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Federal Deposit
Insurance Corporation

Each depositor insured to at least $250,000 per insured bank

2013 Annual Report

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Government Accountability Office's Audit Opinion


Independent Auditor's Report

To the Board of Directors
The Federal Deposit Insurance Corporation

In our audits of the 2013 and 2012 financial statements of the Deposit Insurance Fund (DIF) and of the FSLIC Resolution Fund (FRF), both of which are administered by the Federal Deposit Insurance Corporation (FDIC)1, we found

  • the financial statements of the DIF and of the FRF as of and for the years ended December 31, 2013, and 2012, are presented fairly, in all material respects, in accordance with U.S. generally accepted accounting principles;
  • FDIC maintained, in all material respects, effective internal control over financial reporting relevant to the DIF and to the FRF as of December31 , 2013;and
  • no reportable noncompliance for 2013 with provisions of applicable laws, regulations, contracts, and grant agreements we tested.

The following sections discuss in more detail (1) our report on the financial statements and on internal control over financial reporting, including an emphasis of matter related to improvements in the banking industry's and the DIF's financial condition; (2) our report on compliance with laws, regulations, contracts, and grant agreements; and (3) agency comments.

Report on the Financial Statements and Internal Control over Financial Reporting

In accordance with Section 17 of the Federal Deposit Insurance Act, as amended, and the Government Corporation Control Act, we have audited the financial statements of the DIF and of the FRF, both of which are administered by FDIC. The financial statements for the DIF comprise the balance sheets as of December 31, 2013, and 2012; the related statements of income and fund balance and cash flows for the years then ended; and the related notes to the financial statements. The financial statements for the FRF comprise the balance sheets as of December 31, 2013, and 2012; the related statements of income and accumulated deficit and cash flows for the years then ended; and the related notes to the financial statements. We also have audited FDIC's internal control over financial reporting relevant to the DIF and to the FRF as of December 31, 2013, based on criteria established under 31 U.S.C. § 3512(c), (d), commonly known as the Federal Managers' Financial Integrity Act (FMFIA).

We conducted our audits in accordance with U.S. generally accepted government auditing standards. We believe that the audit evidence we obtained is sufficient and appropriate to provide a basis for our audit opinions.

Management's Responsibility

FDIC management is responsible for (1) the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; (2) maintaining effective internal control over financial reporting, including the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; (3) evaluating the effectiveness of internal control over financial reporting based on the criteria established under FMFIA; and (4) providing its assertion about the effectiveness of internal control over financial reporting as of December 31 , 2013, based on its evaluation, included in the accompanying Management Report on Internal Control over Financial Reporting in appendix I.

Auditor's Responsibility

Our responsibility is to express opinions on these financial statements and opinions on FDI C's internal control over financial reporting relevant to the DIF and to the FRF based on our audits. U.S. generally accepted government auditing standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement, and whether effective internal control over financial reporting was maintained in all material respects.

An audit of financial statements involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the auditor's assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments. the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit of financial statements also involves evaluating the appropriateness of the accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, evaluating the design and operating effectiveness of internal control over financial reporting based on the assessed risk, and testing relevant internal control over financial reporting. Our audit of internal control also considered the entity's process for evaluating and reporting on internal control over financial reporting based on criteria established under FMFIA. Our audits also included performing such other procedures as we considered necessary in the circumstances.

We did not evaluate all internal controls relevant to operating objectives as broadly established under FMFIA, such as those controls relevant to preparing performance information and ensuring efficient operations. We limited our internal control testing to testing controls over financial reporting. Our internal control testing was for the purpose of expressing an opinion on whether effective internal control over financial reporting was maintained, in all material respects. Consequently, our audit may not identify all deficiencies in internal control over financial reporting that are less severe than a material weakness.2

Definitions and Inherent Limitations of Internal Control over Financial Reporting

An entity's internal control over financial reporting is a process effected by those charged with governance, management, and other personnel, the objectives of which are to provide reasonable assurance that (1) transactions are properly recorded, processed, and summarized to permit the preparation of financial statements in accordance with U.S. generally accepted accounting principles, and assets are safeguarded against loss from unauthorized acquisition, use, or disposition, and (2) transactions are executed in accordance with applicable laws, regulations, contracts, and grant agreements that could have a direct and material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements due to fraud or error. We also caution that projecting any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Opinions on Financial Statements

In our opinion:

  • The DIF's financial statements present fairly, in all material respects, the DIF's financial position as of December 31, 2013, and 2012, and the results of its operations and its cash flows for the years then ended, in accordance with U.S. generally accepted accounting principles.
  • The FRF's financial statements present fairly, in all material respects, the FRF's financial position as of December 31 , 2013, and 2012, and the results of its operations and its cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.

