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'f 'lV * » * * i '.■fii2 \1S ir'Jm30 J5 « r Federal Deposit Insurance Corporation a ? A M i" ’ - - 0 U o r t % U L f c The Federal Deposit Insurance Mission Corporation (FDIC) is the independent deposit insurance agency created by Congress in 1933 to m a in ta in s ta b ility and public confidence in the nation's banking system . The FDIC contributes to s ta b ility and public confidence in the nation's finan cial system by insuring deposits, exam ining and super vising financial institutions, and managing receiverships. In its unique role as deposit insurer of banks and savings associations, and in cooperation w ith the other state and federal regulatory agencies, th e FDIC prom otes the safety and soundness of insured depository institutions and the U.S. financial system by identifying, m onitoring and addressing risks to the deposit insurance funds. The FDIC prom otes public understanding and sound public policies by providing finan cial and econom ic inform ation and analyses. It m inimizes disruptive effects from the fa ilu re of banks and savings associations. It assures fairness in th e sale of finan cial products and the provision of finan cial services. The FDIC's long and continuing tra d itio n of public service is supported and sustained by a highly skilled and diverse w orkforce th at responds rapidly and successfully to changes in the finan cial environm ent. Vision The FDIC is an org an iza tio n dedicated to id e n tify in g , analyzing and addressing existing and emerging risks in order to promote s ta b ility and public confidence in the na tio n’s financial system. The FDIC has identified seven core values that guide corporate operations. The values reflect the ideals th a t th e FDIC expects all o f its em ployees to strive fo r as they accom plish the tasks needed to fu lfill the mission. 1 Financial Stewardship The FDIC is com m itted to being a responsible fiducia ry in its e ffo rts to provide insured in stitu tio n s the best value fo r th e ir contribu tions to th e insurance funds. 2 Effectiveness The FDIC's reputation rests on its profession alism, its adherence to th e highest ethical standards, and its skilled and dedicated w orkforce. 3 Responsiveness The FDIC strives to respond rapidly, innovatively and effectively to risks to th e financial system. It w orks effectively w ith other federal and state supervisors to achieve consistency in policy and regulation. It seeks and considers inform ation from the Congress, the financial in stitution industry, individuals seeking and receiving financial services, and others outside the FDIC in the developm ent of policy. The FDIC seeks to m inim ize regulatory burden w h ile fu lfillin g its statutory responsibilities. 4 Teamwork The FDIC promotes and reinforces a corporate perspective and challenges its em ployees to w ork cooperatively across internal and external organizational boundaries. 5 Fairness The FDIC strives to tre a t everyone fa irly and equitably. It exercises its responsibilities w ith care and im partiality, promotes a w ork environm ent th a t is free of discrim ination and values diversity, and adheres to equal opportunity standards. 6 Service The FDIC's long and c ontinu ing tra d itio n o f public service is supported and sustained by a highly skilled and diverse w orkforce th a t responds rapidly and successfully to change. 7 Integrity The FDIC strives to perform its w o rk w ith th e highest sense of integrity, requiring the agency to be, am ong other things, honest and fair. The FDIC can accom m odate the honest difference o f opinion; it cannot accom m odate the com prom ise o f principle. Integrity is measured in term s of w h a t is rig ht and ju st, standards to w hich the FDIC is com m itted. FDIC Federal Deposit Insurance Corporation 550 17th St. NW Washington DC, 20429 Office of the Chairman March 31, 2003 Sirs, In accordance with: • the provisions o f section 17(a) o f the Federal Deposit Insurance Act, • the C hief Financial Officers Act o f 1990, Public Law 101-576, and • the Government Performance and Results Act o f 1993, the Federal Deposit Insurance Corporation is pleased to submit its 2002 Annual Report. 1. Powell Chairman The President of the United States The President of the United States Senate The Speaker of the United States House of Representatives ■ M M M Message from the Chairman Message from the Chief Financial O fficer I. M anagement’s Discussion and Analysis 4 8 10 Operations of the Corporation - The Year in Review insurance Supervision Receivership M anagem ent Operating M ore Efficiently 10 10 13 16 17 Financial Highlights Deposit Insurance Fund Performance Corporate Budgeting Capital Investm ent Review C om m ittee 19 19 21 21 II. Performance Results Summary of 2002 Performance Results by Program 2002 Budget and Expenditures by Program Program Performance Results Multi-Year Performance Trend Program Evaluation III. Financial Statements and Notes Bank Insurance Fund (BIF) Savings Association Insurance Fund (SAIF) FSLIC Resolution Fund (FRF) GAO's A udit Opinion Managem ent's Response Overview of the Industry IV. Management Controls Material W eaknesses High Vulnerability Issues M atters fo r Continued Monitoring Internal Controls and Risk M anagem ent Program V. Appendixes 22 22 24 25 30 38 40 40 60 80 98 104 105 106 107 107 108 109 110 A. Key Statistics 110 B. M ore A bout the FDIC 122 C. O ffice o f Inspector General's M anagem ent and Performance Challenges Facing the FDIC 129 Index 131 M essage from the Chairman I am pleased to present the Federal Deposit Insurance Corporation's (FDIC) 2002 Annual Report. It was a productive year at the FDIC. W e m et all of our major statutory responsibilities, conducting over 2,500 safety and soundness examina tions and over 1,800 compliance examinations of FDIC-supervised institutions and resolving the failure o f 11 FDIC-insured institutions. In addition, w e made substantial progress tow ard our goal of strengthening the Corporation and positioning it to carry out its responsibilities m ore efficiently and effectively in the future. I w ould like to highlight ju st a fe w of our m ost significant accom plishm ents during 2002: • W e moved deposit insurance reform from a concept to Capitol Hill. The House of Representatives overw helm ingly passed deposit insurance reform legislation in 2002, and w e are looking forw ard to passing deposit insurance reform out of the House and Senate before the end o f 2003. • W e im plem ented a ne w streamlined organizational structure that is based on our three major lines of business - insurance, supervision, and receivership management - and substantially reduced the num ber of management and support positions w ithin the Corporation. In conjunction w ith these changes, w e put in place a new management team com m itted to transforming corporate operations for the future, and w e delegated increased authority and responsi bility to low er organizational levels in order to m ove decision-making closer to the bankers and other stakeholders w ith w hom w e work. • W e largely com pleted the staffing reductions that w ere required to bring the size o f our w orkforce into line w ith the decline in our workload resulting from institutional consolidation w ithin the banking industry, and the com pletion of residual w o rk from the banking and th rift crises of the late 1980s and early 1990s. This ongoing e ffo rt w ill continue to be a priority at the FDIC as w e seek to be m ore efficient and better stew ards o f the insurance funds. The centerpiece of this e ffo rt was a highly successful buyout program in w hich approximately 700 employees accepted buyout packages that w ere targeted to elim inate em ployee surpluses and address skills imbalances. • W e continued to shift our use of resources to pay even greater attention to the institutions that represent the greatest potential risk to the insurance funds. Two new major programs w ere initiated in 2002 to address this concern: • Dedicated Examiner Program W e, w ith th e cooperation of our fe llo w regulators, have assigned "d e d ica te d " examiners to each of the eight largest insured banking institutions to monitor their operations and provide more tim ely information about emerging risks. Our examiners w ill w ork closely w ith their counter parts at the federal financial regulatory agencies that are the primary supervisors of those institutions and provide real-time access to information on those institutions. • MERIT Program The new Maximum Efficiency, Risk-Focused, Institution-Targeted (MERIT) Guidelines Program provides fo r the use of risk-focused examination procedures at FDIC-supervised institutions w ith assets o f less than $250 million that are well-managed, well-capitalized and m eet other program criteria. The program ensures that our resources are focused on those institutions that pose the greatest risk to the insurance funds, w hile preserving the integrity o f the examination process. W e expanded our "M o n e y Sm art" program through alliances w ith over 300 national and regional organizations and have recently focused on m easurem ent of the results of these programs. M oney Smart is a financial education program developed to address grow ing national concern over the proliferation o f predatory lending practices, and to help bring people w ith little or no banking experience into the financial mainstream. W e expanded our efforts to dissem inate inform ation, stim ulate discussion, and address the risks facing the financial services industry by hosting three symposia on some of the m ost important issues now facing the banking industry. These symposia brought together som e of the best minds in the business to discuss financial transparency and disclosure, risk management, deposit insurance pricing, and other factors affecting the econom ic landscape fo r banks and the insurance funds. W e also launched an electronic news bulletin called FYI to provide insured institutions and other interested parties high-quality analysis of emerging risks and other issues of concern to the banking industry. W e continued to be vigilant concerning the adequacy of corporate governance. As such, w e initiated various measures designed to m itigate the risk of increased public concern regarding accounting practices and oversight and the adequacy of corporate governance, w hich in part, prom pted passage of the Sarbanes-Oxley A ct of 2002. W e are reviewing board activities, ethics policies and practices o f the banks the FDIC supervises and auditor independ ence requirements. In early 2003, w e issued guidance to institutions about the Sarbanes-Oxley Act, including the actions the FDIC encourages institutions to take to ensure sound corporate governance. W e established an Advisory C om m ittee on Banking Policy that w ill give us the benefit of some of the m ost talented and experienced people in governm ent, business and banking as w e attem pt to reshape the FDIC fo r the future. W e w ill build on this solid record of accom plishm ents in 2003. W e w ill continue to fulfill our stew ardship responsibilities to the insurance funds through an effective supervisory program that prom ptly identifies and addresses emerging risks and a receivership management program that minimizes, to the extent possible, the cost o f insured institution failures. W e w ill continue to disseminate high-quality inform ation and analysis on major issues and to provide leadership fo r the adoption of appropriate policy and regulatory changes. And, w e w ill continue to strive to contain our operational costs and to improve our operational efficiency and effectiveness. It has been an honor to serve as Chairman o f the FDIC during this past year. As a form er banker, I know how im portant the FDIC's w o rk is to the stability of our economy and to the peace of mind of depositors w ho rely on the promise represented by the FDIC seal displayed at insured institutions all across the country. W e at the FDIC w ill continue to do everything possible to give the financial institutions the best value fo r their contributions to the deposit insurance funds, to diligently play our part in ensuring economic stability through good stew ard ship of those funds and forward-thinking policy solutions, and to remain a symbol of confidence upon w hich American consum ers can depend. Sincerely, Donald E. Powell I am pleased to report that, fo r the eleventh consecutive year, the FDIC has received unqualified "clean" opinions from the U.S. General Accounting O ffice (GAO) on audits of its 2002 financial statements for the Bank Insurance Fund (BIF), Savings A ssociation Insurance Fund (SAIF), and Federal Savings and Loan Insurance Corporation Resolution Fund (FRF). These clean opinions a ttest to the fact that our financial statements are fairly presented and dem onstrate discipline and accountability in the execution of our responsibilities as ste w a rd s o f these funds. The Corporation's investm ent strategy reflects prudent m anagem ent of the $32.1 billion BIF and $11.7 billion SAIF. It is notew orthy that the interest earned on investm ent securities last year accounted fo r 94.2 percent of revenues fo r the BIF and 95.8 percent of revenues for the SAIF, w ith $2.26 billion in combined interest earned. A nother notew orthy result in 2002 w as the large accumulation o f unrealized gains on Available for Sale (AFS) securities, particularly in the BIF. For 2002, the BIF accumulated unrealized gains of $566 million, and the SAIF accum ulated unrealized gains of $192 million. In part, th e large balances of unrealized gains helped to maintain the reserve ratios o f the funds above the Designated Reserve Ratio (DRR), w hich benefited the industry by avoiding insurance assessm ent prem ium payments. These tw o factors combined - strong earnings on the investm ent portfolio and unrealized gains - helped to boost the BIF by $1.6 billion, the largest calendar year increase since 1995. Several initiatives focused on reengineering business processes to improve cost m easurem ent and containment. The FDIC budget w as restructured to reflect an ongoing operations com ponent, a receivership operations com ponent, and an investm ent com ponent to help better manage expenses. As a result o f aggres sive e fforts to stream line corporate operations during 2002, the 2003 budget includes estim ated spending of $1.1 billion, w hich is seven percent low er than 2002 spending. The FDIC also established new and more rigorous procedures fo r reviewing proposed capital investm ents. The centerpiece o f this new process is the Capital Investm ent Review C om m ittee (CIRC), w hich w ill be responsible fo r reviewing all major proposed inform ation technology and other investm ent initiatives before they are funded. The CIRC w ill carefully assess the projected return on investment of each proposed project, and ensure that there is a sound business case fo r each project. The Corporation initiated w o rk on tw o major investm ent projects during 2002: • In March, the Board of Directors unanimously approved the expansion of our Seidman Center office com plex in Northern Virginia. The expanded facility w ill house an additional 1,100 employees w h o are now w orking in leased space in do w ntow n W ashington, DC. W e expect to break ground fo r the expanded facility in 2003, w ith com pletion scheduled fo r 2006. This expansion w ill reduce future facility costs by an estim ated $78 million (net present value) over the next 20 years. • During the fourth quarter, w e began developm ent o f an integrated financial system , scheduled to be implem ented in July 2004. This "N e w Financial Environm ent" w ill improve business processes by adopting the best business practices built into softw are packages, sim plify and consolidate financial system s and data, and enhance the Corporation's ability to address its future financial m anagem ent and inform ation needs. It w ill also substantially reduce the costs o f financial m anagem ent and reporting. The FDIC continues to focus on inform ation technology challenges. During 2002, w e conducted a self assessment, w ith an emphasis on inform ation security, to evaluate our progress in addressing prior audit findings. The FDIC inform ation security program w ill continue to be strengthened in 2003 to ensure that key management tools are in place to support the Corporation's mission and strategic goals. The FDIC has evaluated its risk m anagem ent and internal control system s in accordance w ith the reporting requirem ents of the Federal Managers' Financial Integrity A ct of 1982 (FMFIA) and GAO internal control standards. Based on these assessments, I can provide you w ith reasonable assurance that the Corporation's risk management and internal control system s, taken as a whole, are in conformance w ith the standards prescribed by GAO and that the objectives of FMFIA have been achieved. Finally, this year's Annual Report has been redesigned to help streamline our reporting process by combining the Chief Financial O fficers A ct Report, the Program Performance Report, and the traditional Annual Report. The performance results contained in this combined report summarize our success in achieving the goals w e established fo r 2002. Our priority is to provide timely, reliable and useful data to our stakeholders. To that end, the FDIC w ill continue to employ sound financial m anagem ent techniques and emphasize the importance of a strong risk management and internal control program to m eet its statutory, regulatory and fiduciary responsibilities. Sincerely, O perations o f the C o rp o ratio n The Year in Review In 2002, the FDIC continued to posi tion itself to m eet the demands of an evolving banking industry - one that is being reshaped by institution al consolidation, globalization and technology. The Corporation assumed a major leadership role on significant econom ic and policy issues, pursuing the enactm ent of deposit insurance reform legislation and sponsoring several symposia for regulators, policymakers and others on other im portant public policy issues. It also directed increased attention to new and emerging risks in the banking system , focusing more resources on larger institutions and those identified as posing a higher potential risk to the deposit insurance funds. The FDIC im ple mented a streamlined organizational and m anagem ent structure and appointed a new management team to lead it into the future. Highlights of the Corporation's 2002 accom plishm ents in each of its three major business lines are presented below. Insurance________________________ The FDIC insures bank and savings association deposits to help ensure the stability of the financial system and the public's confidence in the U.S. banking system . As insurer, the FDIC continually evaluates how changes in the economy, the finan cial markets and the banking system affect the adequacy and the viability of the deposit insurance funds. The FDIC's effo rts in 2002 focused on deposit insurance reform, other activities to prom ote sound public policies, expanded examination activities and dedicated examiner program, new international capital standards, and resolving failed institutions. Deposit Insurance Reform The FDIC gave priority attention to enactm ent of com prehensive deposit insurance reform legislation in 2002. Legislation containing major elem ents of the FDIC deposit insur ance reform proposals developed over the past three years was introduced both in the House of Representatives and the Senate. On April 23, the FDIC's Chairman testified before the Senate Banking C om m ittee on the FDIC's proposals fo r deposit insurance reform . The FDIC's recommendations, w hich w ere summarized in the testim ony, include: • Merging the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). • Granting the FDIC's Board of Directors the flexibility to manage the combined deposit insurance fund. Under the present system , statutorily mandated m ethods of managing the size of the BIF and SAIF may cause large prem ium sw ings and could force the FDIC to charge the highest prem ium s during d ifficult econom ic tim es when the industry can least afford it. Currently, safer institutions subsidize riskier institutions unnecessarily w hile new entrants and grow ing institutions avoid paying prem ium s. To correct these problems, the FDIC recom mended th a t Congress give the Board of Directors the discretion to: • • Manage the combined fund w ithin a range. • Price deposit insurance accord ing to risk at all tim es and for all insured institutions. • Grant a one-tim e initial assess m ent credit to recognize institutions' past contributions to the fund and create an ongoing system of assessment credits and rebates to prevent the fund from growing too large. Indexing deposit insurance cover age to ensure that basic account coverage is not eroded over tim e by inflation and increasing the current level of deposit insurance coverage fo r retirem ent accounts. The House passed H.R. 3717, the Federal Deposit Insurance Reform A ct of 2002, on May 22 by a vote of 408 to 18. Although the Senate did not pass either H.R. 3717 or a similar Senate bill, S. 1945, the Safe and Fair Deposit Insurance A ct of 2002, during the 107th Congress, the Corporation successfully addressed many key issues surrounding deposit insurance reform, establishing a sound base for future passage o f legislation. Enactment o f deposit insurance reform w ill remain a priority of the FDIC during the 108th Congress. The FDIC w ill continue to examine in greater detail how to im plem ent risk-based pricing for deposit insurance and m ethods that could be used to create objective measurem ents of an insured deposi tory institution's risk. Since im plem entation of pending deposit insurance reform legislation w as not enacted, developm ent of a final pricing recom mendation and im plem entation plan fo r inclusion in a notice and com m ent rulemaking during 2002 w as put on hold. The FDIC continues to refine these options and explore other possibilities fo r using objective measures to price deposit insurance premiums. O ther Activities to Promote Sound Public Policies In addition to its leadership on deposit insurance reform, the Corporation sponsored three policy symposia and hosted various conferences and w orkshops during 2002 on major issues o f concern to the banking industry and regulators. In June, the FDIC held a sym posium on "Enhancing Financial Transparency" that attracted Congressional members and staff, bankers, academics, regulatory policy makers, financial analysts and the media. In July, the FDIC and Credit Suisse First Boston co-sponsored a sym posium on the "Rise of Risk Management: Basel and Beyond." A t that meeting, top g overnm ent o fficials and leading experts fro m Wall S treet, the business sector, the accounting profession and academia discussed the importance of appropriate risk management policies and procedures. In September, the FDIC co-sponsored w ith the Journal o f Financial Services Research a sym posium on pricing the risks of deposit insurance. Leading scholars and researchers examined the latest developm ents in credit risk modeling and related risk m easurem ent m ethods and their im plications fo r deposit insurance pricing. The FDIC also hosted eco nom ic roundtables on the econom ic o utlook and the risks of deflation and the U.S. housing m arket and consum er sector. The FDIC also began publication in early 2002 of an electronic news bulletin called FYI, w ith over 5,000 subscribers by year-end. FYI sum m a rizes emerging issues in banking, finance and the economy. The form at is designed to complement the FDIC's in-depth reports and publications. FYI also serves as a vehicle fo r releasing analytical w ork as it becomes available. In addition, a quarterly communication entitled L e tte r to the Stakeholders has been released fo r FDIC-insured in stitu tio n s, em ployees, and other stakeholders and highlights the FDIC's current initiatives and key perform ance indicators. In February, Chairman Powell established a ne w FDIC Advisory C om m ittee on Banking Policy to provide advice and recom menda tions to the FDIC on a w ide range of issues relating to the Corporation's mission and activities, and examine how the FDIC can improve its effec tiveness and address larger issues facing the financial services sector. The com m ittee is composed of 12 members representing a cross-section of distinguished leaders from academia, econom ics, financial services, private industry, public affairs and the public interest com m unity. The co m m itte e convened fo r th e firs t tim e on November 13 in W ashington, DC. Expanded Special Examination Activities and Dedicated Examiner Program In 2002, the FDIC focused increased examination resources on larger institutions and problem institutions w here the risks to the funds are / / greatest, w hile streamlining exami nations fo r those posing less risk. One key com ponent of this shift was an expansion o f special examination activities in non-FDIC supervised institutions. On January 29, the FDIC Board of Directors adopted an agreem ent w ith the O ffice of T hrift Supervision, the O ffice of the Com ptroller of the Currency, and the Board of Governors of the Federal Reserve System that enables the FDIC to examine insured depository institutions (IDIs) that represent a heightened risk to the deposit insurance funds. The Federal Deposit Insurance A ct provides that the FDIC Board can authorize special examinations of any insured depository institution w henever such an examination is necessary fo r insurance purposes. The FDIC has long considered it a top priority to examine all insured banks and thrifts as needed to assess their financial condition and degree of risk to the insurance funds. This new agreem ent establishes an improved process fo r determ ining w hen the FDIC w ill use its authority to examine any insured institution and provides fo r enhanced coordination and coop eration of the agencies' supervisory efforts. These measures w ill ensure that the FDIC w ill be able to fulfill its responsibilities to p ro te ct the deposit insurance funds in the m ost efficient and least burdensome manner possible. 12 The agreem ent provides that the FDIC may conduct special examina tions of any IDI that: • Has a "3 ," " 4 " or " 5 " CAMELS composite rating (for the adequacy of capital, the quality of assets, the capability of management, the quality and level of earnings, the adequacy of liquidity, and the sensitivity to market risk), or • Is undercapitalized as defined under the Prompt Corrective Action provisions of Section 38 of the Federal Deposit Insurance Act. Under the interagency agreement, the FDIC may seek to participate in examinations or meetings w ith sen ior bank management of institutions that exhibit material deteriorating conditions or other adverse develop m ents regardless of their current rating at the invitation of, or w ith o u t the objection of, the primary federal regulator. The interagency agreem ent also provides for the FDIC's establishment o f a dedicated examiner program fo r the eight largest banking organi zations. Because of their size and m arket share, these eight "large insured depository institutions" (LIDIs) expose the deposit insurance funds to substantial risk. Assets controlled by these eight institutions represent approximately 41 percent of industry assets. A similar level of concentra tion also exists on the deposit side approximately nine percent of all dom estic deposits are held by one LIDI. The FDIC is not the primary regulator fo r the eight LIDIs. However, the FDIC's eight dedicated examiners, selected in A ugust 2002, serve as the FDIC's primary points of contact for the oversight of these institutions. Pursuant to the agreem ent, to the fullest extent possible, the FDIC w ill continue to rely on results of the w o rk perform ed by the primary federal bank supervisors in assessing the condition and risk-managem ent practices of individual institutions. The dedicated examiners are provided access to supervisory personnel and supervisory inform ation, including risk assessments, supervisory plans, reports of examination and other docum ents related to these eight banks, and are invited to participate in certain examination activities. The dedicated examiner program allows the FDIC firs t hand, tim ely access to inform ation needed to stay fully abreast of the risks in these institutions and to quickly recognize w hen ne w risks emerge. To assist the FDIC in quickly identify ing and prioritizing areas of risk both to groups of banks and to specific institutions, a Risk Analysis Center (RAC) w ill be established in 2003 to serve as a central clearinghouse for vital bank risk inform ation. The RAC w ill place special emphasis on the tim ely analysis of inform ation gener ated by the dedicated examiner program. N e w International Capital Standards Internationally, the FDIC continues to participate in a num ber of global supervisory groups, including th e Basel C o m m itte e on Banking Supervision. The FDIC actively participated in th e C o m m itte e's efforts to update and revise the 1988 Basel Capital Accord to make the capital standards of internationally active banks m ore com prehensive, risk-sensitive, and reflective of advances in banks' risk m easure m e n t and m anagem ent practices, w h ile continuing to ensure these banks maintain adequate capital reserves. The FDIC invested resources on several fronts to ensure that the new Accord, w hen final, w ill be compatible w ith the agency's roles as both insurer and supervisor o f banking organizations. The FDIC was w ell represented on several com m ittees, task forces and groups that published docum ents for industry review during 2002. These included: "Q uantitative Impact Study 3 ," w hich is serving as a comprehensive field te s t of the proposals for revising the 1988 Accord, and the "Second W orking Paper on the Treatment of Asset Securitizations," w hich introduces more risk-sensitive approaches for addressing many of the emerging risks in the rapidly growing securiti zation market. Resolving Failed Institutions During 2002, the FDIC resolved 11 financial in stitu tio n failures. These failed institutions had a total of $2.6 billion in assets and $2.2 bil lion in deposits. By the next business day after each failure, the FDIC had issued payout checks to insured depositors, or depositors had access to deposits determined to be insured. (See the accompanying table for details about liquidation activities.) Liq u id atio n H ig h lig h ts 2 0 0 0 -2 0 0 2 Dollars W ' ■- in b i l l i o n s 2002 10 Total Failed Banks Assets of Failed Banks $ 2.5 $ .05 1 Total Failed Savings Associations “ Assets of Failed Savings Associations Net Collections from Assets in Liquidation* $ 1.84 “Total Assets in Liquidation' S 1.24 Net Collections from Assets Not in Liquidation* $ Total Assets Not in Liquidation* $ 1.24 .02 2001 3 $ .05 2000 6 S 1 i-M $ $ $ $ $ 2.18 .31 .57 .08 1.52 $ $ $ $ $ .38 1 .03 60 .54 16 2.80 •A ls o includes assets from thrifts resolved by the form er Federal Savings and Loan Insurance Corporation and the Resolution Trust Corporation. Sup<ervision Supervision and consum er protection are the cornerstones of the FDIC’s efforts to ensure the stability of and public confidence in the nation's financial system . As of year-end, the Corporation supervised 5,348 FDIC-insured state-chartered com mercial banks that are not mem bers of the Federal Reserve System (referred to as "sta te nonm em ber banks"). Through safety and sound ness and consum er compliance examinations of these FDIC-supervised institutions, the FDIC assesses their m anagem ent practices and policies as w ell as their compliance w ith applicable laws and regulations. The FDIC also educates bankers and consumers on m atters of interest to bank custom ers, and addresses consum ers’ questions and concerns. S afety and Soundness Exam inations During 2002, the FDIC conducted 2,534 statutorily required safety and soundness examinations. An on-site safety and soundness examination was not conducted fo r fo u r institu tions because specific circumstances regarding the institutions indicated an exception should be made. A total of 1,806 examinations w ere conducted in 2002 by state authori ties under the alternating examina tion program, and an additional 78 examinations w ere conducted w ith FDIC's assistance. Thirty-six institutions w ere due fo r an exam ination by state authorities, and five institutions had mergers pending at year-end. The remaining 31 institu tions have exam inations scheduled during the first and second quarters o f 2003. 13 ■■Ml FDIC E xam in ation s 2 0 0 0 - 2 0 0 2 Safety and Soundness: Ij; State Nonmember Banks Savings Banks National Banks State Member Banks f Savings Associations Subtotal 1 Compliance/Comm unity Reinvestment Act Trust Departments Data Processing Facilities _ 2001 2000 2,290 229 10 5 0 2,534 1,820 524 1,681 2,300 241 16 2,232 235 17 2 0 2,486 2,257 533 1,585 q 0 2,566 2,180 466 1,625 ;? ............... , ................................. .......... ................................................................ Total The num ber o f FDIC-supervised institutions identified as "p ro b le m " institutions w ith a composite "4 " or " 5 " CAMELS rating increased from 67 at year-end 2001 to 84 at year-end 2002. During 2002, 48 institutions w ere removed from problem status due to com posite rating upgrades, mergers, consolidations, or sales, and 63 institutions w ere added to the problem bank list. The FDIC is required to conduct follow -up exam inations of all designated problem in stitu tio n s w ith in 12 months of their last examination. As of December 31, 2002, all followup exam inations fo r problem in stitu tio n s had been perform ed on schedule. Stream lining Examinations for Financially Sound Institutions W hile directing increased resources to large and high-risk institutions and to the international front, the FDIC also im plem ented measures to improve efficiency by maximizing the use o f risk-focused examination procedures at small well-managed banks in sound financial condition. 14 2002 6,559 6,837 6,861 Specifically, in May 2002, the FDIC im plem ented a new program to stream line safety and soundness examinations of certain financially sound banks. The program, known as "M E R IT " - fo r "m axim um efficiency, risk-focused, institutiontargeted examinations" - streamlines examinations fo r FDIC-supervised institutions w ith a supervisory rating of "1 " or "2 ," that have $250 million or less in total assets and that are well-managed, and m eet other program criteria w hile maintaining the quality and integrity of the examination. By year-end, the pro gram had achieved more than a 20 percent reduction in examination hours for all eligible " 1 " and " 2 " rated FDIC-supervised institutions w ith under $250 million in assets. Reducing Regulatory Burden The FDIC also continued efforts to explore options for reducing regulatory burden on the financial services industry. Based on input from the banking industry and the public, an interdivisional working group devel oped and began im plem enting short- and long-term strategies to reduce regulatory burden. These strategies include seeking accelerated compliance w ith the regulation review requirem ents pursuant to the Econom ic G rowth Recovery and Paperwork Reduction Act, improving com m unication of FDIC regulations and policies to financial institutions, and creating a new FDIC Regulatory Burden W eb page to solicit industry input, and com m unicate initiatives in this area. M inority Depository Institutions The FDIC has historically taken steps to preserve and encourage m inority ow n e rsh ip o f insured financial institutions. On April 9, 2002, the FDIC Board adopted a new policy state m ent related to m inority depository institutions. The new policy state m ent reflects changes in certain regulations and expands th e FDIC's M in o rity D epository In stitu tion s Program. Enhancem ents to the program include increased com m u nication w ith m inority depository institutions, b e tte r coordination w ith trade associations that repre sent m inority depository institutions, better defined roles fo r a national program coordinator and regional coordinators, and m ore opportunities fo r institutions to request technical assistance. Compliance Examination Program The FDIC takes seriously its statutory responsibilities to enforce consum er protection laws and regulations. It adm inisters a compliance examina tion program to help ensure that consumers are able to make informed choices about credit transactions and deposit accounts and to help ensure equal access to the credit markets. The FDIC's compliance examination program covers nearly 20 different federal statutes and regulations rang ing from traditional disclosure laws (such as the Truth in Lending Act) to fair lending statutes (such as the Equal Credit Opportunity and Fair Housing Acts) to the Com m unity Reinvestm ent A ct (CRA), w hich encourages insured depository institutions to help m eet com m unity credit needs. The FDIC has also added the privacy and insurance consum er protection provisions of the Gramm-Leach-Bliley A ct of 1999 to its compliance examination program. Compliance examinations are con ducted on an established schedule by specially trained personnel. The interval betw een compliance exami nations is typically tw o to three years fo r banks w ith strong compliance records. Banks w ith weak compliance performance are typically examined on an annual or shorter cycle. The FDIC uses the full extent of its enforcem ent authority, as appropri ate, to address instances of noncom pliance. Further, the FDIC m eets its statutory responsibilities under the Equal Credit Opportunity A ct to refer patterns or practices of credit discrimination to the Departm ent of Justice. The FDIC conducted 1,820 compliance and CRA examinations in 2002, compared to 2,180 in 2001. Ten FDIC-supervised institutions due fo r an examination in 2002 w ere deferred, nine due to mergers or charter changes, and one to allow coordination w ith a scheduled safety and soundness examination. Nine institutions w ere assigned a com posite " 4 " rating fo r compliance as of year-end 2002. None w ere assigned a com posite " 5 " rating. Eight of the nine "A " rated institutions have entered into a Memorandum of Understanding (MOU) w ith the FDIC to correct compliance issues, and the ninth is currently reviewing a draft MOU, w hich is expected to be final ized in early 2003. (For more details, see the FDIC Examinations table on page 14.) Financial Literacy One of the FDIC's m ost important consum er protection goals is to prom ote financial education to those outside o f the financial mainstream. The "M o n e y S m art" program, unveiled in 2001, is primarily designed to help adults w ith little or no bank ing experience develop positive relationships w ith insured depository institutions. By year-end 2002, the FDIC had supplied more than 32,000 copies o f the M oney Smart training curriculum to various groups. A p proxim ately 40 percent o f the requests fo r M oney Sm art w e re from financial institutions and credit unions. The remainder w ere largely from educational service organiza tions, such as com m unity colleges and adult education centers; com m u nity organizations; state and local governm ent agencies; em ploym ent service organizations; and faith-based groups. Over 1,000 representatives of com m unity organizations, government agencies and financial institutions have attended orientation sessions on Money Smart held across the country. The Money Smart program also includes multi-partner agreements in w hich low and moderate-income adults can receive a variety of gov ernm ent services, and those outside of the financial mainstream are provided financial education w ith M oney Smart as the principal curriculum. As of year-end 2002, the FDIC had entered into partnership agreements w ith the Neighborhood Reinvestment Corporation, U.S. Departm ent of Housing and Urban Development, U.S. D epartm ent o f Labor, U.S. Small Business Administration, Association of M ilitary Banks of America, Independent Com m unity Bankers of America, Internal Revenue Service, O ffice of the W hite House Initiative on Asian American Pacific Islanders, and over 300 other national and regional organizations. A Spanish version of the M oney Smart curricu lum was rolled out in mid-2002, and a Chinese version w ill be available in early 2003. The FDIC is pleased w ith th e positive feedback from the M oney Sm art curriculum and w ill continue to improve and expand this im portant program. Consumer Complaints and Inquiries The FDIC investigates and responds to complaints and inquiries from consumers, financial institutions and other parties about consum er protec tion and fair lending laws, as w ell as deposit insurance matters. In 2002, the FDIC received 8,368 complaints, of w hich 3,987 w ere against statechartered nonm em ber banks. Nearly 54 percent o f the state nonm em ber bank complaints concerned credit card accounts. The m ost frequent complaints involved billing disputes and account errors, loan denials, credit card fees and service charges, and collection practices. In July 2002, the FDIC established a centralized Consumer Response Center (CRC) that is responsible for investigating all types of consum er com plaints about FDIC-supervised institutions and fo r answering consumer inquiries about consum er protection laws and banking practices. The establishm ent o f the CRC w ill fa cilita te tim e ly responses to complaints and inquiries. In addition, the FDIC received over 7,000 w ritte n inquiries and 8,000 telephone inquiries from consumers and bankers about FDIC insurance and consum er protection issues. The largest percentage of inquiries related to w hether specific financial institutions w ere insured by the FDIC and deposit insurance coverage. O ther com m on inquiries w ere requests for copies of FDIC consumer publications, questions about bank ing practices and consum er rights under federal consum er protection laws, and how to obtain a personal credit report. The FDIC has established a Central Call Center as its primary telephone point of contact fo r questions on deposit insurance from the banking com m unity and the public. (For more inform ation about the Call Center (toll-free, 1-877-275-3342), see page 127.) To reach out to consumers needing assistance on m atters arising from failed financial institutions, the FDIC also operates a C ustom er Service Center w ith staff dedicated primarily to handling records research and collateral releases. The records research staff responded to over 4.000 inquiries in 2002. This group researches the historical records of failed financial institutions to answer custom er questions about deposit accounts, loan transaction histories, tax suits for delinquent real estate taxes and other issues. The collateral release sta ff researches and deter mines ownership of collateral securing loans from failed financial institutions in order to provide a release of lien, assignm ent or reconveyance to the borrower. This staff completed nearly 15.000 collateral release requests in 2002 . 