conditions. Assistance Agreements The estimated liabilities for assistance agreements resulted from several large transactions where problem assets were purchased by an acquiring institution under an agreement that calls for the FDIC to absorb credit losses and to pay related costs for funding and asset administration plus an incentive fee. Asset Securitization Guarantee As part o f the FD IC ’ s efforts to maximize the return from the failed bank assets and minimize losses from bank resolutions, the FDIC entered into its first securitization transaction in August 1994. The securitization transaction was accomplished through the creation o f a real estate mortgage investment conduit (REM IC), a trust, that purchases the loans to be securitized from one or more institutions for which the FDIC acts as a receiver or purchases loans owned by the Corporation. The loans in the trust are pooled and stratified and the resulting cash flow is directed into a number o f different classes of pass-through certificates. The regular pass-through certificates are sold to the public through licensed brokerage houses. The largest contributing receiver ship retains residual pass-through certificates, which are entitled to any remaining cash flows from the trust after obligations to regular pass-through holders have been met. To increase the likelihood o f full and timely distributions o f interest and principal to the holders o f the regular pass-through certificates, and thus the marketability o f such certificates, the BIF agreed to provide a credit enhancement through a limited guarantee to cover future credit losses with respect to the loans underlying the certificates. The FDIC securitization involved the following structure: 1) approximately 1,800 performing commercial mortgages from nearly 200 failed banks were sold to a REMIC (FDIC REMIC Trust 1994 C -l); 2) the REMIC in turn sold approximately $759 million in 11 classes o f securities backed by the commercial mortgages; and 3) the investors received a limited guarantee backed by the BIF covering credit losses and other shortfalls due to credit defaults up to a maximum o f $248 million. In exchange for backing the limited guarantee, the BIF received REMIC securities and a portion o f the proceeds from the sale o f the commercial mortgages. The net present value (N P V ) o f the assets received was priced to equal the N P V o f the expected exposure under the guarantee so that the BIF neither profits nor suffers a loss as a result o f the limited guarantee. At December 31, 1995, the BIF has a liability o f $126 million under the guarantee and assets o f $126 million representing the REMIC securities and the portion of the mortgage sales proceeds received. At December 31, 1994, the BIF liability for the guarantee was $128 million and assets were $128 million. Cash receipts from the REMIC securities and mortgages sales proceeds received are $12.9 million and $5.3 million at December 31, 1995 and 1994, respectively, and are reflected in the Statement o f Cash Flows as “Miscellaneous receipts.” Cash payments o f guarantee claims are $2.1 million at December 31, 1995 and are reflected in the Statement o f Cash Flows as “Miscellaneous disbursements." Income related to the REMIC securities is $183 thousand and $28 thousand at December 31, 1995 and 1994, respectively, and is presented as “Other revenue.” The following chart summarizes the B IF’ s remaining obligation under the guarantee. Bank Insurance Fund 55 Asset Securitization Guarantee Dollars in Thousands Maximum Guarantee Claims Paid Maximum Remaining Obligation Obligation through December 31 at December 31 1995 $247,748 $2,429 $245,319 1994 $247,748 $0 $247,748 Litigation Losses The BIF records an estimated loss for unresolved legal cases to the extent those losses are considered to be probable in occurrence and reasonably estimable in amount. In addition, the FDIC's Legal Division has determined that losses from unresolved legal cases totaling $406 million are reasonably possible. This includes $12 million in losses for the BIF in its corporate capacity and $394 million in losses for the BIF in its receivership capacity (see Note 2). 10. Analysis of Changes in Allowance for Losses and Estimated Liabilities Provision for insurance losses includes the estimated losses for bank resolutions that occurred during the year for which an estimated loss was not established and loss adjustments for bank resolutions that occurred in prior years. It also includes an estimated loss for banks that have not yet failed but have been identified by the regulatory process as likely to fail (see Note 9). These are referred to as estimated liabilities for anticipated failure o f insured institutions. In the following charts, transfers include reclassifications from "Estimated Liabilities for: Anticipated failure o f insured institutions" to “Closed banks.” Terminations represent final adjustments to the estimated cost figures for those bank resolutions that were completed and the operations o f the receivership ended. Analysis of Changes in Allowance for Losses and Estimated Liabilities - 1995 Dollars in Millions Beginning Balance 01/01/95 Provision for Insurance Losses Current Prior Year Years Total Net Cash Payments Adjustments/ Transfers/ Terminations Ending Balance 12/31/95 Allowance for Losses: Open bank assistance Corporate owned assets $ 1,156 660 $ 0 $ 0 (140) $ (140) $ 0 99 99 0 $ (959) 0 $ 57 759 Closed banks 22,354 (52) 464 412 0 (1,735) 21,031 Total Allowance for Losses 24,170 (52) 423 371 0 (2,694) 21,847 (570) 14 (439) 14 (157) (20) 279 56 Estimated Liabilities for: Anticipated failure of insured institutions Assistance agreements guarantee 875 163 131 0 Asset securitization guarantee 128 0 0 0 15 0 21 21 1,181 131 (535) (404) Litigation losses Total Estimated Liabilities Provision for Insurance Losses $79 $ (112) $ (33) 0 (101) (2) 0 126 0 0 36 (103) (177) 497 Analysis o f Changes in Allowance for Losses and Estimated Liabilities - 1994 Dollars in Millions Beginning Balance 01/01/94 Provision for Insurance Losses Prior Current Year Years Total Net Cash Payments Adjustments/ Transfers/ Terminations Ending Balance 12/31/94 Allowance for Losses: Open bank assistance Corporate owned assets $ 215 $ 0 742 0 3 $ 1,359 (82) $ (82) 0 0 (421) $ (421) $ $ 1,156 660 Closed banks 23,191 (236) (229) (465) 0 (372) 22,354 Total Allowance for Losses 24,148 (236) (732) (968) 3 987 24,170 2.972 326 406 0 (2.128) (177) (1.722) (177) 0 (37) (375) 51 875 163 Estimated Liabilities for: Anticipated failure of insured institutions Assistance agreements guarantee Asset securitization guarantee Litigation losses Total Estimated Liabilities Provision for Insurance Losses 0 0 0 0 0 128 128 21 0 (6) (6) 0 0 15 3,319 406 (2,311) (1,905) $ 170 $(3,043) $(2,873) (37) (196) 1,181 1 11. Assessments The 1990 OBR Act removed caps on assessment rate increases and authorized the FDIC to set assessment rates for BIF members semiannually, to be applied against a member's average assessment base. The FDICIA: 1) required the FDIC to implement a risk-based assessment system; 2) authorized the FDIC to increase assessment rates for BIF-member institutions as needed to ensure that funds are available to satisfy the BIF's obligations; and 3) authorized the FDIC to increase assessment rates more frequently than semiannually and impose emergency special assessments as necessary to ensure that funds are available to repay U.S. Treasury borrowings. The FDIC uses a risk-based assessment system that charges higher rates to those institutions that pose greater risks to the BIF. To arrive at a risk-based assessment for a particular institution, the FDIC places each institution in one o f nine risk categories using a two-step process based first on capital ratios and then on other relevant information. The F D IC ‘s Board o f Directors (Board) reviews premium rates semiannually. The BIF reached its capitalization level o f 1.25 percent, as mandated by FD IC IA, at the end o f May 1995 (see Note 1). Based on the recapitalization, the Board approved a reduction in assessment rates for BIF members from a range of 23 cents to 31 cents per $100 o f domestic deposits to a range o f 4 cents to 31 cents per $100 of domestic deposits. The Board’ s BIF rate decrease was approved retroactively to June 1, 1995, therefore the BIF refunded $1.5 billion in assessment overpayments in September 1995. In November 1995, the Board approved a new assessment rate structure for the BIF. Effective January 19%, the highest-rated institutions (approximately 92 percent o f the nearly 11,000 BIFinsured banks) will pay the statutory annual minimum of $2,000 for deposit insurance. Rates for all other institutions will be reduced to a range o f 3 cents to 27 cents per $100 of insured deposits. The average assessment rate is expected to decline to approximately 0.43 cents per $100 of domestic deposits, versus the current average assessment rate of 4.4 cents per $100. The projected average assessment rate would be the lowest in the more than 60-year history o f federal deposit insurance for banks. The lowest average assessment rates for banks previously was 3.13 cents per $100 in both 1962 and 1963. Bank Insurance Fund 57 12. Pension Benefits, Savings Plans, Postemployment Benefits and Accrued Annual Leave Eligible FDIC employees (i.e., all permanent and temporary employees with appointments exceeding one year) are covered by either the Civil Service Retirement System (CSRS) or the Federal Employee Retirement System (FERS). The CSRS is a defined benefit plan offset with the Social Security System in certain cases. Plan benefits are determined on the basis of years of creditable service and compensation levels. The CSRS-covered employees also can contribute to the tax-deferred Federal Thrift Savings Plan (TSP). The FERS is a three-part plan consisting o f a basic defined benefit plan that provides benefits based on years o f creditable service and compensation levels, Social Security benefits and the TSP. Automatic and matching employer contributions to the TSP are provided up to specified amounts under the FERS. Eligible FDIC employees also may participate in an FDIC-sponsored tax-deferred savings plan with matching contributions. The BIF pays its share of the employer's portion o f all related costs. Although the BIF contributes a portion of pension benefits for eligible employees, it does not account for the assets of either retirement system. The BIF also does not have actuarial data for accumulated plan benefits or the unfunded liability relative to eligible employees. These amounts are reported and accounted for by the U.S. Office of Personnel Management. Due to a substantial decline in the FDIC's workload, the Corporation developed a staffing reduction program, a component of which is a voluntary separation incentive plan, or buyout. Employees eligible to participate in the buyout program were placed into two categories, depending on the immediacy of the need for staffing reduction. Participating Category I employees agreed to retirement or resignation by December 31, 1995. There are 328 Category I FDIC employees participating at an estimated cost to the BIF of $8.3 million. TTie cost for Category I employees is presented as “Operating expenses” in 1995. Participating Category II employees must have applied by February 7, 1996, and resign or retire no later than September 30, 1997. Consideration o f all Category II applications is not complete; however, the Corporation estimates the possible cost of the buyout program for Category II employees to be about $15.8 million. The cost for Category II employees will be expensed in 19%. The buyout affects other liabilities (postretirement and accrued annual leave); however, that effect is not estimable at this time.The liability to employees for accrued annual leave is approximately $43.4 million and $40.3 million at December 31, 1995 and 1994, respectively. Pension Benefits and Savings Plans Expenses Dollars in Thousands For the Year Ended December 31 1995 Civil Service Retirement System $ 9,411 1994 $ 9,988 Federal Employee Retirement System (Basic Benefit) 36,741 32,410 FDIC Savings Plan 20,545 21,603 Federal Thrift Savings Plan Total 10,264 10,513 $ 76,961 $ 74,514 13. Postretirement Benefits Other than Pensions The FDIC provides certain health, dental and life insurance coverage for its eligible retirees, the retirees' beneficiaries and covered dependents. Retirees eligible for health and/or life insurance coverage are those who have qualified due to: 1) immediate enrollment upon appointment or five years o f participation in the plan and 2) eligibility for an immediate annuity. Dental coverage is provided to all retirees eligible for an immediate annuity. The FDIC is self-insured for hospital/medical, prescription drug, mental health and chemical dependency coverage. Additional risk protection was purchased from Aetna Life Insurance Company through stop-loss and fiduciary liability insurance. A ll claims are administered on an administrative services only basis with the hospital/medical claims administered by Aetna Life Insurance Company, the mental health and chemical dependency claims administered by OHS Foundation Health Psychcare Inc., and the prescription drug claims administered by Caremark. The life insurance program, underwritten by Metropolitan Life Insurance Company, provides basic coverage at no cost to retirees and allows converting optional coverages to direct-pay plans. Dental care is underwritten by Connecticut General Life Insurance Company and provides coverage at no cost to retirees. The BIF expensed $18.8 million and $23 million for net periodic postretirement benefit costs for the years ended December 31, 1995 and 1994, respectively. For measurement purposes, the FDIC assumed the following: 1) a discount rate of 6 percent; 2) an average long-term rate o f return on plan assets o f 5 percent; 3) an increase in health costs in 1995 o f 12 percent, decreasing down to an ultimate rate in 1999 o f 8 percent; and 4) an increase in dental costs for 1995 and thereafter of 8 percent. Both the assumed discount rate and health care cost rate have a significant effect on the amount o f the obligation and periodic cost reported. I f the health care cost rate were increased one percent, the accumulated postretirement benefit obligation as o f December 31, 1995, would have increased by 22.9 percent. The effect o f this change on the aggregate o f service and interest cost for 1995 would be an increase o f 25.6 percent. Net Periodic Postretirement Benefit Cost Dollars in Thousands For the Year Ended December 31 1995 Service cost (benefits attributed to employee service during the year) Interest cost on accumulated postretirement benefit obligation Net total o f other components $ 22,574 $ 25,206 14,706 14,323 (3,567) Total (4,881) (14,907) Return on plan assets As stated in Note 2, the FDIC established an entity to provide accounting and administration on behalf o f the BIF, the SAIF, the FRF and the RTC. The 1994 (11,651) $ 18,806 $ 22,997 BIF funds its liability and these funds are being managed as "plan assets." Accumulated Postretirement Benefit Obligation and Funded Status Dollars in Thousands December 31 1995 1994 $ 79,370 $ 70,944 22,401 16,831 Other active participants 182,408 234,852 Total Obligation 284,179 322,627 Less: Plan assets at fair value (a) 317,037 302,130 (Over) Under Funded Status (32,858) Retirees Fully eligible active plan participants Unrecognized prior service cost Unrecognized net gain 20,497 57,242 0 11,954 0 $ 36,338 $ 20,497 Postretirement Benefit Liability Recognized in the Statements of Financial Position (a) Consists of U.S. Treasury investments Bank Insurance Fund 59 14. Commitments Leases The BIF's allocated share o f FDIC’s lease commitments totals $132.9 million for future years. The lease agreements contain escalation clauses resulting in adjustments, usually on an annual basis. The BIF recognized leased space expense of $42.7 million and $50.9 million for the years ended December 31, 1995 and 1994, respectively. Leased Space Fees Dollars in Thousands 1996 1997 1998 1999 2000 2001 $34,869 $30,604 $21,004 $17,603 $14,318 $14,516 Asset Putbacks Upon resolution o f a failed bank, the assets are placed into receivership and may be sold to an acquirer under an agreement that certain assets may be resold, or “putback,” to the receivership. The values and time limits for these assets to be putback are defined within each agreement. It is possible that the BIF could be called upon to fund the purchase of any or all o f the "unexpired putbacks" at any time prior to expiration. As o f December 31, 1995 there are no assets that are eligible for putback. 15. Concentration o f Credit Risk The BIF is counterparty to a group o f financial instruments with entities located throughout regions o f the United States experiencing problems in both loans and real estate. The BIF's maximum exposure to possible accounting loss, should each counterparty to these instruments fail to perform and any underlying assets prove to be o f no value, is shown as follows: Concentration of Credit Risk at December 31, 1995 Dollars in Millions South east Receivables from bank resolutions, net Corporate owned assets, net Total South west North east M id west Central West $97 $267 $2,958 $150 $13 $652 24 53 51 0 20 32 180 $121 $320 $3,009 $150 $33 $684 $4,317 Total $4,137 (a) (a) The net receivable excludes $3.9 million and $2.5 million, respectively, of the SAIF’s allocated share of maximum credit loss exposure from the resolutions of Southeast Bank, N .A ., Miami, FL, and Olympic National Bank, Los Angeles, CA. There is no risk that the SAIF will not meet these obligations. Insured Deposits As o f December 31, 1995, the total deposits insured by the BIF is approximately $2 trillion. This would be the accounting loss if all depository institutions fail and i f any assets acquired as a result o f the resolution process provide no recovery. 60 16. Disclosures about the Fair Value of Financial Instruments Cash equivalents are short-term, highly liquid investments and are shown at current value. The fair market value o f the investment in U.S. Treasury obligations is disclosed in Note 4 and is based on current market prices. The carrying amount of interest receivable on investments, accounts payable and liabilities incurred from bank resolutions approximates their fair market value. This is due to their short maturities or comparisons with current interest rates. It is not practicable to estimate the fair market value o f net receivables from bank resolutions. These assets are unique, not intended for sale to the private sector, and have no established market. The FDIC believes that a sale to the private sector would require indeterminate, but substantial discounts for an interested party to profit from these assets because o f credit and other risks. A discount o f this proportion would significantly increase the cost of bank resolutions to the BIF. Comparisons with othei financial instruments do not provide a reliable measure o f their fair market value. Due to these and other factors, the FDIC cannot determine an appropriate market discount rate and, thus, is unable to estimate fair market value on a discounted cash flow basis. As shown in Note 5, the carrying amount is the estimated cash recovery value which is the original amount advanced (and/or obligations incurred) net o f the estimated allowance for loss. The majority o f the net investment in corporate owned assets (except real estate) is comprised o f various types o f financial instruments (investments, loans, accounts receivable, etc.) acquired from failed banks. As with net receivables from bank resolutions, it is not practicable to estimate fair market values. Cash recoveries are primarily from the sale o f poor quality assets. They are dependent on market conditions that vary over time and can occur unpredictably over many years following resolution. Since the FDIC cannot reasonably predict the timing o f these cash recoveries, it is unable to estimate fair market value on a discounted cash flow basis. As shown in Note 6, the carrying amount is the estimated cash recovery value, which is the original amount advanced (and/or obligations incurred) net o f the estimated allowance for loss. As stated in Note 9, the carrying amount o f the estimated liability for anticipated failure o f insured institutions is the total o f estimated losses for banks that have not failed, but the regulatory process has identified as likely to fail within the foreseeable future. It does not consider discounted future cash flows. This is because the FDIC cannot predict the timing o f events with reasonable accuracy. For this reason, the FDIC considers the total estimate o f these losses to be the best measure o f their fair market value. Bank Insurance Fund 1 17. Supplementary Information Relating to the Statements of Cash Flows Reconciliation of Net Income to Net Cash Provided by Operating Activities Dollars in Thousands For the Year Ended December 31 1994 1995 Net Income $ 3,605,916 $ 8,726,122 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Income Statement Items: Provision for insurance losses (33,167) Amortization o f U.S. Treasury securities (19,266) Depreciation on buildings 3,339 (2,873,419) 43,145 3,339 Change in Assets and Liabilities: (Increase) in interest receivable on investments and other assets Decrease in receivables from bank resolutions (146,102) 3,659,128 (179,994) 5,916,593 (Increase) decrease in corporate owned assets (37,452) 566,472 (Decrease) increase in accounts payable and other liabilities (63,454) 64,366 (Decrease) in liabilities incurred from bank resolutions (48,694) (3,263,790) (157,000) (375,000) (Decrease) in estimated liability for anticipated failure o f insured institutions (Decrease) increase in estimated liabilities for assistance agreements (4,048) 13,479 (Decrease) increase in estimated liability for asset securitization guarantee (2,054) 128,429 Net Cash Provided by Operating Activities $ 6,757,146 8,769,742 Savings Association Insurance Fund Federal Deposit Insurance Corporation___________________________________________________________________ 1 Savings Association Insurance Fund Statements of Financial Position Dollars in Thousands December 31 1995 1994 Assets Cash and cash equivalents, including restricted amounts of $12,640 for 1995 and $19,004 for 1994 (Note 3) $ Investment in U.S. Treasury obligations, net (Note 4) $ 80,200 2,832,919 2,422,230 8,821 35,692 48,634 38,863 51 6,892 $ 3,802,235 $2,583,877 $ 117,628 Entrance and exit fees receivable, net (Note 5) Interest receivable on investments and other assets Receivables from thrift resolutions, net Total Assets 911,810 Liabilities and the Fund Balance Accounts payable and other liabilities $ 12,429 Estimated liability for anticipated failure of insured institutions (Note 6) 111,000 432,000 228,628 444,429 215,760 202,733 3,357,847 1,936,715 $ 3,802,235 $ 2,583,877 Total Liabilities Commitments and contingencies (Notes 10 and 11) SAIF-Member Exit Fees and Investment Proceeds Held in Escrow (Note 5) Fund Balance Total Liabilities and the Fund Balance The accompanying notes are an integral part of these financial statements. 