Fund Balance as a Percent of Insured Deposits
Fund Balance as a Percent of Insured Deposits
two SAIF institution failures, one each in 2001 and 2002. *Losses
for all resolutions occurring in this calendar year have been updated
through 12/31/03. The loss amounts on open
receiverships are routinely adjusted with updated information
from new appraisals and asset sales, which ultimately affect projected
Source: FDIC, 2002 Annual Report and Reports from FDIC Division
of Finance and FDIC Division of Research and Statistics.
January 29, the FDIC Board of Directors adopted an agreement
with the Office of Thrift Supervision, the Office of the Comptroller
of the Currency, and the Board of Governors of the Federal
System to streamline the FDIC’s ability to examine insured
institutions that represent a heightened risk to the deposit
insurance fund by:
Enabling the FDIC
to conduct special examinations of any insured deposit institution
that has a “3”, “4” or “5” CAMELS composite
Establishing a dedicated
FDIC examiner to the eight largest banking institutions, which control
approximately 41 percent of industry assets.
On May 22, the United
States House of Representatives passed the Federal Deposit Insurance
Reform Act of 2002, by a vote of 408 to 18.
The U.S. economy
moved modestly forward with the further reductions of interest
rates and belt tightening by corporations in all sectors. GDP improved
by 30 basis points to 3.5 percent and inflation was up, but still
only at 2.4 percent. The discount rate dropped to 0.75 percent.
At the end of the year, the prime rate stood at 4.25 percent, and
the 30-year mortgage rate average was down over 100 basis points
to 6.05 percent. Encouraged in part by interest rates, housing
starts increased by 6.4 percent to 1,705,000, and existing sales
were up 7.2 percent. Corporate efficiency efforts cut deeper, however,
into employment and office vacancy rates. Total employment remained
almost flat with an increase of only 0.3 percent and unemployment
increased by 0.3 percent to 6.4 percent. Office vacancies were
up over 200 basis points to 16.5 percent.25_1
Although the economy was still sluggish, the profitability in
commercial banks remained high, partially attributable to extraordinarily
low interest rates. Falling mortgage rates surged mortgage refinancing.
Returns on equity and assets both rose, with the latter reaching
its highest level in the last 30 years.
Commercial banks’ total assets grew by 7.2 percent and
holdings of securities increased by 16 percent. Equity capital
increased by 7.9 percent. Interest expense fell 37 percent and
interest income fell 13 percent. Thus, the net interest margin
increased 9 basis points to 4.04 percent. Non-interest income
grew 5.3 percent while non-interest expense fell due to lower
Commercial and Industrial loans fell 7.3 percent, the largest
decline since 1991. This decrease was a result of tightening
of lending practices and a low demand. There was an increase
in delinquency and charge-off rates in corporate loans (several
large firms claimed bankruptcy—for example, WorldCom).
Commercial real estate loans grew 8.8 percent; this is down from
2001 due to less expansion in construction and land development
lending. Residential mortgage loans increased 20 percent, and
home equity loans increased almost 40 percent. Core deposits
expanded 7.6 percent.25_2
Overall, 9,372 financial institutions were in operation at the
end of 2002. The number of banks on the problem bank list continued
to increase for the third year in a row and grew from 114 to
136.25_3 Table 25-2 shows the number and total assets of FDIC
insured institutions, as well as their profitability as of the
end of 2002.
Financial Institutions Insured by FDIC
($ in Billions)
During 2002, the
FDIC resolved 11 financial institution failures. These failed institutions
had a total of $2.9 billion in assets and $2.5 billion in deposits.
Ten of the institutions were insured by the BIF and the remaining
one was insured by the SAIF. Four of the failures resulted in insured
deposit payoffs, and one other was a partial payoff transaction.
Two resolutions in 2002 warrant special note: Hamilton Bank, N.A.,
Miami, Florida, and NextBank, Phoenix, Arizona. Hamilton Bank had
total assets of $1.4 billion and total deposits of $1.3 billion, and
was closed by the Office of the Comptroller of the Currency on January
11. 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 to an assuming bank. 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 the remaining 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 either 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, Texas. Those remaining assets principally involve bankruptcies,
litigation or investigations. As of December 31, 2003, the cost of
the Hamilton Bank failure to the Bank Insurance Fund was estimated
to be $171.5 million.
The second noteworthy resolution involved an Internet-only bank,
NextBank, N.A., which was chartered in Phoenix, Arizona. NextBank
was closed by the Office of the Comptroller of the Currency on February
7. NextBank was formed when its holding company parent, NextCard,
Inc. (NCI) purchased Avco National Bank in 1999. NextBank operated
as a limited purpose national credit card bank under the provisions
of the Competitive Equality Banking Act of 1987 (CEBA). As a limited
purpose credit card bank, NextBank operated under the following restrictions:
1) it could only engage in credit card operations; 2) it could not
accept demand deposits or deposits that the depositor may withdraw
by check or similar means; 3) it could not accept savings or time
deposits of less that $100,000 (except as security for loans); 4)
it could maintain only one office that accepts deposits; and 5) it
could not engage in the business of making commercial loans. NextBank
held assets of $700.2 million, and deposits of $551.3 million.
