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Operations of the

Corporation – 

The Year in Review

In 2002, the FDIC continued to position itself to meet the demands of

an evolving banking industry – one

that is being reshaped by institutional consolidation, globalization 

and technology. The Corporation

assumed a major leadership role 

on significant economic and policy

issues, pursuing the enactment of

deposit insurance reform legislation

and sponsoring several symposia for

regulators, policymakers and others

on other important 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 implemented a streamlined organizational

and management structure and

appointed a new management team

to lead it into the future.

Highlights of the Corporation’s 2002

accomplishments 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 financial markets and the banking system

affect the adequacy and the viability

of the deposit insurance funds. 

I. Management’s

Discussion

and Analysis

The FDIC’s efforts in 2002 focused

on deposit insurance reform, other

activities to promote 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 enactment of comprehensive

deposit insurance reform legislation

in 2002. Legislation containing major

elements of the FDIC deposit insurance 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

Committee on the FDIC’s proposals

for deposit insurance reform. 

The FDIC’s recommendations, which

were summarized in the testimony,

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 methods of 

managing the size of the BIF and 

SAIF may cause large premium 

swings and could force the FDIC 

to charge the highest premiums 

during difficult economic times 

when the industry can least afford

it. Currently, safer institutions 

subsidize riskier institutions 

unnecessarily while new entrants 

and growing institutions avoid 

paying premiums. To correct 

these problems, the FDIC recommended that Congress give the 

Board of Directors the discretion 

to: 
● Manage the combined fund 

within a range.

● Price deposit insurance according to risk at all times and for 

all insured institutions.

● Grant a one-time initial assessment 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 coverage to ensure that basic account 

coverage is not eroded over time 

by inflation and increasing the 

current level of deposit insurance 

coverage for retirement accounts.

The House passed H.R. 3717, the

Federal Deposit Insurance Reform

Act 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 Act of 2002,

during the 107th Congress, the

Corporation successfully addressed

many key issues surrounding deposit

insurance reform, establishing 

a sound base for future passage 

of legislation. Enactment of deposit

insurance reform will remain a 

priority of the FDIC during the 108th

Congress. The FDIC will continue 

to examine in greater detail how 

to implement risk-based pricing for

deposit insurance and methods that

could be used to create objective

measurements of an insured depository institution’s risk.

Since implementation of pending

deposit insurance reform legislation

was not enacted, development of

a final pricing recommendation and

implementation plan for inclusion in

a notice and comment rulemaking

during 2002 was put on hold. The

FDIC continues to refine these

options and explore other possibilities

for using objective measures to 

price deposit insurance premiums. 

Other 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 workshops during 2002 on major

issues of concern to the banking

industry and regulators. In June, 

the FDIC held a symposium 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 symposium on the

“Rise of Risk Management: Basel

and Beyond.” At that meeting, top

government officials and leading

experts from Wall Street, the 

business sector, the accounting 

profession and academia discussed

the importance of appropriate risk

management policies and procedures.

In September, the FDIC co-sponsored

with the Journal of Financial Services

Research a symposium on pricing

the risks of deposit insurance. Leading

scholars and researchers examined

the latest developments in credit 

risk modeling and related risk 

measurement methods and their

implications for deposit insurance

pricing. The FDIC also hosted economic roundtables on the economic

outlook and the risks of deflation 

and the U.S. housing market and

consumer sector.

The FDIC also began publication 

in early 2002 of an electronic news

bulletin called FYI, with over 5,000

subscribers by year-end. FYI summarizes emerging issues in banking,

finance and the economy. The format

is designed to complement the FDIC’s

in-depth reports and publications. FYI

also serves as a vehicle for releasing

analytical work as it becomes available.

In addition, a quarterly communication

entitled Letter to the Stakeholders

has been released for FDIC-insured

institutions, employees, and other

stakeholders and highlights the

FDIC’s current initiatives and key

performance indicators. 

In February, Chairman Powell 

established a new FDIC Advisory

Committee on Banking Policy to 

provide advice and recommendations to the FDIC on a wide range 

of issues relating to the Corporation’s

mission and activities, and examine

how the FDIC can improve its effectiveness and address larger issues

facing the financial services sector.

The committee is composed of 12

members representing a cross-section

of distinguished leaders from 

academia, economics, financial 

services, private industry, public

affairs and the public interest community. The committee convened

for the first time on November 13 

in Washington, DC.