63 Federal Deposit Insurance Corporation Savings Association Insurance Fund Statements of Income and the Fund Balance For the Year Ended December 31 Dollars in Thousands 1995 1994 Revenue Assessments (Note 7) $ Interest on U.S. Treasury investments 970,027 $ 1,132,102 169,101 11 1,215,289 39,784 Total Revenue 213 1,139,916 Other revenue 32 777 Entrance fees (Note 5) 82,942 20,303 Expenses and Losses Operating expenses Provision for insurance losses (321,000) 414,000 Total Expenses and Losses (281,216) 434,303 Net Income 1,421,132 780,986 Fund Balance - Beginning 1,936,715 1,155,729 Fund Balance - Ending $ The accompanying notes are an integral part of these financial statements. 3,357,847 $ 1,936,715 Savings Association Insurance Fund Federal Deposit Insurance Corporation Savings Association Insurance Fund Statements of Cash Flows Dollars in Thousands For the Year Ended December 31 1995 1994 Cash Flows from Operating Activities Cash provided from: Assessments $1,060,829 $1,132,914 152,622 61,085 8,449 6,984 29,757 31,144 0 1,469 17,149 169,919 437 602 Interest on U.S. Treasury investments Interest on exit fees Entrance and exit fee collections (Note 5) Recoveries from "Oakar" bank resolutions Recoveries from thrift resolutions Miscellaneous receipts Cash used for: Operating expenses (18,487) (14,581) Reimbursement to the FSLIC Resolution Fund for thrift resolutions (15,881) (166,958) (1,142) (1,864) Disbursements for thrift resolutions Miscellaneous disbursements 1 1,233,734 1,385,000 Net Cash Provided by Operating Activities (Note 13) 0 1,220,714 220,420 Cash Flows from Investing Activities Cash provided from: Maturity and sale of U.S. Treasury obligations Cash used for: Purchase of U.S. Treasury obligations (1,787,124) (1,376,669) (402,124) (1,156,249) 831,610 64,465 80,200 15,735 Net Cash Used by Investing Activities Net Increase in Cash and Cash Equivalents Cash and Cash Equivalents - Beginning Cash and Cash Equivalents - Ending The accompanying notes are an integral part of these financial statements. $ 911,810 $ 80,200 Notes to the Financial Statements Savings Association Insurance Fund December 51,1995 and 1994 1. Legislative History and Operations of the Savings Association Insurance Fund Legislative History The Financial Institutions Reform, Recovery, and Enforcement Act o f 1989 (FIRRE A ) was enacted to reform, recapitalize and consolidate the federal deposit insurance system. The FIRREA created the Savings Association Insurance Fund (SAIF), the Bank Insurance Fund (BIF) and the FSLIC Resolution Fund (FRF). It also designated the Federal Deposit Insurance Corporation (FD IC) as the administrator o f these three funds. A ll three funds are maintained separately to carry out their respective mandates. Pursuant to FIRREA, an active institution’ s insurance fund membership and primary federal supervisor are generally determined by the institution’s charter type. Deposits o f SAIF-member institutions are mostly insured by the SAIF; SAIF members are predominantly thrifts supervised by the Office o f Thrift Supervision (OTS). Deposits o f BIF-member institutions are mostly insured by the BIF; BIF members are predominantly commercial and savings banks supervised by the FDIC, the Office o f the Comptroller o f the Currency, or the Federal Reserve. The FRF is responsible for winding up the affairs o f the former Federal Savings and Loan Insurance Corporation (FSLIC). The FIRREA also created the Resolution Trust Corporation (RTC ), which managed and resolved all thrifts previously insured by the FSLIC for which a conservator or receiver was appointed during the period January 1, 1989, through August 8, 1992. The Resolution Trust Corporation Refinancing, Restructuring and Improvement Act o f 1991 (1991 RTC Act) extended the R T C ’s general resolution responsibility through September 30, 1993, and beyond that date for those institutions previously placed under RTC control. The Resolution Trust Corporation Completion Act of 1993 (1993 RTC Act) enacted December 17, 1993, extended the RTC's general resolution responsibility through a date between January 1, 1995, and July 1, 1995. Resolution responsibility transferred from the RTC to the SAIF on July 1, 1995. The Financing Corporation (FICO ), established under the Competitive Equality Banking Act o f 1987, is a mixed-ownership government corporation whose sole purpose was to function as a financing vehicle for the FSLIC. Effective December 12, 1991, as provided by the 1991 RTC Act, the FICO's ability to serve as a financing vehicle for new debt was terminated. Assessments paid on SAIF-insured deposits (excluding BIF-member "Oakar" and "Sasser" banks) are subject to draws by FICO for payment o f interest on their outstanding debt through maturity o f this debt in 2019. "Sasser" banks are SAIF members that converted to a state bank charter in accordance with Section 5(d)(2)(G) o f the Federal Deposit Insurance Act (FD I Act). "Oakar" banks are described in a following section, "Operations o f the SA IF". Other significant legislation includes the Omnibus Budget Reconciliation Act o f 1990 (1990 OBR Act) and the Federal Deposit Insurance Corporation Improvement Act o f 1991 (F D IC IA ). These acts made changes to the FD IC's assessment authority (see Note 7) and borrowing authority (see "Operations o f the S A IF"). The FD ICIA also requires the FDIC to: 1) resolve troubled institutions in a manner that will result in the least possible cost to the deposit insurance funds; 2) to build the reserves in the insurance funds to 1.25 percent o f insured deposits; and 3) upon recapitalization, maintain the insurance funds at 1.25 percent o f insured deposits or a higher percentage as circumstances warrant. Recent Legislative Proposals Recent proposed legislation would, if signed into law, affect the SAIF in the following ways: 1) there would be a one-time special assessment on SAIFassessable deposits to capitalize the SAIF at the designated reserve ratio o f 1.25 percent; 2) BIFmembers would be required to share the interest costs o f Financing Corporation (FICO ) debt on a proportional basis with SAIF-members; and 3) if the thrift charter is eliminated by January 1, 1998, the BIF and the SAIF would be merged on that date. There would be a separate assessment to fund the SAIF-members' share o f the FICO interest costs, Savings Association Insurance Fund and therefore such interest costs would no longer affect regular assessments or the fund balance. Legislative proposals are subject to change as part of the normal legislative process; therefore, it is uncertain what provisions the proposed law, if enacted, will ultimately include. Operations of the SAIF The primary purpose o f the SAIF is to insure the deposits and to protect the depositors o f SAIFinsured institutions. In this capacity, the SAIF has financial responsibility for: 1) all SAIF-insured deposits held by SAIF-member institutions, and 2) all SAIF-insured deposits held by BIFmember "Oakar" banks. The "Oakar" bank provisions are found in Section 5 (d) (3) o f the FDI Act. The provisions allow, with approval o f the appropriate federal regulatory authority, any insured depository institution to merge, consolidate or transfer the assets and liabilities o f an acquired institution without changing insurance coverage for the acquired deposits. Such acquired deposits continue to be either SAIF-insured deposits and assessed at the SAIF assessment rate or BIF-insured deposits and assessed at the BIF assessment rate. In addition, any losses resulting from the failure o f these institutions are to be allocated between the BIF and the SAIF based on the respective dollar amounts o f the institution's BIF-insured and SAIF-insured deposits. The SAIF is funded from the following sources: 1) SAIF assessments from BIF-member "Oakar" banks; 2) other SAIF assessments that are not required for the FICO, including assessments from "Sasser" banks; 3) interest earned on unrestricted investments in U.S. Treasury obligations; 4) U.S. Treasury payments not to exceed $8 billion for losses for fiscal years 1994 through 1998 contingent upon appropriations from the U.S. Treasury; 5) U.S. Treasury payments from unused appropriations to the RTC for losses for two years after the date the RTC is terminated (December 31, 1995); and borrowings from 6) Federal Home Loan Banks; and 7) U.S. Treasury and Federal Financing Bank (FFB). The 1993 RTC Act places significant restrictions on funding from sources 4) and 5) above. Among other restrictions, before appropriated funds from either source are used, the FDIC must certify to Congress that: 1) SAIF-insured institutions are unable to pay premiums sufficient to cover insurance losses or to repay amounts borrowed from the U.S. Treasury without adversely affecting their ability to raise and maintain capital or to maintain the assessment base and 2) an increase in premiums could reasonably be expected to result in greater losses to the government. The 1990 OBR Act established the FDIC's authority to borrow working capital from the FFB on behalf o f the BIF and the SAIF. FD IC IA increased the FD IC's authority to borrow for insurance losses from the U.S. Treasury, on behalf o f the BIF and the SAIF, from $5 billion to $30 billion. The F D IC IA also established a limitation on obligations that can be incurred by the SAIF, known as the maximum obligation limitation (M O L ). Under the M O L, the SAIF cannot incur any additional obligations i f its total obligations exceed the sum of: 1) the SAIF's cash and cash equivalents; 2) 90 percent o f the fair-market value o f the SAIF's other assets; and 3) the total amount authorized to be borrowed from the U.S. Treasury, excluding FFB borrowings. For purposes o f calculating the M O L, the FD IC's total U.S. Treasury borrowing authority was allocated between the BIF and the SAIF based on the ratio o f each fund’ s insured deposits to total insured deposits. A t December 31, 1995, the M O L for the SAIF was $11.7 billion. 2. Summary of Significant Accounting Policies General These financial statements pertain to the financial position, results o f operations and cash flows of the SAIF and are presented in accordance with generally accepted accounting principles (GAAP). These statements do not include reporting for assets and liabilities o f closed thrifts for which the SAIF acts as receiver or liquidating agent. Periodic and final accountability reports o f the SAIF's activities as receiver or liquidating agent are furnished to courts, supervisory authorities and others as required, Use of Estimates The preparation of the SAIF’s financial statements in conformity with generally accepted accounting principles requires FDIC management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Where it is reasonably possible that changes in estimates will cause a material change in the financial statements in the near term, the nature and extent of such changes in estimates have been disclosed in the financial statements. U.S. Treasury Obligations Securities are intended to be held to maturity and are shown at book value. Book value is the face value o f securities plus the unamortized premium or less the unamortized discount. Amortizations are computed on a daily basis from the date of acquisition to the date o f maturity. Interest is calculated on a daily basis and recorded monthly using the effective interest method. Litigation Losses The SAIF accrues, as a charge to current period operations, an estimate o f probable losses from litigation against the SAIF in both its corporate and receivership capacities. The FDIC's Legal Division recommends these estimates on a case-by-case basis. The litigation loss estimates related to receiverships would be included in the allowance for losses for receivables from thrift resolutions. Receivership Administration The FDIC is responsible for controlling and disposing o f the assets o f failed thrift institutions placed in SAIF receivership in an orderly and efficient manner. The assets, and the claims against them, are accounted for separately to ensure that liquidation proceeds are distributed in accordance with applicable laws and regulations. Liquidation expenses incurred by the SAIF on behalf o f its receivership are recovered from the receivership. Cost Allocations Among Funds Certain operating expenses (including personnel, administrative and other indirect expenses) not directly charged to each fund under the F D IC ’s management are allocated on the basis o f the relative degree to which the operating expenses were incurred by the funds. The FDIC includes the cost o f facilities used in operations in the BIF's financial statements. The BIF charges the SAIF a rental fee representing an allocated share o f its annual depreciation. The cost o f furniture, fixtures and equipment purchased by the FDIC on behalf o f the three funds under its administration is allocated among these funds on a pro rata basis. The SAIF expenses its share o f these allocated costs at the time o f acquisition because o f their immaterial amounts. Postretirement Benefits Other Than Pensions The FDIC established an entity to provide the accounting and administration o f postretirement benefits on behalf o f the SAIF, the BIF, the FRF and the RTC. The SAIF funds its liabilities for these benefits directly to the entity. Disclosure about Recent Financial Accounting Standards Board Pronouncements In May 1993, the Financial Accounting Standards Board (FASB) issued Statement o f Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment o f a Loan,” to be adopted for fiscal years beginning after December 15, 1994. While FDIC adopted SFAS No. 114, most o f the SAIF assets are specifically outside the scope o f this pronouncement. These assets do not meet the definition o f a loan within the meaning o f the statement or are valued through alternative methods. Any assets subject to Statement No. 114 are immaterial either because o f insignificant book value or because any potential adjustment to the carrying value as a result o f applying Statement No. 114 would be immaterial. The FASB issued SFAS No. 118, “Accounting by Creditors for Impairment o f a Loan - Income Recognition and Disclosures,” in October 1994, to be adopted for fiscal years beginning after December 15, 1994". This statement is an amendment to SFAS No. 114 and was adopted by the FDIC this year. Other recent pronouncements issued by the FASB have been adopted or are either not applicable or not material to the financial statements. Related Parties The nature of related parties and descriptions of related party transactions are disclosed throughout the financial statements and footnotes. Reclassifications Reclassifications have been made in the 1994 financial statements to conform to the presentation used in 1995. Savings Association Insurance Fund 69 3. Cash and Cash Equivalents The SAIF considers cash equivalents to be short term, highly liquid investments with original maturities o f three months or less. Substantially, all the restricted cash is comprised o f the SAIF exit fees collected plus interest earned on exit fees. These funds have been restricted to meet any potential obligation o f the SAIF to the FICO (see Note 5). In 1995, cash restrictions included $190 thousand for health insurance payable and $12.5 million for exit fee and related interest collections. In 1994, cash restrictions included $148 thousand for health insurance payable and $18.9 million for exit fee and related interest collections. 4. Investment in U.S. Treasury Obligations, Net A ll cash received by the SAIF is invested in U.S. Treasury obligations unless the cash is: 1) to defray operating expenses; 2) used for outlays related to liquidation activities; or 3) invested in cash or cash equivalents. In 1995, $190 million was restricted for exit fee and related interest collections invested in U.S. Treasury notes. In 1994, $145 million was restricted for exit fee and related interest collections invested in U.S. Treasury notes. During 1994, the SAIF sold debt securities classified as held-to-maturity. The book value o f the securities sold was $170 million and realized loss was $289 thousand. The sale was compelled by the need to transfer to the FRF funds that were retained by the SAIF in error and subsequently invested. This was an isolated, non-recurring and unusual event that could not have been reasonably anticipated. U.S. Treasury Obligations at December 31, 1995 Dollars in Thousands Maturity Description Less than one year U.S. Treasury notes U.S. Treasury notes U.S. Treasury notes 1-3 years 3-5 years Yield at Purchase Book Value Market Value Face Value 5.8% $1,785,035 $1,791,208 $ 1,785,000 5.7% 588,968 594,712 590,000 5.4% 458,916 $2,832,919 460,500 $2,846,420 $ 2,825,000 Total 450,000 U.S. Treasury Obligations at December 31, 1994 Dollars in Thousands Yield at Purchase Maturity Description Less than one year U.S. Treasury notes 4.4% 1-3 years U.S. Treasury notes 5.8% Total Book Value $1,380,705 Market Value $1,366,503 Face Value $ 1,385,000 1,041,525 1,017,402 1,045,000 $2,422,230 $2,383,905 $ 2,430,000 In 1995, the unamortized premium, net of unamortized discount, was $7.9 million. In 1994, the unamortized discount, net of unamortized premium, was $7.8 million. 