16 Receivership M anagem ent The goal of the receivership manage m ent program is to minimize losses and maximize recoveries to creditors of receiverships. In 2002, the FDIC pursued this goal by quickly and actively marketing assets from failed institutions, providing fo r the expedi tious and orderly te rm in a tio ns of receiverships, and im plem enting a service-billing m ethodology to ensure fair and reasonable charges to receiverships fo r the services provided by the Corporation. Institution and Asset Marketing The FDIC is proactive in its marketing efforts. C om petitive marketing of failed institutions assures that the highest price is obtained fo r the deposit franchise and assets o f the failed institution, thus minimizing the im pact on the deposit insurance funds. All qualified and interested bidders w ere contacted regarding an opportunity to bid fo r each of the 11 institutions that failed in 2002. In addition, 85 percent of the book value of the marketable assets w ere marketed w ithin 90 days of failure. This was done to minimize the costs associated w ith managing the assets and maximize the net recovery to the receivership estate, thereby benefiting the uninsured depositors and the creditors of the failed in stitu tio n . (For details, see table on Liquidation H ighlights on page 13.) Two resolutions in 2002 w arrant special note: Ham ilton Bank and NextBank. The firs t involved Ham ilton Bank, N.A., closed by the Office of the Comptroller o f the Currency on January 11. Hamilton Bank had total assets o f $1.2 billion and total deposits of $1.1 billion, and was headquartered in Miami, FL. The bank operated eig h t bank branches in Florida and a single bank branch in Puerto Rico. Hamilton Bank also had a small representative office in Panama and another in Peru. W hat made this failure so unique was that it w as the firs t tim e the FDIC w as receiver for such a large volum e of international loans. Hamilton's principal focus was comm ercial trade finance and lend ing to small companies operating in the United States and throughout Central America. In resolving th is failure, th e FDIC to o k a rarely used approach to protect depositors by transferring all the insured deposits (savings and checking accounts, certificates of deposit, and Individual Retirement Accounts) fro m three of H am ilton's nine branches, and only th e insured transactional accounts (savings and checking) from the remaining six branches. The Israel D iscount Bank, New York, NY assumed $531.6 million of th e insured deposits. The FDIC paid out more than $582.6 million of insured deposits through checks mailed directly to the remaining account holders. By the end of June, more than $1 billion of Hamilton's assets had been collected, sold or booked as a market-determ ined loss. A t that tim e, Ham ilton’s Miami-based receivership office was closed, and responsibility fo r the remaining assets (approximate book value of $100 million) was transferred to the FDIC's office in Dallas, TX. Those remaining assets principally involve bankruptcies, litigation or investiga tions. As of December 31, 2002, the cost of the Hamilton Bank failure to the Bank Insurance Fund was estim ated to be $172 million. The second notew orthy resolution involved an Internet-only bank, NextBank, N.A., chartered in Phoenix, AZ. NextBank was closed by the O ffice of the Comptroller of the Currency on February 7. NextBank's principal business was the origination and sale of credit card receivables to a special-purpose trust (M aster Trust), w hich paid fo r the receivables by selling securities to the public. These securities w ere backed by the cash flo w s generated from the receivables. The bank had no brick-and-mortar banking facilities, and its main business w as issuing credit cards. The FDIC received no bids fo r th e deposits and paid out the insured deposits by mailing checks directly to depositors. The FDIC, as receiver, assumed serv icing responsibilities for NextBank's credit card portfolio. The credit card portfolio consisted of over one million cards w ith about 800,000 belonging to the Master Trust and the remainder being bank-owned. The management and m arketing of these assets required extensive negotiations w ith the many parties involved in the credit card processing and securitization business. Ultimately, the bank-owned cards w ere sold under a loss-sharing agreement. The FDIC, as servicer, marketed the bank's interest in the trust, but no buyer was found and the M aster Trust cards w e re shut dow n on July 10. The FDIC is currently administering the receivership's remaining interests in the M aster Trust. The N extBank Instant Finance N etw ork receivables w e re sold through D ebt X, an asset-auction com pany th a t operates on the Internet. The sale, consisting of 900 accounts w ith a book value o f approxim ately $1 m illion, w as conducted electronically via D ebt X's secure W eb site. As of December 31, 2002, the cost of the NextBank failure to the Bank Insurance Fund was estim ated to be b e tw een $300 m illion and $350 million. In addition to these resolution activi ties, the FDIC filed a lawsuit in the district court fo r the Northern District of Illinois on November 1 against Ernst & Young, the outside auditors fo r Superior Bank, Hinsdale, Illinois. Superior Bank, a $2 billion institution, failed on July 27, 2001. The complaint charges Ernst & Young w ith fraud and negligence in its audits of Superior and seeks actual damages of $548 million and punitive damages in an am ount three tim es the actual damages, as w ell as interest and costs. The FDIC's com plaint asserts that Ernst & Young failed to properly audit Superior's residual assets and then concealed its erroneous auditing fo r fear that its acknow l edgem ent w ould damage Ernst & Young's $11 billion sale o f its consulting arm to Cap Gemini, a French company. No trial date had been set as o f year-end. Terminations The FDIC, as receiver, manages the receivership estate and its subsidiaries w ith the goal of expeditious and orderly term ination. The oversight and prom pt termination of receiverships preserves value for the uninsured depositors and other receivership claimants by reducing overhead and other holding costs. During 2002, the FDIC continued to m eet its target of term inating 75 percent of receiverships w ithin three years of the failure date. Billing for Services Provided In 2002, the Corporation implemented a new service-billing m ethodology to charge receiverships fo r the services provided by the FDIC. In addition, benchmark data w ere collected to perm it the Corporation to better evaluate and set the rates to be charged fo r these services. During 2003, receivership m anagem ent personnel w ill exam ine those areas in w hich FDIC costs significantly exceed those benchm arks and, w here necessary, im plem ent appro priate cost-m anagem ent measures to address those cost differentials. Operating M ore Efficiently The Corporation took a number of steps in 2002 to improve its overall efficiency and effectiveness, from internal restructuring and downsizing to enhancing technology-related tools. Corporate Reorganization The FDIC substantially revamped its internal organizational structure to improve operational efficiency and unify corporate e fforts in each of the three major business lines: insurance, supervision, and receivership management. As part of this major restructuring, the FDIC also stream lined the Corporation's m anagement and support structures. The major organizational changes made in 2002 include: • The Division of Insurance and the Division of Research and Statistics w ere merged into a new Division of Insurance and Research to facilitate a more integrated and effective research and policy leadership capability. • The Division of Supervision and the Division of Compliance and Consumer Affairs w ere merged into a new Division of Supervision and Consumer Protection. The regional and field structure o f the new division was also streamlined, w ith a reduction in the num ber of regional offices from eight to six. Additionally, 89 field offices w ere consolidated into 52 territo ries fo r safety and soundness functions, and 73 field offices were consolidated into 30 territories for compliance functions. • • The receivership accounting operations of the Division of Finance w ere transferred to the Division o f Resolutions and Receiverships to better align business processes in the C orporation's receivership m anagem ent program. Personnel and training functions w ere merged to create a new Human Resources Branch w ithin the Division o f Adm inistration. Downsizing The Corporation also took steps to com plete the downsizing that it has been addressing fo r much o f the past decade. Em ploym ent dropped from 6,167 at the beginning of 2002 to 5,430 at year-end 2002 as a result of declining w orkloads and organiza tional streamlining. M uch of the needed reduction in staffing was accomplished voluntarily through IS targeted buyout program s that resulted in the retirem ent or resigna tion of approximately 700 employees and the reassignm ent of surplus employees to vacant positions elsewhere w ithin the Corporation. In addition, approximately 30 surplus attorntey positions w ere eliminated through a reduction-in-force in May. The decade of downsizing is substantially completed. The savings resulting from corporate restructuring, downsizing and other initiatives directed tow ard cost con tainm ent and im proved operating efficiency w ill, when fully realized, reduce future corporate operating costs by an estim ated $80 million annually. The initial impact can be seen in the 2003 budget adopted by the Board o f D irectors in December 2002. Estimated 2003 spending w ill decline by seven percent from 2002 spending. Corporate University In another m ove to im prove its long-term operational e fficiency and effectiveness, the Corporation began developing a new Corporate University that w ill be modeled on the best practices of high-performing organizations in both the public and private sectors. The new Corporate University w ill provide an integrated fra m e w o rk fo r addressing future leadership developm ent and skill requirem ents. It w ill include core training program s fo r the FDIC's three major business lines - insurance, supervision, and receivership man agem ent - and give employees the opportunity fo r cross-training and job rotation. This w ill facilitate the establishment, over time, of a flexible, perm anent w o rk fo rc e capable of responding expeditiously to changing workload needs and priorities. Leader ship d e velopm ent program s w ill assist in providing a strong foundation fo r current and future FDIC leaders. The Corporate University w ill use technology, sem inars, hands-on experience and traditional instruction to m ake learning easier, m ore convenient and continual. Inform ation Technology Initiatives In 2002, the Corporation also con tinued to pursue a num ber of major technology-related investm ents that will, w hen implem ented, reduce future operating costs. The largest o f these projects, the N ew Financial E nvironm ent (NFE), w ill greatly improve operating efficiencies and provide substantial cost savings to the FDIC after it is im plem ented in mid-2004. The NFE w ill replace the Corporation's current accounting and related system s and w ill facilitate the im plem entation of stream lined w ork processes. It w ill also provide better inform ation and support to FDIC m anagem ent fo r decision-making. In addition, the FDIC continued to develop FDICconnecf, a secure electronic Web-enabled environm ent allow ing the Corporation to e le c tronically exchange inform ation w ith insured financial institutions. W ith the autom ation of data exchanges, the FDIC w ill be able to streamline and improve business processes, and reduce costs. In particular, the faster receipt of inform ation w ill enable the FDIC to provide more tim ely inform ation to the public. Phase II Construction of the Seidman Center In March 2002, the FDIC Board of Directors unanimously approved the expenditure of $110.9 million for Phase II construction at the FDIC's existing Seidman Center facility in Northern Virginia. The Corporation’s decision was based on an extensive analysis of various lease, purchase and build scenarios. Phase II con struction was determ ined to be the m ost economical option over the long term . The project w ill save the FDIC an estim ated $78 million over 20 years on a net present value basis compared to the projected costs of continued leasing in dow ntow n W ashington, DC. Phase II construc tion is targeted for com pletion by 2006. Financial H ighlights In its role as deposit insurer of banks and savings and loan associations, the FDIC prom otes the safety and soundness of insured depository institutions. The financial highlights discussed below address the per formance of the deposit insurance funds. It also includes a discussion of initiatives to restructure the internal budget to closely m onitor operations and investm ents and the establishment of a Capital Investment Review Committee (CIRC) to better manage capital investm ents. Deposit Insurance Fund Performance The FDIC administers tw o deposit insurance funds - the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) - and manages the FSLIC Resolution Fund (FRF), w hich fulfills the obligations o f the form er Federal Savings and Loan — ^ — — FD IC -lnsured D eposits ( e s tim a te d 1 9 6 0 -2 0 0 2 ) D o l l a r s in b i l l i o n s ISAIF-lnsured IBIF-lnsured 1960 70 80 90 2000 02 3,000 2,500 I I I . . n i l linn 2,000 1,500 ■ I i linn 1,000 500 iiJJiULUJ Source: Commercial Bank Call Reports and Thrift Financial Reports Insurance Corporation (FSLIC) and th e fo rm e r Resolution Trust Corporation (RTC). The fo llo w in g sum m arizes the condition of the FDIC's insurance funds. The Corporation's investm ent strategy fo r the BIF and th e SAIF reflects prudent management, w ith interest earned on investm ent securities of approxim ately $1.69 billion fo r the BIF and $564 m illion fo r the SAIF. Successful investing o f the funds during the year yielded total returns that surpassed M errill Lynch's (ML) 1-10 Year U.S. Treasury Index o f 9.05 percent fo r calendar year 2002. The BIF and the SAIF portfolio investm ents yielded returns of 9.20 and 9.89 percent, w hich exceeded the M L Index by 15 and 84 basis points, respectively. III I Deposit insurance assessm ent rates remained unchanged from 2001 for both the BIF and the SAIF, ranging from 0 to 27 cents annually per $100 of assessable deposits. Under the assessm ent rate schedule, 91.5 percent o f BIF-member institutions and 90.1 percent of SAIF-member institutions w e re in the low est riskassessm ent category and paid no deposit insurance assessm ent for the firs t semiannual period of 2003. D eposits insured by the FDIC approached $3.4 trillion in 2002, as the number o f insured institutions fell below the 9,400 mark fo r the firs t tim e. Insured deposits rose by 1.2 percent during the fourth quarter, bringing the grow th rate fo r the full year to 5.5 percent, the secondfastest annual grow th rate in the past 16 years. Insured deposits of the 9,372 FDIC m em ber institutions rose by $177 billion in 2002, including an $8.3 billion (4.3 percent) increase in insured brokered deposits. 19 m l ln s u r a n c e Fund Reserve Ratios P e rc e n t o f In s u re d D e p o s ts 1.45 t l 1.40 1.30 1.25 (target ratio) 1 ] * III]I■ I Ir3i k! 1J 1.35 1 k 1 1 11 1S It 1 1 i 1 I 11 1 I1 I JL 0 12/96 12/97 12/98 During 2002, deposits insured by the BIF increased by 4.9 percent, to $2.5 trillion. The BIF balance was $32.1 billion at year-end 2002, or 1.27 percent of estim ated insured deposits (compared to 1.25 percent at Septem ber 30, 2002). This was up from the year-end 2001 reserve ratio of 1.26 percent, as deposits insured by the BIF increased by $117.9 billion and the BIF fund balance increased by $1.6 billion. The reserve ratio o f th e SAIF w as 1.37 percent at year-end 2002 (com pared to 1.38 percent at September 30, 2002), up from 1.36 percent at year-end 2001. The balance of th e SAIF w as $11.7 billion on D ecem ber 31, 2002. SAIF-insured depo sits w e re $860.4 billion at year-end 2002, having grow n 7.4 percent fo r th e year. (See the accompanying table on Insurance Fund Reserve Ratios.) 20 12/99 12/00 12/01 3/02 Despite the relatively rapid grow th of insured deposits, insured institutions continued to rely increasingly on other funding alternatives. Insured deposits as a percentage of dom estic liabilities continued a steady, 11-year decline, falling to 49.9 percent at the end of 2002, compared to 50.9 per cent at the end of 2001. A t year-end 2002, the ratio w as 45 percent for institutions w ith total assets greater than $1 billion, and 71 percent fo r smaller institutions. (See the accom panying tables on FDIC-insured Deposits on page 19 and Risk Related Premiums on page 21.) 6/02 9/02 ! 12/02 During 2002, 11 FDIC-insured institu tions failed. Ten of those institutions, w ith combined assets of $2.5 billion, w ere insured by the BIF. The other institution, w ith assets of $50 million, was insured by the SAIF. Losses fo r the 11 failures are estim ated at $630 million. In 2001, there w ere four failures of insured institutions, w ith total assets of $2.2 billion and estimated losses of $445 million. The con tin g e n t liabilities fo r anticipated failures of BIF-and SAIF-insured institutions as of December 31, 2002, w e re $1.0 billion and $90 m illion, respectively. I Capital Investm ent Review Com m ittee iR is k -R e la te d Prem ium s The follow ing tables show the number and percentage of institutions insured by the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF), according to risk classifications effective for the first semi annual assessment period of 2003. Each institution is categorized based on its capitalization and a supervisory subgroup rating (A, B, or C), w hich is generally determined by on-site examinations. Assessment rates are basis points, cents per $100 of assessable deposits, per year. BIF Supervisory Subgroups* Well Capitalized: Assessment Rate Number o f Institutions Adequately Capitalized: Assessment Rate Number of Institutions Undercapitalized: Assessment Rate Number of Institutions . - - A B — 0 7,470(91.7% ) 3 441 (5.4%) 3 106(1.3% ) w C M 10 13 (0.2%) ■■ .....24 0(0.0% ) 24 10(0.1% ) 0 1,113(90.6% ) 3 82 (6.7%) 17 18(1.5% ) 3 7(0.6%) 10 4 (0.3%) 24 4 (0.3%) 10 0 (0.0%) 24 0 (0.0%) 27 1 (0.1%) * • 10 1 (0.0%) i 17 97(1.2% ) 27 5(0.1% ) SAIF Supervisory Subgroups' Well Capitalized: Assessment Rate Number of Institutions Adequately Capitalized: Assessment Rate Number of Institutions Undercapitalized: Assessment Rate Number of Institutions ■ , — • BIF data exclude SAIF-m em ber "Oakar" institutions th at hold BIF-insured deposits. The assessm ent rate reflects the rate for BIF-assessable deposits, which rem ained the sam e throughout 2002. ■ SAIF data exclude BIF-m em ber "Oakar" institutions th at hold SAIF-insured deposits. The assessm ent rate reflects the rate for SAIF-assessable deposits, w hich rem ained the sam e throughout 2002. Corporate Budgeting The FDIC has restructured its budget fo r 2003 to include separate Operating and In vestm e n t Budgets. The Operating Budget includes funding fo r both ongoing operations of the Corporation and receivership operations. The new Investm ent Budget approved by the Board of Directors is a com posite of individual budgets for major investment projects. The Board approved a 2003 Corporate Operating Budget of $1,070.5 million and a multi-year Investm ent Budget of $70.4 million. Total estim ated spending fo r 2003 w ill be approximately $1.1 billion, seven percent low er than 2002 spending. A lm ost tw o-thirds of projected 2003 spending w ill fund personnel and related costs. During 2002, the FDIC began man aging its capital investm ents from a new vantage point. The FDIC created a Capital Investment Review C o m m itte e (CIRC), dedicated to reviewing and overseeing all major inform ation technology (IT) and non-IT in ve stm e n t initiatives w ith e stim ated capital outlays o f m ore than $3 m illion, as w e ll as certain other projects that cost less but are considered m ission-critical to the FDIC. The purpose o f th e CIRC is to im plem ent a system atic management review process that supports budg eting fo r th e FDIC's capital invest m ents and ensures the regular monitoring and proper management of these investm ents, once funded. The CIRC is responsible fo r reviewing the major capital investment initiatives funded in the new Investment Budget as w ell as significant enhancements and maintenance costs associated w ith the FDIC's current initiatives. The in ve stm e n ts review ed by th e CIRC include m ajor co m puter purchases, so ftw a re application developm ents, and office buildings. The CIRC determines w hether the business case supporting the proposed investm ent is sound, w elljustified and appropriate fo r funding consideration by the FDIC's Board o f Directors. The CIRC w ill also continue to m onitor and report on the status of approved investm ent projects to the Board of Directors. 21 II. Performance Results Sum m ary of 2002 Performance Results by Program In accordance w ith Section 232.8 of the O ffice o f M anagem ent and Budget's Circular No. A -11, Part 2, the FDIC is pleased to report that there w ere no situations in 2002 w here performance had an adverse e ffe ct on the FDIC's activities or programs. In addition, 2002 performance w as considered in the developm ent of the FDIC's 2003 Annual Performance Goals. The Office o f Inspector General (OIG) has shared its vie w of the challenges the Corporation is confronting and has acknowledged the numerous actions under w ay to address these issues. See Appendix C for a list of these challenges. Management is com m itted to addressing issues identified by the OIG, as evidenced by the initiatives discussed in the operations section of the report. Program Area Insurance Performance Results • Resolved 11 insured institution failures, providing depositors w ith tim ely access to insured deposits in each case. For seven of the failures, depositors had uninterrupted and continuous access to insured deposits as the deposits w ere assumed by an acquiring entity. For the remaining four failures, a deposit payout was conducted w here a check in the am ount of the insured deposit was mailed to each depositor in the required tim e frames. •T h e House of Representatives voted to approve deposit insurance reform legislation. Although the Senate failed to act on the legislation before adjournment, the Corporation w ill continue to pursue deposit insurance reform in the 108th Congress. •C o m p le te d risk assessm ents for all large insured depository institutions. • Improved the accuracy and efficiency of off-site risk identification models. • Published • • • • • • • economic and banking inform ation and analysis: Quarterly editions o f Regional Outlook, 68 Briefing Notes, Semiannual FDIC Report on U nderwriting Practices, Semiannual Report on U nderw riting Practices by Region, Six Bank Trends, Quarterly editions o f the Real Estate Data System, and Semiannual Survey o f Real Estate Trends. •C re a te d a new electronic com m unications tool (FY7) to dissem inate pertinent, tim ely analysis on risk-related issues to key stakeholders; published 36 FYls. Supervision ‘ C o nd ucted 2,5 34 sa fe ty and sou nd ne ss exa m in ation s. T his included all s ta tu to rily required sa fe ty and sou nd ne ss exam inations, e xce p t fo r a sm all n u m b e r d e fe rre d due to pending m ergers. •C o n d u c te d 1,820 com p lia nce and C o m m u n ity R e in ve stm e n t A c t e xa m in ation s in accordance w ith FDIC policy. Receivership • C o ntacted all k n o w n and qu alified po tentia l bidders in each o f th e 11 in s titu tio n fa ilu re s in 2002. M anagem ent . M a rke te d at least 85 p e rce n t o f all m arke ta ble asse ts w ith in a 90-day tim e fra m e fo r nine of th e 11 in s titu tio n s th a t failed in 2002. (For th e rem a ining tw o in stitu tio n s, th e 90-day tim e fra m e had n o t expired a t year-end.) •T e rm in a te d 108 receiverships. 2002 Budget and Expenditures by Program The FDIC budget fo r 2002 totaled $1.22 billion. Excluding $142.9 million fo r Corporate General and Adm inistrative expenditures, budget am ounts w ere allocated to corporate programs and related goals as follow s: $152.6 million, or 14 percent, to the Insurance program; $606.7 million, or 57 percent, to the Supervision program; and $313.9 million, or 29 percent, to the Receivership M anagem ent program. Actual expenditures fo r the year totaled $1.19 billion. Excluding $125.8 million fo r Corporate General and Adm inistrative expenses, actual expenditures w ere allocated to programs as follow s: $118.3 million, or 11 percent, to the Insurance program; $629.3 million, or 59 percent, to the Supervision program; and $316.5 million, or 30 percent, to the Receivership M anagem ent program. H igher-than-proposed spending fo r the Supervision program and low er-thanprojected spending fo r the Insurance program reflect actual tim e charges by examiners. During 2003, the FDIC w ill review tim e reported by examiners to ensure that they are accurately allocating their tim e betw een these tw o programs. P ro g ra m P e r f o r m a n c e Results Supervision Program Results Strategic Goal: FDIC-supervised institutions are safe and sound. Annual Performance Goal Indicator Target Results 1 Conduct on-site safety and soundness examinations to assess an FDICsupervised insured depository institution's overall financial condition, management practices and policies, and compliance w ith applicable regulations. Conduct required examinations in accordance w ith statute and FDIC policy. One hundred percent of required examinations are conducted on tim e. Achieved 2 Prompt supervisory actions are taken to address problems found during the FDIC examination of FDICsupervised institutions identified as problem insured depository institutions. FDIC-supervised insured depository institution compliance w ith formal and informal enforcement actions is monitored. The num ber of m onths from the last examination of a problem bank until a follow-up examination is conducted. Follow-up examination is conducted w ithin 12 months o f com pletion of the prior examination. Achieved Strategic Goal: Consumers' rights are protected and FDIC-supervised institutions invest in th eir com m unities ■■■■■■■■■■■■■■■ ■ I E ighty-five percent of Achieved Assessm ent of participants' Effective outreach and technical workshop participants who understanding of the financial assistance are provided on topics com plete self-evaluation education topics after attending related to the Com m unity form s rate as "3 " or better, a One Stop Center financial Reinvestment A ct (CRA), fair education workshop. The FDIC’s on a scale o f " 1 " to "4 ," the lending, and com m unity compliance examination program degree to which they increase development. their understanding of the covers nearly 20 different federal financial education topic(s). statutes and regulations ranging from traditional disclosure laws (such as the Truth in Lending Act) to fair lending statutes (such as the Equal Credit Opportunity and Fair Housing Acts) to the C om m unity R einvestm ent Act (CRA), w hich encourages insured depository institutions to help m eet com m unity credit needs. The FDIC has also added the privacy and insurance consum er protection provisions of the Gramm-Leach-Bliley Act of 1999 to its compliance examination program. 2.5 S u p e rv is io n P ro g ra m R e s u lts (continued) Strategic Goal: Consumers' rights are protected and FDIC-supervised institutions invest in their com m unities. Annual Performance Goal Indicator Target Results 4 Effectively m eet the statutory man date to investigate and respond to consum er complaints about FDICsupervised financial institutions. Timely responses to w ritten complaints. Ninety percent of w ritten complaints are responded to w ithin tim e frames established by policy. Achieved 5 Conduct comprehensive and compliance-only examinations in accordance w ith FDIC examination frequency policy. Conduct required examinations in accordance w ith statute and FDIC policy. One hundred percent of required examinations are conducted w ithin tim e frames established by statute and FDIC policy. Achieved 6 Prompt supervisory actions are taken and m onitored on all institutions rated " 4 " or "5 " for compliance to address problems identified during compliance examinations. Timely follow -up examination and related activity confirm s w hether the institution is in compliance w ith the enforcem ent action. A follow -up examination or related activity is conducted w ithin 12 m onths from the date o f a formal enforcem ent action confirm ing compliance w ith the enforcem ent action. Achieved In s u ra n c e P ro g ra m R e s u lts Strategic Goal: Insured depositors are p rotected from loss w ith o u t recoijrse to taxpayer funding. 1 26 FDIC is prepared to deal w ith all financial institution closings and emerging issues. Number of business days after institution failure by w hich depositors w ill have access to insured funds either through transfer of deposits to successor insured depository institution or depositor payout. If the failure occurs on a Friday, the target is one business day. Achieved If the failure occurs on any other day of the w eek, the target is tw o business days. Achieved In s u ra n c e P ro g ra m R e s u lts (continued) Strategic Goal: Insured depositors are protected from loss w ith o u t recourse to taxpayer funding. • 2 3 . -s®?. - s -• - - - v , .v-1'" . Annual Performance Goal Indicator Target Results Identify and address risks to the insurance funds. Maintain and improve off-site risk identification model(s). Review and enhance existing FDIC off-site risk identification m odels to address credit, agricultural, real estate, technology and other risks by December 31, 2002. Achieved Assess risks posed by large insured depository institutions. Assess risks in 100 percent of large insured depository institutions and adopt appropriate strategy. Achieved Identify and fo llo w up on concerns referred for examination or other action (e.g., contact the insured institution or primary supervisor). Identify and fo llo w up on 100 percent of referrals. Achieved Disseminate data and analyses on current issues and risks affecting the banking industry to bankers, supervisors, stakeholders and the public. Analyses are included in regular publications or as ad-hoc reports on a tim ely basis. Achieved Conduct industry outreach aimed at the banking comm unity and industry trade groups to discuss current trends and concerns and to inform bankers about available FDIC resources. Achieved Maintain and improve the Research Information System (RIS), w hich serves as the foundation of m ost analysis and statistical reporting for the FDIC. Update and expand data availability in RIS. Achieved D evelop a m ore e ffic ie n t approach to bank data collection and management. D evelop p ro je ct scope, evaluate technical alternatives, prepare recom m endations and establish im plem entation schedule. Achieved Maintain sufficient and reliable inform ation on insured depository institutions. In s u ra n c e P ro g ra m R e s u lts (continued) Strategic Goal: Insured depositors are protected from loss w ith o u t recourse to taxpayer funding. 4 Annual Performance Goal Indicator Target Results Maintain and improve the deposit insurance system . Continue the comprehensive deposit insurance review initiated in 2000. W ork w ith the Congress to develop and pass a reform package. Achieved Develop pricing recom m en dations and im plem entation plans fo r inclusion in a notice and com m ent rulemaking during 2002. On Hold Develop and analyze baseline data of im plem ented m odifi cation results. Achieved Identify and review possible modifications to the Risk-Related Premium System (RRPS). Assess the feasibility of Achieved developing objective screens for the RRPS that identify financial institutions dem on strating excessive risk, such as certain types of credit risk, market risk and operational risk. Analyze the accuracy of projected losses to and reserves fo r the insurance funds. Maintain the reserve balance to insured deposits. V Review discrepancies between projected failed assets and actual failed assets by applying sophisticated analytical techniques to examine the effectiveness of the loss projection model and adjust the system accordingly. Achieved Perform comprehensive analysis o f all aspects of reserving m ethodology and im plem ent enhancements as necessary. Achieved Maintain the designated reserve ratio (DRR) as required by statute, using the DRR target. Achieved R e c e iv e rs h ip M a n a g e m e n t P ro g ra m R e s u lts Strategic Goal: Recovery to creditors of receiverships is achieved. U M a H H H H M a o B a flB H iiiw a a iK a i Annual Performance Goal Indicator Target Results 1 M arket failing institutions to all known qualified and interested potential bidders. List o f qualified and interested bidders. Contact all known qualified and interested bidders. Achieved 2 The FDIC values, manages and markets assets of failed institutions and their subsidiaries in a tim ely m anner to m axim ize net return. Failed institution's assets are marketed. Eighty-five percent of book value of failed institution's m arketable assets are m arketed w ith in 90 days o f failure. Achieved 3 Investigations w ill be conducted into all potential professional liability claim areas in all failed insured depository institutions, and a decision to close or pursue each claim is made as promptly as possible, considering the size and com plexity of the institution. Percentage of investigated claim areas fo r w hich a decision has been made to close or pursue the claim w ithin 18 months after the failure date. For 80 percent of all claim areas, a decision is made to close or pursue the claim. Achieved 4 The FDIC, as receiver, manages the receivership estate and its subsidiaries tow ard an orderly termination. Timely term ination of new receiverships. Terminate 75 percent of Achieved receiverships managed through the Receivership Oversight Program w ithin three years of the failure date (starting w ith receiverships established in the year 2000). 