Expanded Special Examination

Activities and Dedicated Examiner

Program

In 2002, the FDIC focused increased

examination resources on larger

institutions and problem institutions

where the risks to the funds are

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greatest, while streamlining examinations for those posing less risk.

One key component of this shift was

an expansion of special examination

activities in non-FDIC supervised

institutions. 

On 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 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 Act provides 

that the FDIC Board can authorize

special examinations of any insured

depository institution whenever 

such an examination is necessary 

for 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

agreement establishes an improved

process for determining when the

FDIC will use its authority to examine

any insured institution and provides

for enhanced coordination and cooperation of the agencies’ supervisory

efforts. These measures will ensure

that the FDIC will be able to fulfill 

its responsibilities to protect the

deposit insurance funds in the most

efficient and least burdensome 

manner possible.

The agreement provides that the

FDIC may conduct special examinations 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 with senior bank management of institutions

that exhibit material deteriorating

conditions or other adverse developments regardless of their current 

rating at the invitation of, or without

the objection of, the primary federal

regulator. 

The interagency agreement also 

provides for the FDIC’s establishment

of a dedicated examiner program 

for the eight largest banking organizations. Because of their size and

market 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 concentration also exists on the deposit side –

approximately nine percent of all

domestic deposits are held by one

LIDI. 

The FDIC is not the primary regulator

for the eight LIDIs. However, the

FDIC’s eight dedicated examiners,

selected in August 2002, serve as

the FDIC’s primary points of contact

for the oversight of these institutions.

Pursuant to the agreement, to the

fullest extent possible, the FDIC 

will continue to rely on results of 

the work performed by the primary

federal bank supervisors in assessing

the condition and risk-management

practices of individual institutions.

The dedicated examiners are provided

access to supervisory personnel and

supervisory information, including

risk assessments, supervisory plans,

reports of examination and other

documents related to these eight

banks, and are invited to participate

in certain examination activities. 

The dedicated examiner program

allows the FDIC first hand, timely

access to information needed to 

stay fully abreast of the risks in

these institutions and to quickly 

recognize when new risks emerge.

To assist the FDIC in quickly identifying and prioritizing areas of risk both

to groups of banks and to specific

institutions, a Risk Analysis Center

(RAC) will be established in 2003 to

serve as a central clearinghouse for

vital bank risk information. The RAC

will place special emphasis on the

timely analysis of information generated by the dedicated examiner 

program.

New International Capital

Standards

Internationally, the FDIC continues 

to participate in a number of global

supervisory groups, including 

the Basel Committee on Banking

Supervision. The FDIC actively 

participated in the Committee’s
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efforts to update and revise the 

1988 Basel Capital Accord to make

the capital standards of internationally

active banks more comprehensive,

risk-sensitive, and reflective of

advances in banks’ risk measurement and management practices,

while continuing to ensure these

banks maintain adequate capital

reserves. 

The FDIC invested resources on 

several fronts to ensure that the new

Accord, when final, will be compatible

with the agency’s roles as both

insurer and supervisor of banking

organizations. The FDIC was well

represented on several committees,

task forces and groups that published

documents for industry review during

2002. These included: “Quantitative

Impact Study 3,” which is serving 

as a comprehensive field test of 

the proposals for revising the 1988

Accord, and the “Second Working

Paper on the Treatment of Asset

Securitizations,” which introduces

more risk-sensitive approaches for

addressing many of the emerging

risks in the rapidly growing securitization market. 

Resolving Failed Institutions 

During 2002, the FDIC resolved 

11 financial institution failures. 

These failed institutions had a total

of $2.6 billion in assets and $2.2 billion 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.) 

Supervision 

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. As of year-end, 

the Corporation supervised 5,348

FDIC-insured state-chartered commercial banks that are not members

of the Federal Reserve System

(referred to as “state nonmember

banks”). Through safety and soundness and consumer compliance

examinations of these FDIC-supervised institutions, the FDIC assesses

their 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 2002, the FDIC conducted

2,534 statutorily required safety and

soundness examinations. An on-site

safety and soundness examination

was not conducted for four institutions because specific circumstances

regarding the institutions indicated

an exception should be made.