70 5. Entrance and Exit Fees Receivable, Net The SAIF receives entrance and exit fees for con version transactions when an insured depository institution converts from the BIF to the SAIF (resulting in an entrance fee) or from the SAIF to the BIF (resulting in an exit fee). Regulations approved by the FDIC's Board o f Directors and published in the Federal Register on March 21, 1990, directed that exit fees paid to the SAIF be held in escrow. The FDIC and the Secretary o f the Treasury w ill determine when it is no longer necessary to escrow such funds for the payment o f interest on obligations previously issued by the FICO. These escrowed exit fees are invested in U.S. Treasury securities pending determination o f ownership. The interest earned is also held in escrow. Interest on these investments was $9.1 million and $6.5 million for 1995 and 1994, respectively. The SAIF records entrance fees as revenue after a BIF-to-SAIF conversion transaction. However, due to the requirement that the SAIF exit fees be held in an escrow account, the SAIF does not recognize exit fees or related interest earned as revenue. Instead, the SAIF recognizes a SAIF-to-BIF conversion transaction by establishing a receivable from the institution and a corresponding escrow account entry to recognize the potential payment to the FICO. As exit fee proceeds are received, the receivable is reduced while the escrow remains pending the determination o f funding requirements for interest payments on the FICO's obligations. Within specified parameters, the regulations allow an institution to pay its entrance/exit fees interest free, in equal annual installments over a maximum period o f not more than five years. When an institution elects such a payment plan, the SAIF records the entrance or exit fee receivable at its present value. The discount rate used to determine the present value o f the funds for 1995 and 1994 was three percent. Entrance and Exit Fees Receivable, Net -1995 Dollars in Thousands Entrance fees Beginning Balance 01/01/95 $ 6 New Receivables $ 11 35,686 1,117 Exit fees Total $ 35,692 $ 1,128 Collections $ (6) 1,758 $ (29,751) $ (29,757) 0 Ending Balance 12/31/95 $ 11 8,810 Net Change Unamortized Discount $ 1,758 $ 8,821 Entrance and Exit Fees Receivable, Net - 1994 Dollars in Thousands Beginning Balance 01/01/94 Entrance fees $ Exit fees Total 3 New Receivables $ 60,652 $ 60,655 32 Collections $ 998 $ 1,030 (29) Net Change Unamortized Discount Ending Balance 12/31/94 $ $ $ (31,144) 0 6 5,151 (31,115) $ 35,686 5,151 $ 35,692 6. Estimated Liabilities for: Anticipated Failure of Insured Institutions The SAIF records an estimated loss for thrifts as well as "Oakar" and "Sasser" banks that have not yet failed but have been identified by the regulatory process as likely (probable) to fail within the foreseeable future as a result o f regulatory insolvency (equity less than two percent o f assets). This includes institutions that were solvent at year- Savings Association Insurance Fund end, but that have adverse financial trends and, absent some favorable event (such as obtaining additional capital or merging), are likely to fail in the future. The FDIC relies on this finding regarding regulatory insolvency as the determining factor in defining the existence o f the "accountable event" that triggers loss recognition under G A AP. The FDIC cannot predict the precise timing and cost o f failures. An estimated liability and a corresponding reduction in the fund balance are recorded in the period when the liability is deemed probable and reasonably estimable. It should be noted, however, that future assessment revenues will be available to the SAIF to recover some or all of these losses and that these amounts have not been reflected as a reduction in the losses. The estimated liabilities for anticipated failure o f insured institutions as o f December 31, 1995 and 1994 were $111 million and $432 million, respectively. The estimated liability is derived in part from estimates o f recoveries from the sale o f the assets o f these probable thrift failures. These estimates are regularly re-evaluated in light o f changing economic conditions, but because the amount o f recoveries is uncertain, the ultimate costs to the SAIF from thrift failures could be affected. The FDIC estimates that thrifts with combined assets o f approximately $2 billion may fail in 1996 and 1997, and the SAIF has recognized a loss o f $111 million for those failures considered probable. The level o f thrift failures during 1996 and 1997 may vary from this estimate with additional losses reasonably possible ranging up to $160 million. The further into the future projections o f thrift failures are made, the greater the uncertainty o f thrifts failing and the magnitude o f the loss associated with those failures. The accuracy o f these estimates will largely depend on future economic conditions, particularly in the real estate markets and the level o f future interest rates. Litigation Losses The SAIF records an estimated loss for unresolved legal cases to the extent those losses are considered to be probable in occurrence and reasonably estimable in amount. In addition, the FDIC's Legal Division has determined that losses from unresolved legal cases totaling $11 million are reasonably possible. 7. Assessments The 1990 OBR Act removed caps on assessment rate increases and authorized the FDIC to set assessment rates for SAIF members semiannually, to be applied against a member's average assessment base. The FDICIA: 1) required the FDIC to implement a risk-based assessment system; 2) authorized the FDIC to increase assessment rates for SAIF-member institutions as needed to ensure that funds are available to satisfy the S A IF ’s obligations; and 3) authorized FDIC to increase assessment rates more frequently than semiannually and impose emergency special assessments as necessary to ensure that funds are available to repay U.S. Treasury borrowings. The FDIC uses a risk-based assessment system that charges higher rates to those institutions that pose greater risks to the SAIF. To arrive at a risk-based assessment for a particular institution, the FDIC places each institution in one of nine risk categories using a two-step process based first on capital ratios and then on other relevant information. The FDIC’s Board of Directors reviews premium rates semiannually. The FICO has priority over the SAIF for receiving and utilizing SAIF assessments to ensure availability o f funds for interest on F IC O ’s debt obligations. Accordingly, the SAIF recognized as assessment revenue only that portion o f SAIF assessments not required by the FICO. Assessments on the SAIFinsured deposits held by BIF-member "Oakar" or SAIF-member "Sasser" institutions are not subject to draws by FICO and, thus, are retained in SAIF in their entirety. Since 1993, each thrift has paid an assessment rate of between 23 and 31 cents per $100 o f domestic deposits, depending on risk classification. For calendar year 1995, the assessment rate averaged approximately 23.2 cents per $100 o f domestic deposits. As o f December 31, 1995, the SAIF's reserve ratio is .47 percent o f insured deposits. Secondary Reserve Offset The FIRREA authorized insured thrifts to offset against any assessment premiums their pro rata share o f amounts that previously were part o f the 71 F SLIC ’s "Secondary Reserve." The Secondary Reserve represented premium prepayments that insured thrifts were required by law to deposit with the FSLIC during the period 1961 through 1973 to quickly increase the FSLIC's insurance reserves to absorb losses if the regular assessments were insufficient. The Secondary Reserve offset reduces the gross SAIFmember assessments due from certain institutions, thereby reducing the assessment premiums available to the FICO and the SAIF. In 1994, the SAIF paid $11 million in refunds to institutions due secondary reserve credits that had previously been acquired through an unassisted merger. The remaining Secondary Reserve credit is $399 thousand and $427 thousand for 1995 and 1994, respectively. SAIF Assessments Dollars in Thousands For the Year Ended December 31 1995 SAIF assessments from thrifts $ 1,184,097 Less: Secondary Reserve offset/refunds 1994 $ 1,301,499 (13,170) (717,909) FICO assessment (a) Plus: Assessment receivables outstanding (14,318) (596,000) (70) 1,453 Less: Prepaid assessments (26,832) SAIF-Member Assessments Earned, (Net) 426,116 690,369 SAIF assessments from “Sasser” banks 121,209 99,895 SAIF assessments from BIF-member “Oakar” banks Total Assessment Revenue (2,265) 422,702 $ 341,838 970,027 $ 1,132,102 (a) FICO payments were reduced by $69 million and $185 million in 1995 and 1994, respectively, because of cash held by FICO. 8. Pension Benefits, Savings Plans, Postemployment Benefits and Accrued Annual Leave Eligible FDIC employees (i.e., all permanent and temporary employees with appointments exceeding one year) are covered by either the C ivil Service Retirement System (CSRS) or the Federal Employee Retirement System (FERS). The CSRS is a defined benefit plan offset with the Social Security System in certain cases. Plan benefits are determined on the basis o f years o f creditable service and compensation levels. The CSRScovered employees also can contribute to the tax-deferred Federal Thrift Savings Plan (TSP). The FERS is a three-part plan consisting o f a basic defined benefit plan that provides benefits based on years o f creditable service and compensation levels, Social Security benefits and the TSP. Automatic and matching employer contributions to the TSP are provided up to specified amounts under the FERS. Eligible FDIC employees also may participate in an FDIC-sponsored tax-deferred savings plan with matching contributions. The SAIF pays its share o f the employer's portion o f all related costs. Although the SAIF contributes a portion o f pension benefits for eligible employees, it does not account for the assets o f either retirement system. The SA IF also does not have actuarial data for accumulated plan benefits or the unfunded liability relative to eligible employees. These amounts are reported and accounted for by the U.S. O ffice o f Personnel Management. Due to a substantial decline in the FD IC 's workload, the Corporation developed a staffing reduction program, a component o f which is a voluntary separation incentive plan, or buyout. Employees eligible to participate in the buyout Savings Association Insurance Fund program were placed into two categories, depending on the immediacy o f the need for staffing reduction. Participating Category I employees agreed to retirement or resignation by December 31, 1995. There are 328 Category I FDIC employees participating at an estimated cost to the SAIF o f $3.1 million. The cost for Category I employees is presented as “Operating expenses” in 1995. Participating Category II employees must have applied by February 7, 1996, and resign or retire no later than September 30, 1997. Consideration o f all Category II applications is not complete; however, the FDIC estimates the possible cost o f the buyout program for Category II employees to be about $5.8 million. The cost for Category II employees will be expensed in 1996. The buyout affects other liabilities (postretirement and accrued annual leave); however, that effect is not estimable at this time. The liability to employees for accrued annual leave is approximately $757 thousand and $685 thousand at December 31, 1995 and 1994, respectively. Pension Benefits and Savings Plans Expenses Dollars in Thousands For the Year Ended December 31 1995 Civil Service Retirement System $ 549 1994 $ 329 1,394 663 FDIC Savings Plan 895 436 Federal Thrift Savings Plan 486 202 Federal Employee Retirement System (Basic Benefit) Total $ 3,324 $ 1,630 9. Postretirement Benefits Other than Pensions The FDIC provides certain health, dental and life insurance coverage for its eligible retirees, the retirees' beneficiaries and covered dependents. Retirees eligible for health and/or life insurance coverage are those who have qualified due to: 1) immediate enrollment upon appointment or five years of participation in the plan and 2) eligibility for an immediate annuity. Dental coverage is provided to all retirees eligible for an immediate annuity. The FDIC is self-insured for hospital/medical, prescription drug, mental health and chemical dependency coverage. Additional risk protection was purchased from Aetna Life Insurance Company through stop-loss and fiduciary liability insurance. A ll claims are administered on an administrative services only basis with the hospital/medical claims administered by Aetna Life Insurance Company, the mental health and chemical dependency claims administered by OHS Foundation Health Psychcare Inc., and the prescription drug claims administered by Caremark. The life insurance program, underwritten by Metropolitan Life Insurance Company, provides basic coverage at no cost to retirees and allows converting optional coverages to direct-pay plans. Dental care is underwritten by Connecticut General Life Insurance Company and provides coverage at no cost to retirees. The SAIF expensed $226 thousand and $586 thousand for net periodic postretirement benefit costs for the years ended December 31, 1995 and 1994, respectively. For measurement purposes, the FDIC assumed the following: 1) a discount rate of 6 percent; 2) an average long-term rate o f return on plan assets o f 5 percent; 3) an increase in health costs in 1995 o f 12 percent, decreasing down to an ultimate rate in 1999 of 8 percent; and 4) an increase in dental costs in 1995 and thereafter of 8 percent. Both the assumed discount rate and health care cost rate have a significant effect on the amount of the obligation and periodic cost reported. I f the health care cost rate were increased one percent, the accumulated postretirement benefit obligation as of December 31, 1995, would have increased by 22.9 percent. The effect o f this change on the aggregate of service and interest cost for 1995 would be an increase o f 25.6 percent. 73 Net Periodic Postretirement Benefit Cost For the Year Ended Dollars in Thousands December 31 1995 $ 431 Service cost (benefits attributed to employee service during the year) 1994 $ 664 378 Interest cost on accumulated postretirement benefit obligation 281 Net total o f other components (68) (129) (418) (327) Return on plan assets Total $ 226 As stated in Note 2, the FDIC established an entity to provide accounting and administration on behalf o f the SAIF, the BIF, the FRF and the RTC. The $ 586 SAIF funds its liability and these funds are being managed as "plan assets." Accumulated Postretirement Benefit Obligation and Funded Status Dollars in Thousands December 31 1994 1995 Retirees $ 2,230 Fully eligible active plan participants $ 1,979 629 470 Other active participants 5,124 6,552 Total Obligation 7,983 9,001 Less: Plan assets at fair value (a) 8,904 8,486 (Over) Under Funded Status (921) Unrecognized prior service cost 515 1,305 0 273 Unrecognized net gain 0 Postretirement Benefit Liability Recognized in the Statements of Financial Position $ 657 $ 515 (a) Consists of U.S. Treasury investments 10. Commitments The SAIF's allocated share o f FDIC lease commitments totals $2.6 million for future years. The lease agreements contain escalation clauses resulting in adjustments, usually on an annual basis The SAIF recognized leased space expense o f $1.6 million and $1.1 million for the years ended December 31, 1995 and 1994, respectively. Leased Space Fees Dollars in Thousands 1996 1997 1998 1999 2000 2001 $660 $595 $408 $329 $298 $306 Savings Association Insurance Fund 75 11. Concentration of Credit Risk The SAIF is counterparty to financial instruments with entities located in two regions o f the United States experiencing problems in both loans and real estate. The SAIF's maximum exposure to possible accounting loss for these instruments is $3.9 million for Southeast Bank, N .A ., Miami, Florida, and $2.5 million for Olympic National Bank, Los Angeles, California. Insured Deposits As o f December 31, 1995, the total deposits insured by the SAIF is approximately $711 billion. This would be the accounting loss i f all the depository institutions fail and i f any assets acquired as a result o f the resolution process provide no recovery. 12. Disclosures about the Fair Value of Financial Instruments Cash equivalents are short-term, highly liquid investments and are shown at current value. The fair market value o f the investment in U.S. Treasury obligations is disclosed in Note 4 and is based on current market prices. The carrying amount o f interest receivable on investments, short-term receivables, and accounts payable and other liabilities approximates their fair market value. This is due to their short maturities or comparison with current interest rates. As explained in Note 5, entrance and exit fees receivable are net o f discounts calculated using an interest rate com parable to U.S. Treasury Bill or Government bond/note rates at the time the receivables are accrued. It is not practicable to estimate the fair market value o f net receivables from thrift resolutions. These assets are unique, not intended for sale to the private sector and have no established market. The FDIC believes that a sale to the private sector would require indeterminate, but substantial discounts for an interested party to profit from these assets because o f credit and other risks. A discount o f this proportion would significantly increase the cost o f resolutions to the SAIF. Comparisons with other financial instruments do not provide a reliable measure o f their fair market value. Due to these and other factors, the FDIC cannot determine an appropriate market discount rate and, thus, is unable to estimate fair market value on a discounted cash flow basis. As stated in Note 6, the carrying amount o f the estimated liability for anticipated failure o f insured institutions is the total o f estimated losses for thrifts as well as "Oakar" and "Sasser" banks that have not failed, but the regulatory process has identified as likely to fail within the foreseeable future. It does not consider discounted future cash flows. This is because the FDIC cannot predict the timing o f events with reasonable accuracy. For this reason, the FDIC considers the total estimate o f these losses to be the best measure o f their fair market value. 13. Supplementary Information Relating to the Statements of Cash Flows Reconciliation of Net Income to Net Cash Provided by Operating Activities____________________________ Dollars in Thousands For the Year Ended December 31 ______________________________________________________________________________ 1995________________1994 Net Income_____________________________________________________________ $ 1,421,132________ $ 780,986 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Income Statement Items: Provision for insurance losses Amortization o f U.S. Treasury securities (unrestricted) Loss on sale o f U.S. Treasury securities 414,000 (321,000) (2,646) (8,114) 289 0 Change in Assets and Liabilities: (Increase) in amortization o f U.S. Treasury securities (restricted) (450) (17) 24,963 Decrease in entrance and exit fees receivable 26,871 (Increase) in interest receivable on investments (9,771) (10,824) 6,841 168,056 and other assets Decrease in receivables from thrift resolutions Increase (Decrease) in accounts payable and other liabilities (Decrease) in liabilities incurred from thrift resolutions Increase in exit fees and investment proceeds held in escrow Net Cash Provided by Operating Activities (a) SAIF Transferred $169 million to the FRF 105,198 0 (a) (166,953) (932) 13,027 13,792 $ 1,233,734 $ 1,220,714 FSLIC Resolution Fund Federal Deposit Insurance Corporation FSLIC Resolution Fund Statements of Financial Position Dollars in Thousands December 31 1995 1994 Assets Cash and cash equivalents (Note 3) $ 274,973 $ 1,278,548 Receivables from thrift resolutions, net (Note 4) 370,443 1,054,107 Investment in corporate owned assets, net (Note 5) 504,341 370,177 4,620 20,003 $ 1,154,377 $ 2,722,835 $ $ Other assets, net (Note 6) Total Assets Liabilities Accounts payable and other liabilities 11,045 13,262 238,387 2,164,438 Assistance agreements 81,340 277,577 Litigation losses 27,000 2,100 Total Liabilities 357,772 2,457,377 Contributed capital 44,156,000 43,991,000 Accumulated deficit (43,359,395) (43,725,542) 796,605 265,458 $ 1,154,377 $ 2,722,835 Liabilities incurred from thrift resolutions (Note 7) Estimated Liabilities fo r : (Note 8) Commitments and contingencies (Notes 14 and 15) Resolution Equity (Note 10) Total Resolution Equity Total Liabilities and Resolution Equity The accompanying notes are an integral part of these financial statements. Federal Deposit Insurance Corporation FSLIC Resolution Fund Statements of Income and Accumulated Deficit Dollars in Thousands For the Year Ended December 31 ____________________________________________________________________ 1995___________________1994 Revenue Interest on U .S. Treasury investments $ Revenue from corporate owned assets 46,904 $ 77,191 77,087 115,280 Limited partnership and other revenue (Note 11) 314,012 275,779 Total Revenue 438,003 468,250 Operating expenses 11,640 15,535 Interest expense 13,901 37,624 Expenses and Losses Corporate owned asset expenses 55,181 Provision for losses (Note 9) (13,684) Other expenses 4,818 Total Expenses and Losses (233,904) 366,147 Accumulated Deficit - Beginning 702,154 (43,725,542) (44,427,696) $ (43,359,395) $ (43,725,542) The accompanying notes are an integral part of these financial statements. 