29 M u lt i- Y e a r P e r f o r m a n c e T re n d Depositor Payouts in Instance of Failure Annual Goal 1999 Results 2000 Results 2001 Results 2002 Results 2003 Goal Insured deposits are trans ferred to successor insured depository institution or depositor payouts are begun within three days of insured depository institution failure. Timely payments made to all depositors for seven of eight insured depository institutions that failed in 1999. Timely payments made to all depositors of the seven insured depository institutions that failed in 2000. Annual goal revised (see below). Annual goal revised (see below). Annual goal revised (see below). Annual goal not established in 1999. Annual goal not established in 2000. Timely payments made to all depositors of the four insured depository institutions that failed in 2001. Timely payments made to all depositors of the 11 insured depository institutions that failed in 2002. Deal w ith all financial institution closings and emerging issues. Revised Goal: FDIC is prepared to deal with all financial institution closings and emerging issues. Legislation on deposit insurance reform was introduced in the House and the Senate. Risk Classifications Maintain and improve the deposit insurance system. SO To improve system, Financial Risk Committee established. Reserve ratio maintained at or above the statutory mandate of 1.25 percent. Reserve ratio maintained. FDIC published its final recommendations for deposit insurance reform. Reserve ratio main tained at or above the statutory ratio of 1.25 percent. Chairman testified before the Senate Committee in support of deposit insurance reform. Maintain and improve the deposit insurance system. Provide educational infor mation to insured depository institu tions and their customers to help them under stand the rules for determining the amount of insurance coverage on their deposits. R isk Id e n tific a tio n a n d R e p D rtin g Annual Goal 1999 Results 2000 Results 2001 Results 2002 Results 2003 Goal Identify and address risks to the insurance funds. Off-site and on-site risk identification processes were used to identify risk areas and concerns such as: subprime lending, construction lending practices, loan underwriting standards, electronic banking and privacy. Economic trends and emerging risks were identified, monitored and addressed through the publication of surveys, guidance and reports and outreach programs. Developed several approaches to credit risk that will be incorporated into Virtual Supervisory Information On the Net system. Risk assessments of all large insured depository institutions (LIDIs) were completed in compliance with program requirements. Significant progress made in improving the accuracy and efficiency of offsite risk identifica tion models. Risk assessments of all large insured depository institutions (LIDIs) were completed in compliance with program requirements. Identify and address risks to the insurance funds. Conducted 2,568 or 97 percent of required safety and soundness examinations* Conducted 2,575 or 97 percent of required safety and soundness examinations.* Conducted 2,534 or 98 percent of required safety and soundness examinations. Conduct on-site safety and sound ness examinations to assess an FDICsupervised insured depository institu tion’s overall financial condition, management practices and policies, and compliance with applicable regulations. On average, examination reports were processed and mailed to institutions within 44 days of receipt in regional office. Target is 45 days. Sixty-seven institutions designated as problem (com posite "4 " or "5 " rated). Fifty-six were removed from problem status and 76 added. Eighty-four institutions designated as problem (com posite "4 " o r "5" rated). Forty-eight were removed from problem status and 63 added. Take prompt supervisory actions to address prob lems identified during the FDIC examination of FDIC-supervised institutions identified as problem insured depository institu tions. Monitor FDICsupervised insured depository institu tions' compliance with formal and informal enforce ment actions. S a fe ty a n d S o u n d n e s s E x a in in a tio n s Conduct on-site safety and soundness examinations to assess an FDIC-supervised insured depository institution's overall financial condition, management practices and policies, and compliance with applicable regulations. Conducted 2,555 or 95 percent of required safety and soundness examinations* Note: From 1999 -2001, the totals reflect examinations initiated during the year. This will vary slightly from the chart on page 14, which displays examinations completed during these years. S a fe ty a n d S o u n d n e s s Enfc r c e m e n t A c tio n s Take prompt supervisory actions to address problems identified during the FDIC examination of FDIC-supervised institutions identified as problem insured depository institutions. Monitor FDIC-supervised insured depository institutions' compliance with formal and informal enforcement actions. The number of problem institutions increased from 41 at 12/31/98 to 43 as of 12/31/99. Thirty-one institutions removed from problem status and 33 added. Compliance Examinations Annual Goal 1999 Results 2000 Results 2001 Results 2002 Results 2003 Goal Conduct comprehensive and compliance-only examinations in accordance with FDIC examination frequency policy. Conducted 2,368 examinations or 102 percent of annual target. No delinquent examinations. Conducted 2,257 examinations or 102 percent of annual target. There were three delinquent examinations at the end of 2000. Conducted 2,180 comprehensive, compliance only, and CRA examinations in accordance with FDIC policy. Conducted 1,820 comprehensive, compliance only, and CRA examinations in accordance with FDIC policy. Conduct comprehensive and compliance only examinations in accordance with FDIC examination frequency policy. Annual goal was not established in 1999. One pilot forum on financial literacy and predatory lending was held in each region. Annual goal revised (see below). Annual goal revised (see below). Annual goal revised (see below). Annual goal was not established in 1999. Annual goal was not established in 2000. Conducted 25 Money Smart workshops with over 600 participants. Money Smart classes attended by approximately 2,800 participants. Provide effective outreach and technical assistance on topics related to the CRA, fair lending and community development. CRA Outreach Effective outreach, technical assistance and training are provided on topics related to the Community Reinvestment Act (CRA) and community development. Revised Goal: Provide effective outreach and technical assistance on topics related to the CRA, fair lending and community development. Compliance Enforcement Actions Annual Goal 1999 Results 2000 Results 2001 Results 2002 Results 2003 Goal Corrective actions are taken, if appropriate, to address problems identified during compliance examinations; bank compliance with those actions is monitored. Nine institutions were designated as compliance problems and rated "4 ." All enforcement actions were in place. Annual goal revised (see below). Annual goal revised (see below). Annual goal revised (see below). Annual goal revised (see below). Annual goal was not established in 1999. For institutions Six of seven on average rated institutions had either been a composite examined in the "4 " or "5 ," the FDIC conducted preceding 12 all follow-up months or were examinations still within the 12 within the targeted month time frame between exam time frame of of 12 months inations. One institution was from the issuance pending resolution date of a formal enforcement action. for safety and soundness reasons, and the compliance examination was deferred pending resolution. Eight of nine institutions had entered into a Memorandum of Understanding (MOU) with the FDIC and the ninth was in the process of reviewing the recommended MOU. Prompt supervisory actions are taken and monitored on all institutions rated "A" or "5 " for compliance. Revised Goal: Prompt supervisory actions are taken and monitored on all institutions rated "A" or "5 " for compliance. 33 Consumer Com plaints and Inquiries Annual Goal 1999 Results 2000 Results 2001 Results 2002 Results 2003 Goal Effectively respond to written complaints and inquiries related to deposit insurance and consumer protection laws. A pilot customer satisfaction survey was conducted. One hundred percent of the FDIC's responses to the 6,736 written complaints and inquiries received were made within targeted average turnaround tim e frames. FDIC sent 612 survey cards to consumers and bankers who contacted the Washington Office concerning inquiries and complaints. Eightyfour (14 percent) of the cards were returned to the FDIC. Sixty-two percent of the the responses rated the FDIC as "excellent" in response quality and 64 percent rated the FDIC as "excellent" in in timeliness of response. Annual goal revised (see below). Annual goal revised (see below). Annual goal was not established in 1999. Annual goal was not established in 2000. Annual goal was not established in 2001. FDIC received 8,368 consumer complaints, closing 95 percent of them. Of the complaints closed, 94 percent were closed within policy time frames. Meet the statutory mandate to investigate and respond to consumer complaints about FDIC-supervised financial institutions. Revised Goal: Meet the statutory mandate to investigate and respond to consumer complaints about FDIC-supervised financial institutions. Digitized 34 for FRASER Asset M anagem ent IliHHHHHHHRHHHHHHHBHH Annual Goal 1999 Results 2000 Results 2001 Results 2002 Results 2003 Goal Market 80 percent of a failed institution's assets to franchise and nonfranchise investors within 90 days of resolution. Annual goal was not established in 1999. Ninety-five percent of failed institutions' assets were marketed within 90 days, thus exceeding the target of 80 percent. Annual goal revised (see below). Annual goal revised (see below). Annual goal revised (see below). Revised Goal: Value, manage and market assets of the failed institutions and their subsidiaries in a timely manner to maximize net return. Annual goal was not established in 1999. Annual goal was not established in 2000. For three institutions that failed, the FDIC marketed 100 percent of the marketable assets. The remaining institution was placed into con servatorship. Loan pools, servicing operations and residuals that totaled in excess of the 80 percent target were marketed within the 90-day time period. For nine of 11 institutions that failed, at least 85 percent of all marketable assets were marketed within the 90-day time frame, thus meeting the target. For tw o of the failures, 90 days had not expired by year-end. Value, manage and market assets of the failed institutions and their subsidiaries in a timely manner to maximize net return. Least-Cost Resolution Annual Goal 1999 Results 2000 Results 2001 Results 2002 Results 2003 Goal Market to all known qualified and interested potential assuming institutions. Annual goal was not established in 1999. There were seven failures in 2000. One hundred percent of the qualified potential bidders were contacted. There were four failures in 2001. One hundred percent of the qualified potential bidders were contacted. There were 11 failures in 2002. One hundred percent of the qualified potential bidders were contacted. Market failing institutions to all known qualified and interested potential bidders. As of 12/31/99, six institutions failed within the first three quarters of 1999 and decisions were made with regard to five of the 66 potential claims. For the April 1998 failure, decisions were made in all 11 claim areas in 17 months. The remaining 1998 failures occurred less than 18 months ago. A decision to close or pursue each claim was made within 18 months after the failure date for 100 percent of all investigations. Annual goal revised (see below). Annual goal revised (see below). Annual goal revised (see below). Annual goal was not established in 1999. Annual goal was not established in 2000. Five of nine institutions that reached the 18month milestone had 100 percent of professional liability investiga tions completed. Two of six institu tions that reached the 18-month milestone during 2002 had 100 per cent of professional liability investiga tions completed. The other four institutions had at least 80 percent of professional liability investiga tions completed, meeting the goal of 80 percent. Conduct investigations into all potential professional liability claim areas in all failed insured depository institutions. Decide to close or pursue each claim as promptly as possible, considering the size and complexity of the institution. Professional Liability Claims Investigations are conducted into all potential professional liability claim areas in all failed insured depository institutions and a decision to close or pursue each claim will be made within 18 months after the failure date in 80 percent of all investigations. Revised Goal: Conduct investigations into all potential professional liability claim areas in all failed insured depository institutions. Decide to close or pursue each claim as promptly as possible, considering the size and complexity of the institution. Digitized 36 for FRASER Receivership Terminations Annual Goal 1999 Results 2000 Results 2001 Results 2002 Results 2003 Goal Achieve a 35 percent reduction in the number of active receiverships in 2000. Annual goal was not established in 1999. One hundred fifty-six receiver ships were terminated, thus achieving the. goal of 156 Annual goal revised (see below). Annual goal revised (see below). Annual goal revised (see below). Annual goal was not established in 1999. Annual goal was not established in 2000. Fifty-two out of the 76 targeted receiverships were terminated in 2001. In mid-2001, the target of 76 terminations was revised to 36. The pace of termination was slowed by impediments that represented material financial or legal risks to the FDIC. For the eight failures from 1999 that matured in 2002, FDIC terminated six receiverships, meeting the target to terminate 75 percent within three years of failure. Manage the receivership estate and its subsidiaries toward an orderly termination. Value, manage and market assets of the failed institutions and their subsidiaries in a timely manner to maximize net return. Revised Goal: Manage the receivership estate and its subsidiaries toward an orderly termination. P ro g ra m E v a lu a tio n During 2002 and early 2003, the FDIC com pleted evaluations o f programs designed to achieve the strategic objectives set forth in the Supervision: Consumer Rights program area of the FDIC's 2001-2006 Strategic Plan. The program evaluation of each strategic objective included a list of issues to be evaluated, background context of the evaluation, analysis of programs and actions to achieve the objective, evaluation methodology, and findings. The follow ing section presents the issues evaluated and summarizes the results of this evaluation. Strategic Objective Deposit insurance funds and system remain viable. Issues Evaluated How does the FDIC ensure that FDIC-supervised institutions com ply w ith consum er protection, Com m unity R einvestm ent A ct (CRA), and fair lending laws? Findings The FDIC has extensive procedures in place to evaluate how w ell FDIC-supervised institutions comply w ith consum er protection, CRA, and fair lending laws. The FDIC conducts compliance and CRA examinations to evaluate FDIC-supervised institutions' practices regarding consum er protection, CRA, and fair lending laws. In addition to the examination process, the FDIC investigates consum er complaints about banking practices. Noncompliance w ith consum er protection and fair lending laws can result in civil liability and negative publicity as w ell as informal or formal enforcem ent actions against the institution to correct the identified violations. The FDIC also uses the institutions' record of compliance w ith consum er protection, CRA, and fair lending laws w hen evaluating applications fo r new or expanded activities and certain other corporate applications. The Program Evaluation team found that, through its compliance and CRA examinations and its Complaint and Inquiry Program, the FDIC has appropriate procedures in place to evaluate how w ell FDIC-supervised institutions com ply w ith consum er protection, CRA, and fair lending laws. Strategic Objective Consumers have access to easily understood inform ation about their rights and the disclosures due them under consum er protection and fair lending laws. Issues Evaluated Does the FDIC provide inform ation to consumers about their rights and the disclosures due consumers under current consum er protection and fair lending laws? Is the inform ation easily accessible and easily understood? Findings The FDIC undertakes an extensive and expanding number of activities to provide information on consumers' rights and the disclosures due them under consum er protection and fair lending laws. A w ide array of materials detail consum ers' rights; provide consum er inform ation and answers to questions concerning deposit insurance, banks, and consum er rights; and o ffe r practical guidance on how to become a better inform ed user of financial services. These are readily accessible and w idely distributed on the FDIC's W eb site and at outreach seminars and w orkshops. M any materials are also available in hard copy and som e in m ultiple languages. For example, Spanish, Korean and Chinese versions of inform ation on how FDIC deposit insurance w orks are in print. The FDIC also has been actively involved in consum er education and disclosure w ith the creation, im plem entation and ongoing support of programs such as Money Smart and "EDIE" - the FDIC's Electronic Deposit Insurance Estimator. In addition, the FDIC conducts evaluations to assess the effectiveness of its activities and program modifications and im provem ents. The Program Evaluation team found that through its extensive inform ation dissemination efforts, consum er education and outreach activities, and procedures to handle consum er complaints and inquiries, the FDIC has appropriate measures in place to prom ote the protection of consum ers' rights. 5ANKING ON OUR FUTURE T o d ay , T o g e t h e r - I n v e s t i n o u r Y outh Distinguished economists from banks, the U.S. Senate and the W hite House join FDIC economic experts in November in a roundtable discussion of ways to deal w ith future developments. Richard Brown, Associate Director in the Division of Insurance and Research, moderates the discussion. Donna Gambrell, Deputy Director of the Division of Supervision and Consumer Protection, hosts a signing ceremony in April when the FDIC and the Neighborhood Reinvestment Corporation, a public nonprofit corporation, agreed to pool their resources to promote financial literacy. Chairman Powell speaks to students participating in the FDIC’s M oney Smart program at H.D. W oodson High School in W ashington, DC. The FDIC's Advisory Committee - leaders from U.S. business, education, finance and governm ent holds its firs t m eeting in November in the FDIC's Board Room. The com m ittee was formed to advise the FDIC on delivery of services, policy development and corporate infrastructure. President George W. Bush's Chief of Staff, A ndrew Card, was invited to speak to the Advisory Committee. Deputy to the Chairman and Chief Operating Officer John F. Bovenzi (right) and Deputy to the Chairman and Chief Financial Officer Steven 0. App also addressed the committee. 39 III. Financial Statements and Notes Bank Insurance Fund December 31, 2002 and 2001 Federal Deposit Insurance Corporation Bank Insurance Fund Statem ents of Financial Position at December 31 Dollars in Thousands 2002 2001 Assets Cash and cash equivalents $ 4,606,896 $ 1,436,613 Investment in U.S. Treasury obligations, net: (Note 3) H eld -to-m atu rity securities 16,709,665 20,477,568 A vailable-for-sale securities 10,823,593 9,685,367 Interest receivable on investm ents and other assets, net 483,674 547,101 Receivables from bank resolutions, net (N ote 4) 505,395 79,155 Property and equipm ent, ne t (N ote 5) 303,084 303,969 Total Assets $ 33,432,307 $ 32,529,773 $ 148,573 $ 134,990 Liabilities Accounts payable and other lia b ilitie s Contingent liabilities for: (Note 6) 1,008,097 A nticipa ted fa ilu re of insured in stitution s Litigation losses 1,911,000 204,805 Other contingencies Total Liabilities 37,123 20,492 7,835 1,381,967 2,090,948 31,238,171 30,192,903 812,169 245,922 32.050,340 30,438,825 Commitments and off-balance-sheet exposure (Note 10) Fund Balance Accum ulated net income Unrealized gain on available-for-sale securities, ne t (N ote 3) Total Fund Balance Total Liabilities and Fund Balance $ 33,432,307 S 32,529,773 The accompanying notes are an integral part of these financial statements. 41 Federal Deposit Insurance Corporation Bank Insurance Fund Statem ents of Income and Fund Balance for th e Years Ended December 31 Dollars in Thousands 2002 2001 Revenue Interest on U.S. Treasury obligations $ 1,692,381 Assessm ents (N ote 7) O ther revenue 1,834,768 47,777 0 78,227 Realized gain on sale of U.S.Treasury obligations Total Revenue $ 84,030 19,474 35,964 1,795,885 1,996,736 Expenses and Losses Operating expenses 821,136 785,855 Provision fo r insurance losses (N ote 8) (86,970) 1,756,321 Interest and other insurance expenses 16,451 17,226 750,617 2,559,402 Total Expenses and Losses Net lncome/(Loss) 1,045,268 Unrealized gain on available-for-sale securities, ne t (N ote 3) Comprehensive lncome/(Loss) Fund Balance - Beginning Fund Balance - Ending The accompanying notes are an integral part of these financial statements. 42FRASER Digitized for $ (562,666) 566,247 26,269 1,611,515 (536,397) 30,438,825 30,975,222 32,050,340 $ 30,438,825 Federal Deposit Insurance Corporation Bank Insurance Fund Statem ents of Cash Flows for th e Years Ended December 31 Dollars in Thousands 2002 2001 Cash Flows From Operating Activities Cash provided by: Interest on U.S. Treasury obligations $ 1,858,852 $ 1,116,406 Recoveries from bank resolutions 1,913,936 368,603 Assessm ents 81,971 47,075 M iscellaneous receipts 22,607 38,422 (742,270) (729,635) Cash used by: Operating expenses (2,168,187) (84,651) (38,311) (21,696) 131,068 1,532,054 M a tu rity o f U.S. Treasury obligations, he ld -to-m atu rity 3,625,000 3,320,000 M a tu rity or sale of U.S. Treasury obligations, available-for-sale 1,150,000 2,398,572 D isbursem ents fo r bank resolutions M iscellaneous disbursem ents Net Cash Provided by Operating Activities (Note 13) Cash Flows From Investing Activities Cash provided by: Cash used by: (49,647) (61,189) 0 (1,418,875) (1,686,138) (4,490,345) Net Cash Provided/(Used) by Investing Activities 3,039,215 (251,837) Net Increase in Cash and Cash Equivalents 3,170,283 1,280,217 Cash and Cash Equivalents - Beginning 1,436,613 156,396 Purchase o f property and equipm ent Purchase o f U.S. Treasury obligations, he ld -to-m atu rity Purchase o f U.S. Treasury obligations, available-for-sale Cash and Cash Equivalents - Ending S 4,606,896 $ 1,436,613 The accompanying notes are an integral part of these financial statements. 43 Bank Insurance Fund Notes to the Financial Statements December 31, 2002 and 2001 ■ ■ ■ ■ ■ ■ ■ ■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■ ■■■Mi 1. L egislative H istory and O p eratio n s o f th e Bank Insurance Fund Legislative History The U.S. Congress created the Federal Deposit Insurance Corporation (FDIC) through enactm ent of the Banking A ct of 1933. The FDIC w as created to restore and maintain public confidence in the nation's banking system . The Financial Institutions Reform, Recovery, and Enforcem ent A ct of 1989 (FIRREA) 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 (SAIF), and the FSLIC Resolution Fund (FRF). It also designated the FDIC as the adm inistrator of these funds. All three funds are maintained separately to carry out their respective mandates. The BIF and the SAIF are insurance funds responsible for protecting insured bank and th rift depositors from loss due to institution failures. The FRF is a resolution fund responsible fo r w inding up the affairs of the fo rm e r Federal Savings and Loan Insurance Corporation (FSLIC) and liquidating the assets and liabilities transferred from the form er Resolution Trust Corporation (RTC). Pursuant to FIRREA, an active institution's insurance fund membership and primary federal supervisor are generally determ ined by the in stitu tio n 's charter type. Deposits of BIF-member institutions are generally insured by the BIF; BIF members are predominantly commercial and savings banks supervised by the FDIC, the Office of the Comptroller of the Currency, or the Federal Reserve Board. Deposits of SAIF-member institutions are generally insured by the SAIF; SAIF members are predominantly thrifts supervised by the Office of Thrift Supervision. In addition to traditional banks and thrifts, several other categories o f institutions exist. The Federal Deposit Insurance A ct (FDI Act), Section 5(d)(3), provides that a m em ber of one insurance fund may, w ith the approval of its primary federal supervisor, merge, consolidate w ith, or acquire the deposit liabilities of an institution that is a m em ber of the other insurance fund w ith o u t changing insurance fund status for the acquired deposits. These institutions w ith deposits insured by both insurance funds are referred to as Oakar financial institutions. The FDI Act, Section 5(d)(2)(G), allows SAIF-member th rifts to convert to a bank charter and retain their SAIF m em bership. These institutions are referred to as Sasser financial institutions. The Home O w ners’ Loan A ct (HOLA), Section 5(o), allows BIF-member banks to convert to a th rift charter and retain their BIF m em bership. These institutions are referred to as HOLA thrifts. O ther Significant Legislation The Om nibus Budget Reconciliation A ct of 1990 (1990 OBR Act), the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), and the Deposit Insurance Funds A ct of 1996 (DIFA) made changes to the FDIC's assessm ent authority (see Note 7) and borrowing authority. The FDICIA also requires the FDIC to: 1) resolve failing institutions in a manner that w ill result in the least possible cost to the deposit insurance funds and 2) maintain the insurance funds at not less than 1.25 percent o f estim ated insured deposits or a higher percentage as circumstances warrant. Bank Insurance Fund The Gramm-Leach-Bliley A ct (GLBA) was enacted on November 12,1999, in order to modernize the financial services industry (banks, brokerages, insurers, and other financial services providers). The GLBA lifts restrictions on affiliations among banks, securities firm s, and insurance companies. It also expands the financial activities perm issible fo r financial holding companies and insured depository institutions, their affiliates and subsidiaries. Recent Legislative Initiatives Legislation on deposit insurance reform was introduced during February 2002 in the House and Senate. The House acted on the FDIC's recom m endations by passing legislation, H.R. 3717, the Federal Deposit Insurance Reform A ct of 2002, on May 22, 2002. Another reform bill, S. 1945, the Safe and Fair Deposit Insurance A ct of 2002, w as introduced in the Senate on February 14, 2002. No further action was taken by the 107th Congress during the year on these bills. In January and February 2003, however, similar deposit insurance reform legislation w as reintroduced in the Senate and House, respectively. Legislative proposals during the 107th Congress included merging BIF and SAIF, modifying restrictions on charging risk-based insurance premiums, implementing assessment credits and rebates, changing the designated reserve ratio from a fixed 1.25 per cent of estim ated insured deposits to a range, increasing deposit insurance coverage for all accounts (including higher coverage for retirem ent accounts), and indexing the insurance lim it to inflation. Deposit insurance reform provisions may have a significant impact on the BIF and the SAIF, if enacted into law. FDIC manage ment, however, cannot predict w hich provisions, if any, will ultimately be enacted. Operations of th e BIF The primary purpose of the BIF is to: 1) insure the deposits and protect the depositors of BIF-insured institutions and 2) resolve failed institutions, including managing and disposing of their assets. In addition, the FDIC, acting on behalf of the BIF, examines state-chartered banks that are not m em bers of the Federal Reserve System. The BIF is primarily funded from: 1) interest earned on investments in U.S. Treasury obligations and 2) deposit insurance assessments. Additional funding sources are U.S. Treasury and Federal Financing Bank (FFB) borrowings, if necessary. The 1990 OBR A ct established the FDIC's authority to borrow from the FFB on behalf of the BIF and the SAIF. The FDICIA increased the FDIC's authority to borrow fo r insurance purposes from the U.S. Treasury, on behalf o f the BIF and the SAIF, from $5 billion to $30 billion. The FDICIA established a limitation on obligations that can be incurred by the BIF, known as the M axim um Obligation Limitation (MOL). As o f Decem ber 31, 2002 and December 31, 2001, the M O L fo r the BIF w as $56.7 billion and $55.4 billion, respectively. Receivership Operations The FDIC is responsible fo r managing and disposing o f th e assets o f failed institu tio n s in an orderly and e fficie n t manner. The assets held by receivership entities, and the claims against them , are accounted for separately from BIF assets and liabilities to ensure that receivership proceeds are distributed in accordance w ith applicable laws and regulations. Also, the income and expenses attributable to receiverships are accounted for as transactions of those receiverships. Expenses paid by the BIF on behalf of the receiverships are recovered from those receiverships. 2. S um m ary o f S ig n ifica n t A c c o u n tin g P o licie s General These financial statem ents pertain to the financial position, results of operations, and cash flo w s of the BIF and are presented in conform ity w ith U.S. generally accepted accounting principles (GAAP). These statements do not include reporting fo r assets and liabilities o f closed banks fo r w hich the FDIC acts as receiver. Periodic and final accountability reports of the FDIC's activities as receiver are furnished to courts, supervisory authorities, and others as required. Use of Estimates FDIC m anagem ent makes estim ates and assum ptions that a ffect the am ounts reported in the financial statem ents and accompanying notes. Actual results could differ from these estimates. W here it is reasonably possible that changes in estim ates w ill cause a material change in the financial statem ents in the near term , the nature and extent of such changes in estim ates have been disclosed. Cash Equivalents Cash equivalents are short-term, highly liquid investments w ith original maturities of three m onths or less. Cash equivalents consist primarily of Special U.S. Treasury Certificates. Investm ent in U.S. Treasury Obligations Section 13(a) of the FDI Act, as amended, (12 U.S.C. 1823(a)), states that BIF funds "shall be invested in obligations o f the United States or in obligations guaranteed as to principal and interest by the United States". The A ct further requires that the Secretary of the Treasury approve all such investments in excess of $100,000. The Secretary has granted approval to invest BIF funds only in U.S. Treasury obligations, provided that such obligations are purchased or sold through the Bureau of the Public Debt's Government Account Series (GAS) program. BIF investments in U.S.Treasury obligations are either classified as held-to-maturity or available-for-sale. Securities designated as held-to-maturity are shown at amor tized cost. Amortized cost is the face value of 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 of maturity, except fo r callable U.S. Treasury securities, which are amortized to the first anticipated call date. Securities designated as available-for-sale are shown at market value, which approximates fair value. Unrealized gains and losses are included in Comprehensive Income. Realized gains and losses are included in the Statements of Income and Fund Balance as components of Net Income. Interest on both types of securities is calculated on a daily basis and recorded monthly using the effective interest method. Bank Insurance Fund Allow ance for Losses on Receivables From Bank Resolutions The BIF records a receivable for the amounts advanced and/or obligations incurred for resolving failing and failed banks. 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 estimates of discounted cash recoveries from the assets of failed banks, net of all applicable estimated liquidation costs. Cost Allocations Among Funds Operating expenses not directly charged to the funds are allocated to all funds administered by the FDIC using workload-based allocation percentages. These percentages are developed during the annual corporate planning process and through supplem ental functional analyses. Depreciation The FDIC has designated the BIF as adm inistrator of property and equipm ent used in its operations. Consequently, the BIF includes the cost of these assets in its financial statem ents and provides the necessary funding fo r them . The BIF charges the other funds usage fees representing an allocated share o f its annual depreciation expense. These usage fees are recorded as cost recoveries, w hich reduce operating expenses. The W ashington, D.C. office buildings and the L. W illiam Seidman Center in Arlington, Virginia, are depreciated on a straight-line basis over a 50-year estimated life. The San Francisco condom inium offices are depreciated on a straight-line basis over a 35-year estim ated life. Leasehold im provem ents are capitalized and depreciated over the lesser of the remaining life of the lease or the estim ated useful life o f the im provem ents, if determ ined to be material. Capital assets depreciated on a straight-line basis over a five-year estim ated life include main fram e equipm ent; furniture, fixtures, and general equipm ent; and internal-use softw are. Personal com puter equipm ent is depreciated on a straight-line basis over a three-year estim ated life. Related Parties The nature of related parties and a description of related party transactions are dis cussed in Note 1 and disclosed throughout the financial statements and footnotes. Reclassifications Reclassifications have been made in the 2001 financial statements to conform to the presentation used in 2002. 47 ■ ■ ■ M M 3. Investm ent in U .S. Treasury O b lig a tio n s, Net As of December 31, 2002 and December 31, 2001, the book value of investments in U.S. Treasury obligations, net, was $27.5 billion and $30.2 billion, respectively. As of December 31, 2002, the FDIC held $6.2 billion of Treasury inflation-indexed securities (TIIS) for the BIF. These securities are indexed to increases or decreases in the Consumer Price Index fo r All Urban Consumers (CPI-U). Additionally, FDIC held $1.5 billion of callable U.S. Treasury bonds at December 31, 2002, w ith the prem ium s being amortized to the firs t call date. Callable U.S. Treasury bonds may be called five years prior to the respective bonds' stated m aturity on their semi-annual coupon payment dates upon 120 days notice. There were no available-for-sale securities sold during 2002. In 2001, the BIF reported a gross realized gain of $78 million on the sale of securities designated as availablefor-sale. Proceeds from the sales were $1.5 billion. Specific identification was used to determine cost of the securities sold in computing the realized gain. U.S. Treasury Obligations at December 31, 2002 Dollars in T h o u s a n d s Unrealized Holding Gains Net Maturity* Yield at^ Purchase’ Face Value Carrying Amount Unrealized Holding Losses Market Value Held-to-Maturity W ith in 1 ye a r 5.98% A fte r 1 year th ru 5 years 6.24% 10,265,000 10,401,894 1,169,295 11,571,189 A fte r 5 years thru 10 years 5.39% 2,895,000 2,961,035 370,281 3,331,316 Treasury Inflation-Indexed A fte r 5 y ears t hru 10 years 3.82% Total $ 2,690,000 $ 607,987 $ 2,737,1 i 63,325 609,548 16,457,987 $ 1,390,000 $ 16,709,665 $ $ 2,800,513 68,169 677,717 1,671,070 $ 18,380,735 Available-for-Sale W ith in 1 year 5.31% A fte r 1 year thru 5 years 4.91% Treasury Inflation-Indexed A fte r 5 years thru 1 !0 je a j^ 3.78% $ 3,355,1 5,010,245 Total 9,755,245 1,389,723 27,614 1,417,337 3,595,734 235,538 3,831,272 5,025,967 549,017 5,574,984 $ 10,011,424 812,169 $ 10,823,593 $ 26,721,089 Total Investment in U.S. Treasury Obligations, Net Total $ 26,213,232 $ 2,483,239 S $ 29,204,328 For purposes of this table, all callable securities are assumed to mature on their first call dates. Their yields at purchase are reported as their yield to firs t call date. For TIIS, the yields in the above table are stated at their real yields at purchase, not their effective yields. Effective yields on TIIS include a long-term annual inflation assumption as measured by the CPI-U. The long-term CPI-U consensus forecast is 2.4%, based on figures issued by the Office of M anagem ent and Budget and the Congressional Budget Office in early 2002. Bank Insurance Fund U.S. Treasury Obligations at December 31, 2001 Dollars in Thousands Maturity* Yield atT Purchase Net Carrying Amount Face Value Unrealized Holding Gains Unrealized Holding Losses Market Value 1 Held-to-Maturity 3,666,801 10,345,000 10,516,639 752,344 (2,193) 11,266,790 A fte r 5 years thru 10 years 5.39% 5,505,000 5,696,333 196,238 0 5,892,571 Treasury Inflation-Indexed A fte r 5 years thru 10 years 3.82% 596,008 1 $ ' 20,071,008 $ 20,477,568 $ $ $ $ 11,807 597,795 1,031,536 ’ s (25) 3,737,923 6.40% Total $ 71,147 5.77% A fte r 1 year thru 5 years $ 3,625,000 $ W ith in 1 year $ 0 609,602 (2,218) S 21,506,886 1Available-for-Sale W ith in 1 year 4.57% A fte r 1 year thru 5 years 5.54% Treasury Inflation-Indexed A fte r 5 years thru 10 years 3.78% Total $ 1,050,000 4,911,545 “ S 9,346,545 1,056,197 3,454,666 3,385,000 4,928,582 $ 9,439,445 10,721 $ 156,271 103,950 $ 270,942 0 $ S 1,066,918 3,610,937 0 (25,020) 5,007,512 (25,020) 9,685,367 $ I Total Investment in U.S. Treasury Obligations, Net Total $ 29,417,553 § S 29,917,013 S 1,302,478 _ L (27,238) $ 31,192,253 • For purposes of this table, all callable securities are assumed to mature on their first call dates. Their yields at purchase are reported as their yield to firs t call date. T For TIIS, the yields in the above table are stated at their real yields at purchase, not their effective yields. Effective yields on TIIS include a w eighted average of Bloomberg s calculation of yield w ith a long-term inflation assumption of 2.5% annually, as measured by the Consumer Price Index (CPI). As of Decem ber 31, 2002 and 2001, the unamortized prem ium, net of the unamortized discount, was $508 million and $499 million, respectively. 