Emphasis of Matters

Improvement in the Banking Industry's and the DIFs Financial Condition

As discussed in note 7 to the DIF's financial statements, the banking industry continued to improve in 2013. During 2013, 24 insured institutions with combined assets of $5.8 billion failed. The losses to the DI F from failures that occurred in 2013 were lower than the amount accrued at the end of 2012, as the aggregate number and size of institution failures in 2013-and their estimated cost to the DIF-were less than anticipated. The DIF's contingent liability for anticipated failures declined from $3.2 billion at December 31, 2012, to $1.2 billion at December 31, 2013. As discussed in note 17 to the DIF's financial statements, through March 6, 2014, 5 institutions have failed thus far during 2014.

As of December 31 , 2013, the DIF had a fund balance of $47.2 billion, compared to a fund balance of $33 billion at December 31 , 2012. The DIF's ratio of reserves to estimated insured deposits as of December 31, 2013, was 0.79 percent, compared to 0.44 percent at December 31, 2012. This improvement was primarily attributable to revenue earned in 2013 and, as noted above, lower losses from failed institutions than estimated at December 31, 2012, and lower estimated losses for institutions that failed in prior years. FDIC's long-range plan is to maintain the reserve ratio at a minimum 2 percent.

Our opinion on the DIF's financial statements is not modified with respect to this matter.

Opinions on Internal Control over Financial Reporting

In our opinion:

  • FDIC maintained, in all material respects, effective internal control over financial reporting relevant to the DIF as of December 31, 2013, based on criteria established under FMFIA.
  • FDIC maintained, in all material respects, effective internal control over financial reporting relevant to the FRF as of December 31, 2013, based on criteria established under FMFIA.
During our 2013 audit, we identified deficiencies in FDIC's internal control over financial reporting that we do not consider to be material weaknesses or significant deficiencies.3 Nonetheless, these deficiencies warrant FDIC management's attention. We have communicated these matters to FDIC management and, where appropriate, will report on them separately.

Report on Compliance with Laws, Regulations, Contracts, and Grant Agreements

In connection with our audits of the financial statements of the DIF and the FRF, both of which are administered by the FDIC, we tested compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements consistent with our auditor's responsibility discussed below. We caution that noncompliance may occur and not be detected by these tests. We performed our tests of compliance in accordance with U.S. generally accepted government auditing standards.

Management's Responsibility

FDIC management is responsible for complying with applicable laws, regulations, contracts, and grant agreements.

Auditor's Responsibility

Our responsibility is to test compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements that have a direct effect on the determination of material amounts and disclosures in the financial statements of the DIF and the FRF, and perform certain other limited procedures. Accordingly, we did not test FDIC's compliance with all applicable laws, regulations, contracts, and grant agreements.

Results of Our Tests for Compliance with Laws, Regulations, Contracts, and Grant Agreements

Our tests for compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements disclosed no instances of noncompliance for 2013 that would be reportable under U.S. generally accepted government auditing standards. However, the objective of our tests was not to provide an opinion on compliance with applicable laws, regulations, contracts, and grant agreements. Accordingly, we do not express such an opinion.

Intended Purpose of Report on Compliance with Laws, Regulations, Contracts, and Grant Agreements

The purpose of this report is solely to describe the scope of our testing of compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements, and the results of that testing, and not to provide an opinion on compliance. This report is an integral part of an audit performed in accordance with U.S. generally accepted government auditing standards in considering compliance. Accordingly, this report on compliance with laws, regulations, contracts, and grant agreements is not suitable for any other purpose.

Agency Comments

In commenting on a draft of this report, FDIC's Chief Financial Officer (CFO) noted that the agency was pleased that we provided unmodified opinions on the DIF's and the FRF's financial statements and that we reported that FDIC had effective internal control over financial reporting and complied with tested provisions of applicable laws, regulations, contracts, and grant agreements.

FDIC's CFO also stated that FDIC will continue to take steps to strengthen and improve its internal control environment, and that FDIC will continue its dedication to establishing sound financial management as a top priority in helping achieve the agency's mission.

James R. Dalkin's signature

James R. Dalkin
Director
Financial Management and Assurance

March 6, 2014

1A third fund managed by FDIC, the Orderly Liquidation Fund, established by Section 210 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376, 1506 (July 21 , 2010), is unfunded and did not have any transactions during 2013 or 2012.

2A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected, on a timely basis. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis.

3A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit the attention of those charged with governance.

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