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. As of December 31, 2003, 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 two 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 $11
billion sale of its consulting arm to Cap Gemini, a French company.
No trial date had been set as of year-end 2003.
A more recent estimate of losses per transaction type is shown in
Estimated Losses by FDIC Transaction Type ($ in Millions)
as of 12/31/03
Losses as a
Percent of Assets
for all resolutions occurring in this calendar year
have been updated through 12/31/03. The loss amounts on open receiverships
adjusted with updated information from new appraisals
and asset sales, which ultimately affect projected recoveries. Back
from FDIC Division of Research and Statistics.
Payments to Depositors and Other Creditors
In the 11 financial institutions that failed in 2002, deposits totaled
over $2 billion in 78,170 deposit accounts. Four of the failures resulted
in insured deposit payoffs, and one other (Hamilton Bank) was a partial
payoff transaction. Dividends paid on all active receiverships totaled
over $2.1 billion in 2002.
There have been a total of 2,226 insured financial institution resolutions
since the FDIC began operations in 1934. Of this total, 1,477 were
P&A transactions, 141 were open bank assistance transactions,
and 608 were deposit payoff transactions.
Total disbursements by the FDIC since January 1, 1934, have amounted
to $111.6 billion. Of that amount, actual and projected recoveries
are anticipated to be approximately $72.5 billion, which equates to
a projected loss of $39.1 billion to the BIF/SAIF funds.
At the beginning of 2002, the FDIC held $573.4 million in assets
from failed institutions. That included $131.7 million in BIF assets,
$233.6 million in RTC assets, $14.2 million in FSLIC Resolution Funds
(FRF) assets, and $193.9 million in assets from SAIF-insured institutions.
During the year, the FDIC acquired an additional $2.5 billion in assets
from 11 financial institution failures. The failure of Hamilton Bank,
N.A. alone was responsible for almost one half of the assets acquired
during the year. The FDIC collected $1.7 billion during the year,
and the ending balance for assets in liquidation was $1.2 billion.
Of the $1.2 billion, $657 million was assets in liquidation for BIF,
$397 million for SAIF, $13 million for FRF, and $173 million for RTC.
Asset marketing continued to play a key role in asset liquidations
for the FDIC and their efforts contributed almost $421 million
(7,299 loans sold) to the recoveries. The FDIC also had over $77
million in non-asset related collections during this year. While
these collections came from a number of different sources, $32.6
million was the result of recoveries from fidelity bond insurance
claims, director and professional liability settlements, and criminal
restitutions, and another $12 million represented recoveries of
state and federal tax benefits due to failed institutions.
Table 25-4 shows the FDIC’s assets in liquidation and Chart
25-1 shows the asset mix.
FDIC End of the Year Assets in Liquidation ($ in Millions)
The Corporation’s investment strategy reflected prudent management of
the $32.1 billion BIF and $11.7 billion SAIF. It is noteworthy that the interest
earned on investment securities accounted for 94.2 percent of revenues for
the BIF and 95.8 percent of revenues for the SAIF, with $2.3 billion in combined
The FDIC substantially revamped its internal organizational structure
to improve operational efficiency and unify corporate efforts in
each of the three major business lines: insurance, supervision, and
management. As part of this major restructuring, the FDIC also streamlined
Corporation’s management and support structures.
The major organizational changes made in 2002 include:
Division of Insurance and the Division of Research and Statistics
were merged into a new Division of Insurance and Research to
facilitate a more integrated and effective research and policy
of Supervision and the Division of Compliance and Consumer Affairs
were merged into a new Division of Supervision and Consumer Protection.
regional and field structure of the new division was also streamlined,
with a reduction in the number of regional offices from eight to
six. Additionally, 89 field offices were consolidated into 52 territories
for safety and soundness
functions, and 73 field offices were consolidated into 30 territories
for compliance functions.
accounting operations of the Division of Finance were transferred
to the Division of Resolutions and Receiverships to better align
in the Corporation’s receivership management program.
and training functions were merged to create a new Human Resources
Branch within the Division of Administration. program.
continued the downsizing that it has been addressing for much
of the past decade. Employment dropped from 6,167 at the beginning
of 2002 to 5,430 at year-end 2002 as a result of declining workloads
and organizational streamlining. Much of the needed reduction
in staffing was accomplished voluntarily through targeted buyout
programs that resulted in the retirement or resignation of approximately
700 employees and the reassignment of surplus employees to vacant
positions elsewhere within the Corporation. In addition, approximately
30 surplus attorney positions were eliminated through a reduction-in-force
in May. Chart 25-2 shows the staffing levels for the past five
The savings resulting from corporate restructuring, downsizing
and other initiatives directed toward cost containment and
improved operating efficiency will, when fully realized, reduce
future corporate operating costs by an estimated $80 million
annually. The initial impact can be seen in the 2003 budget
adopted by the Board of Directors in December 2002. Estimated
2003 spending will decline by 7 percent from 2002 spending.
of Labor and Statistics, Department of Labor; Bureau of Economic Analysis,
Department of Commerce; Housing Market Statistics, National Association
of Home Builders; and Federal Home Loan Mortgage Corporation. Back
Federal Reserve Bulletin Volume 89, Number 6, June 2003. Back
FDIC Quarterly Banking Profile, Fourth Quarter 2002. Back