49 £££■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■ 4. R eceivables From B ank R esolutions, Net The bank resolution process takes different form s depending on the unique facts and circumstances surrounding each failing or failed institution. Payments for institutions that fail are made to cover obligations to insured depositors and represent claims by the BIF against the receiverships' assets. There w ere ten bank failures in 2002 and three in 2001, w ith assets at failure of $2.5 billion and $54 million, respectively, and BIF outlays of $2.1 billion and $49.5 million, respectively. Assets held by the FDIC in its receivership capacity fo r closed BIF-insured insti tutions are the main source of repaym ent o f the BIF's receivables from closed banks. As of December 31, 2002 and 2001, BIF receiverships held assets w ith a book value of $1.1 billion and $154.6 million, respectively (including cash, investm ents, and miscellaneous receivables of $479 million and $71.9 million at December 31, 2002 and 2001, respectively). Generally, the estim ated cash recoveries from the management and disposition of these assets that are used to derive the allowance for losses are based in part on a statistical sampling of receivership assets. For certain recent and significant failures, a separate evaluation was performed, based on non-representative sampling, to estim ate cash recoveries on the m ajority of receivership assets in order to determ ine the appropriate allowance for losses. These estim ated recoveries are regularly evaluated, but remain subject to uncertainties because of potential changes in econom ic conditions. Such uncertainties could cause the BIF's and other claimants' actual recoveries to vary from the level currently estimated. I Receivables From Bank Resolutions, N et at December 31 Dollars | in T h o u s a n d s 2002 Receivables from closed banks $ (5,550,218) A llow an ce fo r losses Total Digitized50 for FRASER III 2001 6,055,613 505,395 $ 5,368,970 (5,289,815) __ S 79,155 Bank Insurance Fund 5. P rop erty and Equipm en t, Net Property and Equipm ent, N et at December 31 Dollars in T h o u s a n d s 2002 Land $ 37,352 2001 $ 29,631 Buildings 171,362 175,265 A pplication so ftw a re (includes w ork-in-process) 155,196 131,104 Furniture, fixtures, and equipm ent A ccum ulated depreciation Total $ 98,497 93,593 (159,323) (125,624) 303,084 $ 303,969 The depreciation expense w as $47 m illion and $45 m illion fo r 2002 and 2001, respectively. 6. C o n tin g e n t Lia b ilitie s for: Anticipated Failure of Insured Institutions The BIF records a contingent liability and a loss provision fo r banks (including Oakar and Sasser financial institutions) th a t are likely to fail w ith in one year of the reporting date, absent som e favorable event such as obtaining additional capital or merging, when the liability becomes probable and reasonably estimable. The contingent liability is derived by applying expected failure rates and histori cal loss rates to groups o f institu tio n s w ith certain shared characteristics. In addition, institution-specific analysis is perform ed on those banks w h e re failure is im m inent absent institution m anagem ent resolution o f existing problem s. As o f Decem ber 31, 2002 and 2001, the contingent liabilities fo r anticipated failure of insured institutions w ere $1.0 billion and $1.9 billion, respectively. In addition to these recorded contingent liabilities, the FDIC has identified additional risk in the financial services industry that could result in a material loss to the BIF should potentially vulnerable financial institutions ultim ately fail. This risk is evidenced by the level of problem bank assets and the presence of various high-risk banking business models that are particularly vulnerable to adverse econom ic and market conditions. Due to the uncertainty surrounding future econom ic and market conditions, there are other banks fo r w hich the risk of failure is less certain, but still consid ered reasonably possible. Should these banks fail, the BIF could incur additional estim ated losses up to $6.0 billion. The accuracy o f these estim ates w ill largely depend on future economic and market conditions. The FDIC's Board o f Directors has the statutory authority to consider the contingent liability from anticipated failures o f insured institutions w hen setting assessm ent rates. 51 Litigation Losses The BIF records an estim ated loss fo r unresolved legal cases to the extent that those losses are considered probable and reasonably estimable. In addition to the am ount recorded as probable, the FDIC has determ ined that losses totaling $53.8 million from unresolved legal cases are reasonably possible. Other Contingencies Representations and Warranties As part o f the FDIC's efforts to maximize the return from the sale of assets from bank resolutions, representations and warranties, and guarantees are offered on certain loan sales. In general, the guarantees, representations, and warranties on loans sold relate to the com pleteness and accuracy of loan docu m entation, the quality of the underw riting standards used, the accuracy of the delinquency status w hen sold, and the conform ity o f the loans w ith characteris tics of the pool in w hich they w e re sold. The total am ount of loans sold subject to unexpired representations and warranties, and guarantees w as $6.7 billion as o f Decem ber 31, 2002. The contingent liability from all outstanding claims asserted in connection w ith representations and w arranties w as $11.6 million and $1.5 million at Decem ber 31, 2002 and 2001, respectively. In addition, future losses on representations and warranties, and guarantees could be incurred over the remaining life of the loans sold, w hich is generally 20 years or more. Consequently, the FDIC believes it is possible that additional losses may be incurred by the BIF from the universe of outstanding contracts w ith unasserted representation and warranty claims. However, because of the uncertainties surrounding the tim ing of when claims may be asserted, the FDIC is unable to reasonably estim ate a range o f loss to the BIF from outstanding contracts w ith unasserted representation and warranty claims. 7. A sse ssm e n ts The 1990 OBR A ct removed caps on assessm ent rate increases and authorized the FDIC to set assessm ent rates fo r BIF m em bers semiannually, to be applied against a m em ber's average assessm ent base. The FDICIA: 1) required the FDIC to im plem ent a risk-based assessm ent system ; 2) authorized the FDIC to increase assessm ent rates fo r BIF-member institutions as needed to ensure that funds are available to satisfy the BIF’s obligations; 3) required the FDIC to build and maintain the reserves in the insurance funds to not less than 1.25 percent of estim ated insured deposits; and 4) authorized the FDIC to increase assess m ent rates more frequently than semiannually and im pose em ergency special assessm ents as necessary to ensure that funds are available to repay U.S. Treasury borrowings. The FDIC uses a risk-based assessm ent system that charges higher rates to those institutions that pose greater risks to the BIF. To arrive at a risk-based Bank Insurance Fund assessm ent fo r a particular institution, the FDIC places each institution in one of nine risk categories, using a tw o-step process based firs t on capital ratios and then on other relevant information. The assessm ent rate averaged approximately 22 cents and 14 cents per $100 of assessable deposits fo r 2002 and 2001, respectively. On Novem ber 12, 2002, the Board voted to retain the BIF assess m ent schedule at the annual rate o f 0 to 27 cents per $100 of assessable deposits fo r the firs t semiannual period o f 2003. The Board reviews prem ium rates semiannually. As stated above, the FDICIA requires the FDIC to maintain the insurance funds at a designated reserve ratio (DRR) of not less than 1.25 percent of estimated insured deposits (or a higher percentage as circum stances warrant). As of Septem ber 30, 2002, the BIF reserve ratio was 1.25 percent of estim ated insured deposits. The FDICIA authorizes and mandates BIF assessm ents if needed to maintain the fund at the DRR or to return the fund to the DRR if it falls below the DRR. The FDIC is required to set semiannual assessm ent rates that are sufficient to increase the reserve ratio to the DRR not later than one year after such rates are set, or in accordance w ith a recapitalization schedule of fifteen years or less. The DIFA provided, among other things, fo r the elimination of the mandatory m inim um assessm ent form erly provided fo r in the FDI Act. It also provided for the expansion of the assessment base for payments of the interest on obligations issued by the Financing Corporation (FICO) to include all FDIC-insured institutions, and it made the FICO assessm ent separate from regular assessments, effective on January 1, 1997. The FICO w as established by the C om petitive Equality Banking A ct o f 1987 as a m ixed-ow nership governm ent corporation w hose sole purpose w as to function as a financing vehicle fo r the FSLIC. The annual FICO interest obligations o f approximately $790 million are paid on a pro rata basis using the same rate fo r banks and thrifts. The FICO assessm ent has no financial impact on the BIF. The FICO assessm ent is separate from the regular assessm ents and is imposed on banks and thrifts, not on the insurance funds. The FDIC, as adm inistrator o f the BIF and the SAIF, is acting solely as a collection agent fo r the FICO. During 2002 and 2001, $621 m illion and $627 m illion, respectively, w as collected fro m BIF-m em ber institu tio n s and rem itted to the FICO. 8. Pro vision fo r Insurance Losses Provision for insurance losses was a negative $87 million for 2002 and $1.8 billion for 2001. The follow ing chart lists the m ajor com ponents of the provision for insurance losses. I Provision fo r Insurance Losses fo r th e Years Ended D e ce m b er 31 Dollars j in T h o u s a n d s 2001 2002 Valuation Adjustments: $ Closed banks Open bank assistance and other assets Total Valuation Adjustments 616,844 $ (41,106) 6,006 (928) 622.850 (42,034) (902,903) 1,776,645 Contingent Liabilities Adjustments: A n ticip a te d fa ilu re o f insured in stitution s Litig ation losses 190,572 Other contingencies Total Contingent Liabilities Adjustments $ Total Digitized 54 for FRASER 16,095 2,511 5,615 (709,820) 1,798,355 (86,970) $ 1,756,321 9. Em p loye e Ben efits Pension Benefits, Savings Plans and Postem ploym ent Benefits Eligible FDIC employees (permanent and term employees w ith appointm ents exceeding one year) are covered by either the Civil Service R etirem ent System (CSRS) or the Federal Employees Retirement System (FERS). The CSRS is a defined benefit plan, w hich is o ffse t w ith the Social Security System in certain cases. Plan benefits are determ ined on the basis of years o f creditable service and compensation levels. The CSRS-covered em ployees also can contribute to the tax-deferred Federal T hrift 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. Autom atic and matching em ployer contri butions to the TSP are provided up to specified am ounts under the FERS. Although the BIF contributes a portion of pension benefits for eligible employees, it does not account fo r the assets of either retirem ent system . The BIF also does not have actuarial data fo r accumulated plan benefits or the unfunded liability relative to eligible employees. These am ounts are reported on and accounted fo r by the U.S. O ffice of Personnel Management. Eligible FDIC employees also may participate in a FDIC-sponsored tax-deferred 401 (k) savings plan w ith matching contributions. The BIF pays its share of the em ployer's portion of all related costs. Bank Insurance Fund 1 Pension Benefits, Savings Plans Expenses and Postem ploym ent Benefits for th e Years Ended December 31 Dollars in T h o u s a n d s 2002 Separation Incentive Payment $ 29,085 2001 $ 3,304 Civil Service R etirem ent System 13,365 11,205 Federal Employees R etirem ent System (Basic Benefit) 30,366 29,562 FDIC Savings Plan 18,956 18,254 Federal T h rift Savings Plan 12,235 11,871 Total $ 104,007 S 74,196 During 2002, the Corporation offered voluntary employee buyout programs to a m ajority of its employees and conducted a reduction-in-force (RIF) in an effort to reduce identified staffing excesses. As a result, over 700 employees left or w ill leave the Corporation by December 31, 2003. Approxim ately 91 percent of the affected employees have left their positions in 2002. Termination benefits included compensation of fifty percent of the current salary fo r voluntary depar tures. The total cost of this benefit to the Corporation was $33.1 million for 2002, w ith BIF's pro rata share totaling $28.9 million, w hich is included in the "Operating expenses" line item . In 2002, BIF paid $10.1 million of this com pen sation benefit and the remaining unpaid am ount is recorded as a liability in the "A ccounts payable and other liabilities" line item. Accrued Annual Leave The BIF's pro rata share of the Corporation's liability to employees fo r accrued annual leave is approximately $34.1 million and $35.3 million at December 31, 2002 and 2001, respectively. Postretirem ent Benefits Other Than Pensions The FDIC provides certain life and dental insurance coverage fo r its eligible retirees, the retirees' beneficiaries, and covered dependents. Retirees eligible fo r life insurance coverage are those w h o have qualified due to: 1) immediate enrollm ent upon appointm ent or five years of participation in the plan and 2) eligibility fo r an im m ediate annuity. The life insurance program provides basic coverage at no cost to retirees and allows converting optional coverages to direct-pay plans. Dental coverage is provided at no cost to all retirees eligible fo r an im m ediate annuity. A t December 31, 2002 and 2001, the BIF's net postretirem ent benefit asset recognized in the "In te re st receivable on invest ments and other assets, n e t" line item in the Statem ents of Financial Position was $130 thousand and $3.6 million, respectively. The Corporation's postretirem ent benefits plan curtailm ent loss resulting from the voluntary em ployee buyout programs and reduction-in-force was $1.6 million in 2002, w ith BIF's pro rata share totaling $1.3 million. 10. C o m m itm e n ts and O ff-B alance-Sheet Exposure Com m itm ents: Leased Space The BIF's allocated share of the FDIC's lease com m itm ents totals $138.6 million fo r future years. The lease agreem ents contain escalation clauses resulting in adjustm ents, usually on an annual basis. The allocation to the BIF o f the FDIC's future lease com m itm ents is based upon current relationships of the workloads among the BIF, the SAIF, and the FRF. Changes in the relative workloads could cause the am ounts allocated to the BIF in the future to vary from the am ounts shown below. The BIF recognized leased space expense of $36.9 million and $38.5 million fo r the years ended Decem ber 31, 2002 and 2001, respectively. 1 Leased Space C om m itm ents Dollars in T h o u s a n d s 2003 2004 2005 2006 2007 2008/Thereafter $ 38,318 $ 34,487 $ 28,780 $ 19,309 $ 11,076 S 6,667 Off-Balance-Sheet Exposure: Asset Securitization Guarantees As part of the FDIC's effo rts to maximize the return from the sale or disposition of assets from bank resolutions, the FDIC has securitized som e receivership assets. To facilitate the securitizations, the BIF provided lim ited guarantees to cover certain losses on the securitized assets up to a specified m axim um . In exchange fo r backing the lim ited guarantees, the BIF received assets from the receiverships in an amount equal to the expected exposure under the guarantees. The remaining term of the lim ited guarantee is 24 years. The table below gives the maximum off-balance-sheet exposure the BIF has under these guarantees. Bank Insurance Fund I Asset Securitization Guarantees at December 31 Dollars in Thousands 2002 M axim um exposure under th e lim ite d guarantees $ Less: G uarantee claim s paid (inception-to-date) $ (35,034) Less: A m o un t o f exposure recognized as a conting ent lia b ility Maximum Off-Balance-Sheet Exposure Under the Limited Guarantees 243,764 2001 (6,508) $ 202,222 330,936 (34,756) (3,966) $ 292,214 Deposit Insurance As of Septem ber 30, 2002, deposits insured by the BIF totaled approximately $2.5 trillion. This w ould be the accounting loss if all depository institutions were to fail and the acquired assets provided no recoveries. 11. C o n ce n tra tio n o f C re d it R isk Financial instrum ents that potentially subject the BIF to credit risk consist primarily of gross receivables from bank resolutions totaling $6.1 billion. The receivables from bank resolutions include payments made to cover obligations to insured depositors, advances to receiverships to provide working capital, and receivables fo r expenses paid by the BIF on behalf o f receiverships. Assets held by the FDIC in its receivership capacity fo r closed BIF-insured institutions are the main source o f repaym ent of the BIF's receivables from closed banks. An allowance fo r loss of $5.6 billion, or 92% of the gross receivable, was recorded as of Decem ber 31, 2002. Of the remaining eight percent of the gross receivable, the am ount of credit risk is limited since 77% of the receivable w ill be repaid from receivership cash and cash equivalents. 12. D isclosures A b o u t the Fair Value o f Financial Instruments Cash equivalents are short-term , highly liquid investm ents and are shown at current value. The fair market value of the investm ent in U.S. Treasury obligations is disclosed in Note 3 and is based on current m arket prices. The carrying amount of interest receivable on investments, short-term receivables, and accounts payable and other liabilities approximates their fair market value, due to their short maturities and/or comparability w ith current interest rates. The net receivables from bank resolutions primarily include the BIF's subrogated claim arising from payments to insured depositors. The receivership assets that w ill ultim ately be used to pay the corporate subrogated claim are valued using discount rates that include consideration of market risk. These discounts ultimately affect the BIF's allowance fo r loss against the net receivables from bank resolu tions. Therefore, the corporate subrogated claim indirectly includes the effe ct of discounting and should not be view ed as being stated in term s of nominal cash flow s. Although the value of the corporate subrogated claim is influenced by valuation of receivership assets (see Note 4), such receivership valuation is not equivalent to the valuation of the corporate claim. Since the corporate claim is unique, not intended fo r sale to the private sector, and has no established market, it is not practicable to estim ate its fair m arket value. The FDIC believes that a sale to the private sector o f the corporate claim w ould require indeterm inate, but substantial discounts fo r an interested party to profit from these assets because of credit and other risks. In addition, the tim ing of receivership payments to the BIF on the subrogated claim does not necessarily correspond w ith the tim ing of collections on receivership assets. Therefore, the e ffe ct of discounting used by receiverships should not necessarily be viewed as producing an estim ate of m arket value fo r the net receivables from bank resolutions. Bank Insurance Fund 13. S u p plem en tary Inform ation R elating to the S tatem ents o f Cash Flow s I Reconciliation of N et Income to N et Cash Provided by Operating Activities for the Years Ended December 31 Dollars in T h o u s a n d s 2002 Net lncome/(Loss) $ 1,045.268 2001 $ (562,666) Adjustments to Reconcile Net lncome/(Loss) to Net Cash Provided by Operating Activities Income Statement Items: A m ortization o f U.S. Treasury obligations 217,742 160,763 (110,679) (96,064) Gain on sale o f U.S.Treasury obligations 0 (78,227) D epreciation on property and equipm ent 47,484 44,723 2,149 1,568 TIIS in fla tio n adjustm ent R etirem ent o f property and equipm ent Change in Assets and Liabilities: Decrease in in tere st receivable on investm ents and other assets (Increase) Decrease in receivables from bank resolutions Increase (Decrease) in accounts payable and other lia b ilitie s (Decrease) Increase in contingent lia b ilitie s fo r an ticipated fa ilu re of insured in stitution s Increase in other contingencies Increase in contingent lia b ilitie s fo r litig a tio n losses Net Cash Provided by Operating Activities $ 63,688 17,273 (426,239) 270,434 14,218 (16,591) (902,903) 1,769,645 12,658 5,995 167,682 15,201 131,068 $ 1,532,054 59 Savings Association Insurance Fund December 31. 2002 and 2001 Savings A ssociation Insurance Fund Federal Deposit Insurance Corporation 1Savings Association insurance Fund S tatem ents of Financial Position at December 31 Dollars in T h o u s a n d s 2002 2001 Assets Cash and cash equivalents 1,907,353 $ $ 276,507 Cash and other assets: R estricted fo r SAIF-m em ber e xit fees (N ote 3) (Includes cash and cash equivalents of $187.7 million and $71.9 million at December 31, 2002 and December 31, 2001, respectively) 311,864 299,374 H eld -to-m atu rity securities 5,726,840 6,718,418 A vailable-for-sale securities 3,769,576 2,745,476 Investment in U.S. Treasury obligations, net: (Note 4) Interest receivable on investm ents and other assets, net 153,320 156,126 Receivables fro m th rift resolutions, ne t (N ote 5) 287,855 1,285,150 Total Assets $ 12,156,808 S 11,481,051 $ 7,100 $ 8,111 Liabilities Accounts payable and other lia b ilitie s Contingent liabilities for: (Note 6) 90,493 233,000 SAIF-m em ber e xit fees and investm ent proceeds held in escrow (N ote 3) 311,864 299,374 Total Liabilities 410,070 546,127 11,465,716 10,845,515 281,022 89,409 11,746,738 10,934,924 A nticipa ted fa ilu re o f insured in stitu tio n s Litigation losses 5,642 613 Commitments and off-balance-sheet exposure (Note 10) Fund Balance Accum ulated net income U nrealized gain on available-for-sale securities, net (N ote 4) Total Fund Balance Total Liabilities and Fund Balance S 12,156,808 $ 11,481,051 The accompanying notes are an integral part of these financial statements. 61 Federal Deposit Insurance Corporation Savings Association Insurance Fund Statem ents of Income and Fund Balance for the Years Ended December 31 Dollars in T h o u s a n d s 2002 2001 Revenue__________________________________________________________________________________ Interest on U.S. Treasury obligations $ 564,259 Assessm ents (N ote 7] Realized gain on sale of U.S.Treasury obligations O ther revenue ___________$ 633,725 35,402 23,783 51,630 0 12,364 779 733,121 588,821 Total Revenue Expenses and Losses O perating expenses O ther insurance expenses Total Expenses and Losses Net Income 101,591 124,363 Provision fo r insurance losses (N ote 8) (156,494) 443,103 751 19,389 (31,380) 564,083 169,038 620,201 Unrealized gain on available-for-sale securities, net (N ote 4) 191,613 7,238 Comprehensive Income 811,814 176,276 10,934,924 10,758,648 Fund Balance - Beginning Fund Balance - Ending The accompanying notes are an integral part of these financial statements. Digitized 62 for FRASER $ 11,746,738 S 10,934,924 Savings A ssociation Insurance Fund Federal Deposit Insurance Corporation 1S aving s A ssociation Insurance Fund S ta te m e n ts of Cash F lo w s fo r th e Years Ended D e c e m b e r 31 Dollars in Thousands 2001 2002 Cash Flows From Operating Activities Cash provided by: Interest on U.S. Treasury obligations $ 576,192 $ 661,895 35,554 Assessm ents 23,709 Entrance and e xit fees, includinq in tere st on e xit fees (N ote 3) 15,811 16,725 1,126,940 246,535 73 2,615 (119,993) (103) (1,976,964) 1,497,470 (1,116,421) 1,070,000 2,049,512 150,000 875,245 0 (826,788) Recoveries fro m th rift resolutions M iscellaneous receipts Cash used by: O perating expenses (102,429) (125,159) D isbursem ents fo r th rift resolutions M iscellaneous disbursem ents Net Cash Provided by (Used by) Operating Activities (Note 13) (352) Cash Flows From Investing Activities Cash provided by: M a tu rity of U.S. Treasury obligations, he ld -to-m atu rity M a tu rity or sale U.S. Treasury obligations, available-for-sale Cash used by: Purchase of U.S. Treasury obligations, he ld -to-m atu rity Purchase of U.S. Treasury obligations, available-for-sale Net Cash Provided by Investing Activities Net Increase in Cash and Cash Equivalents Cash and Cash Equivalents - Beginning Unrestricted Cash and Cash Equivalents ■ Ending The accompanying notes are an integral part of these financial statements. (823,265) 249,187 1,274,704 1,746,657 158,283 348,424 190,141 1,907,353 276,507 71,917 187,728 Restricted Cash and Cash Equivalents - Ending Cash and Cash Equivalents - Ending (970,813) $ 2,095,081 S 348,424 Savings Association Insurance Fund Notes to the Financial Statements December 31, 2002 and 2001 1. L egislative H istory and O p eratio n s o f th e Savings A sso ciatio n Insurance Fund Legislative History The Financial Institutions Reform, Recovery, and Enforcem ent A ct of 1989 (FIRREA) 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 (FDIC) as the adm inistrator of these funds. All three funds are maintained separately to carry out their respective mandates. The SAIF and the BIF are insurance funds responsible fo r protecting insured th rift and bank depositors from loss due to institution failures. The FRF is a resolution fund responsible fo r w inding up the affairs of the form er Federal Savings and Loan Insurance Corporation (FSLIC) and liquidating the assets and liabilities transferred from the fo rm e r Resolution Trust Corporation (RTC). Pursuant to the Resolution Trust Corporation Completion A ct of 1993 (RTC Completion Act), resolution responsibility transferred from the RTC to the SAIF on July 1, 1995. Prior to that date, th rift resolutions w ere the responsibility of the RTC (January 1, 1989 through June 30, 1995) or the FSLIC (prior to 1989). Pursuant to FIRREA, an active institution's insurance fund mem bership and primary federal supervisor are generally determ ined by the institution's charter type. Deposits of SAIF-member institutions are generally insured by the SAIF; SAIF m em bers are predom inantly th rifts supervised by the O ffice of Thrift Supervision (OTS). Deposits of BIF-member institutions are generally insured by the BIF; BIF m em bers are predom inantly com m ercial and savings banks supervised by the FDIC, the Office o f the Com ptroller of the Currency, or the Federal Reserve Board. In addition to traditional th rifts and banks, several other categories of institutions exist. The Federal Deposit Insurance A ct (FDI Act), Section 5(d)(3), provides that a m em ber of one insurance fund may, w ith the approval of its primary federal supervisor, merge, consolidate w ith, or acquire the deposit liabilities of an institu tion that is a m em ber of the other insurance fund w ith o u t changing insurance fund status fo r the acquired deposits. These institutions w ith deposits insured by both insurance funds are referred to as Oakar financial institutions. The FDI Act, Section 5(d)(2)(G), allows SAIF-member th rifts to convert to a bank charter and retain their SAIF m em bership. These institutions are referred to as Sasser financial institutions. The Home O w ners' Loan A ct (HOLA), Section 5(o), allows BIF-member banks to convert to a th rift charter and retain their BIF m em bership. These institutions are referred to as HOLA thrifts. O ther Significant Legislation The Omnibus Budget Reconciliation A ct of 1990 (1990 OBR Act), the Federal Deposit Insurance Corporation Im provem ent A ct of 1991 (FDICIA), and the Deposit Insurance Funds A ct o f 1996 (DIFA) made changes to the FDIC's Savings A ssociation Insurance Fund assessm ent authority (see Note 7) and borrowing authority. The FDICIA also requires the FDIC to: 1) resolve failing institutions in a manner that w ill result in the least possible cost to the deposit insurance funds and 2) maintain the insurance funds at not less than 1.25 percent of estim ated insured deposits or a higher percentage as circum stances warrant. The Gramm Leach Bliley A ct (GLBA) w as enacted on November 12,1999, in order to modernize the financial services industry (banks, brokerages, insurers, and other financial service providers). The GLBA lifts restrictions on affiliations among banks, securities firm s, and insurance companies. It also expands the financial activities perm issible fo r financial holding companies and insured depository institutions, their affiliates and subsidiaries. Recent Legislative Initiatives Legislation on deposit insurance reform was introduced during February 2002 in the House and Senate. The House acted on the FDIC's recom m endations by passing legislation, H.R. 3717, the Federal Deposit Insurance Reform A ct of 2002, on May 22, 2002. Another reform bill, S. 1945, the Safe and Fair Deposit Insurance A ct of 2002, w as introduced in the Senate on February 14, 2002. No further action was taken by the 107th Congress during the year on these bills. In January and February 2003, however, similar deposit insurance reform legislation w as reintroduced in the Senate and House, respectively. Legislative proposals during the 107th Congress included merging SAIF and BIF, modifying restrictions on charging risk-based insurance prem ium s, im plem enting assess m ent credits and rebates, changing the designated reserve ratio from a fixed 1.25 percent of estim ated insured deposits to a range, increasing deposit insurance coverage fo r all accounts (including higher coverage fo r retirem ent accounts), and indexing the insurance lim it to inflation. Deposit insurance reform provisions may have a significant impact on the SAIF and the BIF, if enacted into law. FDIC management, however, cannot predict w hich provisions, if any, w ill ultim ately be enacted. Operations of the SAIF The primary purpose of the SAIF is to: 1) insure the deposits and protect the depositors o f SAIF-insured institutions and 2) resolve failed institutions, including disposing of their assets. In this capacity, the SAIF has financial responsibility for all SAIF-insured deposits held by SAIF-member institutions and by BIF-member banks designated as Oakar financial institutions. The SAIF is primarily funded from : 1) interest earned on investm ents in U.S. Treasury obligations and 2) deposit insurance assessments. Additional funding sources are borrowings from the U.S. Treasury, the Federal Financing Bank (FFB), and the Federal Home Loan Banks, if necessary. The 1990 OBR A ct established the FDIC's authority to borrow from the FFB on behalf o f the SAIF and the BIF. The FDICIA increased the FDIC's authority to borrow fo r insurance purposes from the U.S. Treasury, on behalf of the SAIF and the BIF, from $5 billion to $30 billion. The FDICIA established a limitation on obligations that can be incurred by the SAIF, known as the M axim um Obligation Limitation (MOL). As o f Decem ber 31, 2002 and December 31, 2001, the M O L for the SAIF was $19.9 billion and $18.8 billion, respectively. Receivership Operations The FDIC is responsible fo r managing and disposing o f the assets of failed institutions in an orderly and efficient manner. The assets held by receivership enti ties, and the claims against them, are accounted for separately from SAIF assets and liabilities to ensure that receivership proceeds are distributed in accordance w ith applicable laws and regulations. Also, the income and expenses attributable to receiverships are accounted for as transactions of those receiverships. Expenses paid by the SAIF on behalf of the receiverships are recovered from those receiverships. 2 . S um m ary o f S ig n ific a n t A cc o u n tin g Policies General These financial statem ents pertain to the financial position, results of operations, and cash flo w s o f the SAIF and are presented in conform ity w ith U.S. generally accepted accounting principles (GAAP). These statements do not include reporting fo r assets and liabilities of closed th rift institutions fo r w hich the FDIC acts as receiver. Periodic and final accountability reports of the FDIC's activities as receiver are furnished to courts, supervisory authorities, and others as required. Use of Estimates FDIC m anagem ent makes estim ates and assum ptions that a ffect the amounts reported in the financial statem ents and accompanying notes. Actual results could d iffe r from these estim ates. W here it is reasonably possible that changes in estim ates w ill cause a material change in the financial statem ents in the near term , the nature and extent of such changes in estim ates have been disclosed. Cash Equivalents Cash equivalents are short-term, highly liquid investments w ith original maturities of three months or less. Cash equivalents consist primarily of Special U.S. Treasury Certificates. Investm ent in U.S. Treasury Obligations Section 13(a) of the FDI Act, as amended, (12 U.S.C.1823 (a)), states that SAIF funds "shall be invested in obligations of the United States or in obligations guaran teed as to principal and interest by the United States." The A ct further requires that the Secretary of the Treasury approve all such investments in excess of $100,000. The Secretary has granted approval to invest SAIF funds only in U.S. Treasury obligations, provided that such obligations are purchased or sold through the Bureau of the Public Debt's Governm ent A ccount Series (GAS) program. Savings Association Insurance Fund SAIF's investments in U.S. Treasury obligations are either classified as held-tomaturity or available-for-sale. Securities designated as held-to-maturity are shown at amortized cost. Amortized cost is the face value of 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 of maturity. Securities des ignated as available-for-sale are shown at market value, w hich approximates fair value. Unrealized gains and losses are included in Comprehensive Income. Realized gains and losses are included in the Statements of Income and Fund Balance as components of Net Income. Interest on both types of securities is calculated on a daily basis and recorded monthly using the effective interest method. Allowance for Losses on Receivables From Thrift Resolutions The SAIF records a receivable for the amounts advanced and/or obligations incurred fo r resolving failing and failed thrifts. 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 estimates of discounted cash recover ies from the assets of failed thrifts, net of all applicable estimated liquidation costs. Cost Allocations Among Funds Operating expenses not directly charged to the funds are allocated to all funds administered by the FDIC using workload-based allocation percentages. These percentages are developed during the annual corporate planning process and through supplem ental functional analyses. Related Parties The nature of related parties and a description o f related party transactions are discussed in Note 1 and disclosed th roughout th e financial statem ents and footnotes. Reclassifications Reclassifications have been made in the 2001 financial statem ents to conform to the presentation used in 2002. 3 . Cash and O th er Assets: R estricted fo r S A IF -M em b er Exit Fees The SAIF collects entrance and exit fees fo r conversion 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 of Directors (Board) and published in the FederalHegister on March 21, 1990, directed that exit fees paid to the SAIF be held in escrow. The FDIC and the Secretary of the Treasury w ill determ ine w hen it is no longer necessary to escrow such funds fo r the paym ent of interest on obligations previously issued by the FICO. These escrow ed exit fees are invested in 6 U.S. Treasury securities pending determ ination o f ownership. The interest earned is also held in escrow. There w ere no conversion transactions during 2002 and 2001 that resulted in an exit fee to the SAIF. le a s h and O ther Assets: Restricted for S A IF-M em b er Exit Fees at December 31 Dollars in I Thousands 2002 Cash and cash equivalents $ 2001 187,728 Investm ent in U.S. Treasury obligations, net 71,917 $ 223,213 122,402 Interest receivable on U.S. Treasury obligations 4,244 1,734 Total $ 311,864 299,374 $ U.S. Treasury Obligations at December 31, 2002 (Restricted for S AIF-M em ber Exit Fees) Dollars in T h o u s a n d s Held-to-Maturity Yield at Purchase Maturity Face Value W ith in 1 year_______________ 6.59% A fte r 1 year thru 5 years A fte r 5 years thru 10 years 5.45% ...4.99% Total $ ___ ~ 35,000___ $ 64,000 ~ $ ~ 20,000 Net Carrying Amount Unrealized Holding Gains 34,986 ______ $ Unrealized Holding Losses 222_________ $ 0 Market Value $ J35.208 66,830____________6,298_________________ 0_____________ 73,128 20,586____________2,108 0 119,000 ______ 22,694 $ 122,402$ U.S. Treasury Obligations at December 31, 2001 (Restricted for S AIF-M em ber Exit Fees) Dollars in T h o u s a n d s Held-to-Maturity Maturity Yield at Purchase Net Carrying Amount Unrealized Holding Gains Unrealized Holding Losses $ $ 5.95% 100,000 $ 100,027 A fte r 1 year thru 5 years 6.10% 75,000 76,764 3,814 0 80,578 A fte r 5 years thru 10 years 5.03% 44,000 46,422 893 0 47,315 219,000 $ 223,213 0 $ 230,284 Digitized (tS for FRASER $ $ 2,364 Market Value W ith in 1 year Total $ Face Value 7,071 S 0 $ 102,391 The unamortized prem ium, net of the unamortized discount, was $3.4 million and $4.2 million at December 31, 2002 and 2001, respectively. 