I. Management's Discussion and Analysis
Supervision and Consumer Protection
Supervision and consumer protection are the cornerstones of the FDIC's efforts to ensure the stability of and public confidence in the nation's financial system. At year-end 2003, the Corporation was the primary federal regulator for 5,340 FDIC-insured, state-chartered institutions that are not members of the Federal Reserve System (generally referred to as "State Nonmember" institutions). Through safety and soundness, consumer compliance, and Community Reinvestment Act (CRA) examinations of these FDIC-supervised institutions, the FDIC assesses their operating condition, management practices and policies as well as their compliance with applicable laws and regulations. The FDIC also educates bankers and consumers on matters of interest to bank customers and addresses consumers' questions and concerns.
Safety and Soundness Examinations
During 2003, the Corporation conducted 2,421 statutorily required safety and soundness examinations. The number and total assets of FDIC-supervised institutions identified as "problem" institutions (defined as having a composite CAMELS1 rating of "4" or "5") decreased during 2003. As of December 31, 2003, 73 institutions with total assets of $8.2 billion had been identified as problem institutions, compared to 84 institutions with total assets of $12.8 billion on December 31, 2002. These changes represent a decrease of 13.1 percent and 35.9 percent in the number and assets of problem institutions, respectively. During 2003, 58 institutions were removed from problem institution status due to composite rating upgrades, mergers, consolidations or sales, and 47 were newly identified as problem institutions. The FDIC is required to conduct follow-up examinations of all designated problem institutions within 12 months of the last examination. As of December 31, 2003, all follow-up examinations for problem institutions had been performed on schedule.
Compliance and Community Reinvestment Act (CRA) Examinations
The FDIC conducted 1,610 comprehensive compliance-CRA examinations, 307 compliance-only examinations2, and two CRA-only examinations in 2003, compared to 1,334 comprehensive compliance-CRA examinations, 493 compliance-only examinations, and 13 CRA-only examinations in 2002. One institution was assigned a composite "4" rating for compliance as of year-end 2003. None were assigned a composite "5" rating. The "4" rated institution has entered into a Memorandum of Understanding (MOU) with the FDIC to correct compliance issues. The ratings for institutions with CRA-only examinations were rated "Satisfactory." (See the accompanying table for details about the FDIC Examinations.)
FDIC Examinations 2001-2003
Safety and Soundness:
State Nonmember Banks
State Member Banks
Subtotal – Safety and Soundness Examinations
Compliance - Community Reinvestment Act
Subtotal CRA/Compliance Examinations
Data Processing Facilities
Subtotal – Specialty Examinations
Examination Program Efficiencies
The FDIC continues to implement measures to improve efficiency by maximizing the use of risk-focused examination procedures at well-managed banks that meet certain criteria.
The Maximum Efficiency, Risk-Focused, Institution Targeted (MERIT) Program provides for the use of risk-focused safety and soundness examination procedures at FDIC-supervised institutions with assets of $250 million or less that are well-managed, well-capitalized and meet other program criteria. This program helps ensure that the FDIC's resources are focused on those institutions that pose the greatest risk to the insurance funds, while preserving the integrity of the examination process.
The FDIC refocused its compliance examination approach during the second half of 2003. The revised process evaluates a financial institution's compliance management system through a review of policies and procedures and discussions with staff from the institution. Examiners place emphasis on how well the institution's own compliance management system is working to identify emerging risks, monitor changes to laws and regulations, ensure employees understand their responsibilities, incorporate compliance into business operations, review those operations to ensure compliance with applicable laws and regulations, and take effective corrective actions when necessary. Based on risks identified in the compliance management system, examiners pinpoint areas for further evaluation using transaction testing.
USA PATRIOT Act
Since the enactment of the USA PATRIOT Act (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001), the FDIC has participated in numerous interagency working groups to draft revisions to the Bank Secrecy Act as required by the USA PATRIOT Act and to develop interpretive guidance for the financial services industry. In May 2003, the FDIC, in conjunction with other regulatory agencies, jointly issued a final rule to implement Section 326 of the USA PATRIOT Act. Section 326 requires financial institutions to implement a customer identification program to verify the identity of customers opening new accounts. The FDIC has taken steps to educate its examination staff and members of the banking industry on the USA PATRIOT Act at outreach events, training conferences and seminars. To assist financial institutions in their efforts to comply with the Bank Secrecy Act and the USA PATRIOT Act, the FDIC publicly released its examination procedures for the Bank Secrecy Act in October 2003.
To facilitate industry cooperation with law enforcement authorities in their ongoing investigation of terrorist activities through the implementation of Section 314(a) of the USA PATRIOT Act, the FDIC also worked with other federal banking regulators to incorporate point-of-contact information as a required item in the Call Report, beginning with the March 2003 Call Report. The FDIC is the only banking regulator to use this mechanism thus far to provide current point-of-contact information to the Financial Crimes Enforcement Network (FinCEN) to aid in its distribution of Section 314(a) information-sharing requests.