10,355 71,856 Net Income Accumulated Deficit - Ending 66,394 (363,812) FSLIC Resolution Fund Federal Deposit Insurance Corporation FSLIC Resolution Fund Statements of Cash Flows Dollars in Thousands For the Year Ended December 31 1995 1994 Cash Flows from Operating Activities Cash provided from: Interest on U.S. Treasury investments $ 47,028 $ 77,191 Recoveries from thrift resolutions 785,698 2,019,635 Recoveries from corporate owned assets 420,182 416,987 3,502 4,722 Miscellaneous receipts Cash used for: Operating expenses (14,399) (19,053) (9,719) (28,620) (1,790,471) (2,077,535) (576,996) (222,037) (1,840) (2,578) Interest paid on indebtedness incurred from thrift resolutions Disbursements for thrift resolutions Disbursements for corporate owned assets Miscellaneous disbursements Net Cash (Used by) Provided by Operating Activities (Note 17) (1,137,015) 168,712 Cash Flows from Financing Activities Cash provided from: U.S. Treasury payments 165,000 0 Cash used for: (31,560) (494,095) 133,440 (494,095) (1,003,575) (325,383) Payments o f indebtedness incurred from thrift resolutions Net Cash Provided by (Used by) Financing Activities Net Decrease in Cash and Cash Equivalents 1,278,548 Cash and Cash Equivalents - Beginning Cash and Cash Equivalents - Ending The accompanying notes are an integral part of these financial statements. $ 1,603,931 274,973 $ 1,278,548 Notes to the Financial Statements FSLIC Resolution Fund December 31,1995 and 1994 1. Legislative History and Operations of the FSLIC Resolution Fund Legislative History The Financial Institutions Reform, Recovery, and Enforcement Act o f 1989 (FIRRE A ) was enacted to reform, recapitalize and consolidate the federal deposit insurance system. The FIRREA created the FSLIC Resolution Fund (FRF), the Bank Insurance Fund (BIF), and the Savings Association Insurance Fund (SAIF). It also designated the Federal Deposit Insurance Corporation (FD IC ) as the administrator o f these three funds. A ll three funds are maintained separately to carry out their respective mandates. The FRF is responsible for winding up the affairs o f the former Federal Savings and Loan Insurance Corporation (FSLIC). The BIF and SAIF provide insurance for member banks and thrifts. The FIRREA also created the Resolution Trust Corporation (R TC ), which managed and resolved all thrifts previously insured by the FSLIC for which a conservator or receiver was appointed during the period January 1, 1989, through August 8, 1992. The Resolution Trust Corporation Refinancing, Restructuring and Improvement Act o f 1991 (1991 RTC Act) extended the RTC 's general resolution responsibility through September 30, 1993, and beyond that date for those institutions previously placed under the R TC 's control. The Resolution Trust Corporation Completion Act o f 1993 (1993 RTC Act), enacted December 17, 1993, extended the RTC 's general resolution responsibility through a date between January 1, 1995 and July 1, 1995. Resolution responsibility transferred from the RTC to the SAIF on July 1, 1995. The Resolution Funding Corporation (REFCORP) was established by the FIRREA to provide funds to the RTC for use in thrift resolutions. The Financing Corporation (FICO ), established under the Competitive Equality Banking Act o f 1987, is a mixed-ownership government corporation whose sole purpose was to function as a financing vehicle for the FSLIC. Effective December 12, 1991, as provided by the 1991 RTC Act, the FICO's ability to serve as a financing vehicle for new debt was terminated. Operations of the FRF The primary purpose o f the FRF is to liquidate the assets and contractual obligations o f the nowdefunct FSLIC. The FRF will complete the resolution of all thrifts that failed before January 1, 1989, or were assisted through August 8, 1989. The FIRREA provided that the RTC manage any receiverships resulting from thrift failures that occurred after December 31, 1988, but prior to the enactment o f the FIRREA. There are five such receiverships that affect the FRF financial statements because the FRF remains financially responsible for the losses associated with these resolution cases. The FRF is primarily funded from the following sources: 1) income earned on and funds received from the management and disposition o f assets o f the FRF; 2) the FRF’ s portion o f liquidating dividends paid by FRF receiverships, provided such funds are not required by the REFCORP or the FICO; and 3) interest earned on one-day U.S. Treasury investments purchased with proceeds of 1) and 2). I f these sources are insufficient to satisfy the liabilities o f the FRF, payments will be made from the U.S. Treasury in amounts necessary, as are appropriated by Congress, to carry out the objectives o f the FRF. T o facilitate efforts to wind up the resolution activity o f the FRF, Public Law 103-327 provides $827 million in funding to be available until expended. The FRF received $165 million under this appropriation on November 2, 1995. The 1993 RTC Act accelerated the termination date o f the RTC from no later than December 31, 1996, to no later than December 31, 1995. A ll remaining assets and liabilities o f the RTC were transferred to the FRF on January 1, 1996, after which any future net proceeds from the sale o f such assets will be transferred to the REFCORP for interest payments after satisfaction o f any outstanding liabilities o f the RTC. The FRF will continue until all o f its assets are sold or otherwise liquidated and all o f its liabilities are satisfied. Upon the dissolution o f the FRF, any funds remaining w ill be paid to the U.S. Treasury. FSLIC Resolution Fund 81 2. Summary o f Significant Accounting Policies General These financial statements pertain to the financial position, results o f operations and cash flows o f the FRF and are presented in accordance with generally accepted accounting principles (G A A P ). These statements do not include reporting for assets and liabilities o f closed insured thrift institutions for which the FRF acts as receiver or liquidating agent. Periodic and final accountability reports o f the FRF's activities as receiver or liquidating agent are furnished to courts, supervisory authorities and others as required. Use of Estimates The preparation o f the FR F’s financial statements in conformity with generally accepted accounting principles requires FDIC management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Where it is reasonably possible that changes in estimates will cause a material change in the financial statements in the near term, the nature and extent o f such changes in estimates have been disclosed in the financial statements. Allowance for Losses on Receivables from Thrift Resolutions and Investment in Corporate Owned Assets The FRF records as a receivable the amounts advanced and/or obligations incurred for assisting and closing thrift institutions. The FRF also records as an asset the amounts advanced for investment in corporate owned assets. Any related allowance for loss represents the difference between the funds advanced and/or obligations incurred and the expected repayment. The latter is based on the estimated cash recoveries from the assets o f the assisted or failed thrift institution, net o f all estimated liquidation costs. Estimated Liabilities for Assistance Agreements The FRF establishes an estimated liability for probable future assistance payable to acquirers o f troubled thrifts under its financial assistance agreements. Such estimates are presented on a discounted basis. Litigation Losses The FRF accrues, as a charge to current period operations, an estimate o f probable losses from litigation against the FRF in both its corporate and receivership capacities. The FDIC's Legal Division recommends these estimates on a case-by-case basis. The litigation loss estimates related to receiverships are included in the allowance for losses for receivables from thrift resolutions. Receivership Administration The FDIC is responsible for controlling and disposing o f the assets o f failed institutions in an orderly and efficient manner. The assets, and the claims against them, are accounted for separately to ensure that liquidation proceeds are distributed in accordance with applicable laws and regulations. Also, the income and expenses attributable to receiverships are accounted for as transactions o f those receiverships. Liquidation expenses incurred by the FRF on behalf of the receiverships are recovered from those receiverships. Cost Allocations Among Funds Certain operating expenses (including personnel, administrative and other indirect expenses) not directly charged to each fund under the FDIC's management are allocated on the basis o f the relative degree to which the operating expenses were incurred by the funds. The FDIC includes the cost o f facilities used in operations in the B IF’s financial statements. The BIF charges the FRF a rental fee representing an allocated share o f its annual depreciation. The cost o f furniture, fixtures and equipment purchased by the FDIC on behalf o f the three funds under its administration is allocated among these funds on a pro rata basis. The FRF expenses its share o f these allocated costs at the time o f acquisition because o f their immaterial amounts. Postretirement Benefits Other Than Pensions The FDIC established an entity to provide the accounting and administration o f postretirement benefits on behalf o f the FRF, the BIF, the SAIF and the RTC. The FRF funds its liabilities for these benefits directly to the entity. Disclosure about Recent Financial Accounting Standards Board Pronouncements In May 1993, the Financial Accounting Standards Board (FASB) issued Statement o f Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment o f a Loan," to be adopted for fiscal years beginning after December 15, 1994. While FDIC adopted SFAS No. 114, most o f the FRF assets are specifically outside the scope o f this pronouncement. These assets do not meet the definition o f a loan within the meaning o f the statement or are valued through alternative methods. Any assets subject to Statement No. 114 are immaterial either because o f insignificant book value or because any potential adjustment to the carrying value as a result o f applying Statement No. 114 would be immaterial. The FASB issued SFAS No. 118, “Accounting by Creditors for Impairment o f a Loan - Income Recognition and Disclosures,” in October 1994, to be adopted for fiscal years beginning after December 15, 1994". This statement is an amendment to SFAS No. 114 and was adopted by the FDIC this year. Other recent pronouncements issued by the FASB have been adopted or are either not applicable or not material to the financial statements. Wholly Owned Subsidiary The Federal Asset Disposition Association (F A D A ) is a wholly owned subsidiary o f the FRF. The F A D A was placed in receivership on February 5, 1990. However, due to outstanding litigation, a final liquidating dividend to the FRF will not be made until the F A D A 's litigation liability is settled or dismissed. The investment in the F A D A is accounted for using the equity method and is included in "Other assets, net" (Note 6). As of December 31, 1995, the value o f the investment has been adjusted for projected expenses relating to the liquidation o f the F A D A . The F A D A 's estimate o f probable litigation losses is $2.8 million. Accordingly, a $2.8 million litigation loss has been recognized as a reduction in the value o f the FRF's investment in the F A D A . There were no additional litigation losses considered reasonably possible as o f December 31, 1995. Related Parties The nature o f related parties and descriptions o f related party transactions are disclosed throughout the financial statements and footnotes. Reclassifications Reclassifications have been made in the 1994 financial statements to conform to the presentation used in 1995. 3. Cash and Cash Equivalents The FRF considers cash equivalents to be short-term, highly liquid investments with original maturities o f three months or less. In 1995, cash restrictions included $403 thousand for health insurance payable and $565 thousand for funds held in trust. In 1994, cash restrictions included $204 thousand for health insurance payable and $821 thousand for funds held in trust. 4. Receivables from Thrift Resolutions, Net As o f December 31, 1995 and 1994, the FRF, in its receivership capacity, held assets with a book value o f $533 million and $947 million, respectively. The estimated cash recoveries from the sale o f these assets (excluding cash and miscellaneous receivables o f $174 million in 1995 and $168 million in 1994) are regularly evaluated, but remain subject to uncertainties because o f changing economic conditions. These factors could affect the FRF's actual recoveries upon the sale o f these assets from the level o f recoveries currently estimated. FSLIC Resolution Fund Receivables from Thrift Resolutions, Net Dollars in Thousands December 31 1995 1994 Assets from Open Thrift Assistance: Collateralized loans $ Notes receivable 0 $ 130,420 360,000 130,657 Subordinated debt instruments 14,301 21,301 Capital instruments 65,000 65,000 0 29,624 417,733 429,628 2,761 4,717 (446,514) (423,296) 183,701 617,631 8,600,088 9,114,230 Collateralized advances/loans 279,297 289,494 Other receivables 219,737 218,918 Interest in limited partnerships Preferred stock Interest receivable Allowance for losses (Note 9) Receivables from Closed Thrifts: Resolution transactions (8,912,380) (9,186,166) 186,742 Allowance for losses (Note 9) 436,476 370,443 $ 1,054,107 Total_________________________________________________________________________$ 5. Investment in Corporate Owned Assets, Net The FRF's investment in corporate owned assets is comprised o f amounts that: 1) the FSLIC paid to purchase assets from troubled or failed thrifts and 2) the FRF pays to acquire receivership assets, terminate receiverships and purchase covered assets. The majority o f these assets are real estate and mortgage loans. The FRF recognizes income and expenses on these assets. Income consists primarily o f the portion o f collections on performing mortgages related to interest earned. Expenses are recognized for administering the management and liquidation o f these assets. Investment in Corporate Owned Assets, Net Dollars in Thousands December 31 1995 Investment in corporate owned assets Allowance for losses (Note 9) Total $ 3,664,397 1994 $ 3,444,413 (3,160,056) $ 504,341 (3,074,236) $ 370,177 84 w Other Assets, Net M.nm xmminw m 6. December 31 Dollars in Thousands 1995 1994 $ 15,000 Investment in FAD A (Note 2) $ 25,000 (11,074) Allowance for loss (Note 9) (12,375) 3,926 Accounts receivable 12,625 126 Investment in FAD A, Net 230 568 7,148 $ 4,620 $ 20,003 Due from other government entities Total I 7. Liabilities Incurred from Thrift Resolutions The FSLIC issued promissory notes and entered into assistance agreements to prevent the default and subsequent liquidation o f certain insured thrift institutions. These notes and agreements required the FSLIC to provide financial assistance over time. Under the FIRREA, the FRF assumed these obligations. Notes payable and obligations for assistance agreement payments incurred but not yet paid are in "Liabilities incurred from thrift resolutions." Estimated future assistance payments are included in "Estimated liabilities for: Assistance agreements" (see Note 8). Liabilities Incurred from Thrift Resolutions Dollars in Thousands December 31 1995 Notes payable to Federal Home Loan Banks/U.S. Treasury $ $ 360,000 725 725 157,800 189,360 0 1,530,043 Capital instruments Assistance agreement notes payable Assistance agreement costs payable Interest payable 2,600 2,931 77,262 Other liabilities to thrift institutions Total $ Maturities of Liabilities Dollars in Thousands 1994 0 1996 1997 1998 $112,147 $31,560 $94,680 81,379 238,387 $ 2,164,438 FSLIC Resolution Fund 85 8. Estimated Liabilities for: Assistance Agreements The "Estimated liabilities for: Assistance agreements" represents, on a discounted basis, an estimate o f future assistance payments to acquirers o f troubled thrift institutions. The nominal dollar amount before discounting was $91 million and $294 million, as o f December 31, 1995 and 1994, respectively. The discount rates applied as o f December 31, 1995 and 1994, were 5.5 percent and 6.3 percent, respectively, based on U.S. money rates for federal funds. Future assistance stems from the FRF's obligation to: 1) fund losses inherent in assets covered under the assistance agreements (e.g., by subsidizing asset write-downs, capital losses and goodwill amortization) and 2) supplement the actual yield earned from covered assets as necessary for the acquirer to achieve a specified yield (the "guaranteed yield"). Estimated total assistance costs recognized for current assistance agreements with institutions involving covered assets include estimates for the loss expected on the assets based on their appraised values. The FRF is obligated to fund any losses sustained by the institutions on the sale o f the assets. I f all underlying assets prove to be o f no value, the possible cash requirements and the accounting loss could be as high as $467 million (see Note 15). The costs and related cash requirements associated with maintaining covered assets are calculated using an applicable cost o f funds rate and would change proportionately with market rates. The estimated liabilities for assistance agreements are affected by several factors, including adjustments to expected notes payable, the terms o f the assistance agreements outstanding and, in particular, the marketability o f the related covered assets. The variable nature o f the FRF assistance agreements will cause the cost requirements to fluctuate. This fluctuation will impact both the timing and amount o f eventual cash flows. The number o f assistance agreements outstanding as o f December 31, 1995 and 1994, were 37 and 54, respectively. The last agreement is scheduled to expire in December 1998. Litigation Losses The FRF records an estimated loss for unresolved legal cases to the extent those losses are considered to be probable in occurrence and reasonably estimable in amount. In addition, the FD IC ’ s Legal Division has determined that losses from unresolved legal cases totaling $132 million are reasonably possible. This includes $125 million in losses for the FRF in its corporate capacity and $7 million in losses for the FRF in its receivership capacity (see Note 2). There exists an additional category o f contingencies with respect to FRF that arises from supervisory goodwill and other capital forbearances granted to the acquirers o f troubled thrifts by the Federal Home Loan Bank Board in the 1980’s. Subsequently, FIRREA imposed minimum capital requirements on thrifts and limited the use of supervisory goodwill and other forbearances to meet these capital requirements. There are currently approximately 120 cases pending which result from the elimination o f supervisory goodwill and forbearances. To date, one o f these cases has resulted in a final judgment o f $6 million against FDIC, which FDIC paid from FRF in accordance with the court’s order. FDIC believes that judgments in such cases are properly paid from the Judgment Fund, a permanent, indefinite appropriation established by 31 U.S.C. 1304. The extent to which FRF will be the source for paying other judgments in such cases is uncertain. 9. Analysis o f Changes in Allowance for Losses and Estimated Liabilities In the following charts, transfers primarily include reclassifications from "Estimated liabilities for: Assistance agreements" to "Liabilities incurred from thrift resolutions" for notes payable and related accrued assistance agreement costs. Terminations represent final adjustments to the estimated cost figures for those thrift resolutions that were completed and the operations o f the receivership ended. Analysis of Changes in Allowance for Losses and Estimated Liabilities - 1995 Dollars in Millions Allowance for Losses: Open thrift assistance Provision for Losses Beginning Balance 01/01/95 $ 423 $ 16 Net Cash Payments $ 0 Adjustments/ Transfers/ Terminations $ 7 Ending Balance 12/31/95 $ 446 (7) 0 (267) 8,912 90 0 (4) 3,160 12 (1) 0 0 11 12,695 98 0 (264) 12,529 (203) 143 81 Closed thrifts 9,186 Corporate owned assets 3,074 Investment in F A D A Total Allowance for Losses Estimated Liabilities for: 278 Assistance agreements (137) 25 2 Litigation losses 280 Total Estimated Liabilities Provision for Losses $ 0 27 143 0 (203) (112) 108 (14) Analysis of Changes in Allowance for Losses and Estimated Liabilities - 1994 Dollars in Millions Allowance for Losses: Open thrift assistance Beginning Balance 01/01/94 $ 423 Closed thrifts $ 9,549 Corporate owned assets Provision for Losses 2,988 Due from the SAIF Investment in F A D A Total Allowance for Losses 0 (133) Net Cash Payments $ 0 Adjustments/ Transfers/ Terminations $ 0 Ending Balance 12/31/94 $ 423 0 (230) 9,186 86 0 0 3,074 7 0 0 (7) 0 11 1 0 0 12 12,978 (46) 0 1,290 (320) (1,424) 70 2 0 (237) 12,695 Estimated Liabilities for: Assistance agreements Litigation losses Total Estimated Liabilities Provision for Losses 1,360 (318) $ (364) (1,424) 732 278 (70) 2 662 280 FSLIC Resolution Fund 87 10. Resolution Equity The accumulated deficit includes $7.5 billion in non-redeemable capital certificates and redeemable capital stock issued by the FSLIC. Capital instruments were issued by the FSLIC and the FRF to the FICO as a means o f obtaining capital. Effective December 12, 1991, the FICO's authority to issue obligations as a means o f financing for the FRF was terminated (see Note 1). Furthermore, the implementation o f the FIRREA, in effect, removed the redemption characteristics o f the capital stock issued by the FSLIC. Resolution Equity Dollars in Thousands Beginning Balance 01/01/95 Contributed capital Total Net Income $ 43,991,000 $ $ 265,458 $ Beginning Balance 01/01/94 Contributed capital $43,991,000 Total $ (436,696) 366,147 Net Income $ $ 0 $ 702,154 $ 44,156,000 165,000 0 $ (43,359,395) 165,000 $ $ 0 $ 0 $ 796,605 Ending Balance 12/31/94 Treasury Payments 702,154 (44,427,696) Accumulated deficit 0 366,147 (43,725,542) Accumulated deficit Ending Balance 12/31/95 Treasury Payments 43,991,000 (43,725,542) 0 $ 265,458 11. Limited Partnership and Other Revenue During 1993, the FDIC's Board o f Directors delegated to the RTC the authority to execute partnership agreements on behalf o f the FDIC. Under that authority, the FRF secured a limited partnership interest in two partnerships, Mountain A M D and Brazos Partners, in order to achieve a least cost resolution. The FRF has collected its entire interest in the partnerships. However, funds in excess o f the original investment continue to be collected by the FRF. Limited Partnership and Other Revenue Dollars in Thousands For the Year Ended December 31 1995 Gain on limited partnership agreements Interest earned on assistance agreements Other assistance agreements revenue Interest earned on subrogated claims o f depositors Interest earned on advances to receiverships 1994 $292,124 $229,651 10,776 23,798 7,940 300 0 20,786 1,737 