8,628 Savings Association Insurance Fund 4 . In v es tm e n t in U .S. Treasury O b ligatio ns, N et As o f D ecem ber 31, 2002 and 2001, the book value o f in ve stm e n ts in U.S. Treasury Obligations, net, was $9.5 billion and, the FDIC held $2.1 billion of Treasury inflation-indexed securities (TIIS) fo r the SAIF. These securities are indexed to increases or decreases in the Consumer Price Index fo r all Urban Consumers (CPI-U). During 2002, FDIC purchased $639 million of callable U.S. Treasury securities fo r the SAIF. These securities are designated as either held-to-maturity or available-for-sale, w ith the prem ium s being amortized to the firs t call date. Callable U.S. Treasury bonds may be called five years prior to the respective bonds' stated m aturity on their semi-annual coupon payment dates upon 120 days notice. None of these securities w ere called during the year. There w ere no available-for-sale securities sold during 2002. In 2001, the SAIF reported a gross realized gain of $52 million on the sale of securities designated as available-for-sale. Proceeds from the sales w ere $795 million. Specific identifi cation w as used to determ ine cost o f the securities sold in com puting the realized gain. 69 U.S. Treasury Obligations at December 31, 2002 (Unrestricted) Dollars in T h o u s a n d s Maturity* Net Carrying Amount Face Value Yield at Purchase’ Unrealized Holding Gains I Held-to-Maturity Unrealized Holding Losses Market Value I $ 541,662 $ 12,242 0 $ 553,904 6.23% 5.91% 2,880,000 2,941,199 317,167 0 3,258,366 A fte r 5 years thru 10 years 5.78% 2,030,000 2,021,651 298,277 0 2,319,928 Treasury Inflation-Indexed A fte r 5 years thru 10 years 3.85% $ Total 535,000 $ W ith in 1 year A fte r 1 year thru 5 years 224,432 222,328 5,669,432 S 5,726,840 23,917 $ 1Available-for-Sale 651,603 0 246,245 $ 0 $ $ 0 $ 6,378,443 ] $ 473,317 $ 9,660 5.77% A fte r 1 year thru 5 years 4.81% 1,235,000 Treasury Inflation-Indexed A fte r 5 years thru 10 years 3.84% 1,675,573 1,672,974 3,385,573 $ 3,488,554 S 281,022 $ 9,215,394 $ 932,625 $ 475,000 $ W ith in 1 year Total $ 1,342,263 82,983 188,379 s 0 0 482,977 1,425,246 0 1,861,353 $ 3,769,576 Total Investment in U.S. Treasury Obligations, Net Total $ 9,055,005 $ 10,148,019 • For purposes of this table, all callable securities are assumed to mature on their firs t call dates. Their yields at purchase are reported as th e ir yield to first call date. T For TIIS, the yields in the above table are stated at their real yields at purchase, not their effective yields. Effective yields on TIIS include a long-term annual inflation assumption as measured by the CPI-U. The long-term CPI-U consensus forecast is 2.4%, based on figures issued by the Office of Management and Budget and the Congressional Budget Office in early 2002. TOFRASER Digitized for Savings A ssociation Insurance Fund U.S. Treasury Obligations at December 31, 2001 (Unrestricted) Dollars in Thousands Maturity Yield at Purchase* Net Carrying Amount Face Value Unrealized Holding Gains Unrealized Holding Losses Market Value Held-to-Maturity j W ith in 1 year 5.91% A fte r 1 year thru 5 years 6.17% 2,540,000 2,592,612 162,155 0 2,754,767 A fte r 5 years thru 10 years 5.65% 2,905,000 2,935,018 138,050 0 3,073,068 $ 970,000 $ 973,252 $ 15,735 $ 0 $ 988,987 Treasury Inflation-Indexed A fte r 5 years thru 10 years 3.85% Total S 220,012 217,536 6,635,012 $ 6,718,418 S 4,813 $ $ 0 320,753 S 3,213 $ 222,349 0 S 0 $ 7,039,171 Available-for-Sale W ith in 1 year 6.44% A fte r 1 year thru 5 years 6.18% Treasury Inflation-Indexed A fte r 5 years thru 10 years 3.84% Total $ 75,000 930,000 S 74,412 942,448 55,065 77,625 0 1,642,564 1,639,207 2,647,564 S 2,656,067 $ 94,870 S (5,461) S 9,374,485 S 415,623 S (5,461) 36,592 997,513 (5,461) 1,670,338 $ 2,745,476 Total Investment in U.S. Treasury Obligations, Net Total S 9,282,576 S 9,784,647 • For TIIS, the yields in the above table are stated at their real yields at purchase, not their effective yields. Effective yields on TIIS include a weighted average of Bloomberg's calculation of yield w ith a long-term inflation assumption of 2.5% annually, as measured by the Consumer Price Index (CPI). As of December 31, 2002 and 2001, the unamortized prem ium, net of the unamortized discount, was $160.4 million and $91.9 million, respectively. 71 ■ S S H H M N K M H M H M H H B H H IM H H M H B IM M fi 5. R eceivables From T h rift R esolutions, N et The th rift resolution process takes different form s depending on the unique facts and circumstances surrounding each failing or failed institution. Payments for institutions that fail are made to cover obligations to insured depositors and repre sent claims by the SAIF against the receiverships' assets. There was one th rift failure in both 2002 and 2001, w ith assets at failure of $50.2 million and $2.2 billion, respectively, and SAIF outlays of $37 million and $1 billion, respectively. Receivables from th rift resolutions decreased by $997 million to $288 million at December 31, 2002. This decrease was primarily due to: 1) recoveries totaling $850 million of payments made to cover obligations to insured depositors for the Superior Bank, FSB receivership and 2) a final paym ent of $213 million from the Superior conservatorship to repay the line of credit of $1.5 billion, w hich w as extended to the conservatorship fo r liquidity purposes. A ssets held by the FDIC in its receivership capacity fo r closed SAIF-insured insti tutions are the main source of repaym ent of the SAIF's receivables from closed thrifts. As of December 31, 2002 and 2001, SAIF receiverships held assets w ith a book value of $490 million and $210 million, respectively (including cash, investm ents, and miscellaneous receivables of $93 million and $16 million at December 31, 2002, and 2001, respectively). The estim ated cash recoveries from the management and disposition o f these assets that are used to derive the allow ance fo r losses are based, primarily, on a non-representative sam pling o f receivership assets. This non-representative sample, based primarily on asset book values, provided 95% coverage of the entire portfolio's book value fo r the year ended Decem ber 31, 2002. These estim ated recoveries are regularly evaluated, but remain subject to uncertainties because of potential changes in econom ic conditions. Such uncertainties could cause the SAIF's and other claim ants' actual recoveries to vary from the level currently estim ated. As part of the FDIC's efforts to maximize the return from the sale of assets from th rift resolutions, representations and warranties, and guarantees w ere offered on loan sales from the Superior resolution. In general, the guarantees, represen tations, and warranties on loans sold relate to the com pleteness and accuracy of loan documentation, the quality of the underwriting standards used, the accuracy o f the delinquency status w hen sold, and the conform ity of the loans w ith characteristics of the pool in w hich they w ere sold. The total am ount of loans sold subject to unexpired representations and warranties, and guarantees was $4.8 billion as of December 31, 2002. SAIF did not establish a liability fo r all outstanding claims asserted in connection w ith representations and warranties because the receivership has sufficient funds to pay fo r such claims. However, future losses on representations and warranties, and guarantees could be incurred over the remaining life of the loans sold, w hich is generally 20 years or more. Consequently, the FDIC believes it is possible that additional losses may be incurred by the SAIF from the universe of outstanding contracts w ith unasserted representation and warranty claims. However, because of the uncertainties surrounding the tim ing of when claims may be asserted, the FDIC is unable to reasonably estim ate a range of loss to the SAIF from outstanding contracts w ith unasserted representation and warranty claims. Savings A ssociation Insurance Fund 6 . C o n tin g e n t Liabilities for: Anticipated Failure of Insured Institutions The SAIF records a contingent liability and a loss provision fo r th rifts (including Oakar and Sasser financial institutions) that are likely to fail w ithin one year of the reporting date, absent some favorable event such as obtaining additional capital or merging, w hen the liability becomes probable and reasonably estimable. The c o n tin g e n t liability is derived by applying expected failure rates and historical loss rates to groups of institutions w ith certain shared characteristics. In addition, institution-specific analysis is performed on those thrifts w here failure is im m inent absent institution management resolution of existing problems. As of Decem ber 31, 2002 and 2001, the contingent liabilities fo r anticipated failure o f insured institutions w ere S90 million and $233 million, respectively. Due to the uncertainty surrounding future economic and market conditions, there are other th rifts fo r w hich the risk of failure is less certain, but still considered reasonably possible. Should these th rifts fail, the SAIF could incur additional estim ated losses up to $1.3 billion. The accuracy o f these estim ates w ill largely depend on future econom ic and m arket conditions. The FDIC's Board of Directors has the statutory authority to consider the contingent liability from anticipated failures of insured institutions w hen setting assessm ent rates. Litigation Losses The SAIF records an estim ated loss fo r unresolved legal cases to the extent those losses are considered probable and reasonably estimable. In addition to the am ount recorded as probable, the FDIC has determ ined that losses from unresolved legal cases totaling $1.6 million are reasonably possible. In addition, tw o cases are currently pending in the U.S. D istrict Court against the FDIC alleging that the FDIC's calculation of a special assessm ent exceeded the amounts due pursuant to the DIFA. The DIFA authorized the FDIC to make a one-tim e special assessm ent fo r the purpose o f fully capitalizing the SAIF to its designated reserve ratio (DRR) of 1.25% . The plaintiffs seek refunds of special assessm ent overpaym ents and interest from the date o f the overpaym ents. The FDIC believes the probability of refunds is rem ote and therefore no estim ate of loss is recorded or disclosed. 7. Assessm ents ||||||a ||||a ||a H ||a |||||^ ^ The 1990 OBR A ct removed caps on assessm ent rate increases and authorized the FDIC to set assessm ent rates for SAIF m em bers semiannually, to be applied against a m em ber's average assessm ent base. The FDICIA: 1) required the FDIC to im plem ent a risk-based assessm ent system ; 2) authorized the FDIC to increase assessm ent rates fo r SAIF-member institutions as needed to ensure that funds are available to satisfy the SAIF's obligations; 3) required the FDIC to build and maintain the reserves in the insurance funds to not less than 1.25 percent of estimated insured deposits; and 4) authorized the FDIC to increase assessment rates m ore frequently than semiannually and impose em ergency special assess ments as necessary to ensure that funds are available to repay U.S. Treasury borrowings. The FDIC uses a risk-based assessm ent system that charges higher rates to those institutions that pose greater risks to the SAIF. To arrive at a risk-based assessm ent fo r a particular institution, the FDIC places each institution in one o f nine risk categories, using a tw o-step process based firs t on capital ratios and then on other relevant inform ation. The assessm ent rate averaged approximately 26 cents and 41 cents per $100 of assessable deposits fo r 2002 and 2001, respectively. On N ovem ber 12, 2002, the Board voted to retain the SAIF assessm ent schedule at the annual rate of 0 to 27 cents per $100 o f assessable deposits fo r the firs t semiannual period of 2003. The Board review s prem ium rates semiannually. The DIFA provided, among other things, fo r the capitalization of the SAIF to its DRR of 1.25 percent by means o f a one-tim e special assessm ent on SAIFinsured deposits. The SAIF achieved its required capitalization by means of a $4.5 billion special assessm ent effective October 1, 1996. Since October 1996, the SAIF has maintained a reserve ratio at or higher than the DRR of 1.25 percent of insured deposits. As of September 30, 2002, the SAIF reserve ratio was 1.38 percent of estim ated insured deposits. The DIFA provided fo r the elimination of the mandatory m inim um assessm ent form erly provided fo r in the FDI Act. It also provided fo r the expansion of the assessm ent base fo r payments of the interest on obligations issued by the Financing Corporation (FICO) to include all FDIC-insured institutions, and it made the FICO assessm ent separate from regular assessments, effective on January 1, 1997. The FICO was established by the Com petitive Equality Banking A ct of 1987 as a m ixed-ownership governm ent corporation w hose sole purpose w as to function as a financing vehicle fo r the FSLIC. The annual FICO interest obligations of approximately $790 million are paid on a pro rata basis using the same rates fo r th rifts and banks. The FICO assessm ent has no financial impact on the SAIF. The FICO assessm ent is separate from the regular assessm ents and is imposed on th rifts and banks, not on the insurance funds. The FDIC, as adm inistrator o f the SAIF and th e BIF, is acting solely as a collection agent fo r the FICO. During 2002 and 2001, $161 m illion and $164 million, respectively, w as collected from SAIF-m em ber in stitu tio ns and rem itted to the FICO. Savings A ssociation Insurance Fund 8. Provision fo r Insurance Losses Provision fo r insurance losses w as a negative $156.5 million and $443.1 million fo r 2002 and 2001, respectively. In 2002, the negative provision w as primarily due to low er estim ated losses fo r anticipated failures w hich resulted from the improved financial condition o f a fe w large thrifts. The follow ing chart lists the major com ponents o f the provision fo r insurance losses. Provision for Insurance Losses for th e Years Ended December 31 Dollars in T h o u s a n d s 2001 2002 Valuation Adjustments: $ Closed th rifts Total Valuation Adjustments (10,113) $ 440,487 (10,113) 440,487 (142,507) (1,083) (3,874) 3,699 Contingent Liabilities Adjustments: A nticipa ted fa ilu re of insured in stitution s Litigation losses Total Contingent Liabilities Adjustments $ Total 2,616 (146,381) (156,494) $ 443,103 9. Em ployee B enefits Pension Benefits, Savings Plan and P ostem ploym ent Benefits Eligible FDIC employees (permanent and term em ployees w ith appointm ents exceeding one year) are covered by either the Civil Service R etirem ent System (CSRS) or the Federal Employees R etirem ent System (FERS). The CSRS is a defined benefit plan, w hich is o ffse t w ith the Social Security System in certain cases. Plan benefits are determ ined on the basis of years o f creditable service and com pensation levels. The CSRS-covered employees also can contribute to the tax-deferred Federal T hrift Savings Plan (TSP). The FERS is a three-part plan consisting of a basic defined benefit plan that provides benefits based on years o f creditable service and compensation levels, Social Security benefits, and the TSP. A utom atic and matching employer contributions to the TSP are provided up to specified am ounts under the FERS. Although the SAIF contributes a portion of pension benefits for eligible employees, it does not account fo r the assets o f either retirem ent system . The SAIF also does not have actuarial data fo r accumulated plan benefits or the unfunded liability relative to eligible employees. These am ounts are reported on and accounted fo r by the U.S. O ffice o f Personnel Management. Pension Benefits, Savings Plans Expenses and Postem ploym ent Benefits for th e Years Ended December 31 Dollars in Thousands 2002 Separation Incentive Payment $ 4,276 2001 $ 494 Civil Service R etirem ent System 1,715 1,561 Federal Employees R etirem ent System (Basic Benefit) 4,765 4,043 FDIC Savings Plan 2,951 2,508 Federal T h rift Savings Plan 1,913 Total 76FRASER Digitized for $ 15,620 1,622 S 10,228 Eligible FDIC employees also may participate in a FDIC-sponsored tax-deferred 401 (k) savings plan w ith matching contributions. The SAIF pays its share of the employer's portion of all related costs. During 2002, the Corporation offered voluntary employee buyout programs to a m ajority of its employees and conducted a reduction-in-force (RIF) in an e ffo rt to reduce identified staffing excesses. As a result, over 700 em ployees left or w ill leave the Corporation by Decem ber 31, 2003. Approxim ately 91 percent of the affected employees have left their positions in 2002. Termination benefits included compensation of fifty percent of the current salary fo r voluntary departures. The total cost of this benefit to the Corporation was $33.1 million fo r 2002, w ith SAIF's pro rata share totaling $4.2 million, w hich is included in the "O perating expenses" line item . All o f this am ount was paid by SAIF in 2002. Accrued Annual Leave The SAIF's pro rata share of the Corporation's liability to employees fo r accrued annual leave is approximately $5.5 million and $4.6 million at December 31, 2002 and 2001, respectively. P ostretirem ent Benefits Other Than Pensions The FDIC provides certain life and dental insurance coverage fo r its eligible retirees, the retirees' beneficiaries, and covered dependents. Retirees eligible fo r life insurance coverage are those w ho have qualified due to: 1) im m ediate enrollm ent upon appointm ent or five years of participation in the plan and 2) eligibility fo r an im m ediate annuity. The life insurance program provides basic coverage at no cost to retirees and allows converting optional coverages to direct-pay plans. Dental coverage is provided at no cost to all retirees eligible fo r an im m ediate annuity. A t December 31, 2002, the SAIF's net postretirem ent benefit liability recognized in the "A ccounts payable and other liabilities" line item in the S tatem ent o f Financial Position w as $145 thousand. At December 31, 2001, the SAIF's net postretirem ent benefit asset recognized in the "In te re st receivable on investm ents and other assets, n e t" line item in the S tatem ent of Financial Position was $148 thousand. Savings A ssociation Insurance Fund 10. C o m m itm en ts and O ff-B alan ce-S h eet Exposure Com m itm ents: Leased Space The SAIF's allocated share of the FDIC's lease com m itm ents totals $22.3 million fo r future years. The lease agreem ents contain escalation clauses resulting in adjustm ents, usually on an annual basis. The allocation to the SAIF of the FDIC's future lease com m itm ents is based upon current relationships of the w orkloads among the SAIF, the BIF, and the FRF. Changes in the relative w ork loads could cause the am ounts allocated to the SAIF in the future to vary from the am ounts show n below. The SAIF recognized leased space expense of $6.5 million and $5.8 million at Decem ber 31, 2002 and 2001, respectively. I Leased Space C om m itm ents Dollars in Thousands 2003 2004 2005 2006 2007 2008/Thereafter $ 6,150 $ 5,535 $ 4,619 $ 3,099 $ 1,777 $ 1,070 Off-Balance-Sheet Exposure: Deposit Insurance As of Septem ber 30, 2002, deposits insured by the SAIF totaled approximately $838 billion. This w ould be the accounting loss if all depository institutions w ere to fail and the acquired assets provided no recoveries. 11 . C o nc e n tra tio n o f C red it Risk Financial instrum ents that potentially subject the SAIF to credit risk consist primarily o f gross receivables from th rift resolutions totaling $722 million. The receivables from th rift resolutions include payments made to cover obligations to insured depositors, advances to receiverships to provide w orking capital, and receivables fo r expenses paid by the SAIF on behalf of receiverships. Assets held by the FDIC in its receivership capacity fo r closed SAIF-insured institutions are the main source of repaym ent o f the SAIF's receivables from resolutions. M ost of the gross receivables and related allowance fo r losses of $434 million are attributable to the failure o f Superior Bank. O f SAIF's $288 million net receivable, $282 million is estim ated to be repaid by Superior receivership assets, primarily, cash and a prom issory note arising from a settlem ent w ith the ow ners of the failed institution. The credit risk related to the prom issory note is lim ited since half of the outstanding note is secured by a letter of credit and the remaining half is subject to the creditw orthiness of the payor o f the note. Annual m onitor ing of the creditw orthiness of the payor is perform ed and currently indicates a low risk of non-performance. 12. D isclosures A b o u t the Fair Value o f Financial Instruments Cash equivalents are short-term , highly liquid investm ents and are shown at current value. The fair market value of the investm ent in U.S. Treasury obligations is disclosed in Notes 3 and 4 and is based on current market prices. The carrying a m ount of in te re st receivable on investm ents, short-term receivables, and accounts payable and other liabilities approximates their fair m arket value, due to their short m aturities and/or comparability w ith current interest rates. The net receivables from th rift resolutions primarily include the SAIF's subrogated claim arising from payments to insured depositors. The receivership assets that w ill ultim ately be used to pay the corporate subrogated claim are valued using discount rates that include consideration of market risk. These discounts ultimately a ffe ct the SAIF's allowance fo r loss against th e net receivables fro m th rift resolutions. Therefore, the corporate subrogated claim indirectly includes the e ffe c t o f discounting and should not be vie w e d as being stated in te rm s o f nominal cash flow s. Although the value of the corporate subrogated claim is influenced by valuation o f receivership assets (see Note 5), such receivership valuation is not equivalent to the valuation of the corporate claim. Since the corporate claim is unique, not intended fo r sale to the private sector, and has no established market, it is not practicable to estim ate its fair market value. The FDIC believes that a sale to the private sector of the corporate claim w ould require indeterm inate, but substantial, discounts for an interested party to profit from these assets because o f credit and other risks. In addition, the tim ing of receivership payments to the SAIF on the subrogated claim does not necessarily correspond w ith the tim ing of collections on receivership assets. Therefore, the e ffe ct of discounting used by receiverships should not necessarily be view ed as producing an estim ate o f m arket value fo r the net receivables fro m th rift resolutions. Savings A ssociation Insurance Fund 13. S u p p lem en tary In fo rm atio n R elating to th e S ta te m e n ts o f Cash Flows I Reconciliation of N et Income to N et Cash Provided by Operating Activities for the Years Ended December 31 Dollars in T h o u s a n d s 2002 Net Income S 2001 S 620,201 169,038 Adjustments to Reconcile Net Income to Net Cash Provided by (Used by) Operating Activities Income Statement Items: Am ortization of U.S. Treasury obligations (unrestricted) 32,503 47,333 TIIS in fla tio n adjustm ent (37,429) Gain on sale of U.S. Treasury obligations (37,407) 0 (51,630) 811 863 Change in Assets and Liabilities: Decrease in am ortization o f U.S. Treasury obligations (restricted) Decrease in entrance and e x it fees receivable, including in tere st receivable on investm ents and other assets Decrease (Increase) in receivables from th rift resolutions (Decrease) Increase in accounts payable and other lia b ilitie s (Decrease) in contingent lia b ility fo r an ticipated fa ilu re o f insured in stitution s 5,317 32,641 997,295 (1,281,002) (1,011) 362 (142,507) (1,083) (Decrease) Increase in conting ent lia b ility fo r litig a tio n losses (5,029) 3,699 Increase in e xit fees and investm ent proceeds held in escrow 12,489 15,595 Net Cash Provided by (Used by) Operating Activities $ 1,497,470 S (1,116,421) FSLIC Resolution Fund December 31, 2002 and 2001 FSLIC Resolution Fund Federal Deposit Insurance Corporation I FSLIC Resolution Fund Statem ents of Financial Position at December 31 Dollars in Thousands 2002 2001 Assets Cash and cash equivalents $ Investm ent in se cu ritiza tio n -re la te d assets acquired from receiverships (N ote 3) Receivables fro m th rift resolutions, ne t (N ote 4) Other assets, net (N ote 5) Total Assets 3,618,330 $ 1,087,102 131,304 286,455 22,511 $ 3,490,396 98,114 3,870,259 29,697 $ 4,893,650 Liabilities Accounts payable and other lia b ilitie s $ Contingent lia b ilitie s fo r litig a tio n losses and other (N ote 6) Total Liabilities 14,408 $ 14,787 546 5,304 14,954 20,091 Commitments and concentration o f credit risk (Note Wand Note 11) Resolution Equity (Note 8) Contributed capital A ccum ulated d e fic it Unrealized gain on available-for-sale securities, ne t (N ote 3) A ccum ulated d e ficit, net Total Resolution Equity Total Liabilities and Resolution Equity $ 126,827,821 128,073,030 (123,015,273) (123,505,818) 42,757 306,347 (122,972,516) (123,199,471) 3,855,305 4,873,559 3,870,259 $ 4,893,650 The accompanying notes are an integral part of these financial statements. SI Federal Deposit Insurance Corporation FSLIC Resolution Fund Statements of Income and Accumulated Deficit for the Years Ended December 31 Dollars in T h o u s a n d s 2002 2001 Revenue Interest on secu ritiza tio n-relate d assets acquired from receiverships $ 7,264 Interest on U.S. Treasury obligations Interest on advances and subrogated claim s Realized gain on investm ent in secu ritiza tio n-relate d assets acquired from receiverships (N ote 3) O ther revenue Total Revenue $ 32,758 46,835 99,488 1,394 18,447 352,486 352,179 25,098 78,166 581,038 433,077 Expenses and Losses O perating expenses Provision fo r losses (N ote 7) Expenses fo r g o o d w ill settlem ents and litig a tio n (N ote 1) Interest expense on notes payable and other expenses Realized loss on investm ent in s ecu ritiza tio n-relate d assets acquired fro m receiverships (N o te 3) Total Expenses and Losses Net Income U nrealized loss on available-for-sale securities, net (N ote 3) Comprehensive Income Accumulated Deficit - Beginning Accumulated Deficit - Ending The accompanying notes are an integral part of these financial statements. 45,684 74,683 (149,359) (368,987) 40,351 62,542 4,804 27,299 1£ 52^ (57,468) 23,541 (180,922) 490,545 761,960 (263,590) (149,070) 226,955 612,890 (123,199,471) (123,812,361) $ (122,972,516) $ (123,199,471) j FSLIC Resolution Fund Federal Deposit Insurance Corporation FSLIC Resolution Fund Statem ents of Cash Flows for the Years Ended December 31 Dollars in Thousands 2002 2001 Cash Flows From Operating Activities Cash provided by: Interest on U.S. Treasury obligations $ Interest on s e cu ritiza tio n -re la te d assets acquired from receiverships Recoveries from th rift resolutions M iscellaneous receipts 46,835 $ 99,488 8,745 36,148 307,694 476,678 32,607 53,351 Cash used by: Operating expenses (44,421) (83,342) Disbursem ents fo r th rift resolutions (30,373) (25,153) Disbursem ents fo r g o o d w ill settlem ents and litig a tio n expenses (40,351) (62,542) (9,119) (9,279) 271,617 485,349 M iscellaneous disbursem ents Net Cash Provided by Operating Activities (Note 13) Cash Flows From Investing Activities Cash provided by: Investm ent in s e cu ritiza tio n -re la te d assets acquired from receiverships Net Cash Provided by Investing Activities 1,101,525 902,402 1,101,525 902,402 21,459 0 Cash Flows From Financing Activities Cash provided by: U.S.Treasury paym ents fo r g o o d w ill settlem ents Cash used for: Return o f U.S. Treasury paym ents (N ote 8) Payments to Resolution Funding Corporation (N ote 8) Net Cash Used by Financing Activities Net lncrease/(Decrease) 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. $ 0 (5,300) (1,266,667) (1,406,596) (1,245,208) (1,411,896) 127,934 (24,145) 3,490,396 3,514,541 3,618,330 S 3,490,396 FSLIC Resolution Fund Notes to the Financial Statements December 31, 2002 and 2001 1. L egislative H istory and O perations o f th e FSLIC R esolution Fund Legislative History The U.S. Congress created the Federal Savings and Loan Insurance Corporation (FSLIC) through the enactm ent of the National Housing A ct of 1934. The Financial Institutions Reform, Recovery, and Enforcem ent A ct of 1989 (FIRREA) abolished the insolvent FSLIC, created the FSLIC Resolution Fund (FRF), and transferred the assets and liabilities o f the FSLIC to the FRF-except those assets and liabilities transferred to the Resolution Trust Corporation (RTC)-effective on A ugust 9, 1989. The FRF is responsible fo r w inding up the affairs o f the fo rm e r FSLIC. The FIRREA was enacted to reform, recapitalize, and consolidate the federal deposit insurance system . In addition to the FRF, FIRREA created the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). It also designated the Federal Deposit Insurance Corporation (FDIC) as the administrator of these funds. All three funds are maintained separately to carry out their respective mandates. The FIRREA also created the RTC to manage and resolve all th rifts previously insured by the FSLIC fo r w hich a conservator or receiver was appointed during the period January 1, 1989, through A ugust 8, 1992. The FIRREA established the Resolution Funding Corporation (REFCORP) to provide part of the initial funds used by the RTC for th rift resolutions. Additionally, funds w ere appropriated fo r RTC resolutions pursuant to FIRREA; the RTC Funding A ct of 1991; the RTC Refinancing, Restructuring and Improvement A ct of 1991; and the RTC Completion A ct of 1993. The RTC's resolution responsibility was extended through subsequent legislation from the original term ination date of August 8, 1992. Resolution responsibility transferred from the RTC to the SAIF on July 1, 1995. The RTC Completion A ct of 1993 (RTC Completion Act) term inated the RTC as of Decem ber 31, 1995. All remaining assets and liabilities of the RTC w ere transferred to the FRF on January 1,1996. Today, the FRF consists of tw o distinct pools of assets and liabilities: one com posed of the assets and liabilities o f the FSLIC transferred to the FRF upon the dissolution o f the FSLIC on August 9, 1989 (FRF-FSLIC), and the other com posed of the RTC assets and liabilities transferred to the FRF on January 1, 1996 (FRF-RTC). The assets of one pool are not available to satisfy obligations of the other. The RTC Completion A ct also made available approximately $18 billion w orth of additional funding to the RTC, of w hich the RTC actually d re w dow n $4.6 billion. The RTC Completion A ct requires the FDIC to return to the U.S. Treasury any funds that w ere transferred to the RTC pursuant to the RTC Completion A ct but not needed by the RTC. This appropriation w as fully repaid in 2000. The FDIC m ust transfer to the REFCORP the net proceeds from the FRF's sale o f RTC assets, after providing fo r all outstanding RTC liabilities. Any such funds transferred to the REFCORP pay the interest on the REFCORP bonds issued to FSLIC Resolution Fund fund the early RTC resolutions. Any such payments benefit the U.S. Treasury, w hich w ould otherw ise be obligated to pay the interest on the bonds. During 2002, the FRF-RTC transferred $1.3 billion to the REFCORR Operations of the FRF The FRF w ill continue operations until all o f its assets are sold or otherwise liquidated and all of its liabilities are satisfied. Any funds remaining in the FRFFSLIC w ill be paid to the U.S. Treasury. Any remaining funds of the FRF-RTC w ill be distributed to the REFCORP to pay the interest on the REFCORP bonds. FDIC has conducted an extensive re vie w and cataloging o f FRF's residual assets and liabilities and is continuing to explore approaches fo r concluding FRF's activities. Some o f the issues and item s that remain open in FRF are: 1) criminal restitution orders (generally have from 5 to 10 years remaining); 2) litigation claims and judgm ents obtained against officers and directors and other professionals responsible fo r causing th rift losses (judgments generally vary from 5 to 10 years); 3) numerous assistance agreem ents entered into by the form er FSLIC (FRF could continue to receive tax sharing benefits through year 2020); 4) goodwill litigation (no final date for resolution has been established; see Note 6); and 5) representations and warranties made to support the sale of assets including loans and servicing rights (these liabilities could be incurred over the remaining life o f the loans, w hich is generally 20 years or more; see Note 6). FDIC is considering w h e th e r enabling legislation or other measures may be needed to liquidate the remaining FRF assets and liabilities. The FRF has been primarily funded from the follow ing sources: 1) U.S. Treasury appropriations; 2) am ounts borrowed by the RTC from the Federal Financing Bank (FFB); 3) am ounts received from the issuance of capital certificates to REF CORP; 4) funds received from the m anagem ent and disposition o f assets of the FRF; 5) the FRF's portion o f liquidating dividends paid by FRF receiverships; and 6) interest earned on Special U.S. Treasury Certificates purchased w ith proceeds of 4) and 5). If these sources are insufficient to satisfy the liabilities o f the FRF, payments w ill be made from the U.S. Treasury in am ounts necessary, as appropriated by Congress, to carry out the objectives of the FRF. Public Law 103-327 provided $827 m illion in funding to be available until expended to facilitate efforts to w ind up the resolution activity o f the FRF-FSLIC. The FRF received $165 million under this appropriation on November 2, 1995. In addition, Public Law 104-208 and Public Law 105-61 authorized the use by the U.S. D epartm ent o f Justice (DOJ) of $26.1 m illion and $33.7 million, respectively, from the original $827 million in funding, thus reducing the am ount available to be expended to $602.2 million. The funding made available to DOJ covers the reim bursem ent o f reasonable expenses of litigation incurred in the defense of claims against the United States arising from the goodwill litigation cases. A dditional g oodw ill litigation expenses incurred by DOJ are paid directly from the FRF-FSLIC based on a M em orandum o f Understanding (MOU) dated October 2, 1998, betw een the FDIC and DOJ. Under the term s o f the MOU, the FRF-FSLIC paid $17.5 million and $66.8 million to DOJ fo r fiscal years 2003 and 2002, respectively. DOJ returns any unused fiscal year funding to the FRF unless special circum stances w arrant these funds be carried over and applied against current fiscal year charges. A t Septem ber 30, 2002, DOJ had $68.6 million in unused funds that w ere applied against FY 2003 charges of $86.1 million. Separate funding fo r goodwill judgm ents and settlem ents is available through Public Law 106-113 (see Note 6). Receivership Operations The FDIC is responsible fo r managing and disposing o f the assets of failed institutions in an orderly and efficient manner. The assets held by receivership entities, and the claims against them , are accounted for separately from FRF assets and liabilities to ensure that receivership proceeds are distributed in accordance w ith applicable laws and regulations. Also, the income and expenses attributable to receiverships are accounted fo r as transactions of those receiver ships. Expenses paid by the FRF on behalf o f the receiverships are recovered from those receiverships. 2. S um m ary o f S ig n ific a n t A cc o u n tin g Policies General These financial statem ents pertain to the financial position, results of operations, and cash flo w s o f the FRF and are presented in conform ity w ith U.S. generally accepted accounting principles (GAAP). These statem ents do not include report ing fo r assets and liabilities of closed th rift institutions fo r w hich the FDIC acts as receiver. Periodic and final accountability reports of the FDIC's activities as receiver are furnished to courts, supervisory authorities, and others as required. Use of Estimates FDIC m anagem ent makes estim ates and assum ptions that a ffect the amounts reported in the financial statem ents and accompanying notes. Actual results could d iffe r from these estim ates. W here it is reasonably possible that changes in estim ates w ill cause a material change in the financial statem ents in the near term , the nature and extent of such changes in estim ates have been disclosed. Cash Equivalents Cash equivalents are short-term, highly liquid investm ents w ith original maturities of three m onths or less. Cash equivalents consist o f Special U.S. Treasury Certificates. Investm ent in Securitization-Related Assets Acquired From Receiverships The investm ent in securitization-related assets acquired from receiverships is classified as available-for-sale and is shown at fair value w ith unrealized gains and losses included in Resolution Equity. Unrealized gains and losses are com puted on a quarterly basis using a cash flo w model that calculates the estim ated FSLIC Resolution Fund fair value of the assets at term ination. This model is updated w ith current data supplied by the trustees, w hich includes prepaym ent speed, delinquency rates, and m arket pricing. Realized gains and losses are recorded based upon the difference betw een the proceeds at term ination of the deal and the book value of the investm ent on both the escrow account and the related residual certificate, and are included as components of Net Income. Additionally, realized losses are recognized on the credit enhancem ent reserve fo r a decline in fair value that is judged to be an other-than-temporary impairment. Allow ance for Losses on Receivables From Thrift Resolutions The FRF records a receivable fo r the am ounts advanced and/or obligations incurred fo r resolving troubled and failed thrifts. 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 estimates of discounted cash recoveries from the assets of assisted or failed th rift institutions, net of all applicable estim ated liquidation costs. Estimated cash recoveries also include dividends and gains on sales from equity instrum ents acquired in resolution transactions. Cost Allocations Am ong Funds Operating expenses not directly charged to the funds are allocated to all funds administered by the FDIC using workload-based allocation percentages. These percentages are developed during the annual corporate planning process and through supplem ental functional analyses. Related Parties Limited Partnership Equity Interests. Former RTC receiverships w ere holders of limited partnership equity interests as a result of various RTC sales programs that included the National Land Fund; M ultiple Investor Fund; N-Series; S-Series; and Judgem ents, Deficiencies, and Charge-offs programs. The m ajority of the limited partnership equity interests have been transferred from the receiverships to the FRF. These assets are included in the "O th e r assets, n e t" line item in the FRF's Statem ents o f Financial Position. The nature of related parties and a description of related party transactions are dis cussed in Note 1 and disclosed throughout the financial statements and footnotes. Reclassifications Reclassifications have been made in the 2001 financial statem ents to conform to the presentation used in 2002. 