The Director's Corner
The FDIC and the other banking agencies frequently publish and issue guidance for insured institutions and their officers and directors to use to fulfill their responsibilities. This useful and practical information was made available during the first quarter of 2003, when the FDIC established the "Director's Corner" on its external Web site. This site includes items such as Interagency Policy Statements, Supervisory Guidance, and Financial Institution Letters on the topics of Corporate Governance Practices, Auditing and Internal Controls, Accounting Practices and the Allowance for Loan and Lease Losses, and other areas of interest to bank directors.
In January 2003, the FDIC published for public review and comment draft examination guidelines for state nonmember institutions that offer payday loans. More than 1,000 comments were received and considered prior to implementing final guidelines in July 2003. Necessitated by the high-risk nature of the business line and the substantial growth of the product, the final guidelines identify the key safety and soundness and consumer protection issues that examiners will consider when evaluating payday lending during examinations. The FDIC's guidelines, while similar in many respects to those issued by other financial institution regulatory agencies, are more explicit on the applicability of the expanded interagency guidance to sub-prime lending programs, capital requirements, allowance for loan and lease losses, classifications, accounting for accrued interest and fees and recoveries, and lending concentrations.
Money Smart Financial Literacy Program
DSC Money Smart team members (l to r): Pam Bronson, Joan Lok, Kip Child, Jacqui Gordon, Cathie Davis, Teresa Perez, Jim Pilkington, and Clinton Vaughn join Chairman Powell and team leader Nelson Hernandez on stage to accept
the Service to America Business and Commerce medal.
Defense Secretary Donald Rumsfeld and FDIC Chairman Donald Powell agree, at a meeting at the Pentagon, to make Money Smart training available to 1.4 million servicemen and servicewomen worldwide.
One of the Corporation's top priorities in 2003 was the continued promotion of financial education through its Money Smart Program. The FDIC was awarded the prestigious Service to America Business and Commerce medal in October 2003 for its efforts in promoting financial literacy using the Money Smart curriculum. These medals honor people and organizations that have shown a strong commitment to public service and have made a significant contribution in their field of government that is innovative, high-impact and critical for the nation.
Since its introduction in July 2001, the Money Smart program has generated a great deal of interest. Primarily designed to help adults with little or no banking experience develop positive relationships with insured depository institutions, the program has been widely cited in over 100 national and local publications. Requests for the program have been received from Mexico, Thailand and Canada. During 2003, the FDIC continued to expand the public's access to Money Smart by translating the program into Chinese and Korean and expanding membership in the Money Smart Alliance. By year-end 2003, the FDIC had trained over 5,000 volunteer instructors, taught over 100,000 consumers and supplied more than 111,000 copies of the Money Smart training curriculum to various groups, including government, community, financial and faith-based organizations.
Consumer Complaints and Inquiries
The FDIC investigates and responds to complaints and inquiries from consumers, financial institutions and other parties about potential violations of consumer protection and fair lending laws, as well as deposit insurance matters. As of December 31, 2003, the FDIC had received 8,026 complaints, of which 4,047 were against state-chartered nonmember banks. Approximately fifty percent of the state nonmember bank consumer complaints concerned credit card accounts. The most frequent complaints involved loan denials, billing disputes and account errors, terms and conditions, collection practices, reporting of erroneous information, and credit card fees and service charges. The FDIC's centralized Consumer Response Center (CRC) is responsible for investigating all types of consumer complaints about FDIC-supervised institutions and for answering consumer inquiries about consumer protection laws and banking practices.
During 2003, the FDIC received over 100,000 inquiries from consumers and members of the banking community. The FDIC Central Call Center serves as the primary telephone point of contact for questions on deposit insurance coverage from the banking community and the public. (For more information on the Call Center, which can be reached at 1-877-ASK-FDIC, or 1-877-275-3342, toll free, see page 129.)
The FDIC has long recognized the importance of good corporate governance in maintaining the integrity and stability of the nation's banking system. The Sarbanes-Oxley Act of 2002 (Act) imposes new reporting, corporate governance, and auditor independence requirements on companies including insured depository institutions and bank and thrift holding companies with securities registered under the federal securities laws. In response to questions about the applicability of the Act to insured depository institutions that are not public companies, the FDIC issued comprehensive guidance in March 2003, describing significant provisions of the Act and related rules of implementation adopted by the Securities and Exchange Commission. The guidance explained how adopting sound corporate governance practices outlined in the Act may benefit banking organizations, including those that are not public companies, and how several of the Act's requirements mirror existing banking agency policy guidance related to corporate governance.
1 The CAMELS composite rating represents 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, and ranges from "1" (strongest) to "5" (weakest).
2 Compliance-only examinations are conducted for most institutions at or near the mid-point between comprehensive CRA-compliance examinations under the Gramm-Leach-Bliley Act of 1999, which amended the Community Reinvestment Act of 1977. CRA examinations at small financial institutions with aggregate assets of $250 million or less are subject to a CRA examination no more than once every five years if they receive a CRA rating of "Outstanding" and no more than once every four years if they receive a CRA rating of "Satisfactory."