A total of 1,806 examinations were

conducted in 2002 by state authorities under the alternating examination program, and an additional 

78 examinations were conducted

with FDIC’s assistance. Thirty-six

institutions were due for an examination by state authorities, and five

institutions had mergers pending 

at year-end. The remaining 31 institutions have examinations scheduled 

during the first and second quarters

of 2003. 

2002 2001 2000

Total Failed Banks 10 3 6

Assets of Failed Banks $ 2.5 $ .05 $ .38

Total Failed Savings Associations 1 1 1

Assets of Failed Savings Associations $ .05 $ 2.18 $ .03

Net Collections from Assets in Liquidation●$ 1.84 $ .31 $ .60

Total Assets in Liquidation●$ 1.24 $ .57 $ .54

Net Collections from Assets Not in Liquidation●$ .02 $ .08 $ .16

Total Assets Not in Liquidation●$ 1.24 $ 1.52 $ 2.80

Also includes assets from thrifts resolved by the former Federal Savings and Loan Insurance Corporation and the Resolution

Trust Corporation. 

Dollars in billions

Liquidation Highlights 2000-2002

●
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The number of FDIC-supervised

institutions identified as “problem”

institutions with a composite “4” or

“5” CAMELS rating increased from

67 at year-end 2001 to 84 at year-end

2002. During 2002, 48 institutions

were removed from problem status

due to composite rating upgrades,

mergers, consolidations, or sales, 

and 63 institutions were added to

the problem bank list. The FDIC is

required to conduct follow-up 

examinations of all designated

problem institutions within 

12 months of their last examination. 

As of December 31, 2002, all followup examinations for problem 

institutions had been performed 

on schedule. 

Streamlining Examinations 

for Financially Sound Institutions

While directing increased resources

to large and high-risk institutions and

to the international front, the FDIC

also implemented measures to

improve efficiency by maximizing 

the use of risk-focused examination

procedures at small well-managed

banks in sound financial condition.

Specifically, in May 2002, the FDIC

implemented a new program to

streamline safety and soundness

examinations of certain financially

sound banks. The program, known

as “MERIT” – for “maximum 

efficiency, risk-focused, institutiontargeted examinations” – streamlines

examinations for FDIC-supervised

institutions with a supervisory rating

of “1” or “2,” that have $250 million

or less in total assets and that 

are well-managed, and meet other

program criteria while maintaining

the quality and integrity of the 

examination. By year-end, the program had achieved more than a 

20 percent reduction in examination

hours for all eligible “1” and “2”

rated FDIC-supervised institutions

with 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 developed and began implementing 

short- and long-term strategies to

reduce regulatory burden. These

strategies include seeking accelerated

compliance with the regulation review

requirements pursuant to the

Economic Growth Recovery and

Paperwork Reduction Act, improving

communication of FDIC regulations

and policies to financial institutions,

and creating a new FDIC Regulatory

Burden Web page to solicit industry

input, and communicate initiatives 

in this area.

Minority Depository Institutions

The FDIC has historically taken steps

to preserve and encourage minority

ownership of insured financial 

institutions. On April 9, 2002, the FDIC

Board adopted a new policy statement related to minority depository

institutions. The new policy statement reflects changes in certain 

regulations and expands the FDIC’s

Minority Depository Institutions

Program. Enhancements to the 

program include increased communication with minority depository

institutions, better coordination 

with trade associations that represent minority depository institutions,

better defined roles for a national

program coordinator and regional

coordinators, and more opportunities

for institutions to request technical

assistance. 

Compliance Examination Program

The FDIC takes seriously its statutory

responsibilities to enforce consumer

protection laws and regulations. 

It administers a compliance examination 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 ranging from traditional disclosure laws

(such as the Truth in Lending Act) 

2002 2001 2000

Safety and Soundness:

State Nonmember Banks 2,290 2,300 2,232

Savings Banks 229 241 235

National Banks 10 16 17

State Member Banks 5 9 2

Savings Associations 0 0 0

Subtotal 2,534 2,566 2,486

Compliance/Community Reinvestment Act 1,820 2,180 2,257

Trust Departments 524 466 533

Data Processing Facilities 1,681 1,625 1,585

Total 6,559 6,837 6,861

FDIC Examinations 2000-2002
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to fair lending statutes (such as 

the Equal Credit Opportunity and 

Fair Housing Acts) to the Community

Reinvestment Act (CRA), which

encourages insured depository 

institutions to help meet community

credit needs. The FDIC has also

added the privacy and insurance 

consumer protection provisions of

the Gramm-Leach-Bliley Act of 1999

to its compliance examination 

program. 