3 . In v es tm e n t in S e cu ritizatio n -R e lated Assets A cq u ired From R eceiverships In 2002, the investm ent in securitization-related assets decreased by $989 million to $98 million primarily due to the term ination of 15 securitization deals. The FRF received $1.1 billion in proceeds from terminations during 2002 and $851 million during 2001. The one remaining deal that is active as of Decem ber 31, 2002, is expected to term inate in 2003. The RTC engaged in numerous securitization transactions in order to maximize the return from the sale or disposition of assets. The RTC sold $42.4 billion of receivership, conservatorship, and corporate loans to various trusts that issued regular pass-through certificates through its mortgage-backed securities program. A portion of the proceeds from the sale of the certificates w as placed in credit enhancem ent reserves (escrow accounts) to cover future credit losses w ith respect to the loans underlying the certificates. In addition, the escrow accounts w ere established to increase the likelihood of full and tim ely distributions of interest and principal to the certificate holders and thus increase the marketability of the certificates. The FRF's exposure from credit losses on loans sold through the program is limited to the balance of the escrow accounts. The FRF is entitled to any proceeds remaining in the escrow accounts at term ination of the securiti zation transactions. As part of the securitization transactions, the receiverships received a participation in the residual pass-through certificates (residual certifi cates) issued through its mortgage-backed securities program. The residual certificates entitle the holder to any cash flo w from the sale of collateral remain ing in the trust after the regular pass-through certificates and actual term ination expenses are paid. In 1996 and 1998, the escrow accounts and residual certificates w ere transferred from the receiverships to the FRF fo r $5.7 billion and $1.4 billion, respectively. Both transfers w e re o ffs e t by am ounts ow ed by the receiverships to the FRF. Investm ent in Securitization-Related Assets Acquired From Receiverships at December 31, 2002 Dollars in T h o u s a n d s Cost Credit enhancem ent reserve $ “ $ $ 55,357 40,092 Unrealized Holding Losses $ 15,749 8,256 Residual certifica tes Total 47,101 Unrealized Holding Gains $ 55,841 (13,084) Fair Value $ $ (13,084) 74,109 24,005 0 $ 98,114 FSLIC Resolution Fund Investm ent in Securitization-Related Assets Acquired From Receiverships at December 31, 2001 Dollars in Thousands Cost Credit enhancem ent reserve $ Unrealized Holding Losses $ $ 227,082 Residual certifica tes Total 553,673 Unrealized Holding Gains S 153,567 173,466 780,755 $ 327,033 $ Fair Value $ (20,686) 686,554 0 400,548 (20,686) S 1,087,102 4 . R eceivables From T h rift R esolutions, N et The th rift resolution process took different form s depending on the unique facts and circum stances surrounding each failing or failed institution. Payments for institutions that failed w ere made to cover obligations to insured depositors and represent claims by the FRF against the receiverships' assets. Payments to prevent a failure w ere made to operating institutions when cost and other criteria w ere met. Assets held by the FDIC in its receivership capacity fo r the form er FSLIC and SAIF-insured institutions are a significant source of repaym ent o f the FRF's receivables from th rift resolutions. As o f Decem ber 31, 2002 and 2001, FRF receiverships held assets w ith a book value o f $290 million and $448 million, respectively (including cash, investm ents, and miscellaneous receivables of $146 million and $264 million at December 31, 2002 and 2001, respectively). The estim ated cash recoveries from the management and disposition of these assets that are used to derive the allowance fo r losses are based on a non representative sampling o f receivership assets. This non-representative sample, based primarily on asset book values, provided 97% coverage of the entire portfolio's book value. These estim ated recoveries are regularly evaluated, but remain subject to uncertainties because of potential changes in economic conditions. Such uncertainties could cause the FRF's and other claimants' actual recoveries to vary from the level currently estimated. 1Receivables From Thrift Resolutions, Net at December 31 Dollars in T h o u s a n d s 2001 2002 Assets from open th rift assistance $ A llow an ce fo r losses Net Assets From Open Thrift Assistance Receivables from closed th rifts A llow an ce fo r losses Net Receivables From Closed Thrifts Total $ 15,000 $ 384,885 (15,000) (374,885) 0 10,000 27,636,213 32,534,350 (27,504,909) (32,257,895) 131,304 276,455 131,304 $ 286,455 $9 5. O ther A s se ts , Net Other Assets, N et at December 31 Dollars in T h o u s a n d s 2002 Accounts receivable, net $ Due fro m FDIC funds Assets acquired by th e Corporation, net Lim ited partnership equity interests $ $ 22,511 1,555 0 500 16,428 21,784 5,348 Total 2001 735 5,858 $ 29,697 6 . C o n t in g e n t L ia b ilit ie s f o r : Litigation Losses The FRF records an estimated loss fo r unresolved legal cases to the extent those losses are considered probable and reasonably estimable. In addition to the amount recorded as probable, the FDIC has determined that losses from unresolved legal cases totaling $43.3 million are reasonably possible. Additional Contingency Goodwill Litigation In United States v. W instar Corp., 518 U.S. 839 (1996), the Supreme Court held that w hen it became impossible follow ing the enactm ent of FIRREA in 1989 for the federal governm ent to perform certain agreements to count goodwill tow ard regulatory capital, the plaintiffs w ere entitled to recover damages from the United States. To date, approximately 120 lawsuits have been filed against the United States based on alleged breaches of these agreements (Goodwill Litigation). During 2002, the trial court entered orders finally dismissing 22 Goodwill Litigation cases. On July 22, 1998, DOJ's O ffice of Legal Counsel (OLC) concluded that the FRF is legally available to satisfy all judgm ents and settlem ents in the Goodwill Litigation involving supervisory action or assistance agreements. OLC determined that nonperformance o f these agreem ents w as a contingent liability that was transferred to the FRF on A ugust 9, 1989, upon the dissolution of the FSLIC. Under the analysis set forth in the OLC opinion, as liabilities transferred on A ugust 9, 1989, these contingent liabilities fo r future nonperform ance of prior agreem ents w ith respect to supervisory goodwill w ere transferred to the FRFFSLIC, w hich is that portion of the FRF encompassing the obligations of the form er FSLIC. The FRF-RTC, w hich encompasses the obligations of the form er RTC and was created upon the term ination of the RTC on Decem ber 31, 1995, is not available to pay any settlem ents or judgm ents arising out of the Goodwill Litigation. On July 23, 1998, the U.S. Treasury determ ined, based on OLC's opinion, that the FRF is the appropriate source of funds fo r paym ents of any such judgm ents and settlem ents. FSLIC Resolution Fund Section 110 of the Departm ent of Justice Appropriations Act, 2000 (Public Law 106-113, Appendix A, Title I, 113 Stat. 1501A-3, 1501A-20) provides to the FRF-FSLIC such sum s as may be necessary fo r the paym ent of judgm ents and com prom ise settlem ents in the Goodwill Litigation, to remain available until expended. Because an appropriation is available to pay such judgm ents and settlem ents, any liabilities fo r the Goodwill Litigation should have no material im pact on the financial condition o f th e FRF-FSLIC. N evertheless, the Civil Division o f the DOJ has taken the position that all resources of the FRF m ust be exhausted before the appropriation may be utilized. The FDIC and the Department of the Treasury disagree w ith the position advocated by the Civil Division o f the DOJ. OLC is considering this question, but has not issued an opinion. The lawsuits comprising the Goodwill Litigation are against the United States and as such are defended by the DOJ. On January 6, 2003, the DOJ again informed the FDIC that it is "unable at this tim e to provide a reasonable estimate of the likely aggregate contingent liability resulting from the l/V/nsfar-related cases." This uncer tainty arises, in part, from the existence of significant unresolved issues pending at the appellate or trial court level, as well as the unique circumstances of each case. The FDIC believes that it is probable that additional amounts, possibly substantial, may be paid from the FRF-FSLIC as a result of judgm ents and settlem ents in the Goodwill Litigation. However, based on the response from the DOJ, the FDIC is unable to estimate a range of loss to the FRF-FSLIC from the Goodwill Litigation, or determ ine w hether any such loss w ould have a material e ffect on the financial condition of the FRF-FSLIC if the FRF m ust be exhausted before the Section 110 appropriation may be utilized. Guarini Litigation Paralleling the goodwill cases are eight similar cases alleging that the govern m ent breached agreem ents regarding tax benefits associated w ith certain FSLIC-assisted acquisitions. These agreem ents allegedly contained the promise of tax deductions for losses incurred on the sale of certain thrift assets purchased by plaintiffs, from the FSLIC, even though the FSLIC provided the plantiffs w ith tax-exem pt reim bursem ent. A provision in the Om nibus Budget Reconciliation A ct of 1993 (popularly referred to as the "Guarini legislation") eliminated the tax deductions fo r these losses. To date, there have been liability determ inations in five o f the "G uarini" cases. In one of these cases, damages of approximately $28 million w ere recently awarded by the Court of Federal Claims subsequent to the date of the financial statements. As the tim e for filing an appeal has not yet lapsed, there may be appeals. Decisions on liability have not been made in the other tw o pending cases. An eighth case w as settled during 2002 fo r $20 thousand. The FDIC believes that it is possible that substantial am ounts may be paid from the FRF-FSLIC as a result of the judgm ents and settlem ents from the "Guarini litigation". However, because the litigation of damages computation is still ongoing, the am ount of the damages is not estim able at this tim e. Representations and Warranties As part o f the RTC's efforts to maximize the return from the sale of assets from th rift resolutions, representations and warranties, and guarantees w ere offered on certain loan sales. In general, the guarantees, representations, and warranties f on loans sold relate to the com pleteness and accuracy of loan documentation, the quality of the underw riting standards used, the accuracy o f the delinquency status w hen sold, and the co n fo rm ity o f the loans w ith characteristics o f the pool in w hich th e y w e re sold. The total am ount of the loans sold subject to unexpired representations and warranties, and guarantees was $173 billion as of Decem ber 31, 2002. The contingent liability from all outstanding claims asserted in connection w ith representations and warranties w as $77 thousand and $2.3 million at December 31, 2002 and 2001, respectively. In addition, future losses on representations and warranties, and guarantees could be incurred over the remaining life of the loans sold, w hich is generally 20 years or more. Consequently, the FDIC believes it is possible that additional losses may be incurred by the FRF from the universe of outstanding contracts w ith unasserted representation and warranty claims. However, because o f the uncertainties surrounding the tim ing o f w hen claims may be asserted, the FDIC is unable to reasonably estim ate a range of loss to the FRF from outstanding contracts w ith unasserted representation and warranty claims. 7. Provision fo r Losses The provision for losses was a negative $149 million and a negative $369 million fo r 2002 and 2001, respectively. In 2002, the negative provision w as primarily due to: 1) recoveries of $95 million of net tax benefits sharing from assistance agreem ents, 2) low er estim ated losses of $26 million to the credit enhancem ent reserve, and 3) low er estimated losses of $20 million fo r assets in liquidation. The negative provision in 2001 resulted primarily from: 1) recoveries of $163 million o f net tax benefits sharing from assistance agreem ents and 2) recoveries of $120 million from receiverships w ith positive equity w here the FRF is entitled to the positive value o f the receivership to reduce the overall cost o f resolving the institutions. Provision for Losses for the Years Ended December 31 Dollars in T h o u s a n d s 2002 2001 Valuation Adjustments: Open th rift assistance Tax be ne fits sharing recoveries $ (3,072) $ _______________________ (95,079)____________ (23,652) (163,111) Closed th rifts (20,164) (93,710) M iscellaneous receivables (28,776) (88,758) (147,091) (369,231) Total Valuation Adjustments Contingent Liabilities Adjustments: Litig ation losses (86) (2,015) R epresentations and w arran tie s (2,182) 2,259 Total Contingent Liabilities Adjustments (2,268) Total S (149,359) 244 S (368,987) FSLIC Resolution Fund 8 . R esolution Equity As stated in the Legislative History section of Note 1, the FRF is comprised of tw o distinct pools: the FRF-FSLIC and the FRF-RTC. The FRF-FSLIC consists of the assets and liabilities of the form er FSLIC. The FRF-RTC consists of the assets and liabilities of the form er RTC. Pursuant to legal restrictions, the tw o pools are maintained separately and the assets of one pool are not available to satisfy obligations of the other. The follow ing table show s the contributed capital, accumulated deficit, and resulting resolution equity fo r each pool. Resolution Equity at December 31, 2002 Dollars in Thousands FRF-FSLIC Contributed capital - beginning $ Add: U.S. Treasury paym ents fo r g o o d w ill settlem ents Less: REFCORP payments Contributed capital-ending A ccum ulated d e fic it Less: Unrealized gain on available-for-sale securities Accumulated deficit, net $ Total 44,157,025 FRF Consolidated FRF-RTC $ ~ 83,916,004 $ .... 128,073X129 21,459 0 21,459 0 (1,266,667) (1,266,667) 44,178,484 82,649,337 126,827,821 (41,282,541) (81,732,732) (123,015,273) 0 42,757 42,757 (41,282,541) (81,689,975) (122,972,516) $ 2,895,943 959,362 $ 3,855,305 Resolution Equity at December 31, 2001 Dollars in T h o u s a n d s FRF-FSLIC C ontributed capital - beginning $ 44,157,025 FRF Consolidated FRF-RTC $ 85,327,901 $ 129,484,926 Less: U.S. Treasury repaym ents 0 (5,300) (5,300) Less: REFCORP paym ents 0 (1,406,596) (1,406,596) Contributed capital-ending Accum ulated d e fic it Less: Unrealized gain on available-for-sale securities 83,916,005 128,073,030 (82,133,208) (123,505,818) 0 306,347 306,347 (41,372,610) Accumulated deficit, net Total 44,157,025 (41,372,610) $ 2,784,415 (81,826,861) $ 2,089,144 (123,199,471) S 4,873,559 93 Contributed Capital To date, the FRF-FSLIC and the form er RTC received $43.5 billion and $60.1 billion from the U.S.Treasury, respectively. These payments w ere used to fund losses from th rift resolutions prior to July 1,1995. Additionally, the FRF-FSLIC issued $670 million in capital certificates to the FICO and the RTC issued $31.3 billion of these instrum ents to the REFCORP. FIRREA prohibited the paym ent of dividends on any of these capital certificates. Through Decem ber 31, 2002, as described in Note 1, th e FRF-RTC has returned $4,556 billion to the U.S.Treasury and made payments of $4,122 billion to the REFCORP. These actions serve to reduce contributed capital. Accum ulated Deficit The accumulated deficit represents the cum ulative excess o f expenses over revenue fo r activity related to the FRF-FSLIC and the FRF-RTC. Approxim ately $29.7 billion and $87.9 billion w ere brought forw ard from the form er FSLIC and the fo rm e r RTC on A ugust 9,1989, and January 1,1996, respectively. The FRF-FSLIC accumulated deficit has increased by $11.5 billion, w hereas the FRF-RTC accumulated deficit has decreased by $6.2 billion, since their dissolution dates. 9 . E m p lo y e e B e n e fit s Pension Benefits, Savings Plans and Postem ploym ent Benefits Eligible FDIC employees (permanent and term employees w ith appointm ents exceeding one year) are covered by either the Civil Service R etirem ent System (CSRS) or the Federal Employees R etirem ent System (FERS). The CSRS is a defined benefit plan, w hich is o ffse t w ith the Social Security System in certain cases. Plan benefits are determ ined on the basis of years of creditable service and compensation levels. The CSRS-covered em ployees also can contribute to the tax-deferred Federal Thrift Savings Plan (TSP). The FERS is a three-part plan consisting of a basic defined benefit plan that provides benefits based on years o f creditable service and compensation levels, Social Security benefits, and the TSP. Autom atic and matching employer contributions to the TSP are provided up to specified am ounts under the FERS. Although the FRF contributes a portion of pension benefits fo r eligible employees, it does not account fo r the assets of either retirem ent system . The FRF also does not have actuarial data fo r accumulated plan benefits or the unfunded liability relative to eligible employees. These am ounts are reported on and accounted fo r by the U.S. O ffice of Personnel Management. Eligible FDIC employees also may participate in a FDIC-sponsored tax-deferred 401 (k) savings plan w ith matching contributions. The FRF pays its share of the employer's portion of all related costs. FSLIC Resolution Fund I Pension Benefits, Savings Plans Expenses and Postem ploym ent Benefits for the Years Ended December 31 Dollars i in T h o u s a n d s 2001 2002 Civil Service R etirem ent System $ 711 $ 1,055 Federal Employees R etirem ent System (Basic Benefit) 1,987 FDIC Savings Plan 1,186 1,748 756 1,131 Federal T h rift Savings Plan Total S 4,640 2,966 $ 6,900 Accrued Annual Leave The FRF's pro rata share o f the Corporation's liability to employees fo r accrued annual leave is approximately $2.5 million and $4.1 million at December 31, 2002 and 2001, respectively. Postretirem ent Benefits Other Than Pensions The FDIC provides certain life and dental insurance coverage fo r its eligible retirees, the retirees' beneficiaries and covered dependents. Retirees eligible fo r life insurance coverage are those w ho have qualified due to: 1) im m ediate enrollm ent upon appointm ent or five years o f participation in the plan and 2) eligibility fo r an im m ediate annuity. The life insurance program provides basic coverage at no cost to retirees and allows converting optional coverages to direct-pay plans. Dental coverage is provided at no cost to all retirees eligible fo r an im m ediate annuity. A t December 31, 2002, the FRF's net postretirem ent b e n e fit liability recognized in the "A ccounts payable and o ther lia b ilitie s" line item in the S tatem ent o f Financial Position w as $466 thousand. A t Decem ber 31, 2001, the FRF’s net postretirem ent benefit asset recognized in the "O th e r assets, n e t" line item in the S tatem ent of Financial Position was $232 thousand. 1 0 . C o m m it m e n t s Leased Space The FRF's allocated share of the FDIC's lease com m itm ents totals $8.7 million fo r future years. The lease agreem ents contain escalation clauses resulting in adjustm ents, usually on an annual basis. The allocation to the FRF of the FDIC's future lease com m itm ents is based upon current relationships o f the workloads among the FRF, the BIF, and the SAIF. Changes in the relative w orkloads could cause the am ounts allocated to the FRF in the future to vary from the am ounts show n below. The FRF recognized leased space expense of $4.0 million and $5.5 million fo r the years ended Decem ber 31, 2002 and 2001, respectively. 9 I Leased Space C om m itm ents Dollars in T h o u s a n d s 2003 2004 2005 2006 2007 2008/Thereafter $ 2,064 $ 2,039 $ 1,898 $ 1,378 $ 811 $ 474 1 1 . C o n c e n t r a t io n o f C r e d it R is k Financial in stru m e n ts th a t potentially subject th e FRF to c re d it risk consist prim arily of: 1) gross receivables fro m th rift resolutions totaling $27.7 billion and 2) an investm ent in securitization-related assets acquired from receiverships totaling $98.1 million. The receivables from th rift resolutions include payments made to cover obligations to insured depositors, advances to receiverships to provide working capital, and receivables fo r expenses paid by the FRF on behalf of receiverships. Assets held by the FDIC in its receivership capacity for the form er FSLIC and SAIF-insured institutions are the main source of repaym ent of the FRF's receivables from th rift resolutions. An allowance fo r loss of $27.5 billion, or 99.5% of the gross receivable, w as recorded as of Decem ber 31, 2002. Of the remaining 0.5 percent of the gross receivable, 85% o f the receivable is expected to be repaid from receivership cash, cash equivalents, and pledged cash reserves. The credit risk related to the pledged cash reserves is limited since the m ajority of these assets are evaluated annually and have experienced minimal losses. The value o f the investm ent in securitization-related assets is influenced by the economy of the area relating to the underlying loans. O f this investm ent, $130.5 million of the underlying mortgages are located in California and $44.3 million of loans are located in New Jersey. No other state accounted fo r a material portion o f the investment. 1 2 . D is c lo s u r e s A b o u t t h e F a ir V a lu e o f F in a n c ia l In s t r u m e n t s Cash equivalents are short-term , highly liquid investm ents and are show n at current value. The carrying am ount o f short-term receivables and accounts payable and other liabilities approximates their fair m arket value, due to their short m aturities and/or comparability w ith current interest rates. The net receivables from th rift resolutions primarily include the FRF's subrogated claim arising from payments to insured depositors. The receivership assets that w ill ultim ately be used to pay the corporate subrogated claim are valued using discount rates th a t include consideration o f m arket risk. These discounts ultim ately affect the FRF's allowance fo r loss against the net receivables from th rift resolutions. Therefore, the corporate subrogated claim indirectly includes the effe ct of discounting and should not be view ed as being stated in term s of nominal cash flow s. FSLIC Resolution Fund Although the value of the corporate subrogated claim is influenced by valuation of receivership assets (see Note 4), such receivership valuation is not equivalent to the valuation o f the corporate claim. Since the corporate claim is unique, not intended fo r sale to the private sector, and has no established market, it is not practicable to estim ate its fair market value. The FDIC believes that a sale to the private sector of the corporate claim w ould require indeterm inate, but substantial, discounts fo r an interested party to profit from these assets because o f credit and other risks. In addition, the tim ing of receivership payments to the FRF on the subrogated claim does not necessarily correspond w ith the tim in g o f collections on receivership assets. Therefore, the e ffe c t o f discounting used by receiverships should not necessarily be view ed as producing an estim ate of market value fo r the net receivables from th rift resolutions. The investm ent in securitization-related assets acquired from receiverships is adjusted to fair value at each reporting date using a valuation model that estimates the present value o f estim ated expected future cash flo w s discounted fo r the various risks involved, including both m arket and credit risks, as w ell as other attributes o f the underlying assets (see Note 3). 1 3 . S u p p le m e n t a r y I n f o r m a t io n R e la t in g t o t h e S t a t e m e n t s o f C a s h F lo w s Reconciliation of N et Income to N et Cash Provided by Operating Activities for th e Years Ended December 31 Dollars in T h o u s a n d s Net Income 2002 2001 490,545 761,960 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Change in Assets and Liabilities: Decrease in receivables from th rift resolutions (Increase) in securitization-related assets acquired from receiverships 155,151 129,921 (376,127) (327,132) Decrease in other assets 7,185 21,044 (Decrease) in accounts payable and other lia b ilitie s (379) (26,301) 0 (74,872) (4,758) 729 (Decrease) in lia b ilitie s fro m th rift resolutions (Decrease) Increase in contingent lia b ilitie s fo r litig a tio n losses $ Net Cash Provided by Operating Activities 271,617 S 485,349 ■■■■■■■■■ 1 4 . S u b s e q u e n t E v e n ts On January 10, 2003, FRF paid REFCORP $400 million from excess FRF-RTC cash, bringing total payments to REFCORP to $4.5 billion. 1 4 gao Comptroller General o f the United States ^A c c o u n ta b ility * Integrity * Reliability United S tates General Accounting Office Washington, D.C. 20548 To the Board o f Directors The Federal Deposit Insurance Corporation W e have audited the statem ents of financial position as o f Decem ber 31, 2002 and 2001, fo r the three funds adm inistered by the Federal Deposit Insurance Corporation (FDIC), the related statem ents of income and fund balance (accumu lated deficit), and the statem ents of cash flo w s fo r the years then ended. In our audits o f the Bank Insurance Fund (BIF), the Savings Association Insurance Fund (SAIF), and the FSLIC Resolution Fund (FRF), w e found • the financial statem ents of each fund are presented fairly, in all material respects, in conform ity w ith U.S. generally accepted accounting principles; • although certain internal controls should be improved, FDIC had effective internal control over financial reporting (including safeguarding o f assets) and compliance w ith laws and regulations; and • no reportable noncompliance w ith the laws and regulations that w e tested. The follow ing sections discuss our conclusions in more detail. They also present inform ation on (1) the scope o f our audits, (2) a reportable condition1 related to inform ation system control weaknesses, (3) BIF's reserve ratio, and (4) our evaluation of FDIC management's com m ents on a draft of this report. Opinion on BIF's Financial Statem ents Digitized9S for FRASER The financial statem ents, including the accompanying notes, present fairly, in all material respects, in conform ity w ith U.S. generally accepted accounting principles, BIF's financial position as of December 31, 2002 and 2001, and the results of its operations and its cash flo w s fo r the years then ended. 1 Reportable conditions involve matters coming to the auditor's attention that, in the auditor's judgment, should be communicated because they represent significant deficiencies in the design or operation of internal control and could adversely affect FDIC’s ability to meet the control objectives described in this report. Opinion on SAIF's Financial Statem ents The financial statem ents, including the accompanying notes, present fairly, in all material respects, in conform ity w ith U.S. generally accepted accounting principles, SAIF's financial position as of Decem ber 31, 2002 and 2001, and the results of its operations and its cash flo w s fo r the years then ended. Opinion on FRF's Financial S tatem ents The financial statem ents, including the accompanying notes, present fairly, in all material respects, in conform ity w ith U.S. generally accepted accounting principles, FRF's financial position as of Decem ber 31, 2002 and 2001, and the results of its operations and its cash flo w s fo r the years then ended. Opinion on Internal Control Although certain internal controls should be improved, FDIC m anagement main tained, in all material respects, effective internal control over financial reporting (including safeguarding assets) and compliance as of December 31, 2002, that provided reasonable but not absolute assurance that m isstatem ents, losses, or noncompliance material in relation to FDIC's financial statem ents w ould be prevented or detected on a tim ely basis. Our opinion is based on criteria established under 31 U.S.C. 3512 (c), (d) [Federal Managers' Financial Integrity A ct (FMFIA)]. Our w o rk identified weaknesses in FDIC's inform ation system controls, w hich w e describe as a reportable condition in a later section of this report. The reportable condition in inform ation system controls, although not considered material, represents a significant deficiency in the design or operation o f internal control that could adversely a ffect FDIC's ability to m eet its internal control objectives. Although the weaknesses did not materially affect the 2002 financial statem ents, m isstatem ents may nevertheless occur in other FDIC-reported financial inform ation as a result of the internal control weaknesses. Compliance w ith Laws and Regulations Objectives, Scope, and M ethodology Our te sts fo r com pliance w ith selected provisions o f laws and regulations disclosed no instances o f noncom pliance th a t w o u ld be reportable under U.S. generally accepted governm ent auditing standards. However, the objective o f our audits was not to provide an opinion on overall compliance w ith selected laws and regulations. Accordingly, w e do not express such an opinion. FDIC management is responsible for (1) preparing the annual financial statements in conform ity w ith U.S. generally accepted accounting principles, (2) establishing, maintaining, and assessing internal control to provide reasonable assurance that the broad control objectives o f FMFIA are met, and (3) complying w ith selected laws and regulations. W e are responsible fo r obtaining reasonable assurance about w hether (1) the financial statem ents are presented fairly, in all material respects, in conform ity w ith U.S. generally accepted accounting principles, and (2) m anagem ent main tained effective internal control, the objectives of w hich are 99 • financial re p o rtin g -tra n s a c tio n s are properly recorded, processed, and sum m arized to p e rm it th e preparation of financial sta te m e n ts in c o n fo rm ity w ith U.S. generally accepted accounting principles, and assets are safeguarded against loss from unauthorized acquisition, use, or disposition, and • compliance w ith laws and regulations-transactions are executed in accordance w ith laws and regulations that could have a direct and material e ffe ct on the financial statem ents. W e are also responsible fo r testing compliance w ith selected provisions of laws and regulations that have a direct and material effect on the financial statements. In order to fulfill these responsibilities, w e • examined, on a te s t basis, evidence supporting the am ounts and disclosures in the financial statem ents; • assessed the accounting principles used and significant estim ates made by management; • evaluated the overall presentation of the financial statem ents; • obtained an understanding of internal control related to financial reporting (including safeguarding assets) and compliance w ith laws and regulations; • tested relevant internal controls over financial reporting and compliance, and evaluated the design and operating effectiveness of internal control; • considered FDIC's process fo r evaluating and reporting on internal control based on criteria established by FMFIA; and • tested compliance w ith selected provisions of the Federal Deposit Insurance Act, as amended, and the Chief Financial Officers A ct of 1990. W e did not evaluate all internal controls relevant to operating objectives as broadly defined by FMFIA, such as those controls relevant to preparing statistical reports and ensuring efficient operations. W e lim ited our internal control testing to controls over financial reporting and compliance. Because of inherent lim itations in internal control, m isstatem ents due to error or fraud, losses, or noncompliance may nevertheless occur and not be detected. W e 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 w ith controls may deteriorate. W e did not te s t compliance w ith all laws and regulations applicable to FDIC. W e limited our tests of compliance to those deemed applicable to the financial statem ents fo r the year ended D ecem ber 31, 2002. W e caution that noncom pliance may occur and not be detected by these te sts and that such testing may not be sufficient fo r other purposes. W e perform ed our w ork in accordance w ith U.S. generally accepted governm ent auditing standards. FDIC management provided comm ents on a draft of this report. They are discussed and evaluated in a later section of this report and are reprinted in appendix I. Reportable Condition In connection w ith the funds' financial statem ent audits, w e reviewed FDIC's inform ation system controls. Effective inform ation system controls are essential to safeguarding financial data, protecting com puter application programs, providing fo r the integrity o f system software, and ensuring the continued com puter operations in case o f unexpected interruption. These controls include the corporatewide security management program, access controls, system software, application developm ent and change control, segregation of duties, and service continuity controls. During 2002, FDIC made progress in improving inform ation system controls. Of the 41 prior year recom m endations that w e made, FDIC had com pleted action on 18 and partially com pleted or had action plans to address those remaining. During our current review, FDIC also corrected several new ly identified weaknesses. Nevertheless, continuing and newly identified vulnerabilities involving information system controls continue to impair FDIC's ability to ensure the reliability, confidentiality, and availability of financial data. For example, FDIC did not have inform ation system controls to adequately ensure that (1) users had only the access needed to perform their assigned duties, (2) its netw ork was secured from unauthorized access, and (3) com prehensive programs w ere in place to routinely oversee and m onitor access to its com puter data to identify unusual or suspicious access. The effe ct of these w eaknesses increases the risk of unauthorized disclosure of critical FDIC financial and sensitive personnel and bank examination inform ation, disruption of critical financial operations, and loss of assets. As w e have previously reported, the primary reason fo r FDIC's inform ation system control weaknesses is that it has not fully developed and im plem ented a comprehensive corporatewide security m anagem ent program. An effective program w ould include assessing risks, establishing a central security function, establishing policies and related controls, raising awareness of prevailing risks and m itigating controls, and regularly evaluating the effectiveness of established controls. During the past year, FDIC has made progress in im plem enting such a program, including establishing a central security sta ff to provide guidance and oversight, enhancing its security awareness program, and continuing efforts to develop and update security policy. However, FDIC has not yet fully established a risk assessm ent process and the recently im plem ented program to assess the effectiveness of controls does not address all critical evaluation areas. 101 A com plete risk assessm ent process w ould assist m anagem ent in making decisions on necessary controls. Similarly, an ongoing com prehensive program o f te sts and evaluations of the effectiveness of established controls w ould enable FDIC to identify and correct inform ation security w eaknesses, such as those reported in th is review. W e determ ined that other management controls m itigated the e ffe ct of the inform ation system control weaknesses on the preparation of the funds' financial statem ents. Because o f their sensitive nature, the details surrounding these weaknesses are being reported separately to FDIC management, along w ith our recom m endations fo r corrective actions. BIF's Reserve Ratio The Federal Deposit Insurance Corporation Im provem ent A ct of 1991 (FDICIA) requires FDIC to maintain BIF fund balance at a designated reserve ratio of at least 1.25 percent of estim ated insured deposits.2 Under FDIC's required riskbased assessm ent system , as long as BIF's reserve ratio is at or above the designated reserve ratio, FDIC cannot charge prem ium s to institutions that are well-capitalized and highly rated by supervisors. Currently, over 90 percent of the industry does not pay fo r deposit insurance. In 1991, BIF's reserve ratio was significantly below the designated reserve ratio and did not reach the designated reserve ratio of 1.25 percent of estim ated insured deposits until May 1995.3 During the years ended December 31, 1995 through 2000, BIF's reserve ratio ranged from 1.30 to 1.38. As of Decem ber 31, 2001, and Septem ber 30, 2002, BIF's ratio decreased to 1.26 and 1.25, respectively. A t its Novem ber 12, 2002, meeting, the FDIC Board of Directors voted to maintain the existing BIF assess m ent rate schedule fo r the firs t semiannual assessm ent period o f 2003 based on the board's determ ination that the reserve ratio w ould likely remain at or near 1.25 during the firs t half of 2003. M ost of BIF's income com es from the interest earned on investm ents w ith the U.S. Treasury. FDIC describes the recent legisla tive initiatives to reform the federal deposit insurance system in note 1 of the financial statem ents fo r BIF and SAIF. 2 Section 302 of FDICIA amended section 7(b) of the Federal Deposit Insurance Act. FDICIA requirements are the same for both BIF and SAIF. SAIF reached the designated reserve ratio in 1996, and as of September 30, 2002, SAIF's reserve ratio was 1.38 percent. 