1,054 Other 1,435 190 Total $ 314,012 $ 275,779 88 12. Pension Benefits, Savings Plans and Accrued Annual Leave Eligible FDIC employees (i.e., all permanent and temporary employees with appointments exceeding one year) are covered by either the Civil Service Retirement System (CSRS) or the Federal Employee Retirement System (FERS). The CSRS is a defined benefit plan offset with the Social Security System in certain cases. Plan benefits are determined on the basis o f years o f creditable service and compensation levels. The CSRS-covered employees also can contribute to the tax-deferred Federal Thrift Savings Plan (TSP) . The FERS is a three-part plan consisting o f a basic defined benefit plan that provides benefits based on years o f creditable service and compensation levels, Social Security benefits and the TSP. Automatic and matching employer contributions to the TSP are provided up to specified amounts under the FERS. Eligible FDIC employees also may participate in an FDIC-sponsored tax-deferred savings plan with matching contributions. The FRF pays its share o f the employer's portion o f all related costs. Although the FRF contributes a portion o f pension benefits for eligible employees, it does not account for the assets o f either retirement system. The FRF also does not have actuarial data for accumulated plan benefits or the unfunded liability relative to eligible employees. These amounts are reported and accounted for by the U.S. Office o f Personnel Management. The liability to employees for accrued annual leave is approximately $2.9 million and $3.2 million at December 31, 1995 and 1994, respectively. Pension Benefits and Savings Plans Expenses For the Year Ended December 31 Dollars in Thousands 1995 $ Civil Service Retirement System 1994 471 $ 548 Federal Employee Retirement System (Basic Benefit) 2,691 2,222 FDIC Savings Plan 1,357 1,520 Federal Thrift Savings Plan Total 703 $ 5,222 725 $ 5,015 13. Postretirement Benefits Other than Pensions The FDIC provides certain health, dental and life insurance coverage for its eligible retirees, the retirees' beneficiaries and covered dependents. Retirees eligible for health and/or life insurance coverage are those who have qualified due to: 1) immediate enrollment upon appointment or five years o f participation in the plan and 2) eligibility for an immediate annuity. Dental coverage is provided to all retirees eligible for an immediate annuity. The FDIC is self-insured for hospital/medical, prescription drug, mental health and chemical dependency coverage. Additional risk protection was purchased from Aetna Life Insurance Company through stop-loss and fiduciary liability insurance. A ll claims are administered on an administrative services only basis with the hospital/medical claims administered by Aetna Life Insurance Company, the mental health and chemical dependency claims administered by OHS Foundation Health Psychcare Inc., and the prescription drug claims administered by Caremark. The life insurance program, underwritten by Metropolitan Life Insurance Company, provides basic coverage at no cost to retirees and allows converting optional coverages to direct-pay plans. Dental care is underwritten by Connecticut General Life Insurance Company and provides coverage at no cost to retirees. The FRF expensed $1.8 million and $1.4 million for net periodic postretirement benefit costs for the FSLIC Resolution Fund 89 years ended December 31, 1995 and 1994, respectively. For measurement purposes, the FDIC assumed the following: 1) a discount rate o f 6 percent; 2) an average long-term rate of return on plan assets o f 5 percent; 3) an increase in health costs in 1995 of 12 percent, decreasing down to an ultimate rate in 1999 of 8 percent; and 4) an increase in dental costs in 1995 and thereafter o f 8 percent. Both the assumed discount rate and health care cost rate have a significant effect on the amount o f the obligation and periodic cost reported. I f the health care cost rate were increased one percent, the accumulated postretirement benefit obligation as o f December 31, 1995, would have increased by 22.9 percent. The effect o f this change on the aggregate o f service and interest cost for 1995 would be an increase o f 25.6 percent. Net Periodic Postretirement Benefit Cost Dollars in Thousands For the Year Ended December 31 1995 Service cost (benefits attributed to employee service during the year) 1994 $ 1,587 Interest cost on accumulated postretirement benefit obligation $ 1,325 1,035 752 Net total o f other components (251) (256) Return on plan assets (563) (442) Total As stated in Note 2, the FDIC established an entity to provide accounting and administration on behalf o f the FRF, the BIF, the SAIF and the RTC. The $ 1,808 $ 1,379 FRF funds its liability and these funds are being managed as "plan assets." Accumulated Postretirement Benefit Obligation and Funded Status Dollars in Thousands December 31 1995 Retirees Fully eligible active plan participants $ 3,010 1994 $ 2,798 849 664 6,917 9,262 Total Obligation 10,776 12,724 Less: Plan assets at fair value (a) 12,018 11,455 (Over) Under Funded Status (1,242) 1,269 Other active participants Unrecognized prior service cost Unrecognized net gain 3,480 0 727 0 $ 2,965 $ 1,269 Postretirement Benefit Liability Recognized in the Statements of Financial Position (a) Consists of U.S. Treasury investments I 14. Commitments The FRF's allocated share o f FD IC ’ s lease commitments totals $7.3 million for future years. The lease agreements contain escalation clauses resulting in adjustments, usually on an annual basis. The FRF recognized leased space expense of $4.5 million and $8.9 million for the years ended December 31, 1995 and 1994, respectively, Leased Space Fees Dollars in Thousands 1996_____________ 1997_____________ 1998______________ 1999______________ 2000____________ 2001 $1,845 $1,668 $1,145_____________ $921______________ $837____________ $862 15. Concentration o f Credit Risk The FRF is counterparty to a group o f financial instruments with entities located throughout regions o f the United States experiencing problems in both loans and real estate. The FRF's maximum exposure to possible accounting loss, should each counterparty to these instruments fail to perform and any underlying assets prove to be o f no value, is shown as follows: Concentration of Credit Risk at December 31, 1995 Dollars in Millions South east Receivables from thrift resolutions, net South west $ $ Investment in corporate owned assets, net 10 Assistance agreements covered assets, net of estimated capital loss (off-balance-sheet) Total 36 163 $ 407 46 $ 1,030 0 M id west $ 0 460 0 $ Northeast 0 $ 0 0 $ 7 7 26 $ 3 0 $ West Central 79 $ 467 10 $ 179 370 504 31 50 $ 138 Total $ 1,341 16. Disclosures about the Fair Value o f Financial Instruments Cash equivalents are short-term, highly liquid investments and are shown at current value. The carrying amount of accounts payable, liabilities incurred from thrift resolutions and the estimated liabilities for assistance agreements approximates their fair market value. This is due to their short maturities or comparisons with current interest rates. It is not practicable to estimate fair market values of net receivables from thrift resolutions. These assets are unique, not intended for sale to the private sector and have no established market. The FDIC believes that a sale to the private sector would require indeterminate, but substantial discounts for an interested party to profit from these assets because o f credit and other risks. A discount o f this proportion would significantly increase the cost o f thrift resolutions to the FRF. Comparisons with other financial instruments do not provide a reliable measure o f their fair market value. Due to these and other factors, the FDIC cannot determine an appropriate market discount rate and, thus, is unable to estimate fair market value on a discounted cash flow basis. As shown in Note 4, the carrying amount is the estimated cash recovery value, which is the original amount advanced (and/or obligations incurred) net o f the estimated allowance for loss. The majority o f the net investment in corporate owned assets (except real estate) is comprised o f various types o f financial instruments (investments, loans, accounts receivable, etc.) acquired from failed thrifts. As with net receivables from thrift resolutions, it is not practicable to estimate fair market values. Cash recoveries are primarily from the sale o f poor quality assets. They are dependent on market conditions that vary over time, and can occur unpredictably over many years following resolution. Since the FDIC cannot reasonably predict the timing o f these cash recoveries, it is unable to estimate fair market value on a discounted cash flow basis. As shown in Note 5, the carrying amount is the estimated cash recovery value, which is the original amount advanced (and/or obligations incurred) net o f the estimated allowance for loss. FSLIC Resolution Fund 1 17. Supplementary Information Relating to the Statements of Cash Flows Non-cash financing activities for the years ended December 31, 1995 and 1994, include a decrease in collateralized loans guaranteed by the FRF o f $360 million and $20 million, respectively (see Note 4). Reconciliation of Net Income to Net Cash ( Used by) Provided by Operating Activities Dollars in Thousands For the Year Ended December 31 1995 Net Income $ 366,147 1994 $ 702,154 Adjustments to Reconcile Net Income to Net Cash (Used by) Provided by Operating Activities Income Statement Item: Provision for losses (13,684) (363,812) Change in Assets and Liabilities: Decrease in receivables from thrift resolutions (Increase) decrease in investment in corporate owned assets Decrease in other assets (Decrease) in accounts payable and other liabilities (Decrease) in liabilities incurred from thrift resolutions (Decrease) in estimated liabilities for assistance agreements Net Cash (Used by) Provided by Operating Activities 675,943 1,343,143 (223,856) 121,049 14,281 160,511 (2,217) (93,129) (1,899,484) (838,703) (54,145) (862,501) $ (1,137,015) $ 168,712 Comptroller General o f the United States Washington, D.C. 20548 B-262039 To the Board of Directors Federal Deposit Insurance Corporation We have audited the statements of financial position as of December 31, 1995 and 1994, of the three funds administered by the Federal Deposit Insurance Corporation (FDIC), the related statements of income and fund balance (accumulated deficit), and statements of cash flows for the years then ended. In our audits of the Bank Insurance Fund (BIF), the Savings Association Insurance Fund (SAIF), and the Federal Savings and Loan Insurance Corporation (FSLIC) Resolution Fund (FRF), we found - the financial statements of each fund, taken as a whole, were reliable in all material respects; -- although certain internal controls should be improved, FDIC management fairly stated that internal controls in place on December 31, 1995, were effective in safeguarding assets from material loss, assuring compliance with relevant laws and regulations, and assuring that there were no material misstatements in the financial statements of the three funds administered by FDIC; and - no reportable noncompliance with laws and regulations we tested. During our audits of the 1994 financial statements of the three funds,1we identified weaknesses in FDIC's internal controls which, while not material, affected its ability to ensure that internal control objectives were achieved. We made a number of recommendations to address each of the weaknesses identified in our 1994 audits. In conducting our 1995 audits, we found that FDIC made progress in addressing several internal control weaknesses identified in our 1994 audits. FDIC's actions during 1995 fully resolved weaknesses we identified in controls over safeguarding of assets and proper reporting of asset management and disposition activity by contracted asset servicing entities. Also, FDIC made some progress in improving controls over its asset valuation process. However, additional improvements are needed, as FDIC has not fully addressed our concerns regarding weaknesses in documentation maintained to support asset recovery estimates. Our 1995 audits continued to find weaknesses, though not material, in controls over FDIC’s process for estimating recoveries from failed institution assets. In our 1995 audits, we also continued to find weaknesses in FDIC's time and attendance reporting process. FDIC has initiatives underway to streamline its time and attendance process which it believes will address the internal control weaknesses we identified. In addition, during 1995, we found a weakness in FDIC's electronic data processing controls which, due to its sensitive nature, is being communicated separately to FDIC. The condition of the nation's banks and savings associations continued to improve. The improved condition of the banking industry, and the higher premiums BIF-insured institutions have paid in the last several years, resulted in BIF reaching its designated capitalization level in 1995. Consequently, FDIC lowered premium rates charged to BIF-insured institutions. While the improved condition of the nation's thrifts and higher premiums have helped improve SAIF's condition, a significant premium rate differential developed between BIF and SAIF during 1995 and, absent legislative action, will likely remain for a number of years. This significant premium rate differential could adversely affect the thrift industry’s ability to finance certain obligations arising from the thrift crisis of the 1980s and could eventually lead to higher deposit insurance premium rates. ‘Financial Audit: Federal Deposit Insurance Corporation's 1994 and 1993 Financial Statements (GA07AIMD-95-102, March 31, 1995). The following sections discuss our conclusions in more detail and discuss (1) the scope of our audits, (2) significant matters related to the condition and outlook of the banking and thrift industries and the insurance funds, and what progress the Corporation has made in addressing internal control weaknesses identified in prior audits, (3) reportable conditions2identified in our 1995 audits, (4) recommendations from our 1995 audits, and (5) the Corporation's comments on a draft of this report and our evaluation. OPINION ON FINANCIAL STATEMENTS Bank Insurance Fimd In our opinion, the financial statements and accompanying notes present fairly, in all material respects, in conformity with generally accepted accounting principles, the Bank Insurance Fund's financial position as of December 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended. However, misstatements may nevertheless occur in other FDIC-reported financial information on BIF as a result of the internal control weaknesses summarized above and discussed in detail in a later section of this report. Savings Association Insurance Fund In our opinion, the financial statements and accompanying notes present fairly, in all material respects, in conformity with generally accepted accounting principles, the Savings Association Insurance Fund's financial position as of December 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended. However, misstatements may nevertheless occur in other FDIC-reported financial information on SAIF as a result of the internal control weaknesses summarized above and discussed in detail in a later section of this report. FSLIC Resolution Fund In our opinion, the financial statements and accompanying notes present fairly, in all material respects, in conformity with generally accepted accounting principles, the FSLIC Resolution Fund's financial position as of December 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended. However, misstatements may nevertheless occur in other FDIC-reported financial information on FRF as a result of the internal control weaknesses summarized above and discussed in detail in a later section of this report. 2 Reportable conditions involve matters coming to the auditor’s attention relating to significant deficiencies in the design or operation of internal controls that, in the auditor’s judgment, could adversely affect an entity’s ability to (1) safeguard assets against loss from unauthorized acquisition, use, or disposition, (2) ensure the execution of transactions in accordance with management’s authority and in accordance with laws and regulations, and (3) properly record, process, and summarize transactions to permit the preparation of financial statements and to maintain accountability for assets. A material weakness is a reportable condition in which the design or operation of the internal controls does not reduce to a relatively low level the risk that losses, noncompliance, or misstatements in amounts that would be material in relation to the financial statements may occur and not be detected within a timely period by employees in the normal course of their assigned duties. On January 1, 1996, FRF assumed responsibility for liquidating the assets and satisfying the obligations of the Resolution Trust Corporation (RTC).3 As discussed in note 1 of FRF’s financial statements,4proceeds from the management and disposition of RTC’s assets will be used to satisfy the transferred obligations. Any additional proceeds after satisfaction of RTC’s obligations will be transferred to the Resolution Funding Corporation.6 As discussed in note 8 of FRF's financial statements, there are approximately 120 pending lawsuits which stem from legislation that resulted in the elimination of supervisory goodwill and other forbearances from regulatory capital. These lawsuits assert various legal claims including breach of contract or an uncompensated taking of property resulting from the FIRREA provisions regarding minimum capital requirements for thrifts and limitations as to the use of supervisory goodwill to meet minimum capital requirements. One case has resulted in a final judgment of $6 million against FDIC, which was paid by FRF. On July 1, 1996, the United States Supreme Court concluded that the government is liable for damages in three other cases, consolidated for appeal to the Supreme Court, in which the changes in regulatory treatment required by FIRREA led the government to not honor its contractual obligations. However, because the lower courts had not determined the appropriate measure or amount of damages, the Supreme Court returned the cases to the Court of Federal Claims for further proceedings. Until the amount of damages are determined by the court, the amount of additional costs from these three cases is uncertain. Further, with respect to the other pending cases, the outcome of each case and the amount of any possible damages will depend on the facts and circumstances, including the wording of agreements between thrift regulators and acquirers of troubled savings and loan institutions. Estimates of possible damages suggest that the additional costs associated with these claims may be in the billions. The Congressional Budget Office's December 1995 update of its baseline budget projections increased its projection of future outlays for fiscal years 1997 through 2002 by $9 billion for possible payments of such claims. As mentioned above, the final judgment of $6 million in one case against FDIC was paid by FRF. However, as discussed in note 8 of FRF's financial statements, FDIC believes that judgments in such cases are properly paid from the Judgment Fund.6 The extent to which FRF will be the source of paying other judgments in such cases is uncertain. :iThe Resolution Trust Corporation was created by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) to manage and resolve all troubled savings institutions that were previously insured by FSLIC and for which a conservator or receiver was appointed during the period January 1, 1989, through August 8, 1992. This period was extended to September 30, 1993, by the Resolution Trust Corporation Refinancing, Restructuring, and Improvement Act of 1991 and was further extended on December 17, 1993, to a date not earlier than January 1, 1995, nor later than July 1, 1995, by the Resolution Trust Corporation Completion Act of 1993 (RTC Completion Act). The RTC Completion Act stated that the final date would be determined by the Chairperson of the Thrift Depositor Protection Oversight Board. On December 5, 1994, the Chairperson made the determination that RTC would continue to resolve failed thrift institutions through June 30, 1995. Finally, the RTC Completion Act required RTC to terminate its operations no later than December 31, 1995. 4 The notes to FRF's financial statements do not present amounts associated with the assets and obligations transferred from RTC as FDIC management is currently considering the future form of the reporting entity (that is, FRF and RTC). 'The Resolution Funding Corporation was established by FIRREA to provide funding for RTC through issuance of long-term debt securities. Any proceeds transferred to the Resolution Funding Corporation will be used to make interest payments on the long-term debt securities. 