Compliance examinations are conducted on an established schedule

by specially trained personnel. The

interval between compliance examinations is typically two to three years

for banks with strong compliance

records. Banks with weak compliance

performance are typically examined

on an annual or shorter cycle. The

FDIC uses the full extent of its

enforcement authority, as appropriate, to address instances of noncompliance. Further, the FDIC meets its

statutory responsibilities under the

Equal Credit Opportunity Act to 

refer patterns or practices of credit

discrimination to the Department of

Justice. The FDIC conducted 1,820

compliance and CRA examinations 

in 2002, compared to 2,180 in 2001.

Ten FDIC-supervised institutions 

due for an examination in 2002 were

deferred, nine due to mergers or

charter changes, and one to allow

coordination with a scheduled safety

and soundness examination. Nine

institutions were assigned a composite “4” rating for compliance 

as of year-end 2002. None were

assigned a composite “5” rating.

Eight of the nine “4” rated institutions

have entered into a Memorandum of

Understanding (MOU) with the FDIC

to correct compliance issues, and the

ninth is currently reviewing a draft

MOU, which is expected to be finalized in early 2003. (For more details,

see the FDIC Examinations table

on page 14.)

Financial Literacy

One of the FDIC’s most important

consumer protection goals is to 

promote financial education to those

outside of the financial mainstream.

The “Money Smart” program,

unveiled in 2001, is primarily designed

to help adults with little or no banking experience develop positive 

relationships with insured depository

institutions. By year-end 2002, the

FDIC had supplied more than 32,000

copies of the Money Smart training

curriculum to various groups.

Approximately 40 percent of the

requests for Money Smart were

from financial institutions and credit

unions. The remainder were largely

from educational service organizations, such as community colleges

and adult education centers; community organizations; state and local

government agencies; employment

service organizations; and faith-based

groups. 

Over 1,000 representatives of 

community 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 which low and moderate-income

adults can receive a variety of government services, and those outside

of the financial mainstream are 

provided financial education with

Money Smart as the principal 

curriculum. 

As of year-end 2002, the FDIC had

entered into partnership agreements

with the Neighborhood Reinvestment

Corporation, U.S. Department of

Housing and Urban Development,

U.S. Department of Labor, 

U.S. Small Business Administration,

Association of Military Banks of

America, Independent Community

Bankers of America, Internal Revenue

Service, Office of the White House

Initiative on Asian American Pacific

Islanders, and over 300 other national

and regional organizations. A Spanish

version of the Money Smart curriculum was rolled out in mid-2002, and

a Chinese version will be available 

in early 2003. The FDIC is pleased

with the positive feedback from 

the Money Smart curriculum and 

will continue to improve and expand

this important program.

Consumer Complaints 

and Inquiries 

The FDIC investigates and responds

to complaints and inquiries from 

consumers, financial institutions and

other parties about consumer protection and fair lending laws, as well as

deposit insurance matters. In 2002,

the FDIC received 8,368 complaints,

of which 3,987 were against statechartered nonmember banks. Nearly

54 percent of the state nonmember

bank complaints concerned credit

card accounts. The most 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 consumer complaints

about FDIC-supervised institutions

and for answering consumer inquiries

about consumer protection laws and

banking practices. The establishment

of the CRC will facilitate timely

responses to complaints and inquiries. 

In addition, the FDIC received over

7,000 written inquiries and 8,000

telephone inquiries from consumers

and bankers about FDIC insurance

and consumer protection issues.
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The largest percentage of inquiries

related to whether specific financial

institutions were insured by the 

FDIC and deposit insurance coverage.

Other common inquiries were

requests for copies of FDIC consumer

publications, questions about banking practices and consumer rights

under federal consumer 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 for questions on

deposit insurance from the banking

community and the public. (For more

information about the Call Center

(toll-free, 1-877-275-3342), 

see page 127.)

To reach out to consumers needing

assistance on matters arising from

failed financial institutions, the FDIC

also operates a Customer Service

Center with 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

customer questions about deposit

accounts, loan transaction histories,

tax suits for delinquent real estate

taxes and other issues. The collateral

release staff researches and determines ownership of collateral securing

loans from failed financial institutions

in order to provide a release of lien,

assignment or reconveyance to the

borrower. This staff completed nearly

15,000 collateral release requests in

2002. 

