Federal Deposit
Insurance Corporation

 
I. Management’s Discussion and Analysis
 

Receivership Management

The goal of the receivership management 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 for the expeditious and orderly terminations of receiverships, and implementing a service-billing methodology to ensure fair and reasonable charges to receiverships for the services provided by the Corporation.

Institution and Asset Marketing
The FDIC is proactive in its marketing efforts. Competitive marketing of failed institutions assures that the highest price is obtained for the deposit franchise and assets of the failed institution, thus minimizing the impact on the deposit insurance funds. All qualified and interested bidders were contacted regarding an opportunity to bid for each of the 11 institutions that failed in 2002. In addition, 85 percent of the book value of the marketable assets were marketed within 90 days of failure. This was done to minimize the costs associated with managing the assets and maximize the net recovery to the receivership estate, thereby benefiting the uninsured depositors and the creditors of the failed institution. (For details, see table on Liquidation Highlights.)

Two resolutions in 2002 warrant special note: Hamilton Bank and NextBank. The first involved Hamilton Bank, N.A., closed by the Office of the Comptroller of the Currency on January 11. Hamilton Bank had total assets of $1.2 billion and total deposits of $1.1 billion, and was headquartered in Miami, FL. The bank operated eight 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. What made this failure so unique was that it was the first time the FDIC was receiver for such a large volume of international loans. Hamilton’s principal focus was commercial trade finance and lending to small companies operating in the United States and throughout Central America.

In resolving this failure, the FDIC took a rarely used approach to protect depositors by transferring all the insured deposits (savings and checking accounts, certificates of deposit, and Individual Retirement Accounts) from three of Hamilton’s nine branches, and only the insured transactional accounts (savings and checking) from the remaining six branches. The Israel Discount Bank, New York, NY assumed $531.6 million of the 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-determined loss. At that time, Hamilton’s Miami-based receivership office was closed, and responsibility for 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 investigations. As of December 31, 2002, the cost of the Hamilton Bank failure to the Bank Insurance Fund was estimated to be $172 million.

The second noteworthy resolution involved an Internet-only bank, NextBank, N.A., chartered in Phoenix, AZ. NextBank was closed by the Office 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 (Master Trust), which paid for the receivables by selling securities to the public. These securities were backed by the cash flows generated from the receivables. The bank had no brick-and-mortar banking facilities, and its main business was issuing credit cards. The FDIC received no bids for the deposits and paid out the insured deposits by mailing checks directly to depositors.

The FDIC, as receiver, assumed servicing responsibilities for NextBank’s credit card portfolio. The credit card portfolio consisted of over one million cards with about 800,000 belonging to the Master Trust and the remainder being bank-owned. The management and marketing of these assets required extensive negotiations with the many parties involved in the credit card processing and securitization business. Ultimately, the bank-owned cards were 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 Master Trust cards were shut down on July 10. The FDIC is currently administering the receivership’s remaining interests in the Master Trust.

The NextBank Instant Finance Network receivables were sold through Debt X, an asset-auction company that operates on the Internet. The sale, consisting of 900 accounts with a book value of approximately $1 million, was conducted electronically via Debt X’s secure Web site. As of December 31, 2002, the cost of the NextBank failure to the Bank Insurance Fund was estimated to be between $300 million and $350 million.

In addition to these resolution activities, the FDIC filed a lawsuit in the district court for the Northern District of Illinois on November 1 against Ernst & Young, the outside auditors for Superior Bank, Hinsdale, Illinois. Superior Bank, a $2 billion institution, failed on July 27, 2001. The complaint charges Ernst & Young with fraud and negligence in its audits of Superior and seeks actual damages of $548 million and punitive damages in an amount three times the actual damages, as well as interest and costs. The FDIC’s complaint asserts that Ernst & Young failed to properly audit Superior’s residual assets and then concealed its erroneous auditing for fear that its acknowledgement would damage Ernst & Young’s $11 billion sale of its consulting arm to Cap Gemini, a French company. No trial date had been set as of year-end.

Terminations
The FDIC, as receiver, manages the receivership estate and its subsidiaries with the goal of expeditious and orderly termination. The oversight and prompt 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 meet its target of terminating 75 percent of receiverships within three years of the failure date.

Billing for Services Provided
In 2002, the Corporation implemented a new service-billing methodology to charge receiverships for the services provided by the FDIC. In addition, benchmark data were collected to permit the Corporation to better evaluate and set the rates to be charged for these services. During 2003, receivership management personnel will examine those areas in which FDIC costs significantly exceed those benchmarks and, where necessary, implement appropriate cost-management measures to address those cost differentials.