6 The Judgment Fund is a permanent, indefinite appropriation established by 31 U.S.C. Sec. 1304. OPINION ON FDIC MANAGEMENT'S ASSERTIONS ABOUT THE EFFECTIVENESS OF FDIC'S INTERNAL CONTROLS For the three funds administered by FDIC, we evaluated FDIC management's assertions about the effectiveness of its internal controls designed to - safeguard assets against unauthorized acquisition, use, or disposition; - assure the execution of transactions in accordance with management's authority and with provisions of selected laws and regulations that have a direct and material effect on the financial statements of the three funds; and - properly record, process, and summarize transactions to permit the preparation of financial statements in accordance with generally accepted accounting principles. FDIC management fairly stated that those controls in place on December 31, 1995, provided reasonable assurance that losses, noncompliance, or misstatements material in relation to the financial statements of each of the three funds would be prevented or detected on a timely basis. Management made this assertion based on criteria in GAO’s Standards for Internal Controls in the Federal Government and consistent with the requirements of the Federal Managers’ Financial Integrity Act of 1982. However, our work identified the need to improve certain internal controls, which were previously summarized and are described in detail in a later section of this report. These weaknesses in internal controls, although not considered to be material weaknesses, represent significant deficiencies in the design or operation of internal controls which could adversely affect FDIC's ability to meet the internal control objectives listed above. COMPLIANCE WITH LAWS AND REGULATIONS Our tests for compliance with selected provisions of laws and regulations disclosed no instances of noncompliance that would be reportable under generally accepted government auditing standards. However, the objective of our audits was not to provide an opinion on overall compliance with laws and regulations. Accordingly, we do not express such an opinion. ORIECTIVES. SCOPE. AND METHODOLOGY FDIC management is responsible for - preparing the annual financial statements of BIF, SAIF, and FEF in conformity with generally accepted accounting principles; - establishing, maintaining, and assessing the Corporation's internal control structure to provide reasonable assurance that internal control objectives as described in GAO's Standards for Internal Controls in the Federal Government are met; and - complying with applicable laws and regulations. We are responsible for obtaining reasonable assurance about whether (1) the financial statements of each of the three funds are free of material misstatement and are presented fairly, in all material respects, in conformity with generally accepted accounting principles and (2) FDIC management’s assertion about the effectiveness of internal controls is fairly stated, in all material respects, based upon the control criteria used by FDIC management in making its assertion. We are also responsible for testing compliance with selected provisions of laws and regulations and for performing limited procedures with respect to certain other information in FDIC's annual financial report. In order to fulfill our responsibilities as auditor of record for the Federal Deposit Insurance Corporation, we - examined, on a test basis, evidence supporting the amounts and disclosures in the financial statements of each of the three funds; - assessed the accounting principles used and significant estimates made by FDIC management; - evaluated the overall presentation of the financial statements for each of the three funds; - obtained an understanding of the internal control structure related to safeguarding assets, compliance with laws and regulations, including the execution of transactions in accordance with management’s authority, and financial reporting; - tested relevant internal controls over safeguarding, compliance, and financial reporting and evaluated management's assertion about the effectiveness of internal controls; and - tested compliance with selected provisions of the Federal Deposit Insurance Act, as amended; the Chief Financial Officers Act; and the Federal Home Loan Bank Act, as amended. We did not evaluate all internal controls relevant to operating objectives, such as controls relevant to preparing statistical reports and ensuring efficient operations. We limited our internal control testing to those controls necessary to achieve the objectives outlined in our opinion on management's assertion about the effectiveness of internal controls. Because of inherent limitations in any internal control structure, losses, noncompliance, or misstatements may nevertheless occur and not be detected. We also caution that projecting our evaluation to future periods is subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with controls may deteriorate. We conducted our audits from July 6, 1995 through May 2, 1996. Our audits were conducted in accordance with generally accepted government auditing standards. FDIC provided comments on a draft of this report. FDIC's comments are discussed and evaluated in a later section of this report. SIGNIFICANT MATTERS The following section is provided to highlight the condition and outlook of the banking and thrift industries and the insurance funds. In addition, we discuss FDIC's progress in addressing internal control weaknesses identified during our previous audits. Condition of FDIC-Insured Institutions Showed Continued Imnrovement in 1995 During 1995, the banking and thrift industries continued their strong performances.7 Commercial banks reported record profits of $48.8 billion in 1995, marking the fourth consecutive year of record earnings. The main source of earnings in 1995 was higher net interest income. The increase in net interest income was attributable to growth in interest-bearing assets, even though net interest margins declined for a second consecutive year. During 1995, commercial banks’ return on assets was 1.17 percent, the third consecutive year that the industry return on assets has exceeded 1 percent. The strong performance of banks was also reflected in the continued reduction in the number of banks identified as problem institutions. As of December 31, 1995, 144 commercial banks with total assets of $17 billion were identified by FDIC as problem institutions. This represented an improvement over 1994, when 247 commercial banks with total assets of $33 billion were identified as problem institutions. Six commercial banks failed in 1995, the fewest number of failures in any year since 1977. ? The information in this section of the report was obtained from The FDIC Quarterly Banking Profile. Fourth Quarter 1995, compiled by FDIC's Division of Research and Statistics from quarterly financial reports submitted by federally insured depository institutions. Thus, we did not audit this information; however, we believe it is consistent with other audited information. Savings institutions reported record earnings of $7.6 billion in 1995, up from the $6.4 billion earned in 1994. Thrifts experienced an increase in net interest margins in the fourth quarter 1995, the first such increase since 1993. In addition, the thrift industry’s annual return on assets rose to 0.78 percent, the highest since 1962. The industry’s improved performance was also reflected in the reduction in the number of troubled institutions. As of December 31, 1995, regulators identified 49 savings institutions with total assets of $14 billion as problem institutions. This was a significant improvement over 1994, when 71 institutions with total assets of $39 billion were identified as problem institutions. In 1995, only two savings institutions failed. A Significant Premium Rate Differential Between Banks and Thrifts Developed in 1995 The strengthened condition of the banking industry, coupled with the relatively high insurance premiums that banks paid between 1991 and 1995, resulted in an accelerated rebuilding of BIF’s reserves. BIF reached its designated reserve ratio of 1.25 percent of estimated insured deposits in May 1995. Consequently, FDIC’s Board of Directors significantly reduced the risk-based premium rates charged to BIF-insured institutions, and, in September 1995, refunded assessment overpayments from the month following the month BIF recapitalized, or from June 1995 through September 1995, after FDIC confirmed that BIF had achieved its designated reserve ratio. At December 31, 1995, BIF’s ratio of reserves to insured deposits equaled 1.30 percent. Although the thrift industry also experienced significant improvements over the past few years, SAIF has not experienced a similar increase in its ratio of reserves to insured deposits. As of December 31, 1995, SAIF's ratio of reserves to insured deposits equaled 0.47 percent, which is still substantially below its designated reserve ratio of 1.25 percent. SAIFs capitalization has been slowed because its members’ premiums have and continue to be used to pay for certain obligations of the thrift crisis, including interest on 30-year bonds issued by the Financing Corporation (FICO).8 FDIC estimates that, absent the statutory requirement to use premiums for these other obligations, SAIF would have been fully capitalized in 1994. Under current law, FICO has authority to assess SAIF-member savings associations to cover its annual interest expense, which will continue until the 30-year bonds mature in the years 2017 through 2019. In 1995, FICO’s assessment totaled $718 million, or approximately 42 percent of SAIF’s assessment revenue.8 As a result of the annual FICO interest payments, the need to capitalize SAIF to its designated reserve ratio, and a reduction in premium rates for BIF-insured institutions, a significant differential in premium rates charged by BIF and SAIF developed in 1995 and, absent legislative action, will likely remain for many years.1 For example, during 1996, institutions with deposits insured by BIF are 0 paying an average of less than one cent per $100 of assessable deposits for deposit insurance (0.3 cents). In contrast, institutions with deposits insured by SAIF are paying an average of 23.4 cents per $100 of assessable deposits for similar deposit insurance. Thus, a premium differential of about 23 basis points1 1 currently exists. ®FICO was established in 1987 to recapitalize the Federal Savings and Loan Insurance Fund, the former insurance fund for thrifts. FICO was funded mainly through the issuance of public debt offerings which were initially limited to $10.8 billion but were later effectively capped at $8.2 billion by the RTC Refinancing, Restructuring, and Improvement Act of 1991. Neither FICO's bond obligations or the interest on these obligations are obligations of the United States nor are they guaranteed by the United States. 'The annual FICO interest obligation, on average, equals approximately $780 million. Because FICO had available cash reserves in 1995, its draw on SAIF’s assessments was slightly less than the amount needed to fully fund the 1995 interest payments. l0 Denosit. Insurance Funds: Analysis of Insurance Premium Disnaritv Between Banks and Thrifts (GAO/AIMD-95-84, March 3, 1995) and Denosit Insurance Funds: Analysis of Insurance Premium Disnaritv Between Banks and Thrifts (GAO/T-AIMD-95-U1, March 23, 1995). “ One hundred basis points are equivalent to one percentage point. In this context, the 23 basis points would translate into a 23-cent premium differential for every $100 in assessable deposits. The Premium Rate Differential Could Affect Funding for FICO’s Interest Obligation and Future Deposit Insurance Premium Rates Only a portion of SAIF’s assessment base is available to fund the annual FICO interest obligation.1 This portion of SAIF’s assessment base has declined on 2 average 11 percent each year since SAIF’s inception in 1989. At December 31, 1995, only $459 billion of SAIF’s total assessment base of $734 billion, or about 62 percent, was available to fund the annual FICO interest obligation. At SAIF's current premium rates, the portion of SAIF’s assessment base needed to fund FICO cannot decline below $333 billion in order to avoid a default on the FICO interest payments. Absent a legislative solution, the premium rate differential between BIF and SAIF provides incentive for SAIF-member institutions to reduce their SAIF-insured deposits to avoid paying higher premiums. Such reductions would further decrease SAIF’s assessment base and increase the potential for a default on the FICO bond interest obligation. When the same product exists in the market place-in this case, deposit insurance-but at two substantially different prices, market forces can provide a strong incentive to avoid the higher price in favor of the lower. Institutions seeking to avoid higher SAIF premiums could do so in a number of ways: (1) reduce the institution’s total assets, which, in turn, would reduce its need for deposits, (2) obtain funding from sources such as Federal Home Loan Bank advances or repurchase agreements, which are not subject to insurance premiums, (3) accept BIF-insured deposits as agents for BIF-member affiliates, or (4) pay lower interest rates on deposits, which would encourage deposits to migrate from SAIF to BIF by letting BIF-member affiliates draw away business with deposit rates reflecting their lower deposit insurance costs. Federal regulators have already observed that some institutions are beginning to use these strategies to decrease their SAIF-insured deposits and, thus, to avoid the higher SAIF premiums. Recently, one large thrift shifted $2.6 billion in deposits to a BIF affiliate. Currently, about 150 SAIF members, with deposits totaling $165 billion, have BIF-member affiliates or are actively pursuing affiliates. The banking regulators have stated that, under existing law, they have limited ability to stop such deposit migration. As noted above, a continual shrinkage of SAIF’s assessment base could have implications not only for debt servicing of the FICO interest obligation, but also for SAIF and BIF premium rates. If SAIF’s assessment base shrinks to the point that current SAIF premium rates can no longer provide for sufficient revenue to fund the annual FICO interest payments, a default on the FICO interest obligation could result absent an increase in SAIF's premium rates. Increasing premium rates to compensate for the shrinkage in SAIF's assessment base could lead to even further shrinkage as the higher premiums force more institutions to seek relief by reducing their dependence on SAIF-insured deposits. This, in turn, would increase the potential for a default on the FICO interest obligation. Also, if SAIF deposits continue to shrink, the fund will become smaller and less able to diversify risk, as it is likely that the stronger SAIF member institutions will shift their deposits to BIF, leaving the weaker institutions to SAIF. Finally, if deposits migrate from SAIF to BIF, BIF’s reserve ratio could be adversely affected because the transferred deposits do not bring with them any reserves. This could ultimately result in higher future premium rates for BIF members in order for the fund to maintain its designated reserve ratio. 1Thrift deposits acquired by BIF members, referred to as “Oakar” deposits, retain 2 SAIF insurance coverage, and the acquiring institution pays insurance premiums to SAIF for these deposits at SAIF’s premium rates. However, because the institution acquiring these deposits is not a savings association and remains a BIF member as opposed to a SAIF member, the insurance premiums it pays to SAIF, while available to capitalize SAIF, are not available to service the FICO interest obligation. Similarly, premiums paid by SAIF-member savings associations that have converted to bank charters, referred to as “Sasser” institutions, are unavailable to fund the FICO interest obligation since the institutions are banks as opposed to savings associations. On March 19, 1996, the House Committee on Banking and Financial Services held hearings on the condition of SAIF. At these hearings, the FDIC Chairman, the Acting Director of the Office of Thrift Supervision, and the Under Secretary for Domestic Finance of the United States Treasury, urged the Congress to pass comprehensive legislation to provide a solution to the problems associated with capitalizing SAIF, funding FICO, and eliminating the premium rate differential. We have, and continue, to support the need to address the significant risks associated with the premium rate differential.1 3 1995 Actions Address Some Weaknesses Identified in Previous Audits In our 1994 financial statement audit report on the three funds administered by FDIC, we identified reportable conditions which affected FDIC's ability to ensure that internal control objectives were achieved. These weaknesses related to FDIC's internal controls designed to ensure that (1) estimated recoveries for failed institution assets were determined using sound methodologies and were adequately documented, (2) third party entities properly safeguarded assets and reported asset activity to FDIC, and (3) time and attendance reporting procedures were effective. During 1995, FDIC and third party asset servicing entities’ actions addressed, or partially addressed, some of the weaknesses identified in our 1994 audit report. During our 1994 audits, we identified weaknesses in FDIC’s documentation of, and methodology for, estimating recoveries from assets acquired from failed institutions. To address our concerns, FDIC developed historical data to support the formula recovery estimates used for most assets with book values under $250,000. Also, FDIC revised its guidance for estimating recoveries from failed institution assets. The revised guidance provides more comprehensive recovery estimation criteria which take into account the asset’s most probable disposition strategy and contains strict documentation standards to support recovery estimates. However, while the revised procedures provide a sound basis for estimating recoveries for failed institution assets, our 1995 audits found that the revised procedures were not effectively implemented. Our 1994 audits also identified weaknesses in oversight of third party entities contracted to manage and dispose of failed institution assets. During 1995, FDIC and third party servicers acted to address internal control weaknesses over third party servicers’ reporting of asset management and disposition activity and safeguarding of collections. Specifically, the Contractor Accounting Oversight Group (CAOG) and Contractor Oversight and Monitoring Branch (COMB) of FDIC’s Division of Finance and Division of Depositor and Asset Services, respectively, fully implemented the requirements of the Letter of Understanding on Accounting Roles and Responsibilities of CAOG and COMB. This letter outlines specific verification procedures, the timing of those procedures, and the FDIC entity responsible for performing the procedures at the contracted asset servicers. The letter was issued in October 1994, but was not fully implemented until after December 31, 1994. However, we found that during 1995, FDIC verified the accuracy of reported asset activity to supporting documentation and to servicers’ detailed accounting records. Third party servicers also improved daily collection procedures designed to ensure that collections are properly safeguarded and completely and accurately reported. Specifically, one servicer effectively implemented procedures to verify collections received and reconcile collections processed and deposited to daily collections. Another servicer implemented dual controls over daily collections and instituted aggressive procedures for collecting delinquent payments. In addition, another servicer completed its servicing agreement with FDIC. As a result of the actions taken by FDIC regarding verification of servicer activity reports and actions taken by the asset servicers regarding safeguarding of collections, we no longer consider these issues to be a reportable condition as of December 31, 1995. 1Peposit Insurance Funds: Analysis of Insurance Premium Disparity Between 3 Banks and Thrifts (GAO/T-AIMD-95-223, August 2, 1995). While the above actions address some of the internal control deficiencies identified in our prior year’s audits, some long-standing deficiencies remain. During 1995, we continued to find weaknesses in FDIC’s adherence to its time and attendance reporting procedures. Also, we continued to find weaknesses in documentation used to support estimated recoveries from failed institution assets. Finally, while FDIC revised its procedures for estimating recoveries for failed institution assets, we found these procedures were not effectively implemented. Consequently, as discussed below, we still consider these weaknesses to be reportable conditions as of December 31, 1995. REPORTABLE CONDITIONS The following reportable conditions represent significant deficiencies in FDIC's internal controls and should be corrected by FDIC management. 