3 If the reserve ratio falls below 1.25 percent of estimated insured deposits, FDICIA requires the FDIC Board of Directors to set semiannual assessment rates for BIF members that are sufficient to increase the reserve ratio to the designated reserve ratio not later than 1 year after such rates are set, or in accordance with a recapitalization schedule of 15 years or FDIC Com m ents and Our Evaluation In com m enting on a draft o f this report, FDIC's Chief Financial O fficer (CFO) was pleased to receive unqualified opinions on BIF's, SAIF’s, and FRF's 2002 and 2001 financial statem ents. FDIC's CFO also acknowledged the inform ation system weaknesses w e identified and plans to continue e fforts to strengthen its inform ation system program and to incorporate our recom m endations into its security plans fo r 2003. W e plan to evaluate the effectiveness of the corrective actions as part of our 2003 audit. David M. W alker Com ptroller General of the United States February 27, 2003 103 104 Appendix I FDI€ Federal Deposit Insurance Corporation 550 17th St. NW Washington DC, 20429 Deputy to the Chairman & Chief Financial Officer March 21, 2003 Mr. David M. Walker Comptroller General of the United States U. S. General Accounting Office 441 G Street, NW Washington, DC 20548 Re: FDIC Management Response on the GAO 2002 Financial Statements Audit Report Dear Mr. Walker: Thank you for the opportunity to comment on the U. S. General Accounting Office’s (GAO) draft audit report titled, Financial Audit: Federal Deposit Insurance Corporation Funds’ 2002 and 2001 Financial Statements, GAO-03-543. The report presents GAO’s opinions on the calendar year 2002 financial statements of the Bank Insurance Fund (BIF), the Savings Association Insurance Fund (SAIF), and the Federal Savings and Loan Insurance Corporation (FSLIC) Resolution Fund (FRF). The report also presents GAO’s opinion on the effectiveness of FDIC’s internal controls as of December 31, 2002 and GAO’s evaluation of FDIC’s compliance with laws and regulations. We are pleased to accept GAO’s unqualified opinions on the BIF, SAIF, and FRF financial statements and to note that there were no material weaknesses identified during the 2002 audits. The GAO reported that: the funds’ financial statements were presented fairly and in conformity with U. S. generally accepted accounting principles; FDIC had effective internal control over financial reporting (including safeguarding of assets) and compliance with laws and regulations; and there were no instances of noncompliance with selected provisions of laws and regulations. GAO identified the need to improve internal control over FDIC’s information systems (IS) and issued a reportable condition. Although GAO identified weaknesses in FDIC’s IS controls, the audit team noted that significant improvements had been made over the last eighteen months, and that the weaknesses did not materially affect the 2002 financial statements. We agree with GAO’s assessment of both the status and the progress made in addressing IS general control weaknesses. During 2002, FDIC’s accomplishments included completion of the first IS controls self assessment, implementation of the Information Security Manager (ISM) program, and development of an information security tactical plan to support FDIC’s information security strategic plan. The FDIC will continue efforts to strengthen its IS program and to incorporate GAO’s recommendations into its security plans for 2003. If you have any questions or concerns, please let me know. Sincerely, Steven O. App Deputy to the Chairman and Chief Financial Officer O verview o f the Industry During 2002, insured commercial banks and savings institutions reported record earnings, as a recovering economy and favorable interest-rate environm ent created conditions conducive to strong performance. The 9,354* commercial banks and savings institutions insured by the FDIC earned $105 billion in 2002, an $18.1 billion (20.8 percent) im prove m ent over 2001, and the firs t tim e their annual earnings have surpassed the $100 billion mark. W ider net interest margins and strong grow th in consumer-related assets helped boost net interest income. Growth in noninterest revenues and higher gains on sales of securities also contributed to the im provem ent in revenues. These positive develop ments helped o ffset higher expenses fo r loan losses stem m ing from the 2001 recession. Commercial banks reported recordhigh earnings fo r the second consec utive year. Net income at the 7,887 banks insured by the FDIC rose to $90.1 billion, from $74.0 billion in 2001. The im provem ent in earnings w as widespread; alm ost three out of every four comm ercial banks 73.3 percent - reported increased earnings in 2002. The industry's return on assets (ROA), a basic yardstick of earnings performance, also set a new record. The average ROA of 1.33 percent surpassed the previous record of 1.31 percent reached in 1999. Net interest income was $21.9 billion (10.2 percent) higher than a year earlier, as the industry's net interest margin im proved to its highest level in five years, and its * Does not include 18 U.S. branches of foreign banks. portfolio of interest-earning assets g re w by 8.5 percent. N oninterest incom e w as up by $14.4 billion (9.2 percent) from 2001. Falling interest rates caused the values of banks' fixed-rate securities portfolios to appreciate in 2002, and sales of securities during the year yielded gains totaling $6.5 billion, an increase of $2.0 billion (45.5 percent) compared to banks' gains in 2001. Against these positive developm ents, the main factor lim iting the im provem ent in bank earnings w as increased expenses to cover loan losses. Commercial banks charged o ff $44.5 billion in loans during 2002, an increase of $7.9 billion (21.7 per cent) from 2001. To cover these and other expected losses, banks set aside a total o f $48.1 billion in loan-loss provisions, an increase of $4.6 billion (10.6 percent) compared to the previous year. M ost of the increases in charge-offs and loan-loss provisions occurred at large banks, w hich have experienced rising losses on loans to comm ercial and industrial borrowers, and on credit-card loans. In the latter part of the year, the deteriorating trend in asset quality, w hich has been underway fo r three years, showed signs o f tapering off, as noncurrent loans declined in the fourth quarter fo r the firs t tim e since 1999. Strong demand fo r residential m ort gage loans - both to finance home purchases and to refinance existing mortgages - helped lift earnings at the nation's 1,467 insured savings institutions. The industry earned $15.2 billion in 2002, surpassing the record level of the previous year by $2.0 billion (14.8 percent). The average ROA of 1.16 was the thirdhighest ever, and the best result fo r the th rift industry in 56 years (in 1945, the industry's ROA was a record 1.27 percent; in 1946, it was 1.20 percent). It easily surpassed the 1.07 percent ROA that thrifts registered in 2001. As was the case w ith comm ercial banks, earnings im provem ents w ere widespread in the th rift industry. A lm ost four out of every five savings institutions 79.1 percent - reported higher net income in 2002, compared to 2001. Net interest income was up by $3.3 billion (9.1 percent) from 2001, as the average net interest margin increased from 3.20 percent to 3.35 percent, its highest level since 1993. Gains on sales of securities totaled $5.6 billion in 2002, an increase of $1.4 billion (31.7 percent) from the previous year. N oninterest income fell fo r the firs t tim e in five years, declining by $692 million (5.9 percent). This drop was caused prim arily by losses on servicing incom e stem m ing from the large w ave o f m ortgage refinancings th a t occurred in 2002. Provisions fo r loan losses w e re $437 m illion (15.3 percent) higher than in 2001, as net loan charge-offs rose by $150 m illion (6.5 percent). As part of the Corporation's continued co m m itm e n t to establish and maintain effective and efficient internal controls, FDIC m anagem ent routinely conducts ongoing evaluations of internal accounting and administrative control system s. The results of these evaluations, as w ell as consideration of audits and reviews conducted by the U.S. General Accounting O ffice (GAO), the O ffice of Inspector General (OIG) and other outside entities, are used as a basis fo r the FDIC's reporting on the condition of the Corporation's internal controls. The FDIC's m anagem ent concludes that the system of internal accounting and administrative controls at the FDIC, taken as a whole, com plies w ith internal control standards prescribed by the GAO and provides reasonable assurance that the related objectives are being met. This standard reflects the fact that all internal control system s, no m atter how w ell designed, have inherent lim itations and should not be relied upon to provide absolute assurance, and that control system s may vary over tim e because of changes in conditions. The Corporation's evaluation processes, the OIG audits and the GAO financial statem ents audits have identified certain areas w here existing internal controls should be improved. FDIC m anagem ent uses the chart below in the evaluation process to determ ine the appropriate classification fo r these areas. Effectiveness of Internal Controls Risks Controls are working as intended Controls are not working as intended, but mitigating controls exist Controls are not working as intended and minor/no mitigating controls exist High* OK High Vulnerability Material Weakness Medium* OK OK High Vulnerability or Matter for Continued Monitoring Low* OK OK Warrants Further Review * High, Medium, and Low are measured on how potentially critical the area or operation is to achieving the mission and objectives of the Corporation. Additionally, consideration is given to the risk to the Corporation, absent the area or operation. M aterial W eaknesses For purposes of this report, FDIC m anagem ent considers a w eakness m aterial if it: • Violates statutory or regulatory requirements; • Significantly weakens safeguards against waste, loss, unauthorized use or misappropriation of funds, property or other assets; • Significantly impairs the mission of the FDIC; • Fosters a conflict of interest; • Deprives the public of needed services; or • M erits the attention of the Chairman, the FDIC Board of Directors or Congress. To determine the existence of material weaknesses, the FDIC has assessed the results o f m anagem ent evalua tions and external audits o f the Corporation's risk management and internal control system s conducted in 2002, as well as management actions taken to address issues identified in these audits and evaluations. Based on this assessm ent and application o f th e above criteria, th e FDIC concludes th a t no material w eaknesses existed w ith in the C orporation's operations fo r 2002 and 2001. High V u ln e ra b ility Issues For purposes of this report, FDIC management has designated a high vulnerability issue as a high-risk or m edium-risk area w ith identified deficiencies and ineffective internal controls w ith m inor or no mitigating controls. These areas w arrant special attention of management, w ith the need to strengthen controls. The FDIC identified Information Systems Security as a high vulnerability issue for 2002 and 2001. Highly sensitive inform ation is just one critical corporate resource that m ust be protected and managed effectively so that the FDIC can fulfill its mission. Information and analysis on banking, financial services and the econom y form the basis fo r the developm ent of sound public policies and promote public understanding and confidence in the nation's financial system . A strong enterprise-wide inform ation security program is essential to the successful accom plishm ent of the FDIC's goals. The FDIC has made considerable progress over the past tw o years in establishing a strong, effective inform ation security program. FDIC m anagement recognizes that this cannot be accomplished overnight but w ill require a continual c o m m itm e n t by management and the organization over a period of several years. In its report e n title d Independent Evaluation o f the FDIC's Information S ecurity Program - 2002, the OIG concluded that "th e Corporation had established and implemented manage m ent controls that provided limited assurance of adequate security of its inform ation resources." The OIG reported that in three of ten manage m ent areas (Contractor and Outside Agency Security, Capital Planning and Investm ent Control, and Performance M easurem ent), the FDIC had no assurance that adequate security had been achieved. The FDIC is aggressively pursuing m anagement actions in these areas. As part of the audits of the FDIC's 2002 financial statem ents, GAO identified w eaknesses in the FDIC's inform ation system controls as a reportable condition. The weaknesses, although not considered material by the GAO, represented a significant deficiency in the design or opera tions of internal controls that could adversely a ffect the FDIC's ability to m eet its internal control objectives. Although the GAO reported that the FDIC made progress in addressing previously identified weaknesses, the GAO stated that the lack of a fully developed and im plem ented comprehensive corporate-wide security management program was the primary reason fo r the continued weaknesses in this area. The weak nesses did not materially a ffect the 2002 financial statem ents. In February 2002, the FDIC's Infor mation Security Strategic Plan was approved to address these deficien cies. The plan provides for a sound inform ation security structure and assures the integrity, confidentiality and availability of corporate inform a tion assets by proactively protecting them from unauthorized access and misuse. During the latter part of 2002, the FDIC undertook a self-assessm ent of its information technology (IT) area w ith primary focus on inform ation security. This self-testing was neces sary to ensure that the FDIC was prepared fo r the 2002 GAO financial statem ents audit. During the selfassessment, the FDIC evaluated its progress in addressing GAO findings from earlier audits, and reviewed additional key IT areas likely to be examined by GAO during the 2002 audit. Upon com pletion of the self-testing, the assessm ent team and m anagem ent recognized that continued and im m ediate effo rts w ere needed to address prior audit findings as w ell as new ly identified high-risk areas. As a result of the self-assessment, the FDIC information security program w ill be considerably strengthened through m ore rigorous policies and procedures. M atters fo r C on tin u e d M o n ito rin g For purposes of this report, matters for continued monitoring are mediumrisk areas w ith ineffective internal controls w ith m inor or no m itigating controls in place, posing m edium risk to the Corporation. These areas w arrant continued m onitoring o f corrective actions through com pletion. The Pre-Exit Clearance Process was a m atter fo r continued monitoring in the 2001 Chief Financial Officers A ct (CFOA) Report. During 2002, an internal control review of the PreExit Clearance Process revealed that existing controls w ere adequate and that access to the FDIC's system s and facilities had not been compro mised by employees or contractors leaving the Corporation. As a result, th is area has been rem oved from the continued monitoring list for the 2002 Annual Report. The C orporation's evaluation and assessm ent process identified three m atters that w arrant continued m onitoring. These m atters w ere also included in the 2001 CFOA Report. I OS 1 Contractor Oversight____________ In 2002, the FDIC continued to emphasize strong internal controls over contract oversight/project management. A number of major new system s and a significant construction project are under developm ent and pose risk to the Corporation if not efficiently and effectively managed. Thus, it is imperative that the basic contract oversight elem ents of tim e, cost and project com pletion be effectively monitored and managed. Major system s initiatives w ithin the FDIC include the New Financial Environm ent (NFE), the A ssess m ent Information M anagem ent System II (AIMS II), the Corporate Human Resources Information System (CHRIS), FDICconnecf, FDIC XP, and Virtual Supervisory Information on the Net (ViSION). The construction project involves the building of Phase II of the Seidman Center. NFE w ill provide an integrated financial system that focuses on data-sharing, state-of-the-art com puting technology, and the ability to grow and change w ith the Corporation's future financial m anagem ent and inform ation needs. The contract is a firm fixed-price contract, and payment is based on the approval of pre determ ined deliverables, not on a percentage of tim e spent on the project. The FDIC has appointed a risk manager w ho is responsible for conducting an independent third-party review of NFE risks, including m onitoring project cost and tim e, and reporting to the Chief Financial Officer and Division o f Finance D irector on riskevaluation results. AIM S II is the platform that w ill provide the FDIC w ith a flexible, robust tool to efficiently track deposit insurance assessm ents levied since the creation of the BIF and the SAIF in 1989, as w ell as any changes that pending deposit insurance reform legisla tio n m ig h t require, including possible credits or refund calculations. CHRIS is an integrated human resources processing and infor mation system that w ill bring together the functions and data now residing in m ultiple stand alone system s; it is being im ple m ented increm entally through four versions over a four-year period. F DICconnecf is a secure, elec tronic, Web-enabled environm ent providing the FDIC w ith the capa bility to electronically exchange inform ation w ith insured financial institutions. In 2003, the FDIC w ill make FDICconnecf available to all institutions and develop several additional electronic data exchanges, including prem ium assessments, delivery of Financial Institution Letters, application submission and tracking infor mation on deposit insurance. FDIC XP is th e n e w corporate com puter software package that w ill provide a more stable and secure environm ent in w hich to work. ViSION is an Internet-based data system that provides the FDIC and staff of the other federal banking agencies and state authorities access to supervisory inform ation about financial in stitutio ns. Phase II Construction of the Seidman Center is a project to construct a tw o -to w e r office building and multi-purpose facility at the FDIC's existing Virginia Square campus. The buildings w ill accom m odate staff presently housed at fo u r leased locations. 2 Risk Designation Levels/ Background Investigations The FDIC adopted the risk desig nation system established by the U.S. O ffice of Personnel Management to provide corporate officials w ith a system atic, consistent and uniform w ay of determining risk levels of positions. The risk designation system requires FDIC officials to desig nate risk levels fo r every position in the FDIC in order to determ ine the type of background investi gations required. In 2002, all divisions and offices w ere rem inded to ensure that position risk designations are appropriately revised w henever the risk o f a position changes. Also, the FDIC began developing a policy and procedures regarding risk desig nation levels and background investigations fo r contractors and subcontractors. 3 Business Continuity Plan The FDIC Business Continuity Plan was developed to sustain tim e-sensitive operations that support mission-critical functions in the event of a disruption. W hile disruptions are unavoidable in som e circumstances, continuity planning helps minim ize negative impacts and allows the FDIC to continue meeting mission-critical requirements. In developing this plan, the FDIC considered mission goals th a t are central to the C orporation's operations and determined key business functions that support them. The FDIC finalized plans fo r its headquarters and all regional offices. In 2002, a series o f tabletop exercises w ere conducted to te s t the Corporation's ability to respond to an emergency and continue critical business operations. Internal C o n tro ls and Risk M anagem ent Program FDIC Circular 4010.3, "FDIC Internal Control Programs and S ystem s," outlines steps necessary to remain in compliance w ith provisions o f the CFOA by establishing FDIC internal control objectives, describing internal control standards, and identifying and monitoring risk m anagement internal control programs and systems. The process focuses on areas o f high risk to provide reasonable assurance th a t th e fo llo w in g objectives are m et: • Programs are efficiently and effectively carried out in accor dance w ith applicable laws and management policies; • Assets are safeguarded against waste, loss, unauthorized use or misappropriation; • S ystem s are established to alert management of potential weaknesses; • Obligations and costs comply w ith applicable laws; and • Revenues and expenditures appli cable to the FDIC's operations are recorded and properly accounted for, so that accounts and reliable financial and statistical reports may be prepared and account ability of assets may be maintained. Division and office directors are required to subm it a certification statem ent addressed to the Chairman asserting that their internal control system s: (1) com ply w ith the FDIC internal control standards and (2) provide reasonable assurance that the FDIC internal control objec tives are achieved. The certification sta te m e n t also reports w h e th e r m aterial weaknesses, high vulnera bility areas, or m atters fo r continued m onitoring exist in the internal control systems and, if so, provides a description of the deficiency and planned corrective action(s). These certification statem ents are used as support fo r the Corporation's Statem ents on Internal Accounting and A dm inistrative Controls. 109 A p p e n d ix A Key S ta tistics S e le c te d S ta tis tic s D o l l a r s in For the year ended December 31 m i l l i o n s 2002 V. Appendixes 2001 __________ 2000 Bank Insurance Fund Financial Results Revenue Operating Expenses Insurance Losses and Expenses Net lncome/(Loss) Comprehensive lncome/(Loss) Insurance Fund Balance Fund as a Percentage of Insured Deposits $ $ Selected Statistics Total BIF-Mem ber Institutions* Problem Institutions Total Assets o f Problem Institutions $ Institution Failures Total Assets of Current Year Failed Institutions $ Number of Active Failed Institution Receiverships $ 1,796 821 <70) 1,045 1,611 32,050 1.25% 8,171 124 34,000 10 2,508 37 » T 1,997 786 1,774 (563) (536) $ 30,439 1.26% $ 8,326 90 $ 32,000 3 $ 54 36 8,572 74 $ 11,000 6 378 $ 51 $ $ 1,906 t7 3 | (128) 1,261 1,56! $ 30,975 1 1.35% | | Savings Association Insurance Fund Financial Results Revenue Operating Expenses Insurance Losses and Expenses N et Income Comprehensive Income Insurance Fund Balance Fund as a Percentage of Insured Deposits Selected Statistics Total SAIF-M em ber Institutions Problem Institutions Total Assets of Problem Institutions Institution Failures Total Assets of Current Year Failed Institutions Number of Active Failed Institution Receiverships $ $ 733 102 462 169 176 $ 10,935 1.36% 589 124 (156) 620 812 11,747 1.38"/ T $ s 1,244 24 ▼ 8,000 1 50 3 $ $ 1,287 24 8,000 1 2,180 3 T As o f S eptem ber 3 0 ,2 0 0 2 . • Comm ercial banks and savings institutions. Does not include U.S. branches o f foreign banks. ■ Savings institutions and com m ercial banks. 664 189 364| 478 $ 10.759 | 1.43% 1,333 20 $ 13,000 1 30| $ 3 N u m b er and D epo sits o f BIF-lnsured Banks Closed Because o f Financial D iffic u ltie s , 1 9 3 4 th ro u g h 2 0 0 2 1 Dollars in Thousands N u m b e r o f In sured B anks D e p o s its o f In sured Banks Year Total W ithout Disbursements by FDIC W ith Disbursements by FDIC Total 2,110 19 2,091 2002 2001 2000 1999 1998 1997 10 3 6 7 3 1 _ - 10 3 6 7 3 1 2,124,501 49,926 311,950 1,268,151 335,076 26,800 - 1996 1995 1994 1993 1992 1991 1990 5 6 13 41 120 124 168 1 10 - 5 6 12 41 110 124 168 168,228 632,700 1,236,488 3,132,177 41,150,898 53,751,763 14,473,300 1989 1988 1987 1986 1985 1984 1983 206 200 184 138 120 79 48 - 206 200 184 138 120 79 48 1982 ,1981 1980 1979 1978 1977 1976 42 10 10 10 7 6 16 - 1975 1974 1973 1972 1971 1970 1969 13 4 6 1 6 7 9 1968 1967 1966 1965 1964 1963 1962 W ithout Disbursements by FDIC Total $ 216,820,335 $ W ith Disbursements FDIC 4,298,814 $ Assets 212,521,521 $ 257,321,694 2,124,501 49,926 311,950 1,268,151 335,076 26,800 2,507,565 54,470 378,088 1,423,819 370,400 25,921 4,257,667 - 168,228 632,700 1,236,488 3,132,177 36,893,231 53,751,763 14,473,300 182,502 753,024 1,392,140 3,539,373 44,197,009 63,119,870 15,660,800 24,090,551 24,931,302 6,281,500 6,471,100 8,059,441 2,883,162 5,441,608 - 24,090,551 24,931,302 6,281,500 6,471,100 8,059,441 2,883,162 5,441,608 29,168,596 35,697,789 6,850,700 6,991,600 8,741,268 3,276,411 7,026,923 - 42 10 10 10 7 6 16 9,908,379 3,826,022 216,300 110,696 854,154 205,208 864,859 - 9,908,379 3,826,022 216,300 110,696 854,154 205,208 864,859 11,632,415 4,859,060 236,164 132,988 994,035 232,612 1,039,293 _ - 13 4 6 1 6 7 9 339,574 1,575,832 971,296 20,480 132,058 54,806 40,134 - 339,574 1,575,832 971,296 20,480 132,058 54,806 40,134 419 ,950 3,822,596 1,309,675 22,054 196,520 62,147 43,572 3 4 7 5 7 2 1 1 3 4 7 5 7 2 0 22,524 10,878 103,523 43,861 23,438 23,444 3,011 3,011 22,524 10,878 103,523 43,861 23,438 23,444 0 25,154 11,993 120,647 58,750 25,849 26,179 N/A 1961 1960 1959 1958 1957 1956 1955 5 1 3 4 2 2 5 _ 1 - 5 1 3 4 1 2 5 8,936 6,930 2,593 8,240 11,247 11,330 11,953 10,084 - 8,936 6,930 2,593 8,240 1,163 11,330 11,953 9,820 7,506 2,858 8,905 1,253 12,914 11,985 1954 1953 1952 1951 1950 1949 1948 2 4 3 2 4 5 3 2 - 2 2 3 2 4 4 998 44,711 3,170 3,408 5,513 6,665 10,674 26,449 1,190 - 998 18,262 3,170 3,408 5,513 5,475 10,674 1,138 18,811 2,388 3,050 4,005 4,886 10,360 1947 1946 1945 1944 1943 1942 1941 5 1 1 2 5 20 15 _ - 5 1 1 2 5 20 15 7,040 347 5,695 1,915 12,525 19,185 29,717 - 7,040 347 5,695 1,915 12,525 19,185 29,717 1940 1939 1938 1937 1936 1935 1934 43 60 74 77 69 26 9 2 43 60 74 75 69 25 9 142,430 157,772 59,684 33,677 27,508 13,405 1,968 328 85 - 142,430 157,772 59,684 33,349 27,508 13,320 1,968 - ~ 1 - - - - 1 - 3 I } 1 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 1 Does not include institutions that received FDIC assistance and were not closed. Also 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. Ill Recoveries and Losses by the Bank Insurance Fund on Disbursements for the Protection of Depositors, 1 9 3 4 th ro u g h 2 0 0 2 Dollars in Thousands D e p o s it P a y o ff C ases2 A ll C a ses1 Recoveries Estimated Additional Recoveries Estimated Losses 16,144,064 11,018,429 308,556 4,817,079 5 0 0 0 0 0 1,586,551 0 0 0 0 0 789,550 0 0 0 0 0 308,501 0 0 0 0 0 488,500 0 0 0 0 0 38,650 84,459 179,046 646,071 3,675,219 6,136,134 2,786,334 0 0 0 5 25 21 20 0 0 0 261,203 1,890,869 1,468,407 2,182,583 0 0 0 159,268 1,398,731 1,000,733 1,648,969 0 0 0 0 0 0 0 0 0 0 101,935 492,138 467,674 533,614 3,428 0 55 0 0 0 0 6,198,801 6,916,094 2,022,766 1,775,717 1,007,235 1,640,154 1,407,038 32 36 51 40 29 16 9 2,116,556 1,252,160 2,103,792 1,155,981 523,789 791,838 148,423 1,262,140 822,612 1,400,945 739,659 411,175 699,483 122,484 0 0 55 0 0 0 0 854,416 429,548 702,792 416,322 112,614 92,355 25,939 1,106,579 107,221 121,675 74,372 512,927 20,654 561,532 0 0 0 0 0 0 0 1,168,571 781,778 30,680 16,117 35,641 5,996 37,865 7 2 3 3 1 0 3 277,240 35,736 13,732 9,936 817 0 11,416 206,247 34,598 11,427 9,003 613 0 9,660 0 0 0 0 0 0 0 70,993 1,138 2,305 933 204 0 1,756 292,431 2,259,633 368,852 14,501 171,430 51,294 41,910 0 0 0 0 0 0 0 39,615 143,644 66,386 1,688 216 272 162 3 0 3 1 5 4 4 25,918 0 16,771 16,189 53,767 29,265 7,596 25,849 0 16,771 14,501 53,574 28,993 7,513 0 0 0 0 0 0 0 69 0 0 1,688 193 272 83 6,476 8,097 10,020 11,479 13,712 19,172 0 6,464 7,087 9,541 10,816 12,171 18,886 0 0 0 0 0 0 0 0 12 1,010 479 663 1,541 286 0 0 4 1 3 7 2 0 0 8,097 735 10,908 13,712 19,172 0 0 7,087 735 10,391 12,171 18,886 0 0 0 0 0 0 0 0 0 1,010 0 517 1,541 286 0 5 1 3 4 1 2 5 6,201 4,765 1,835 3,051 1,031 3,499 7,315 4,700 4,765 1,738 3,023 1,031 3,286 7,085 0 0 0 0 0 0 0 1,501 0 97 28 0 213 230 5 1 3 3 1 1 4 6,201 4,765 1,835 2,796 1,031 2,795 4,438 4,700 4,765 1,738 2,768 1,031 2,582 4,208 0 0 0 0 0 0 0 1,501 0 97 28 0 213 230 1954 1953 1952 1951 1950 1949 1948 2 2 3 2 4 4 3 1,029 5,359 1,525 1,986 4,404 2,685 3,150 771 5,359 733 1,986 3,019 2,316 2,509 0 0 0 0 0 0 0 258 0 792 0 1,385 369 641 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 0 0 0 1947 1946 1945 1944 1943 1942 1941 5 1 1 2 5 20 15 2,038 274 1,845 1,532 7,230 11,684 25,061 1,979 274 1,845 1,492 7,107 10,996 24,470 0 0 0 0 0 0 0 59 0 0 40 123 688 591 0 0 0 1 4 6 8 0 0 0 404 5,500 1,612 12,278 0 0 0 364 5,377 1,320 12,065 0 0 0 0 0 0 0 0 0 0 40 123 292 213 1940 1939 1938 1937 1936 1935 1934 43 60 74 75 69 25 9 87,899 81,828 34,394 20,204 15,206 9,108 941 84,103 74,676 31,969 16,532 12,873 6,423 734 0 0 0 0 0 0 0 3,796 7,152 2,425 3,672 2,333 2,685 207 19 32 50 50 42 24 9 4,895 26,196 9,092 12,365 7,735 6,026 941 4,313 20,399 7,908 9,718 6,397 4,274 734 0 0 0 0 0 0 0 582 5,797 1,184 2,647 1,338 1,752 207 Year Number of Banks Recoveries Estimated Additional Recoveries Estimated Losses Number of Banks Disbursements Disbursements Total 2,221 110,418,984 71,313,524 497,813 38,607,647 608 2002 2001 2000 1999 1998 1997 10 3 6 7 3 1 2,031,006 48,676 268,730 1,244,453 286,597 25,546 941,288 40,165 228,911 403,677 53,152 20,520 461,419 3,016 3,824 11,048 5,966 0 628,299 5,495 35,995 829,728 227,479 5,026 1996 1995 1994 1993 1992 1991 1990 5 6 13 41 122 127 169 169,386 609,045 1,224,769 1,797,302 14,172,884 21,412,652 10,816,602 130,736 524,528 1,045,691 1,150,918 10,495,954 15,271,553 8,028,290 0 58 32 313 1,711 4,965 1,978 1989 1988 1987 1986 1985 1984 1983 207 280 203 145 120 80 48 11,445,829 12,163,006 5,037,871 4,790,969 2,920,687 7,696,215 3,807,082 5,243,600 5,246,912 3,015,050 3,015,252 1,913,452 6,056,061 2,400,044 1982 1981 1980 1979 1978 1977 1976 42 10 11 10 7 6 17 2,275,150 888,999 152,355 90,489 548,568 26,650 599,397 1975 1974 1973 1972 1971 1970 1969 13 5 6 2 7 7 9 332,046 2,403,277 I 435,238 16,189 171,646 51,566 42,072 1968 1967 1966 1965 1964 1963 1962 3 4 7 5 7 2 0 1961 1960 1959 1958 1957 1956 1955 112 c o n tin u e d o n n e x t p a g e Recoveries and Losses by th e Bank Insurance Fund on D isb u rsem ents fo r th e P ro te c tio n o f D epositors, 1 9 3 4 th ro u g h 2 0 0 2 (continued) Dollars in Thousands D e p o s it A s s u m p tio n Cases Year Number of Banks Disbursements Total 1,472 2002 2001 2000 1999 1998 1997 A s sis ta n c e T ra n s a c tio n s 1 Recoveries Estimated Additional Recoveries Estimated Losses Number of Banks Disbursements 82,644,564 54,095,220 189,257 28,360.087 141 5 3 6 7 3 1 444,455 48,676 268,730 1,244,453 286,597 25,546 151,738 40,165 228,911 403,677 53,152 20,520 152,918 3,016 3,824 11,048 5,966 0 139,799 5,495 35,995 829,728 227,479 5,026 0 0 0 0 0 0 1996 1995 1994 1993 1992 1991 1990 5 6 13 36 95 103 148 169,386 609,045 1,224,769 1,536,099 12,280,529 19,938,128 8,629,084 130,736 524,528 1,045,691 991,650 9,095,987 14,267,727 6,376,724 0 58 32 313 1,711 4,965 1,978 38,650 84,459 179,046 544,136 3,182,831 5,665,436 2,250,382 1989 1988 1987 1986 1985 1984 1983 174 164 133 98 87 62 35 9,326,725 9,180,495 2,773,202 3,476,140 1,631,166 1,373,198 2,893,969 3,981,208 4,234,591 1,613,392 2,209,924 1,095,601 941,674 1,850,553 3,428 0 0 0 0 0 0 1982 1981 1980 1979 1978 1977 1976 25 5 7 7 6 6 13 268,372 79,208 138,623 80,553 547,751 26,650 587,981 213,578 71,358 110,248 65,369 512,314 20,654 551,872 1975 1974 1973 1972 1971 1970 1969 10 4 3 0 1 3 5 306,128 2,403,277 418,467 0 117,879 22,301 34,476 1968 1967 1966 1965 1964 1963 1962 3 o 6 2 o o 0 1961 1960 1959 1958 1957 1956 1955 Recoveries Estimated Additional Recoveries Estimated Losses 11,630,356 6,199,875 0 5,430,481 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 2 3 1 0 0 0 0 1,486 6,117 4,935 0 0 0 0 1,236 3,093 2,597 0 0 0 0 0 0 0 0 0 0 0 250 3,024 2,338 5,342,089 4,945,904 1,159,810 1,266,216 535,565 431,524 1,043,416 1 80 19 7 4 2 4 2,548 1,730,351 160,877 158,848 765,732 5,531,179 764,690 252 189,709 713 65,669 406,676 4,414,904 427,007 0 0 0 0 0 0 0 2,296 1,540,642 160,164 93,179 359,056 1,116,275 337,683 o 0 0 0 0 0 0 54,794 7,850 28,375 15,184 35,437 5,996 36,109 10 3 1 0 0 0 1 1,729,538 774,055 0 0 0 0 0 686,754 1,265 o 0 0 0 0 0 0 0 0 0 0 0 1,042,784 772,790 0 0 0 0 0 266,582 2,259,633 352,081 0 117,856 22,301 34,397 0 0 0 0 0 0 0 39,546 143,644 66,386 0 23 0 79 0 1 0 1 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 0 0 0 0 0 0 6,476 o 9,285 571 0 o 0 6,464 0 8,806 425 0 0 0 0 0 0 0 0 0 0 12 0 479 146 0 0 0 0 0 0 0 0 0 0 0 0 0 0 o 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 1 0 1 1 0 0 0 255 0 704 2,877 0 0 0 255 0 704 2,877 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 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1954 1953 1952 1951 1950 1949 1948 2 2 3 2 4 4 3 1,029 5,359 1,525 1,986 4,404 2,685 3,150 771 5,359 733 1,986 3,019 2,316 2,509 0 0 0 0 0 0 0 258 0 792 0 1,385 369 641 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 0 0 0 1947 1946 1945 1944 1943 1942 1941 5 1 1 1 1 14 7 2,038 274 1,845 1,128 1,730 10,072 12,783 1,979 274 1,845 1,128 1,730 9,676 12,405 0 0 0 0 0 0 0 59 0 0 0 0 396 378 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 0 0 0 1940 1939 1938 1937 1936 1935 1934 24 28 24 25 27 1 0 83,004 55,632 25,302 7,839 7,471 3,082 0 79,790 54,277 24,061 6,814 6,476 2,149 0 0 0 0 0 0 0 0 3,214 1,355 1,241 1,025 995 933 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 0 0 0 0 1 Totals do not include dollar amounts for the five open bank assistance transactions between 1971 and 1980. Excludes eight transactions prior to 1962 that required no disbursements. Also, disbursements, recoveries, and estimated additional recoveries do not include working capital advances to and repayments by receiverships. 2 Includes insured deposit transfer cases. Note: Beginning w ith the 1997 Annual Report the number of banks in the Assistance Transactions column for 1988 was changed from 21 to 80 and the number of banks in the All Cases column was changed from 221 to 280 to reflect that one assistance transaction encompassed 60 institutions. Also, certain 1982, 1983, 1989 and 1992 resolutions previously reported in either the Deposit Payoff or Deposit Assumption categories w ere reclassified. 113 Income and Expenses, Bank Insurance Fund, from Beginning of Operations, September 11, 1933, through December 31, 2002 Dollars in Millions Expenses and Losses In com e Year Total Assessment Income Assessment Credits Investment and Other Sources Total $ 85,503.1 $ 53,344.6 $ 6,709.1 $ 38,867.6 $ 54,264.6 $37,121.0 $ 10,160.6 $ 6,989.0 $ 31,238.5 2002 2001 2000 1999 1998 1997 1,795.9 1,996.7 1,905.9 1,815.6 2,000.3 1,615.6 84.0 47.8 45.1 33.3 21.7 24.7 0.0 0.0 0.0 0.0 0.0 0.0 $ 1,711.9 1,948.9 1,860.8 1,782.3 1,978.6 1,590.9 0.0022% 0.0014% 0.0014% 0.0011 % 0.0008% 0.0008% 750.6 2,559.4 645.2 1,922.0 691.5 177.3 (87.0) 1,756.3 (153.0) 1,168.7 (37.7) (503.7) 821.1 785.9 772.9 730.4 697.6 605.2 16.5 17.2 25.3 22.9 31.6 75.8 1,045.3 (562.7) 1,260.7 (106.4) 1,308.8 1,438.3 1996 1995 1994 1993 1992 1991 1990 1,655.3 4,089.1 6,467.0 6,430.8 6,301.5 5,790.0 3,838.3 72.7 2,906.9 5,590.6 5,784.3 5,587.8 5,160.5 2,855.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1,582.6 1,182.2 876.4 646.5 713.7 629.5 983.0 0.0024% 0.1240% 0.2360% 0.2440% 0.2300% 0.2125% 0.1200% 254.6 483.2 (2,259.1) (6,791.4) (625.8) 16,862.3 13,003.3 (325.2) (33.2) (2,873.4) (7,677.4) (2,259.7) 15,476.2 12,133.1 505.3 470.6 423.2 388.53 570.8 284.1 219.6 74.5 45.8 191.1 497.5 1,063.1 1,102.0 650.6 1,400.7 3,605.9 8,726.1 13,222.2 6,927.3 (11,072.3) (9,165.0) 1989 1988 1987 1986 1985 1984 1983 3,494.6 3,347.7 3,319.4 3,260.1 3,385.4 3,099.5 2,628.1 1,885.0 1,773.0 1,696.0 1,516.9 1,433.4 1,321.5 1,214.9 0.0 0.0 0.0 0.0 0.0 0.0 164.0 1,609.6 1,574.7 1,623.4 1,743.2 1,952.0 1,778.0 1,577.2 0.0833% 0.0833% 0.0833% 0.0833% 0.0833% 0.0800% 0.0714% 4,346.2 7,588.4 3,270.9 2,963.7 1,957.9 1,999.2 969.9 3,811.3 6,298.3 2,996.9 2,827.7 1,569.0 1,633.4 675.1 213.9 223.9 204.9 180.3 179.2 151.2 135.7 321.0 1,066.2 69.1 (44.3) 209.7 214.6 159.1 (851.6) (4,240.7) 48.5 296.4 1,427.5 1,100.3 1,658.2 1982 1981 1980 1979 1978 1977 1976 2,524.6 2,074.7 1,310.4 1,090.4 952.1 837.8 764.9 1,108.9 1,039.0 951.9 881.0 810.1 731.3 676.1 96.2 117.1 521.1 524.6 443.1 411.9 379.6 1,511.9 1,152.8 879.6 734.0 585.1 518.4 468.4 0.0769% 0.0714% 0.0370% 0.0333% 0.0385% 0.0370% 0.0370% 999.8 848.1 83.6 93.7 148.9 113.6 212.3 126.4 320.4 (38.1) (17.2) 36.5 20.8 28.0 743.5 400.5 3.5 4.1 9.1 3.5 3.9 1,524.8 1,226.6 1,226.8 996.7 803.2 724.2 552.6 1975 1974 1973 1972 1971 1970 1969 689.3 668.1 561.0 467.0 415.3 382.7 335.8 641.3 587.4 529.4 468.8 417.2 369.3 364.2 362.4 285.4 283.4 280.3 241.4 210.0 220.2 410.4 366.1 315.0 278.5 239.5 223.4 191.8 0.0357% 0.0435% 0.0385% 0.0333% 0.0345% 0.0357% 0.0333% 97.5 159.2 108.2 59.7 60.3 46.0 34.5 27.6 97.9 52.5 10.1 13.4 3.8 1.0 67.7 59.2 54.4 49.6 46.9 42.2 33.5 2.2 2.1 1.3 6.05 0.0 0.0 0.0 591.8 508.9 452.8 407.3 355.0 336.7 301.3 1968 1967 1966 1965 1964 1963 1962 295.0 263.0 241.0 214.6 197.1 181.9 161.1 334.5 303.1 284.3 260.5 238.2 220.6 203.4 202.1 182.4 172.6 158.3 145.2 136.4 126.9 162.6 142.3 129.3 112.4 104.1 97.7 84.6 0.0333% 0.0333% 0.0323% 0.0323% 0.0323% 0.0313% 0.0313% 29.1 27.3 19.9 22.9 18.4 15.1 13.8 0.1 2.9 0.1 5.2 2.9 0.7 0.1 29.0 24.4 19.8 17.7 15.5 14.4 13.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 265.9 235.7 221.1 191.7 178.7 166.8 147.3 114 Effective Assessment Rate1 Total Provision for Losses Administrative and Operating Expenses2 Interest and Other Insur. Expenses Net Incom e/ (Loss) 129.9 127.2 118.2 106.8 103.3 89.34 180.4 c o n tin u e d o n n e x t p a g e Income and Expenses, Bank Insurance Fund, from Beginning of Operations, September 11, 1933, through December 31, 2 002 (co ntinue d) Dollars in Millions In c o m e E xpenses and Losses Year Total Assessment Income Assessment Credits Investment and Other Sources Total $ 85,503.1 $ 53,344.6 $ 6,709.1 $ 38,867.6 $ 54,264.6 $37,121.0 $ 10,160.6 $ 6,989.0 $ 31,238.5 1961 1960 1959 1958 1957 1956 1955 147.3 144.6 136.5 126.8 117.3 111.9 105.8 188.9 180.4 178.2 166.8 159.3 155.5 151.5 115.5 100.8 99.6 93.0 90.2 87.3 85.4 73.9 65.0 57.9 53.0 48.2 43.7 39.7 0.0323% 0.0370% 0.0370% 0.0370% 0.0357% 0.0370% 0.0370% 14.8 12.5 12.1 11.6 9.7 9.4 9.0 1.6 0.1 0.2 0.0 0.1 0.3 0.3 13.2 12.4 11.9 11.6 9.6 9.1 8.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 132.5 132.1 124.4 115.2 107.6 102.5 96.8 1954 1953 1952 1951 1950 1949 1948 99.7 94.2 88.6 83.5 84.8 151.1 145.6 144.2 138.7 131.0 124.3 122.9 122.7 119.3 81.8 78.5 73.7 70.0 68.7 0.0 0.0 37.3 34.0 31.3 29.2 30.6 28.4 26.3 0.0357% 0.0357% 0.0370% 0.0370% 0.0370% 0.0833% 0.0833% 7.8 7.3 7.8 6.6 7.8 6.4 7.0 0.1 0.1 0.8 0.0 1.4 0.3 0.7 7.7 7.2 7.0 6.6 6.4 6.1 6.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 91.9 86.9 80.8 76.9 77.0 144.7 138.6 1947 1946 1945 1944 1943 1942 1941 157.5 130.7 121.0 99.3 86.6 69.1 62.0 114.4 107.0 93.7 80.9 70.0 56.5 51.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 43.1 23.7 27.3 18.4 16.6 12.6 10.6 0.0833% 0.0833% 0.0833% 0.0833% 0.0833% 0.0833% 0.0833% 9.9 10.0 9.4 9.3 9.8 10.1 10.1 0.1 0.1 0.1 0.1 0.2 0.5 0.6 9.8 9.9 9.3 9.2 9.6 9.6 9.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 147.6 120.7 111.6 90.0 76.8 59.0 51.9 55.9 51.2 47.7 48.2 43.8 20.8 7.0 46.2 40.7 38.3 38.8 35.6 11.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 9.7 10.5 9.4 9.4 8.2 9.3 7.0 0.0833% 0.0833% 0.0833% 0.0833% 0.0833% 0.0833% N/A 12.9 16.4 11.3 12.2 10.9 11.3 10.0 3.5 7.2 2.5 3.7 2.6 2.8 0.2 9.4 9.2 8.8 8.5 8.3 8.5 9.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 43.0 34.8 36.4 36.0 32.9 9.5 (3.0) 1940 1939 1938 1937 1936 1935 1933/4 Effective Assessment Rate 5 Total Provision for Losses Administrative and Operating Expenses2 Interest and Other Insur. Expenses Net Incom e/ (Loss) 1 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 m inimum 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 1995. 2 These expenses, which are presented as operating expenses in the Statements of Income and Fund Balance, pertain to the FDIC in its corporate capacity only and do not include costs that are charged to the failed bank receiverships that are managed by the FDIC. The receivership expenses are presented as part of the "Receivables from Bank Resolutions, net" line on the Statements of Financial Position. The narrative and graph presented in the ‘Corporate Planning and Budget" section o f this report (next page) show the aggregate (corporate and receivership) expenditures of the FDIC. 3 Includes $210 million for the cumulative effect of an accounting change for certain postretirement benefits. 4 Includes $105.6 million net loss on governm ent securities. 5 This amount represents interest and other insurance expenses from 1933 to 1972. 6 Includes the aggregate amount of $80.6 million of interest paid on capital stock between 1933 and 1948. ii a Corporate Planning and Budget Dollars in Millions The FDIC's Strategic Plan and Annual Performance Plan provide the basis fo r annual planning and budgeting fo r needed resources. The 2002 aggregate budget (for corporate, receivership and capital spending) w as $1.22 billion, w h ile actual expenditures fo r th e year w e re $1.19 billion, about $146 m illion m ore than 2001 expenditures. Over the past 10 years, the FDIC's expenditures have increased and decreased in response to workload. During the past decade, expenditures generally declined due to decreasing resolution and receivership activity, 1 16 although they tem porarily increased in 1996 in conjunction w ith the absorption o f th e Resolution Trust Corporation (RTC) and its residual operations and w orkload. Total expenditures increased in 2002 due to an increase in receivership-related expenses. The largest com p o n e n t o f FDIC spending is fo r the costs associated w ith sta ffin g . The FDIC's s ta ff has declined each year during the past seven years. Staffing decreased by 12.0 percent in 2002, from 6,167 em ployees at the beginning of the year to 5,430 at the end of the year. E stim ated Insured Deposits and th e Bank Insurance Fund, D ecem b er 3 1 ,1 9 3 4 , th ro u g h S ep tem b e r 3 0 , 2 0 0 2 1 Insu ran ce Fund as a P e rc e n ta g e o f D e p o s its in In su red Banks ($ millions) Year2 Insurance Coverage Total Domestic Deposits 2002 2001 2000 1999 1998 1997 $ 100,000 100,000 100,000 100,000 100,000 100,000 $ 3,764,891 3,584,610 3,326,745 3,038,385 2,996,396 2,785,990 1996 1995 1994 1993 1992 1991 1990 100,000 100,000 100,000 100,000 100,000 100,000 100,000 1989 1988 1987 1986 1985 1984 1983 Estimated Insured 3 Deposits Percentage of Insured Deposits Deposit Insurance Fund Total Domestic Deposits Estimated Insured Deposits $ 2,508,918 2,408,878 2,301,604 2,157,536 2,141,268 2,055,874 66.6 67.2 69.2 71.0 71.5 73.8 $ 31,383.3 30,438.8 30,975.2 29,414.2 29,612.3 28,292.5 0.83 0.85 0.93 0.97 0.99 1.02 1.25 1.26 1.35 1.36 1.38 1.38 2,642,107 2,575,966 2,463,813 2,493,636 2,512,278 2,520,074 2,540,930 2,007,447 1,952,543 1,896,060 1,906,885 1,945,623 1,957,722 1,929,612 76.0 75.8 77.0 76.5 77.4 77.7 75.9 26,854.4 25,453.7 21,847.8 13,121.6 (100.6) (7,027.9) 4,044.5 1.02 0.99 0.89 0.53 (0.00) (0.28) 0.16 1.34 1.30 1.15 0.69 (0.01) (0.36) 0.21 100,000 100,000 100,000 100,000 100,000 100,000 100,000 2,465,922 2,330,768 2,201,549 2,167,596 1,974,512 1,806,520 1,690,576 1,873,837 1,750,259 1,658,802 1,634,302 1,503,393 1,389,874 1,268,332 76.0 75.1 75.3 75.4 76.1 76.9 75.0 13,209.5 14,061.1 18,301.8 18,253.3 17,956.9 16,529.4 15,429.1 0.54 0.60 0.83 0.84 0.91 0.92 0.91 0.70 0.80 1.10 1.12 1.19 1.19 1.22 1982 1981 1980 1979 1978 1977 1976 100,000 100,000 100,000 40,000 40,000 40,000 40,000 1,544,697 1,409,322 1,324,463 1,226,943 1,145,835 1,050,435 941,923 1,134,221 988,898 948,717 808,555 760,706 692,533 628,263 73.4 70.2 71.6 65.9 66.4 65.9 66.7 13,770.9 12,246.1 11,019.5 9,792.7 8,796.0 7,992.8 7,268.8 0.89 0.87 0.83 0.80 0.77 0.76 0.77 1.21 1.24 1.16 1.21 1.16 1.15 1.16 1975 1974 1973 1972 1971 1970 1969 40,000 40,000 20,000 20,000 20,000 20,000 20,000 875,985 833,277 766,509 697,480 610,685 545,198 495,858 569,101 520,309 465,600 419,756 374,568 349,581 313,085 65.0 62.5 60.7 60.2 61.3 64.1 63.1 6,716.0 6,124.2 5,615.3 5,158.7 4,739.9 4,379.6 4,051.1 0.77 0.73 0.73 0.74 0.78 0.80 0.82 1.18 1.18 1.21 1.23 1.27 1.25 1.29 1968 1967 1966 1965 1964 1963 1962 15,000 15,000 15,000 10,000 10,000 10,000 10,000 491,513 448,709 401,096 377,400 348,981 313,304 297,548 296,701 261,149 234,150 209,690 191,787 177,381 170,210 60.2 58.2 58.4 55.6 55.0 56.6 57.2 3,749.2 3,485.5 3,252.0 3,036.3 2,844.7 2,667.9 2,502.0 0.76 0.78 0.81 0.80 0.82 0.85 0.84 1.26 1.33 1.39 1.45 1.48 1.50 1.47 1961 1960 1959 1958 1957 1956 1955 10,000 10,000 10,000 10,000 10,000 10,000 10,000 281,304 260,495 247,589 242,445 225,507 219,393 212,226 160,309 149,684 142,131 137,698 127,055 121,008 116,380 57.0 57.5 57.4 56.8 56.3 55.2 54.8 2,353.8 2,222.2 2,089.8 1,965.4 1,850.5 1,742.1 1,639.6 0.84 0.85 0.84 0.81 0.82 0.79 0.77 1.47 1.48 1.47 1.43 1.46 1.44 1.41 1954 1953 1952 1951 1950 1949 1948 10,000 10,000 10,000 10,000 10,000 5,000 5,000 203,195 193,466 188,142 178,540 167,818 156,786 153,454 110,973 105,610 101,841 96,713 91,359 76,589 75,320 54.6 54.6 54.1 54.2 54.4 48.8 49.1 1,542.7 1,450.7 1,363.5 1,282.2 1,243.9 1,203.9 1,065.9 0.76 0.75 0.72 0.72 0.74 0.77 0.69 1.39 1.37 1.34 1.33 1.36 1.57 1.42 1947 1946 1945 1944 1943 1942 1941 5,000 5,000 5,000 5,000 5,000 5,000 5,000 154,096 148,458 157,174 134,662 111,650 89,869 71,209 76,254 73,759 67,021 56,398 48,440 32,837 28,249 49.5 49.7 42.4 41.9 43.4 36.5 39.7 1,006.1 1,058.5 929.2 804.3 703.1 616.9 553.5 0.65 0.71 0.59 0.60 0.63 0.69 0.78 1.32 1.44 1.39 1.43 1.45 1.88 1.96 1940 1939 1938 1937 1936 1935 19344 5,000 5,000 5,000 5,000 5,000 5,000 5,000 65,288 57,485 50,791 48,228 50,281 45,125 40,060 26,638 24,650 23,121 22,557 22,330 20,158 18,075 40.8 42.9 45.5 46.8 44.4 44.7 45.1 496.0 452.7 420.5 383.1 343.4 306.0 291.7 0.76 0.79 0.83 0.79 0.68 0.68 0.73 1.86 1.84 1.82 1.70 1.54 1.52 1.61 For 2002, the numbers are as of September 30, and prior years reflect December 31. Starting in 1990, deposits in insured banks exclude those deposits held by Bank Insurance Fund members that are insured by the Savings Association Insurance Fund and include those deposits held by Savings Association Insurance Fund members that are insured by the Bank Insurance Fund. Estimated insured deposits reflect deposit information as reported in the fourth quarter FDIC Quarterly Banking Profile. Before 1991, insured deposits were estim ated using percentages determined from the June 30 Call Reports. Initial coverage was $2,500 from January 1 to June 30, 1934. nr Income and Expenses, Savings Association Insurance Fund, by Year, from Beginning of Operations, August 9, 1989, through December 31, 2002 Dollars in Thousands In co m e Expenses and Losses Total Provision for Losses Interest and Other Insurance Expenses Administrative and Operating Expenses Funding Transfer from the FSLIC Resolut. Fund Net Income (Loss) $ 1,468,260 $ 551,239 $ 29,800 $ 887,221 $ 139,498 $ 11,465,717 Year Total Assessment Income Investment and Other Sources Total $ 12,794,479 $ 8,627,989 $ 4,166,490 2002 2001 2000 1999 588,821 733,121 664,080 600,995 23,783 35,402 19,237 15,116 565,038 697,719 644,843 585,879 0.003% 0.004% 0.002% 0.002% (31,380) 564,083 300,018 124,156 (156,494) 443,103 180,805 30,648 751 19,389 8,293 626 124,363 101,591 110,920 92,882 0 0 0 0 620,201 169,038 364,062 476,839 1998 1997 1996 1995 1994 583,859 549,912 5,501,684 1,139,916 1,215,289 15,352 13,914 5,221,560 970,027 1,132,102 568,507 535,998 280,124 169,889 83,187 0.002% 0.004% 0.204% 0.234% 0.244% 116,629 69,986 (28,890) (281,216) 434,303 31,992 (1,879) (91,636) (321,000) 414,000 9 0 128 0 0 84,628 71,865 62,618 39,784 20,303 0 0 0 0 0 467,230 479,926 5,530,574 1,421,132 780,986 1993 1992 1991 1990 1989 923,516 178,643 96,446 18,195 2 897,692 172,079 93,530 18,195 0 25,824 6,564 2,916 0 2 0.250% 0.230% 0.230% 0.208% 0.208% 46,814 28,982 63,085 56,088 5,602 16,531 (14,945) 20,114 0 0 0 (5) 609 0 0 30,283 43,932 42,362 56,088 5,602 0 35,446 42,362 56,088 5,602 876,702 185,107 75,723 18,195 Effective Assessment Rate 2 F D IC -ln s u re d In s titu tio n s Closed D u rin g 2 0 0 2 Dollars in Thousands ---------------------------------------N u m b er of N am e and B ank D e p o s it L o c a tio n C la s s A c c o u n ts N 29,540 T o ta l T o ta l F D IC A s s e ts D e p o s its D is b u r s e m e n ts $ 1,231,646 $ 1,081,788 $ 1,028,668 | E s tim a te d Loss1 D a te o f R e c e iv e r / C lo s in g o r A s s u m in g B a n k A c q u is it io n a n d L o c a tio n Bank Insurance Fund In s u r e d D e p o s it P a y o u ts H a m ilto n B a n k , N A Is ra e l D is c o u n t B a n k o f N e w Y o rk Miami, FL $ 171,500 01.11.02 N e x tB a n k , N A New York, NY F e d e ra l D e p o s it Phoenix, AZ N 4,017 668,681 502,858 548,511 300,000-350,000 02.07.02 In s u r a n c e C o rp o ra tio n SM 687 18,714 17,954 17,372 6,300 03.28.02 In s u r a n c e C o rp o ra tio n SM 1,223 10,595 7,195 7,400 09.30.02 In s u r a n c e C o rp o ra tio n NM 6,295 $ 59,818 1 $ 50,066 $ 59,208 $ 3,300 11.08.02 In s u r a n c e C o rp o ra tio n 2,587 $ 35,424 $ 32,954 $ 29,659 $ 10,600 12.17.02 1,277 $ 10,536 $ 10,720 $ 10,718 $ 4,337 01.18.02 N e w C e n tu ry B a n k F e d e ra l D e p o s it Shelby Township, Ml A m T ra d e In ter. B a n k o f G e o rg ia Atlanta, GA F e d e ra l D e p o s it 9,620 | B a n k of A la m o F e d e ra l D e p o s it Alamo, TN P u rc h a s e a n d A s s u m p tio n - In s u re d D e p o s its T h e F a rm e rs B a n k a n d Trust o f C h e n e y v ille S a b in e S ta te B a n k an d T ru s t Co. NM ChenewiHe, LA Many, LA In s u r e d D e p o s it T ra n s fe r - A s s e t P u rc h a s e B a n k o f S ie r r a B la n c a T h e S e c u rity S ta te B a n k of P e co s NM Sierra Blanca, TX O a k w o o d D e p o s it B a n k C o m p an y Oakwood, OH Pecos, TX T h e S ta te B a n k a n d T ru st C o m p an y SM 7,336 61,607 118,862 116,221 61,862 02.01.02 N e t F irs t N a tio n a l B a n k Defiance, OH B a n k L eu m i U S A Boca Raton, FL N 1,457 32,861 28,830 28,693 0 03.01.02 C o n n e c tic u t B a n k of C o m m e rc e NM Stamford, CT New York, NY H u d so n U n ite d B a n k 18,381 $ 378,658 $ 269,874 $ 259,165 $ 63,000 06.26.02 5,370 $ 50,246 $ 50,542 $ 37,021 $ 1,497 06.27.02 Mahwah, NJ Savings Association Insurance Fund In s u re d D e p o s it T ra n s fe r - A s s e t P u rc h a s e U n iv e rs a l F e d e ra l S a v in g s B a n k Chicago, IL Codes fo r Bank Class: C h ic a g o C o m m u n ity B a n k SA NNational bank NM State-chartered bank that is not a m ember of the Federal Reserve System SM State-chartered bank that is a m ember of the Federal Reserve System Chicago, IL SA Savings association 1 Estimated losses are as of December 31, 2002. Estimated losses are routinely adjusted w ith updated information from new appraisals and asset sales, which ultimately affect the asset values and projected recoveries. US E stim ated Insured D epo sits and th e Savings A sso ciatio n Insurance Fund, D e ce m b er 3 1 , 1 9 8 9 , th ro u g h S ep tem b e r 3 0 , 2 0 0 2 1 D e p o s its in Insured In s titu tio n s ($ Millions) Total Domestic Deposits Insurance Coverage Year2 Estimated Insured Deposits3 Percentage of Insured Deposits In su ran ce Fund as a P e rc e n ta g e o f Deposit Insurance Fund Total Domestic Deposits Estimated Insured Deposits 2002 2001 2000 1999 $ 100,000 100,000 100,000 100,000 $ 958,935 897,278 822,610 764,359 $ 837,591 801,849 752,756 711,345 87.3 89.4 91.5 93.1 $ 11,585.8 10,935.0 10,758.6 10,280.7 1.21 1.22 1.31 1.35 1.38 1.36 1.43 1.45 1998 1997 1996 1995 1994 100,000 100,000 100,000 100,000 100,000 751,413 721,503 708,749 742,547 720,823 708,959 690,132 683,090 711,017 692,626 94.4 95.7 96.4 95.8 96.1 9,839.8 9,368.3 8,888.4 3,357.8 1,936.7 1.31 1.30 1.25 0.45 0.27 1.39 1.36 1.30 0.47 0.28 1993 1992 1991 1990 1989 100,000 100,000 100,000 100,000 100,000 726,473 760,902 810,664 874,738 948,144 695,158 729,458 776,351 830,028 882,920 95.7 95.9 95.8 94.9 93.1 1,155.7 279.0 93.9 18.2 0.0 0.16 0.04 0.01 0.00 0.00 0.17 0.04 0.01 0.00 0.00 1 For 2002, the numbers are as of September 30, and prior years reflect December 31 2 Starting in 1990, deposits in insured institutions exclude those deposits held by Savings Association Insurance Fund members that are insured by the Bank Insurance Fund and include those deposits held by Bank Insurance Fund members that are insured by the Savings Association Insurance Fund. 3 Estimated insured deposits reflect deposit information as reported in the fourth quarter FDIC Quarterly Banking Profile. Before 1991, insured deposits w ere estimated using percentages determined from the June 30 Call Reports. Num ber, Assets, D epo sits, Losses, and Loss to Funds o f Insured T h rifts Taken O ver or Closed Because o f Financial D iffic u ltie s , 1 9 8 9 th ro u g h 2 0 0 2 1 Dollars in Thousands Total Assets Deposits Estimated Receivership Loss Total 753 396,341,365 319,345,975 75,048,291 82,155,438 2002 2001 2000 1999 1 1 1 1 50,246 2,179,783 29,530 62,956 50,542 1,670,802 28,583 63,427 1,497 440,000 1,402 1,343 1,497 440,000 1,402 1,343 1998 1997 1996 1995 1994 0 0 1 2 2 0 0 32,576 423,819 136,815 0 0 32,745 414,692 127,508 0 0 21,222 28,192 11,472 0 0 21,222 27,750 14,599 10 59 144 213 318 6,147,962 44,196,946 78,898,704 129,662,398 134,519,630 4,881,461 34,773,224 65,173,122 98,963,960 113,165,909 279,494 3,102,343 8,436,998 16,034,438 46,689,890 144,196 3,676,057 9,082,403 19,230,580 49,514,389 Year2 1993 1992 1991 1990 19895 4 Loss to Funds 1 Prior to July 1, 1995, all th rift closings w ere the responsibility of the Resolution Trust Corporation (RTC). Since the RTC was term inated on December 31, 1995, and all assets and liabilities transferred to the FSLIC Resolution Fund (FRF), all the results of the thrift closing activity from 1989 through 1995 are now reflected on FRF's books. The Savings Association Insurance Fund (SAIF) became responsible for all thrifts closed after June 30, 1995; there have been only five such failures. Additionally, SAIF was appointed receiver o f one thrift (Heartland FSLA) on October 8, 1993, because, at that time, RTC's authority to resolve FSLIC-insured thrifts had not yet been extended by the RTC Completion Act. 2 Year is the year of failure, not the year of resolution. The estimated losses represent the projected loss at the fund level from receiverships fo r unreimbursed subrogated claims o f the FRF/SAIF and unpaid advances to receiverships from the FRF. 4 The Loss to Funds represents the total resolution cost of the failed thrifts in the SAIF and FRF-RTC funds, which includes corporate revenue and expense items such as interest expense on Federal Financing Bank debt, interest expense on escrowed funds, and interest revenue on advances to receiverships, in addition to the estim ated losses for receiverships. 5 Total for 1989 excludes nine failures of the form er FSLIC. 119 FDIC Applications 2 0 0 0 -2 0 0 2 2002 Deposit Insurance Approved New Branches Approved Denied Mergers Approved Requests for Consent to Serve* Approved Section 19 Section 32 Denied Section 19 Notices of Change in Control Letters of Intent Not to Disapprove Disapproved Brokered Deposit Waivers Approved Denied Savings Association Activities' Approved Denied State Bank Activities/Investments7 H H k p ro v e d Denied <. Conversions of Mutual Institutions Non-Objection Objection 112 112 0 1,285 1,285 0 201 201 0 295 295 12 283 0 0 0 31 31 0 33 33 0 69 69 0 26 26 0 4 4 0 ..... 2001 2000 133 205 133 205 0 0 1 ,0 1 0 1 ,2 8 6 1 ,0 1 0 1 ,2 8 6 0 0 :% 316 266 316 0 0 231 249 231 248 19 15 212 233 0 1 0 1 0 0 21 28 21 28 0 0 21 25 21 25 0 0 76 80 76 80 0 0 29 36 29 36 0 0 4 8 4 8 0 0 * Under Section 19 o f the Federal Deposit Insurance (FDD A ct, an insured institution must receive FDIC approval before employing a person convicted of dishonesty or breach o f trust. Under Section 32, the FDIC m ust approve any change of directors or senior executive officers a t a state nonm em ber bank th at is not in com pliance w ith capital requirements or is otherw ise in troubled condition. Am endm ents to Part 303 o f the FDIC Rules and Regulations changed FDIC oversight responsibility in October 1998. T Section 2 4 o f the FDI Act, in general, precludes an insured state bank from engaging in an activity not perm issible for a national bank and requires notices be filed w ith the FDIC. C o m p l ia n c e , E n f o r c e m e n t and O the r R e la te d L eg al A c t io n s 2 0 0 0 -2 0 0 2 2002 2001 2000 162 144 87 0 0 1 0 7 7 0 4 6 0 6 5 Sec. 8b Cease-and-Desist Actions Notices of Charges Issued Consent Orders 444 3 33 4* 26 Sec. 8e Removal/Prohibition of Director or Officer Notices of Intention to Remove/Prohibit Consent Orders 4 15 4 11 3* 17 0 0 0 Civil Money Penalties Issued Sec.7a Call Report Penalties Sec.8 i Civil M oney Penalties 1 65 4 71 3 11 Sec. 10c Orders of Investigation 7 7 7 Sec. 19 Denials of Service After Criminal Conviction 0 0 1 Sec. 32 Notices Disapproving Officer/Directors Request for Review 0 0 0 1 0 189 0 0 127 Total Number of Actions Initiated by the FDIC Termination of Insurance Involuntary Termination Sec. 8a For Violations, Unsafe/Unsound Practices or Condition Voluntary Termination Sec.8a By Order Upon Request Sec.8p No Deposits Sec.8q Deposits Assumed Sec. 8g Suspension/Removal When Charged With Crime Truth in Lending Act Reimbursement Actions Denials of Requests for Relief Grants of Relief Banks Making Reim bursem ent A Suspicious Activity Reports (O p e n a n d c lo s e d in s t itu t io n s ) * Other Actions Not Listed 0 0 106 42,123 2 8 ,7 5 0 2 0 ,7 2 0 8 0 3 • Two actions included Sec.8 (c) tem porary orders. " One action included a Sec.8 (e) suspension order. A These actions do not constitute the initiation of a form al enforcem ent action and, therefore, are not included in the total num ber of actions initiated. A p p e n d ix B M ore A b o u t the FDIC FDIC Board of Directors Donald E. Powell, Chairman (seated), John M. Reich, John D. Hawke, Jr., James E. Gilleran (standing, left to right) Aajfia)) sauiep Donald E. Powell Don Powell w as sw orn in as the 18th Chairman of the FDIC in A ugust 2001. During the past year he has w orked to maintain the FDIC's reputation o f excellence w h ile positioning the organization to m e e t th e needs o f a rapidly evolving banking industry. Prior to being named FDIC Chairman by President George W. Bush, Mr. Powell - a life-long Texan w as President and CEO of The First National Bank of Amarillo, w here he started his banking career in 1971. In addition to his professional experience as a banker, Mr. Powell has served on num erous boards at universities, civic associations, hospitals and charities. He has been Chairman of the Board of Regents of the Texas A & M University System, w hich has more than 90,000 students. Mr. Powell also serves as A dvisory Board M em ber of the George Bush School of Governm ent and Public Service and as form er Chairman of the Amarillo Chamber o f Commerce. Mr. Powell has also served on the Board o f many other nonprofit, public and com m unity organizations, including the United Way, the Harrington Regional Medical Center, the City of Amarillo Housing Board, and a num ber of other educational institutions. He received his B.S. in economics from W est Texas State University and is a graduate of The S outhw estern Graduate School o f Banking at S outhern M e th o d is t University. John M. Reich Mr. Reich became Vice Chairman o f the FDIC Board o f D irectors on N ovem ber 15, 2002, and has served as a Board m em ber since January 16, 2001. Following Chairman Donna Tanoue's resignation in July 2001 and until Mr. Powell took office in August 2001, Mr. Reich was Acting Chairman of the FDIC. Mr. Reich enjoyed a 23-year career as a com m unity banker in Illinois and Florida, th e last 10 years of w hich w ere as President and CEO of the National Bank o f Sarasota, Sarasota, FL. Before joining the FDIC, Mr. Reich served fo r 12 years on the staff of U.S. Senator Connie Mack (R-FL). From 1998 through 2000, he was Senator Mack's Chief o f Staff, directing and overseeing all of the Senator's offices and com m ittee activities, including the Senate Banking Com m ittee. Mr. Reich's substantial com m unity service includes serving as Chairman of the Board of Trustees of a public hospital facility in Ft. Myers, FL, and Chairman of the Board o f Directors of the Sarasota Family YMCA. He has also served as a Board m em ber fo r a number of civic organizations, and was active fo r many years in youth baseball programs. Mr. Reich holds a B.S. degree from Southern Illinois University and an M.B.A. from the University of South Florida. He is also a graduate of Louisiana State University's School of Banking of the South. John D. Hawke, Jr. Mr. Hawke was sworn in as the 28th Com ptroller of the Currency on December 8, 1998. A fte r serving 10 m onths under a recess appointment, he was sworn in for a full five-year term on October 13, 1999. As Comptroller, Mr. Hawke serves as an FDIC Board mem ber. Prior to his a p p o in tm e n t as C om ptroller, Mr. H awke served fo r th re e and a half years as Under Secretary of the Treasury for Domestic Finance. Before joining Treasury, Mr. Hawke was a senior partner at the Washington, DC, law firm of Arnold & Porter, where he began as an asso ciate in 1962. W hile there, he headed the financial institutions practice, and from 1987 to 1995, served as the firm 's Chairman. In 1975, he left the firm to serve as General Counsel to the Board of Governors of the Federal Reserve System, returning in 1978. Mr. Hawke graduated fro m Yale U niversity in 1954 w ith a B.A. in English. From 1955 to 1957, he served on active duty w ith the U.S. Air Force. After graduating in 1960 from Columbia University School of Law, where he was Editor-in-Chief of the Columbia Law Review, Mr. Hawke was a law clerk for Judge E. Barrett Prettyman on the U.S. Court of Appeals for the District of Columbia Circuit. From 1961 to 1962, he served as counsel to the Select Subcommittee on Education in the House of Representatives. From 1970 to 1987, Mr. Hawke taught courses on federal regulation of bank ing at Georgetown University Law Center. He has also taught courses on bank acquisitions and financial regulation, and served as the Chairman of the Board of Advisors of the Morin Center for Banking Law Studies in Boston. Mr. Hawke has w ritten extensively on matters relating to the regulation of financial institutions. James E. Gilleran Mr. Gilleran became Director of the O ffice of T h rift Supervision (OTS) on D ecem ber 7, 2001. As OTS Director, Mr. Gilleran is also an FDIC Board member. Mr. Gilleran was Chairman and CEO of the Bank of San Francisco from October 1994 until December 2000. From 1989 to 1994, he w as the California State Banking Super intendent. He served as Chairman o f the Conference of State Bank Supervisors (CSBS) from 1993 to 1994, and was a m em ber of the CSBS's Bankers Advisory Council until 2000. Prior to his service as the California Banking Superintendent, Mr. Gilleran w a s m anaging partner o f th e Northern California practice of the public accounting firm KPMG Peat Marwick. Before serving as managing partner, he was in charge of KPMG's banking practice in the w e ste rn region o f the U.S. He w as w ith KPMG fro m 1958 through 1987. Mr. Gilleran has also been involved in a num ber of educational, civic and charitable organizations, including serving as Chairman o f the American Red Cross o f the (San Francisco) Bay Area. Mr. Gilleran is a certified public accountant and a m em ber of the American Institute of CPAs. He graduated from Pace University in 1955, and received his law degree from N orthw estern California University in 1996. / FDIC Organization Chart/Officials as o f Decem ber 31, 2002 124 Corporate Staffing Staffing Trends 1993-2002 24,000 21,0 18,000 15,000 12,000 9,000 6,000 3,0 RTC 1993 94 95 6,775 5,899 2,043 96 97 98 99 2000 01 02 FDIC 14,219 11,627 9,813 9,151 7,793 7,359 7,266 6,452 6,167 5,430 Total Staffing 20,994 17,526 11,856 9,151 7,793 7,359 7,266 6,452 6,167 5,430 N o te : All staffing totals reflect year-end balances. The Resolution Trust Corporation (RTC) was fully staffed w ith FDIC employees and, until February 1992, the RTC was managed by the FDIC Board of Directors. Upon the RTC's sunset at year-end 1995, all of its remaining workload and employees were transferred to the FDIC. 125 Number of Officials and Employees of the FDIC 2 0 0 1 -2 0 0 2 ( y e a r - e n d ) Total Washington Executive O ffices' ^Division of Supervision Division of Compliance and Consumer A ffairs [(Division of Supervision and Consumer Protection Division of Resolutions and Receiverships * jp-egal Division " Division of Finance 2001 2002 89 44 89 1 0 2 ,5 3 2 0 198 0 2 ,3 3 4 * | 506 Division of Research and Statistics [D ivision of Insurance Division of Insurance and Research * (Division of Administration Office of Inspector General (O ffice of Diversity and Economic Opportunity Office of the Ombudsman Office of Internal Control Management 0 570 0 64 0 0 176 0 2,635 522 454 111 124 411 330 524 622 317 375 284 207 0 247 229 349 0 0 396 63 101 475 0 ] 7 9 ] 187 0 157 0 475 158 34 16 17 584 321 397 234 114 ■42 44 62 36 34 31 23 13 i: 10 17 18 0 3 0 1,882 2,275 3,548 3,892 0 75 18 43 0 3 2 | 0 1 8 7 j 5 s 0 | [ 5,430 6,167 * Includes the Offices of the Chairman, Vice Chairman, Director (Appointive!, Chief Operating Officer, Chief Financial Officer, Chief Inform ation Officer, Legislative A ffairs, and Public Affairs. T On June 3 0 ,2 0 0 2 , the Division of Supervision and the Division o f Com pliance and Consumer A ffairs w e re m erged into the n e w Division o f Supervision and Consumer Protection. * On June 30, 2002 , th e Dallas field operations o f the Division of Finance and th e Division o f Inform ation Resources M an a g em en t w e re m erged into the Division of Resolutions and Receiverships. ■ On June 30, 2002 , the O ffice o f the Executive Secretary, form erly included in the Executive Offices' count, w a s m erged into the Legal Division. * On June 30, 2002 , th e Division o f Insurance and the Division of Research and Statistics w e re m erged into the new Division of Insurance and Research. Digitized12 for6FRASER g 100 0 0 30 154 i ........ Total 2001 0 412 m 2002 2,811 229 [D ivision of Information Resources Management Regional/Field 45 2002 Sources of Inform ation Hom e Page on the Internet FDIC Call Center ■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■M M w w w .fdic.gov A w ide range of banking, consum er and financial inform ation is available on the FDIC's Internet home page. This includes the FDIC’s Electronic Deposit Insurance Estimator, "EDIE," w hich estim ates an individual's deposit insurance coverage; the In stitu tio n Directory, financial profiles o f FDIC-insured in stitu tio n s; C om m unity R einvestm ent A ct evaluations and ratings fo r institu tions and thrifts supervised by the FDIC; Call Reports, banks' reports of condition and income; and "M oney Sm art," a training program to help adults outside the financial main stream enhance their money skills and create positive banking relation ships. Readers also can access a variety o f consum er pamphlets, FDIC press releases, speeches and other updates on the agency's activities, as w ell as corporate data bases and customized reports of FDIC and banking industry information. Phone: 877-275-3342 (ASK FDIC) 202-736-0000 TDD: 800-925-4618 The FDIC Call Center in Washington, DC, is the primary telephone point of con tact for general questions from the banking community, the public and FDIC employees. The Call Center directly, or in concert w ith other FDIC subject matter experts, responds to questions about deposit insurance and other consumer issues and concerns, as well as questions about FDIC programs and activities. The Call Center also makes referrals to other federal and state agencies as needed. Hours of operation are 8:00 a.m. to 8:00 p.m. Eastern Time. Information is also available in Spanish. Recorded information about deposit insurance and other topics is available 24 hours a day at the same telephone number. Office of the Om budsman 550 17th S treet, N W W ashington, DC 20429 Phone: 877-275-3342 (ASK FDIC) Fax: 202-942-3040, or 202-942-3041 E-mail: ombudsman@ fdic.gov The O ffice o f the O m budsm an responds to inquiries about the FDIC in a fair, impartial and tim ely manner. It researches questions and com plaints from bankers and the public. The office also recom mends w ays to improve FDIC operations, regulations and custom er service. Public Inform ation Center 801 17th S treet, NW W ashington, DC 20434 Phone: 877-275-3342 (ASK FDIC) 202-416-6940 Fax: 202-416-2076 E-mail: publicinfo@fdic.gov FDIC publications, press releases, speeches and C ongressional te stim o n y, directives to financial institutions, policy manuals and other docum ents are available on request or by subscription through the Public Information Center. These docum ents include the Quarterly Banking Profile, Statistics on Banking, S um m ary o f Deposits and a variety o f consum er pamphlets. / Regional and Area Offices A tla n ta R eqional O ffic e C hicago R egional O ffic e D allas R egional O ffic e 10 Tenth Street, NE Suite 800 Atlanta, Georgia 30309 (678) 916-2200 500 W est Monroe Street Suite 3500 Chicago, Illinois 60661 (312) 382-7500 1910 Pacific Avenue Suite 1900 Dallas, Texas 75201 (2 1 4 )7 5 4 -0 0 9 8 Alabam a Florida Georgia N orth Carolina South Carolina Illinois Indiana Kentucky M ichigan Ohio Virginia W e s t Virginia W isconsin Kansas C itv R egional O ffice N e w Y ork R egional O ffic e 2345 Grand Boulevard Suite 1200 Kansas City, Missouri 64108 (816) 234-8000 20 Exchange Place N ew York, N ew York 10005 (917) 320-2500 Iowa Kansas M innesota M issouri Nebraska D elaw are D istrict of Columbia M aryland N ew Jersey N ew York Pennsylvania N orth Dakota South Dakota Colorado N ew M exico Oklahoma Texas M e m p h is Area Office 5100 Poplar Avenue Suite 1900 Mem phis, Tennessee 38137 (901) 685-1603 Arkansas Louisiana M ississippi Tennessee Puerto Rico Virgin Islands Boston Area Office 15 Braintree Hill O ffice Park Braintree, Massachusetts 02184 (781) 794-5500 Director: Daniel E. Frye Connecticut M aine M assachusetts N ew Ham pshire Rhode Island Verm ont San Francisco R egional O ffic e 25 Ecker Street Suite 2300 San Francisco, California 94105 (415) 546-0160 Alaska Arizona C alifornia Guam H aw aii Idaho M ontana Nevada Oregon Utah W ashington W yom ing A p p e n d ix C - O ffice o f Inspector G eneral's M a n a g e m e n t and Perform ance Challenges Facing th e F D IC The follow ing chart show s the FDIC's m ost significant management and performance challenges as identified by the O ffice o f Inspector General (OIG): Challenge Brief Description 1 Adequacy of Corporate Governance in Insured Depository Institutions A number of well-publicized announcem ents of business failures, including financial institution failures, have raised questions about the credibility o f accounting practices and oversight in the United States. These recent events have increased public concern regarding the adequacy of corporate governance and, in part, prom pted passage o f the Sarbanes-Oxley A ct of of 2002. The public's confidence in the nation's financial system can be shaken by deficiencies in the adequacy o f corporate governance in insured depository institutions. 2 Protection of Consumer Interests The FDIC is legislatively mandated to enforce various statutes and regulations regarding consumer protection and civil rights w ith respect to state-chartered, nonm em ber banks and to encourage com m unity investm ent initiatives by these institutions. 3 Security of Critical Infrastructure To effectively protect critical infrastructure, the FDIC's challenge in this area is to im plem ent measures to m itigate risks, plan fo r and manage emergencies through effective contingency and continuity planning, coordinate protective measures w ith other agencies, determ ine resource and organization requirements, and engage in education and awareness activities. 4 M anagem ent and Analysis of Risks to the Insurance Funds A primary goal of the FDIC under its insurance program is to ensure that its deposit insurance funds do not require resuscitation by the U.S. Treasury. Achieving this goal is a considerable challenge, given that the FDIC supervises only a portion of the insured depository institutions. 5 Effectiveness of Resolution and Receivership Activities One of the FDIC's m ost im portant corporate responsibilities is planning and efficiently handling the franchise marketing of failing FDIC-insured institutions and providing prom pt, responsive and efficient resolution of failed financial institutions. These activities maintain confidence and stability in our financial system . 6 M anagem ent and Security of Inform ation Technology (IT) Resources As corporate employees carry out the FDIC's principal business lines of insuring deposits, examining and supervising financial institutions, and managing receiverships, they rely on inform ation and corresponding technology as an essential resource. Information and analysis on banking, financial services and the econom y form the basis fo r the developm ent of public policies and prom ote public understanding and confidence in the nation's financial system . IT is a critical resource that m ust be safeguarded. 129 A p p e n d ix C - O ffice of Inspector G eneral's M a n a g e m e n t and Perform ance Challenges Facing th e F D IC (co n tin u e d ) Challenge Brief Description 7 Assessment of Corporate Performance The Corporation has made significant progress in im plem enting the Results A ct and needs to continue to address the challenges of developing more outcom e-oriented performance measures, linking performance goals and budgetary resources, im plem enting processes to verify and validate reported performance data, and addressing crosscutting issues and programs that affect other federal financial institution regulatory agencies. 8 Transition to a N e w Financial Environm ent Although the N ew Financial Environment (NFE) offers the FDIC significant benefits, it also presents significant challenges. These challenges w ill te st the Corporation's ability to (1) maintain unqualified opinions on the FDIC's annual financial statem ents through the system im plem entation and associ ated business process reengineering; (2) manage contractor resources, schedules and costs; and (3) coordinate w ith planned and ongoing system developm ent projects related to NFE. 9 Organizational Leadership and M anagem ent of Human Capital The Corporation m ust also w ork to fill key vacancies in a tim ely manner, engage in careful succession planning, and continue to conserve and replenish the institutional knowledge and expertise that has guided the organization over the past years. A significant elem ent relates to organizational leadership at the FDIC Board of Directors level. In order to ensure that the balance betw een various interests im plicit in the Board's structure is preserved, the Board should operate at full strength, w ith all five presidential^ appointed positions filled. 10 Cost C ontainm ent and Procurement Integrity The Corporation m ust continue to identify and implem ent measures to contain and reduce costs, either through m ore careful spending or assessing and making changes in business processes to increase efficiency. Also, the Corporation has taken a number of steps to strengthen internal controls and oversight of contractors. However, our w o rk in this area continues to show that further improvements are necessary to ensure effective acquisition planning, fair and reasonable prices, and delivery of best value goods and services. 130 In d e x H A App, Steven 0 . Applications, 2000-2002 8-9, 104 120 123 107-108 1 B Bank Insurance Fund (BIF): Financial Statements and Notes Fund Performance Highlights Risk-Related Premiums (Also see Statistical Tables) Hawke, John D., Jr. High Vulnerability Issues 41-59 19-20 21 Insurance: Program Results 10-13, 23 26-28 M 107 Material Weaknesses Matters for Continued Monitoring 108-109 C Capital Investment Review Committee Commercial Banks (Financial Performance) Corporate Budgeting: FDIC Expenditures 1993-2002 21 105 21, 24 116 D Deposit Insurance Reform 10-11 E Efficient Operations Enforcement Actions 2000-2002 Examinations 2000-2002 17-19 121 14 F Failed Institutions: FDIC-lnsured Institutions Closed During 2002 Liquidation Highlights Federal Deposit Insurance Corporation (FDIC): Board of Directors Corporate Planning and Budget Organization Chart/Officials Regional and Area Offices Sources of Information Staffing FSLIC Resolution Fund (FRF): Financial Statements and Notes 20 118 13 122-123 116 124 128 127 125-126 81-97 G General Accounting Office: Audit Opinion FDIC Management Response Gilleran, James E. 98-103 104 123 P Performance Results Powell, Donald E. Program Evaluation 22-37 4-7, 122 38 R Receivership Management: Program Results Reich, John M. 16-17, 23 29 123 S Savings Association Insurance Fund (SAIF): 61-79 Financial Statements and Notes Fund Performance Highlights 19-20 21 Risk-Related Premiums (Also see Statistical Tables) 105 Savings Associations (Financial Performance) Statistical Tables: 110 Selected Statistics Number and Deposits of BIF-insured Banks 111 Closed, 1934-2002 Recoveries and Losses by the BIF on Disbursements for the Protection of Depositors, 1934-2002 112-113 Income and Expenses, BIF, from Beginning of Operations 114-115 117 Estimated Insured Deposits and the BIF, 1934-2002 Income and Expenses, SAIF, by Year 118 FDIC-lnsured Institutions Closed During 2002 118 Estimated Insured Deposits and the SAIF, 1989-2002 119 Number, Assets, Deposits, Losses, and Loss to Funds of Insured Thrifts Taken Over or Closed, 1989-2002 Supervision: Program Results 119 13-16, 23 25-26 131 This Annual Report was produced by talented and dedicated staff. To these individuals, w e w ould like to o ffe r our sincere thanks and appreciation. Special recognition is given to the follow ing individuals fo r their contributions: Marjorie C. Bradshaw Sam Collicchio Paul Covas Alan Deaton Jannie F. Eaddy Vicki Faust Barbara Glasby Addie Hargrove Patricia Hughes Mia Jordan Michael H. M acD erm ott Michael J. Powers Jay Rosenstein Joan Spirtas Federal Deposit Insurance Corporation 550 17th Street, NW Washington, DC 20429 - 9990 P-1 4 0 0 -1 0 3 -2 0 0 2