1 Controls to ensure that recovery estimates for assets acquired from failed . financial institutions comply with FDIC’s revised asset recoveiy estimation methodology are not working effectively. Specifically, FDIC’s controls do not ensure that recovery estimates comply with the methodologies specified in FDIC’s Asset Disposition Manual (ADM), or are based on current and complete file documentation. Also, FDIC does not have controls in place to ensure that, in deriving reasonable estimates of recovery for assets in liquidation, the asset recovery estimation process considers the impact of events through the period covered by the three funds’ financial statements. These estimates are used by FDIC to determine the allowance for losses on receivables from resolution activities and investment in corporate-owned assets for the funds. Consequently, these weaknesses resulted in misstatements to BIF's and FRF's 1995 financial statements and could result in future misstatements to each fund’s financial statements if corrective action is not taken by FDIC management. In response to recommendations in our 1994 audit report, in August 1995, FDIC completed the ADM and issued it to Division of Depositor and Asset Services field office staff. This manual contained detailed guidance in asset recovery estimation methodologies and strict requirements for documentation to support such estimates. FDIC’s intent in issuing this manual was to ensure that reasonable estimates of recoveries were available to facilitate the calculation of the December 31, 1995, allowance for losses for the funds administered by FDIC. However, we found that the ADM was not effectively implemented. Specifically, we found that asset recovery estimates were not always consistently supported by, and/or consistent with file documentation or the most probable disposition strategy. Also, we found that asset recovery estimates were not always prepared using the most current information available at the time the estimate was developed. The Asset. Disposition Manual requires supervisory review to verify the accuracy and adequacy of recoveiy estimates. However, we found that the supervisory reviews were generally cursory in nature and frequently did not identify recovery estimates that were not in compliance with the ADM. Consequently, these reviews did not always identify inaccurate or unsupported asset recovery estimates. FDIC uses asset recovery estimates prepared no later than September 30 in calculating the year-end allowance for losses on the receivables from resolution activities and investments in corporate-owned assets reflected in the funds’ financial statements. This creates the potential for significant changes in the estimates of recoveries on the underlying assets in liquidation in the last 3 months of the year to not be fully reflected in the year-end financial statements. In this regard, we found that significant fluctuations in the aggregate estimated recovery value of BIF’s and FRF’s failed institution asset inventory that occurred during the fourth quarter of 1995 were not fully reflected in the year-end allowance for losses on BIF’s and FRF’s receivables from resolution activities and investment in corporate-owned assets. These fluctuations were caused by a number of factors, such as collections on assets, asset dispositions, write-offs, and changes in the circumstances affecting individual assets’ recovery potential. The ADM requires individual asset recovery estimates to be updated within 30 days following any significant event or change in disposition strategy that affects the estimated recovery by 5 percent or more. However, we found that recovery estimates were not always updated to reflect these changes. Also, when such changes were made, they were not used to update the year-end allowance for loss calculation. The lack of consistent adherence to the revised asset valuation methodology, particularly regarding the need for adequate documentation to support such estimates, combined with the lack of an effective process for fully considering the impact of events between the asset valuation date and year-end, resulted in FDIC understating BIF’s and FRF’s allowance for losses on their receivables from resolution activity and investment in corporate-owned assets. This, in turn, contributed to FDIC misstating BIF's fund balance and FRF's accumulated deficit as of December 31, 1995. We selected samples of BIF's and FRF's inventories of failed institution assets. Using the criteria contained in the ADM, we reviewed FDIC's compliance with the ADM at September 30, 1995, and we estimated recoveries for the assets in our samples through the December 31, 1995, financial statement date. Based on our work, we estimate that BIF's fund balance was overstated by about $266 million and FRF's accumulated deficit was understated by about $183 million. However, these amounts were not significant enough to materially misstate the 1995 financial statements.1 4 FDIC is currently making substantial changes to its asset valuation process. The new process is intended to provide for uniformity throughout the organization in estimating amounts to be recovered from failed financial institution assets and will rely heavily on statistical sampling procedures as well as economic and market assumptions. However, it will also rely heavily on available asset documentation in determining the appropriate assumptions to be used to develop recovery estimates. Consequently, in implementing this new asset valuation process, FDIC should ensure that the weaknesses we have identified with respect to the process used during 1995 are fully addressed. 2. FDIC has not strictly enforced adherence to its time and attendance reporting procedures. As in previous audits, our 1995 audits continued to identify deficiencies in adherence to required procedures in preparing time and attendance reports, separation of duties between timekeeping and data entry functions, and reconciliation of payroll reports to time cards. These weaknesses could adversely affect FDIC’s ability to properly allocate expenses among the three funds. In April 1996, FDIC began implementing a new process intended to streamline and improve time and attendance reporting. FDIC officials have indicated that the revised time and attendance process constitutes the initial steps in developing a fully automated system. However, while this revised process may result in some increased efficiencies, the new process, in and of itself, will not correct the deficiencies we identified during the past several years. Further improvements and ultimately a fully automated system may reduce the occurrence of weaknesses such as inadequate reconciliations and lack of separation of duties, but they offer no assurance that existing problems will be fully resolved. Given the longstanding nature of time and attendance reporting deficiencies and the failure of past efforts to fully satisfy our prior audits’ recommendations to correct these deficiencies, it is critical that FDIC management strictly enforce adherence to current and future time and attendance reporting procedures. 3. We identified another weakness related to FDIC's electronic data processing controls during our 1995 audits which, due to its sensitive nature, is being communicated to FDIC management, along with our recommendations for corrective action, through separate correspondence. 1In making this determination, we considered the needs of the users of BIF's and 4 FRF's financial statements. In BIF's case, we considered the Fund balance to be the most significant component to the financial statement users, as the Fund balance reflects BIF's financial health and is a primary consideration in setting premium rates for insured member institutions. In FRF's case, we considered the Accumulated Deficit to be the most significant component to the financial statement users, as it reflects amounts to be funded from appropriations to liquidate the assets and contractual obligations of the defunct FSLIC. In this context, the misstatements we identified through our audits represent one-percent of BIF's $25.5 billion fund balance, and 0.4 percent of FRF's $43.4 billion Accumulated Deficit, respectively, at December 31, 1995. We also noted in FRF's case that the Fund's Resolution Equity at December 31, 1995, is more than sufficient to cover additional losses even were such losses to exceed the level of misstatement we identified in FRF's 1995 financial statements. In addition to the weaknesses discussed above, we noted other less significant matters involving FDIC’s system of internal accounting controls and its operations, which we will be reporting separately to FDIC. RECOMMENDATIONS To address weaknesses identified in this year's audits in the area of estimating recoveries for failed institution assets, we recommend that the Chairman of the Federal Deposit Insurance Corporation direct heads of the Division of Depositor and Asset Services and Division of Finance to - ensure that field office personnel maintain complete and current documentation in asset files to provide a basis for assumptions used to derive asset recovery estimates and that the assumptions used are appropriately documented, - ensure that supervisory reviews of asset recovery estimates are performed thoroughly and include a review of asset file documentation to identify and correct inaccurate or unsupported estimates, and - establish and enforce procedures to ensure that recovery estimates are updated for information made available between the valuation date and the year-end financial statement reporting date. CORPORATION COMMENTS AND 01JR EVALUATION In commenting on a draft of this report, FDIC acknowledged that further improvements could be made to resolve weaknesses in its asset valuation process and is initiating a new process for estimating asset recoveries. FDIC expects this process to be in place for the 1996 annual financial statements. FDIC believes that this new process will address concerns regarding asset valuation methodology, documentation, management review, and timing differences. We will review FDIC's new asset valuation process as part of our 1996 financial audits. FDIC also stated that it reviewed the assets sampled by us in our audits. FDIC noted that its own review found instances of noncompliance by FDIC personnel with the revised Asset Disposition Manual guidelines for estimating asset recoveries. FDIC stated that its review also found numerous instances in which GAO and FDIC were in complete or substantial agreement. FDIC concluded from its review that the revised asset recovery methodology was generally understood and that its staff, in general, properly prepared asset recovery estimates. FDIC also stated that it believes its asset recovery estimates, in the aggregate, are reasonable. FDIC said that asset valuations often cannot be determined with precision, and that various reasonableness tests performed by FDIC staff support the position that both FDIC's asset recovery estimates as reflected in BIF's and FRF's 1995 financial statements and our estimates of the aggregate recovery value of the assets are reasonable. Thus, FDIC believes that there is no basis for asserting that either set of estimates is more accurate than the other. We agree that estimating potential recoveries on failed institution assets is subject to some degree of uncertainty. It is this inherent uncertainty in the estimation process that makes strict adherence to a sound methodology critical to ensuring that reasonable estimates are derived for use in preparing the financial statements. Our estimates are based on a strict application of FDIC's revised methodology and include the impact on asset recovery potential of events through the financial statement reporting date. While certain analytical procedures, as applied by FDIC, may help to provide additional comfort as to the reasonableness of FDIC's official estimation process, they are not a substitute for a systematic, reasonable, and verifiable methodology. As we discuss in this report, FDIC took significant steps during 1995 to address the deficiencies in its asset valuation methodology that we identified in previous audits. However, the level of compliance with the revised methodology was significantly deficient. We found that in over 41 percent of the assets we sampled, FDIC field office personnel did not comply with the revised methodology. This level of noncompliance coupled with the impact on asset recovery estimates of events subsequent to FDIC's valuation date but up to the financial statement reporting date resulted in differences in recovery estimates in about 89 percent of the assets we reviewed. FDIC's own review of the assets we sampled confirmed our audit findings. As we noted in this report, we believe the resulting level of misstatements were not significant enough to materially misstate BIF's and FRF's 1995 financial statements. However, they do illustrate the impact that weaknesses in controls over the asset valuation process can have on the financial statements. FDIC also commented on initatives it has underway to address the deficiencies we identified in its time and attendance reporting and audit processes. FDIC believes these initiatives will facilitate the timely identification and correction of time and attendance related issues. In addition, FDIC noted that it is studying its current expense allocation and recovery methodologies and, as part of this undertaking, is developing methods that will reduce reliance on time and attendance reporting in determining expense allocations to funds and receiverships. FDIC noted that it is currently addressing weaknesses we identified in its electronic data processing controls. FDIC also discussed other management initiatives it has underway to improve its operational effectiveness, including enhancements to its contracting oversight and a more corporatewide monitoring of internal control issues. FDIC noted that it has also established an audit committee to review the adequacy of the Corporation's internal controls and compliance with laws and regulations, and to review internal and external audit recommendations. Charles A. Bowsher Comptroller General of the United States May 2, 1996 Num ber and Deposits of BIF-lnsured Banks Closed Because of Financial Difficulties, 1934 through 19951 (D ollars in Thousands) Number of Insured Banks Without With disbursements disbursements by FDIC Total by FDIC Year Total 2,075 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976 1975 1974 1973 1972 1971 1970 1969 1968 1967 1966 1965 1964 1963 1962 1961 1960 1959 1958 1957 1956 1955 1954 1953 1952 1951 1950 1949 1948 1947 1946 1945 1944 1943 1942 1941 1940 1939 1938 1937 1936 1935 1934 6 13 41 120 124 168 206 200 184 138 120 79 48 42 10 10 10 7 6 16 13 4 6 1 6 7 9 3 4 7 5 7 2 1 5 1 3 4 2 2 5 2 4 3 2 4 5 3 5 1 1 2 5 20 15 43 60 74 77 69 26 9 19 1 10 1 1 2 1 2 1 Deposits of Insured Banks Without disbursements Total 2,056 $212,535,703 6 12 41 110 124 168 206 200 184 138 120 79 48 42 10 10 10 7 6 16 13 4 6 1 6 7 9 3 4 7 5 7 2 0 5 1 3 4 1 2 5 2 2 3 2 4 4 3 5 1 1 2 5 20 15 43 60 74 75 69 25 9 632,700 1,236,488 3,132,177 41,150,898 53,751,763 14,473,300 24,090,551 24,931,302 6,281,500 6,471,100 8,059,441 2,883,162 5,441,608 9,908,379 3,826,022 216,300 110,696 854,154 205,208 864,859 339,574 1,575,832 971,296 20,480 132,058 54,806 40,134 22,524 10,878 103,523 43,861 23,438 23,444 3,011 8,936 6,930 2,593 8,240 11,247 11,330 11,953 998 44,711 3,170 3,408 5,513 6,665 10,674 7,040 347 5,695 1,915 12,525 19,185 29,717 142,430 157,772 59,684 33,677 27,508 13,405 1,968 With disbursements by FDIC $4,298,814 $208,236,889 $252,378,929 632,700 1,236,488 3,132,177 36,893,231 53,751,763 14,473,300 24,090,551 24,931,302 6,281,500 6,471,100 8,059,441 2,883,162 5,441,608 9,908,379 3,826,022 216,300 110,696 854,154 205,208 864,859 339,574 1,575,832 971,296 20,480 132,058 54,806 40,134 22,524 10,878 103,523 43,861 23,438 23,444 0 8,936 6,930 2,593 8,240 1,163 11,330 11,953 998 18,262 3,170 3,408 5,513 5,475 10,674 7,040 347 5,695 1,915 12,525 19,185 29,717 142,430 157,772 59,684 33,349 27,508 13,320 1,968 753,024 1,392,140 3,539,373 44,197,009 63,119,870 15,660,800 29,168,596 35,697,789 6,850,700 6,991,600 8,741,268 3,276,411 7,026,923 11,632,415 4,859,060 236,164 132,988 994,035 232,612 1,039,293 419,950 3,822,596 1,309,675 22,054 196,520 62,147 43,572 25,154 11,993 120,647 58,750 25,849 26,179 N/A 9,820 7,506 2,858 8,905 1,253 12,914 11,985 1,138 18,811 2,388 3,050 4,005 4,886 10,360 6,798 351 6,392 2,098 14,058 22,254 34,804 161,898 181,514 69,513 40,370 31,941 17,242 2,661 4,257,667 3,011 10,084 26,449 1,190 328 85 ' Does not include institutions insured by the Savings Association Insurance Fund (SAIF), which was established by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. Assets by FDIC R ecoveries and L osses by th e B ank In su ran ce Fund on D isb ursem en ts fo r the P rotection o f D epositors, 1934 thro u gh 1995 (Dollars in T h o u sa n d s) ALL CASES1 Year No. of banks Disburse ments Recoveries Deposit payoff cases2 Estimated Additional Recoveries Estimated Losses Year No. of banks Disburse ments Recoveries Estimated Additional Recoveries Estimated Losses Total 2,127 5104,293,099 $62,471,283 54,955,024 $36,866,852 Total 602 $14,463,350 $8,544,410 $1,386,592 1995 6 717,799 342,039 271,347 104,413 1995 0 0 0 0 0 1994 13 1,268,533 602,391 457,849 208,293 1994 0 0 0 0 0 $4,532,348 1993 41 1,767,530 1,032,190 80,824 654,516 1993 5 271,452 165,259 4,257 101,936 1992 122 12,868,562 8,645,986 515,209 3,707,367 1992 24 1,786,457 999,875 279,511 507,071 1991 127 20,638,267 14,083,129 518,492 6,036,646 1991 21 1,468,407 667,688 314,661 486,058 1990 169 10,813,381 7,588,763 335,437 2,889,181 1990 20 2,182,583 1,150,882 293,309 738,392 1989 207 11,445,033 4,712,930 517,216 6,214,947 1989 32 2,116,556 889,604 413,169 813,783 1988 221 12,183,656 4,292,578 1,024,832 6,866,246 1988 36 1,252,160 804,053 17,269 430,838 1987 203 5,037,871 2,976,052 34,258 2,027,561 1987 51 2,103,792 1,371,012 26,455 706,325 1986 145 4,717,669 2,980,561 9,317 1,727,791 1986 40 1,155,981 732,810 5,824 417,347 1985 120 2,920,886 1,701,751 211,568 1,007,567 1985 29 523,789 407,408 3,589 112,792 1984 80 7,696,215 5,506,306 I 554,730 1,635,179 1984 16 791,838 670,935 28,548 92,355 1983 48 3,768,020 2,240,432 102,630 1,424,958 1983 9 148,423 122,484 0 25,939 1982 42 2,275,150 829,794 276,417 1,168,939 1982 7 277,240 205,879 0 71,361 1981 10 888,999 69,326 37,895 781,778 1981 2 35,736 34,598 0 1,138 1980 11 152,355 114,760 7,003 30,592 1980 3 13,732 11,515 0 2,217 562 5,133,173 4,752,295 0 380,878 307 335,204 310,408 0 24,796 1934-79 3 1934-79 3 Deposit assumption cases Year No. of banks Disburse ments Recoveries Assistance transactions1 Estimated Additional Recoveries Estimated Losses Year No. of banks Disburse ments Recoveries Estimated Additional Recoveries Estimated Losses Total 1,444 $79,010,316 $49,192,315 $2,669,180 $27,148,821 Total 81 $10,819,433 $4,734,558 $899,252 1995 6 717,799 342,039 271,347 104,413 0 0 0 0 0 1994 13 1,268,533 602,391 457,849 208,293 1995 1994 0 0 0 0 0 1993 36 1,496,078 866,931 76,567 552,580 1993 0 0 0 0 0 1992 96 11,081,031 7,645,911 235,233 3,199,887 1992 2 1,074 200 465 409 1991 103 19,164,135 13,414,895 201,763 5,547,477 1991 3 5,725 546 2,068 3,111 1990 148 8,628,265 6,437,799 42,034 2,148,432 1990 1 2,533 82 94 2.357 1989 174 9,326,075 3,823,266 103,963 5,398,846 1989 1 2,402 60 84 2,318 1988 164 9,180,495 3,334,299 1,005,285 4,840,911 1988 21 1,751,001 154,226 2,278 1,594,497 1987 133 2,773,202 1,604,327 7,803 1,161,072 1987 19 160,877 713 0 160,164 1986 98 3,402,840 2,186,319 3,493 1,213,028 1986 7 158,848 61,432 0 97,416 1985 87 1,631,365 990,262 105,384 535,719 1985 4 765,732 304,081 102,595 359,056 1,111,299 $5,185,683 1984 62 1,373,198 940,375 1,298 431,525 1984 2 5,531,179 3,894,996 524,884 1983 36 3,533,179 2,099,741 98,488 1,334,950 1983 3 86,418 18,207 4,142 64,069 1982 25 418,321 325,165 13,775 79,381 1982 10 1,579,589 298,750 262,642 1,018,197 1981 5 79,208 33,463 37,895 7,850 1981 3 774,055 1,265 0 772,790 1980 7 138,623 103,245 7,003 28,375 1980 1 N/A N/A N/A N/A 251 4,797,969 4,441,887 0 356,082 1934-79 3 4 0 0 0 0 1934-79 3 1 Totals do not include dollar amounts for five open bank assistance transactions between 1971 and 1980. Excludes eight transactions prior to 1962 that required no disbursements. 2 Includes insured deposit transfer cases. 3 For detail of years 1934 through 1979, refer to Table C of the 1994 Annual Report. In co m e and Expenses, Bank In su ran ce Fund, by Year, from B eginning o f O p eratio n s, S ep tem b er 11, 1933, through D ecem b er 31, 1995 (Dollars in Millions) In c o m e Year Total Assessment Income Total 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976 1975 1974 1973 1972 1971 1970 1969 1968 1967 1966 1965 1964 1963 1962 1961 1960 1959 1958 1957 1956 1955 1954 1953 1952 1951 1950 1949 1948 1947 1946 1945 1944 1943 1942 1941 1940 " 1939 1938 1937 1936 1935 1933-34 $72,717.7 4,089.1 6,467.0 6,430.8 6,301.5 5.789.9 3,838.3 3,494.6 3,347.7 3,319.4 3,260.1 3,385.4 3,099.5 2,628.1 2,524.6 2,074.7 1,310 4 1,090.4 952.1 837.8 764.9 689.3 668.1 561.0 467.0 415.3 382.7 335.8 295.0 263.0 241.0 214.6 197.1 181.9 161.1 147.3 144.6 136.5 126.8 117.3 111.9 105.8 99.7 94.2 88.6 83.5 84.8 151.1 145.6 157.5 130.7 121.0 99.3 86.6 69.1 62 0 55.9 51.2 47.7 48.2 43.8 20 8 7.0 $53,015.3 2,906.9 5,590.6 5,784.3 5,587.8 5.160.5 2,855.3 1,885.0 1,773.0 1,696.0 1,516.9 1,4334 1,321.5 1,214.9 1,108.9 1,039.0 951.9 881.0 810.1 731.3 676.1 641.3 587.4 529.4 468.8 417.2 369.3 364.2 334.5 303.1 284.3 260.5 238.2 220.6 203.4 188.9 180.4 178.2 166.8 159.3 155.5 151.5 144.2 138.7 131.0 124.3 122 9 122.7 119.3 114.4 107.0 93.7 80.9 70.0 56 5 51.4 46.2 40.7 38 3 38.8 35.6 11.5 0.0 Investment Assessment and Other Credits Sources $6,709.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 164.0 96.2 117.1 521.1 524.6 443.1 411.9 379.6 362.4 285.4 283.4 280.3 241.4 210.0 220.2 202.1 182.4 172.6 158.3 145.2 136.4 126.9 115.5 100.8 99.6 93.0 90.2 87.3 85.4 81 8 78.5 73.7 70.0 68.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 $26,411.5 1,182.2 876.4 646.5 713.7 629.4 983.0 1,609.6 1,574.7 1,623.4 1,743.2 1,952.0 1,778.0 1,577.2 1,511.9 1,152.8 879.6 734.0 585.1 518.4 468.4 410.4 366.1 315.0 278.5 239.5 223.4 191.8 162.6 142.3 129.3 112.4 104.1 97.7 84.6 73.9 65.0 57 9 53.0 48.2 43.7 39.7 37.3 34.0 31.3 29.2 30.6 28.4 26.3 43.1 23 7 27.3 18.4 16.6 12.6 10.6 9.7 10.5 9.4 9.4 8.2 9.3 7.0 Effective Assessment Rate1 0.1240% 0.2360% 0.2440% 0.2300% 02125% 0.1200% 0.0833% 0.0833% 0.0833% 0.0833% 0.0833% 0.0800% 0.0714% 0.0769% 0.0714% 0.0370% 0.0333% 0.0385% 0.0370% 0.0370% 0.0357% 0.0435% 0.0385% 0.0333% 0.0345% 0.0357% 0.0333% 0.0333% 0.0333% 0 0323% 0.0323% 0.0323% 0.0313% 0.0313% 0.0323% 0.0370% 0.0370% 0.0370% 0.0357% 0.0370% 0.0370% 0.0357% 0.0357% 0.0370% 0.0370% 0.0370% 0.0833% 0.0833% 0.0833% 0.0833% 0.0833% 0.0833% 0.0833% 0.0833% 0.0833% 0.0833% 0.0833% 0.0833% 0.0833% 0.0833% 0.0833% N/A Total $47,264.0 483.2 (2,259.1) (6,791.4) (625.8) 16,862.3 13,003.3 4,346.2 7,588.4 3,270.9 2,963.7 1,957.9 1,999.2 969.9 999.8 848.1 83.6 93.7 148.9 113.6 212.3 97.5 159.2 108.2 59.7 60.3 46.0 34.5 29.1 27.3 19.9 22.9 18.4 15.1 13.8 14.8 12.5 12.1 11.6 9.7 9.4 9.0 7.8 7.3 7.8 6.6 7.8 6.4 7.0 9.9 10.0 9.4 9.3 9.8 10.1 10.1 12.9 16.4 11.3 12.2 10.9 11.3 10.0 E x p e n s e s a n d L o sses Deposit Insurance Administrative Losses and and Operating Expenses Expenses $42,021.8 12 6 (2,682.3) (7.179.9) (1,196.6) 16,578.2 12,783.7 4,132.3 7,364.5 3,066.0 2,783.4 1,778.7 1,848.0 834.2 869.9 720.9 (34.6) (13.1) 45.6 24.3 31.9 29.8 100.0 53.8 10.1 13.4 3.8 1.0 0.1 2.9 0.1 5.2 2.9 0.7 0.1 1.6 0.1 0.2 0.0 0.1 0.3 0.3 0.1 0.1 0.8 0.0 1.4 0.3 0.7 0.1 0.1 0.1 0.1 0.2 0.5 0.6 3.5 7.2 2.5 3.7 2.6 2.8 0.2 $5,242.2 470.6 423.2 388.5 570.8 284.1 219.6 213.9 2239 204.9 180.3 179.2 151.2 135.7 129.9 127.2 118.2 106.8 103.3 89 3 180.4 67.7 59.2 54.4 49.6 46.9 42.2 33.5 29.0 24.4 19.8 17.7 15.5 14.4 13.7 13.2 12 4 11.9 11.6 9.6 9.1 8.7 7.7 7.2 7.0 6.6 6.4 6.1 6.3 9.8 9.9 9.3 9.2 9.6 9.6 9.5 9.4 9.2 8.8 8.5 8.3 8.5 9.8 Net Income/ (Loss) $25,453.7 3,605.9 8,726.1 13,222.2 6,927.3 (11,072.4) (9,165.0) (851.6) (4,240.7) 48.5 296.4 1,427 5 1,100.3 1,658.2 1,524.8 1,226.6 1,226 8 996.7 803.2 7242 552.6 591.8 508.9 452.8 407.3 355.0 336.7 301.3 265.9 235 7 221.1 191.7 178.7 166.8 147.3 132.5 132.1 1244 115.2 107.6 102.5 96.8 91.9 86.9 80.8 76 9 77.0 144.7 138 6 147.6 120.7 111.6 90.0 76.8 59.0 51.9 43.0 34.8 36.4 36.0 32.9 9.5 (3.0) ' The effective rates from 1950 through 1984 vary from the statutory rate of 0.0833 percent due to assessment credits provided in those years. The statutory rate increased to 0.12 percent in 1990 and to a minimum of 0.15 percent in 1991. The effective rates in 1991 and 1992 vary because the FDIC exercised new authority to increase assessments above the statutory rate when needed. Beginning in 1993, the effective rate is based on a risk-related premium system under which institutions pay assessments in the range of 0.23 percent to 0.31 percent. In May 1995, the BIF reached the mandatory recapitalization level of 1.25%. As a result, the assessment rate was reduced to 4.4 cents per $100 of insured deposits and assessment premiums totaling $1.5 billion were refunded in September. Insured Deposits and the Bank Insurance Fund, December 31, 1934, through 1995 (D o lla rs in M illio n s ) Insurance Year' Coverage 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976 1975 1974 1973 1972 1971 1970 1969 1968 1967 1966 1965 1964 1963 1962 1961 1960 1959 1958 1957 1956 1955 1954 1953 1952 1951 1950 1949 1948 1947 1946 1945 1944 1943 1942 1941 1940 1939 1938 1937 1936 1935 19343 $100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 40,000 40,000 40,000 40,000 40,000 40,000 20,000 20,000 20,000 20,000 20,000 15,000 15,000 15,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 Deposits in Insured Banks Total $2,576,581 2,463,813 2,493,636 2,512,278 2,520,074 2,540,930 2,465,922 2,330,768 2,201,549 2,167,596 1,974,512 1,806,520 1,690,576 1,544,697 1,409,322 1,324,463 1,226,943 1,145,835 1,050,435 941,923 875,985 833,277 766,509 697,480 610,685 545,198 495,858 491,513 448,709 401,096 377,400 348,981 313,304 297,548 281,304 260,495 247,589 242,445 225,507 219,393 212,226 203,195 193,466 188,142 178,540 167,818 156,786 153,454 154,096 148,458 157,174 134,662 111,650 89,869 71,209 65,288 57,485 50,791 48,228 50,281 45,125 40,060 Insured1 $1,952,543 1,896,060 1,906,885 1,945,623 1,957,722 1,929,612 1,873,837 1,750,259 1,658,802 1,634,302 1,503,393 1,389,874 1,268,332 1,134,221 988,898 948,717 808,555 760,706 692,533 628,263 569,101 520,309 465,600 419,756 374,568 349,581 313,085 296,701 261,149 234,150 209,690 191,787 177,381 170,210 160,309 149,684 142,131 137,698 127,055 121,008 116,380 110,973 105,610 101,841 96,713 91,359 76,589 75,320 76,254 73,759 67,021 56,398 48,440 32,837 28,249 26,638 24,650 23,121 22,557 22,330 20,158 18,075 Insurance Fund as a Percentage of Percentage of Deposit Insurance Total Insured Insured Deposits Fund Deposits Deposits 75.8 77.0 76.5 77.4 77.7 75.9 76.0 75.1 75.3 75.4 761 76.9 75.0 73.4 70.2 71.6 659 66.4 65.9 66.7 65.0 62 5 60.7 60.2 61.3 64.1 63.1 60.2 58.2 58.4 55.6 55.0 56.6 57.2 57.0 57.5 57.4 56.8 56.3 55.2 54.8 54.6 54.6 54.1 54.2 54.4 48 8 49.1 49.5 49.7 42.4 41.9 43.4 36 5 39.7 40.8 42.9 45.5 46.8 44.4 44.7 45.1 $25,453.7 21,847.8 13,121.6 (100.6) (7,027.9) 4,044 5 13,209.5 14,061.1 18,301.8 18,253.3 17,956.9 16,529.4 15.429.1 13,770.9 12,246.1 11,019.5 9,792.7 8,796.0 7,992.8 7,268.8 6,716.0 6,124.2 5,615.3 5,158.7 4,739.9 4,379.6 4,051.1 3,749.2 3,485.5 3,252.0 3,036.3 2,844.7 2,667.9 2,502.0 2.353 8 2,222.2 2,089.8 1,965.4 1,850.5 1,742.1 1,639.6 1,542.7 1,450.7 1,363.5 1,282.2 1,243.9 1,203.9 1,065.9 1,006.1 1,058.5 929.2 804.3 703.1 616.9 553.5 496.0 452.7 420.5 383 1 343 4 306.0 291.7 0.99 0.89 0.53 (0.00) (0.28) 0.16 0.54 0.60 0.83 0.84 0.91 0.92 0.91 0.89 0.87 0.83 0.80 0.77 0.76 0.77 0.77 0.73 0.73 0.74 0.78 0.80 0.82 0.76 0.78 0.81 0.80 0 82 0.85 0.84 0.84 0.85 0.84 0.81 0.82 0.79 0.77 0.76 0.75 0.72 0.72 0.74 0 77 0.69 0.65 0.71 0.59 0.60 0.63 0.69 0.78 0.76 0.79 0.83 0.79 0.68 0.68 0.73 1.30 1.15 0.69 (001) (0.36) 021 0.70 0.80 1.10 1.12 1.19 1.19 1.22 1.21 1 24 1.16 1.21 1.16 1.15 1.16 1.18 1.18 1.21 1.23 1.27 1.25 1.29 1.26 1.33 1.39 1.45 1.48 1.50 1.47 1.47 1.48 1.47 1 43 1.46 1.44 1.41 1.39 1 37 1.34 1.33 1.36 1.57 1.42 1.32 1.44 1.39 1.43 1.45 1.88 1.96 1.86 1.84 1.82 1.70 1 54 1.52 1.61 1Starting in 1990, deposits in insured banks exclude those deposits held by Bank Insurance Fund members that are covered by the Savings Association Insurance Fund. 1 Insured deposits are estimated based on deposit information submitted in the December 31 Call Reports (quarterly Reports of Condition and Income) and Thrift Financial Reports submitted by insured institutions. Before 1991, insured deposits were estimated using percentages determined from the June 30 Call Reports. 3 Initial coverage was $2,500 from January 1 to June 30, 1934. BIF- Insured Banks Closed During 1995 (Dollars in Thousands) Number of Deposit Accounts Bank Class Name and Location Total Assets Total Deposits FDIC Disburse ments Estimated Loss1 Receiver/ Assuming Bank and Location Date of Closing or Acquisition Purchase and Assumption - Insured DeD O S its Onlv Guardian Bank Los Angeles, CA SM 4,700 $277,013 $193,600 $262,693 $27,574 01/20/95 Imperial Bank Los Angeles, CA First Trust Bank Ontario, CA NM 26,200 217,814 197,200 211,410 23,007 03/03/95 First Interstate Bank of California Los Angeles, CA Los Angeles Thrift and Loan Company Los Angeles, CA NM 451 21,449 21,900 21,327 5,932 03/31/95 California Federal Bank, FSB Los Angeles, CA Bank USA, N.A. Kihei, HI N 1,000 9,361 8,900 9,165 1,600 05/19/95 Hawaii National Bank Honolulu, HI Founders Bank New Haven, CT NM 5,000 76,279 72,700 74,595 9,000 07/28/95 Centerbank Waterbury, CT Pacific Heritage Bank Los Angeles, CA NM 10,300 151,108 138,400 138,609 37,300 07/28/95 California Federal Bank, FSB Los Angeles, CA Codes for Bank Class: SM NM N State-chartered bank that is a member of the Federal Reserve System. State-chartered bank that is not a member of the Federal Reserve System. National bank. 1 Estimated losses are as of 12/31/95. Estimated losses are routinely adjusted with updated information from new appraisals and asset sales, which ultimately affect the asset values and projected recoveries. Income and Expenses, Savings Association Insurance Fund, by Year, from Beginning of Operations, August 9,1989, through December 31,1995 (Dollars in Thousands) In c o m e E x p e n s e s an d L osses Investment Assessment Year Effective and Other Assessment Income Sources Rate Total Total $3,572,007 1995 1994 Administrative Provision Funding Transfer for Interest and Operating from the FSLIC Total Losses Expenses Expenses Resolution Fund Net Income/ $353,658 $114,700 $604 $238,354 $139,498 $3,357,847 1,421,132 (Loss) $3,283,625 $288,382 1,139,916 970,027 169,889 0.234% (281,216) (321,000) 0 39,784 0 1,215,289 1,132,102 83,187 0.244% 434,303 414,000 0 20,303 0 780,986 1993 923,516 897,692 25,824 0.250% 46,814 16,531 0 30,283 0 876,702 1992 178,643 172,079 6,564 0.230% 28,982 (14,945) 35,446 185,107 96,446 93,530 2,916 0.230% 63,085 20,114 (5) 609 43,932 1991 42,362 42,362 75,723 1990 18,195 18,195 0 0.208% 56,088 0 0 56,088 56,088 18,195 1989 2 0 2 0.208% 5,602 0 0 5,602 5,602 2 Insured D ep osits and the S a v in g s A sso cia tio n In suran ce Fund, D ecem b er 3 1 , 1989, through 19 9 5 (D o lla rs in M illio n s ) Insurance Deposits in Insured Institutions Year1 Coverage Total Insured2 Insurance Fund as a Percentage of Percentage of Deposit Insurance Total Insured Insured Deposits Fund Deposits Deposits 1995 $100,000 $742,467 $711,017 95.8 $3,357.8 0.45 0.47 1994 100,000 720,823 692,626 96.1 1,936.7 0.27 0.28 1993 100,000 726,473 695,158 95.7 1,155.7 0.16 0.17 1992 100,000 760,902 729,458 95.9 279.0 0.04 0.04 1991 100,000 810,664 776,351 95.8 93.9 0.01 0.01 1990 100,000 874,738 830,028 94.9 18.2 0.00 1989 100,000 948,144 882,920 93.1 0.0 0.00 0.00 0.00 1 Starting in 1990, deposits in insured institutions exclude those deposits held by Savings Association Insurance Fund members that are covered by the Bank Insurance Fund. 2 Insured deposits are estimated based on deposit information submitted in the December 31 Call Reports (quarterly Reports of Condition and Income) and Thrift Financial Reports submitted by insured institutions. Before 1991, insured deposits were estimated using percentages determined from the June 30 Call Reports. Sources of Information For a listing o f Regional Offices that also are sources o f information, see Pages 116 and 117. Public Inform ation Center Office o f the Ombudsman 801 17th Street, NW Washington, DC 20434 550 17th Street, NW Washington, DC 20429 Phone: 202-416-6940 Phone: 800-250-9286 or 202-942-3500 Fax: 202-416-2076 Fax: 202-942-3040 or 202-942-3041 Internet: publicinfo@fdic.gov Internet: ombudsman@fdic.gov A variety o f FDIC publications, press releases, speeches and Congressional testimony, direc tives to financial institutions and other documents is available through the Public Information Center. These documents include the Quarterly Banking Profile, Statistics on Banking and a variety o f consumer pamphlets. The Office o f the Ombudsman answers general questions and responds to concerns about FDIC operations. Home Page on the Internet World W ide Web: http://www.fdic.gov The FDIC’s “gopher” address: gopher.fdic.gov Division o f Compliance and Consumer Affairs 550 17th Street, N W Washington, DC 20429 Phone: 800-934-3342 or 202-942-3100 Fax: 202-942-3429 or 202-942-3427 Internet: consumer@fdic.gov The Division o f Compliance and Consumer Affairs responds to questions about deposit insur ance and other consumer issues and concerns, and also offers a number o f publications geared to consumers. A w ide range o f banking and financial information, including the FD IC ’s Quarterly Banking Profile and Statistics on Banking, is available on the FD IC’s Home Page on the Internet. Readers can also access FDIC press releases, recently delivered speeches, and other updates on FDIC activities. 115 Regional Offices 116 Division of Supervision (DOS) / Division of Compliance and Consumer A ffa irs (DCA) Atlanta Dallas New York 1201 West Peachtree Street, NE 1910 Pacific Avenue Suite 1900 Dallas, Texas 75201 214-220-3342 452 Fifth Avenue Suite 1600 Atlanta, Georgia 30309 404-817-1300 Alabama Florida Georgia North Carolina South Carolina Virginia W est Virginia Colorado New Mexico Oklahoma Texas 19th Floor N ew York, N ew York 10018 212-704-1200 Delaware District of Columbia Maryland New Jersey Boston Kansas City San Francisco 200 Lowder Brook Drive 2345 Grand Avenue Suite 1500 Kansas City, Missouri 64108 816-234-8000 25 Ecker Street Iowa Kansas Minnesota Missouri Alaska Arizona California Guam Hawaii Idaho New York Pennsylvania Puerto Rico Virgin Islands Suite 3100 Westwood, Massachusetts 02090 617-320-1600 Connecticut Maine Massachusetts New Hampshire Rhode Island Vermont Nebraska North Dakota South Dakota Chicago 5100 Poplar Avenue Suite 1900 Memphis, Tennessee 38137 312-382-7500 Montana Nevada Oregon Utah Washington W yoming Mem phis 500 West M onroe Street Suite 3600 Chicago, Illinois 60661 Suite 2300 San Francisco, California 94105 415-546-0160 901-685-1603 Illinois Indiana Michigan Ohio Wisconsin Arkansas Kentucky Louisiana Mississippi Tennessee DOS: Examines and superv ises state-chartered banks that are not members of the Federal Reserve System. Provides information about sound banking practices. DCA: Examines FDIC-supervised banks for compliance with consumer protection laws. Informs bankers and the public about deposil insurance and other consumer protections. 117 Division of Depositor and Asset Services (DAS) / Office of the Ombudsman (00) Northeast Service C enter Southeast Service C enter Southwest Service C enter 101 East River Drive 1201 West Peachtree Street, NE 5080 Spectrum Drive East Hartford, Connecticut 06108 860-291-4000 (DAS) Suite 1800 Atlanta, Georgia 30309 404-817-2500 (DAS) 404-817 8990/800 765 5512 ( 0 0 ) Suite 1000E Dallas, Texas 75248 214-991-0059 (DAS) Alabama Delaware District of Columbia Florida Georgia Kentucky Maryland 1910 Pacific Avenue Suite 1404 860-291-4500/800-875-7785 ( 0 0 ) Connecticut Maine Massachusetts New Hampshire New Jersey New York Pennsylvania Puerto Rico Rhode Island Vermont Virgin Islands Mississippi North Carolina South Carolina Tennessee Virginia W est Virginia Midwest Service C enter New Mexico Oklahoma Texas Four Park Plaza Suite 3200 Chicago, Illinois 60661 Arkansas Colorado Louisiana W estern Service C enter 500 West Monroe Dallas, Texas 75201 214-754 6 1 00/800 568 9161(00) Irvine, California 92614 714-263-7100 (DAS) 714-263-7600/800-756-3558(00) 312-382-6000 (DAS) 312 - 382-5700/800-944-5343 ( 0 0 ) Illinois Indiana Iowa Kansas Michigan Minnesota Missouri Nebraska North Dakota Ohio South Dakota Wisconsin Alaska Arizona California Hawaii Idaho Guam Montana Nevada Oregon Utah Washington Wyoming DAS: Makes payments to a closed institution’s depositors and creditors, and performs other duties related to failed institutions. Answers questions about buying assets or tiling claims. 0 0 : A neutral, independent advocate of fairness in FDIC policies and programs. Responds to questions or concerns from the public, the banking industry and FDIC employees. Major Speeches and Testimony by Chairman Heifer Text o f these and other statements are available from the Public Information Center listed on Page 115. 118 Speeches Congressional Testimony February 14__________ 1 _______ February 28_________________ May 2________________________ To the Independent Bankers Association o f America, on the health o f the banking industry, projections for the Bank Insurance Fund (B IF ), and an FDIC proposal to lower BIF premiums. Before the House Committee on Banking and Financial Services, on legislation that would repeal Glass-Steagall Act restrictions on the securities activities o f comm ercial banks. March 15 March 8_____________________ Before the Senate Committee on Banking, Housing and Urban Affairs’ Subcommittee on Financial Institutions and Regulatory Relief, on the FD IC’s efforts to reduce regulatory burdens and provisions o f regulatory reform legislation that the FDIC supports. To the Exchequer Club, on the need for solutions for the Savings Association Insurance Fund (SAIF) and the possible migration o f SAIF-insured deposits to the BIF. Before the House Committee on Banking and Financial Services’ Subcommittee on Financial Institutions and Consumer Credit, on the FD IC’s support for an interagency proposal to improve enforcement o f the Community Reinvestment Act. October 10_________________ To the American Bankers Association, on the FD IC’s drive to boost efficiency, cut costs, reduce staff and retool the Corporation for the future. October 51___________________ To Am erica’s Community Bankers, on steps by the FDIC to adapt to changes in the financial services industry, including efforts to improve cost-efficiencies and reduce regulatory burdens. March 25 Before the House Committee on Banking and Financial Services’ Subcommittee on Financial Institutions and Consumer Credit, on the condition o f the BIF and SAIF. Jill} 28________________ Before the Senate Committee on Banking, Housing and Urban Affairs, on problems facing the SAIF and FDIC recommendations to solve those problems. Index 119 F A Administration, Division o f 31 Affordable Housing Program 24 Appeals Process Applications Processing: FDIC Applications, 1993-95 Assessments (see Deposit Insurance Premiums) 20 Asset Disposition 19 Failed Institutions: Failed Banks by State, 1994-95 Federal Deposit Insurance Corporation: Board o f Directors Financial Statements Highlights B Organization Chart/Officials Bank Insurance Fund (B IF): Financial Statements Regional Offices Sources o f Information 2,6 Fund Balance, 1991-95 Highlights Problem Institutions, 1991-95 5 10,11 7 Reserve Ratios, 1991-95 Risk-Related Premiums 23 25 Liquidation Highlights (also see Statistical Tables) 24,25 45-61 6 23 -26,29-30 Fiechter, Jonathan L. First City Bancorporation FSLIC Resolution Fund (FRF): Financial Statements 12-13 45-91 4-5 14 116-117 115 13 29 7-8,25-26 77-91 18 G (also see Statistical Tables) Budget 31-32 General Accounting Office (GAO) 93-104 H C Commercial Banks (Financial Performance): Annual Return on Assets, 1934-95 Community Reinvestment Act (C R A) Congressional Testimony Consumer Protection Activities Criminal Referrals Cross-Guaranty Transactions 9-10 9 27, 37, 39 118 27-28 25,31 29, 30 D Heifer, Ricki Hove, Andrew (Skip) C., Jr. 2-3,12,17,31 13 I Insurance, Division o f Internet Interstate Banking 3,17 20,28,115 19 L Daiwa Bank and Trust Company 22 Deposit Insurance Premiums 2,6 -7,8, 38,39 Depositor Protection 23 Director and Officer Liability (see Professional Liability Recoveries) 29 D’Oench Duhme Doolin Security Savings Bank, FSB 30 Legislation Enacted in 1995 Litigation Ludwig, Eugene A. 42 29-30 13 M Enforcement Actions: Compliance, Enforcement and Other Legal Actions, 1993-95 Examinations: FDIC Examinations, 1993-95 22 21 3,17-18,20-22 17 29 M eritor Savings Bank E Meriden Trust 30 120 N S (continued) Neely, Joseph H. 13,21,31 O Ombudsman, Office o f the Statistical Tables: Number and Deposits o f Banks Closed, 1934-95 Recoveries and Losses by the BIF on Disbursements to Protect Depositors, 1934-95 Income and Expenses, BIF, 1933-95 Insured Deposits and the BIF, 1934-95 20,115 P Policy Development, Office of 31 Problem Institutions Professional Liability Recoveries 10,11 25 107 108 109 110 R BIF-Insured Banks Closed During 1995 111 Regulations Adopted and Proposed Income and Expenses, SAIF, 1989-95 111 37-41 Regulatory R elief Reorganization Resolution Trust Corporation (RTC ) Risk Assessment 3,21-22 31 8,23,24,26,33 2.,3,17-20 S Insured Deposits and the SAIF, 1989-95 Strategic Plan Supervision 111 2-3,31 2--3,17-22 T Savings Association Insurance Fund (SAIF): Financial Statements 2,7 63-76 6 5 10,11 7 18 Fund Balance Highlights Problem Institutions, 1991-95 Reserve Ratios Risk-Related Premiums (also see Statistical Tables) Saving Institutions (Financial Performance) : 10,11 9 Annual Return on Assets, 1947-95 Speeches 118 Staffing: 2,31-33 Num ber o f FDIC Officials and Employees, 1994-95 32 Truth in Lending 27,42 Published by: T h e O ffice o f C orporate Com m unications R ob ert M. Garsson, Jr. Director___________________ Elizabeth R. Ford Assistant Director_________ Jay Roscnstein Senior Writer-Editor______ David Barr Associate Editor___________ M a rjorie C. Bradshaw Sally J. Kearney Contributing Editors FDIC Annual Report 1995 Design, Production and Printing by: Th e D ivision o f Adm inistration Design Unit GeofTrey L. Wade Coordinator Sam C ollicchio Art Director/Designer Design and Production o f the Financial Statements by: Th e D ivision o f Finance Financial Statements Section Scott D. M iller Senior Financial Management Analyst Federal Deposit Insurance Corporation 550 17th Street, N W W ashington, DC 20429-9990