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 on page 13.) 

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.
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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 costmanagement measures to address

those cost differentials. 

Operating More 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 efforts in each of the

three major business lines: insurance,

supervision, and receivership 

management. As part of this major

restructuring, the FDIC also streamlined the Corporation’s management

and support structures. 
18

The major organizational changes

made in 2002 include:

● The 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 

leadership capability.

● The Division of Supervision and 

the Division of Compliance and 

Consumer Affairs were merged 

into a new Division of Supervision 

and Consumer Protection. The 

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.

● The receivership accounting 

operations of the Division of 

Finance were transferred to 

the Division of Resolutions and 

Receiverships to better align 

business processes in the 

Corporation’s receivership 

management program.

● Personnel and training functions 

were merged to create a new 

Human Resources Branch within 

the Division of Administration.

Downsizing

The Corporation also took steps to

complete 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. The decade of downsizing 

is substantially completed. 

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 seven 

percent from 2002 spending.

Corporate University

In another move to improve its 

long-term operational efficiency 

and effectiveness, the Corporation

began developing a new Corporate

University that will be modeled on

the best practices of high-performing

organizations in both the public and

private sectors. The new Corporate

University will provide an integrated

framework for addressing future

leadership development and skill

requirements. It will include core

training programs for the FDIC’s

three major business lines – insurance,

supervision, and receivership management – and give employees the

opportunity for cross-training and 

job rotation. This will facilitate the

establishment, over time, of a flexible,

permanent workforce capable of

responding expeditiously to changing

workload needs and priorities. Leadership development programs will

assist in providing a strong foundation

for current and future FDIC leaders.

The Corporate University will use

technology, seminars, hands-on 

experience and traditional instruction

to make learning easier, more 

convenient and continual.

Information Technology Initiatives

In 2002, the Corporation also continued to pursue a number of major

technology-related investments that

will, when implemented, reduce

future operating costs. The largest 

of these projects, the New Financial

Environment (NFE), will greatly

improve operating efficiencies and

provide substantial cost savings to

the FDIC after it is implemented in

mid-2004. The NFE will replace the

Corporation’s current accounting and

related systems and will facilitate the

implementation of streamlined work

processes. It will also provide better

information and support to FDIC

management for decision-making. 

In addition, the FDIC continued to

develop FDICconnect, a secure 

electronic Web-enabled environment

allowing the Corporation to electronically exchange information with

insured financial institutions. With

the automation of data exchanges,

the FDIC will be able to streamline

and improve business processes,

and reduce costs. In particular, the

faster receipt of information will

enable the FDIC to provide more

timely information to the public. 
19

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 construction was determined to be the

most economical option over the

long term. The project will save the

FDIC an estimated $78 million over

20 years on a net present value basis

compared to the projected costs 

of continued leasing in downtown

Washington, DC. Phase II construction is targeted for completion by

2006. 

Financial Highlights

In its role as deposit insurer of banks

and savings and loan associations,

the FDIC promotes the safety and

soundness of insured depository

institutions. The financial highlights

discussed below address the performance of the deposit insurance

funds. It also includes a discussion

of initiatives to restructure the 

internal budget to closely monitor

operations and investments and the

establishment of a Capital Investment

Review Committee (CIRC) to better

manage capital investments.

Deposit Insurance Fund

Performance

The FDIC administers two deposit

insurance funds – the Bank Insurance

Fund (BIF) and the Savings Association

Insurance Fund (SAIF) – and manages

the FSLIC Resolution Fund (FRF),

which fulfills the obligations of the

former Federal Savings and Loan

SAIF-Insured

BIF-Insured

3,000

2,500

2,000

1,500

1,000

500

0

Source: Commercial Bank Call Reports and Thrift Financial Reports

1960 70 80 90 2000

FDIC-Insured Deposits (estimated 1960-2002)

Dollars in billions

02

Insurance Corporation (FSLIC) 

and the former Resolution Trust

Corporation (RTC). The following

summarizes the condition of the

FDIC’s insurance funds.

The Corporation’s investment strategy

for the BIF and the SAIF reflects

prudent management, with interest

earned on investment securities 

of approximately $1.69 billion for

the BIF and $564 million for the

SAIF. Successful investing of the

funds during the year yielded total

returns that surpassed Merrill

Lynch’s (ML) 1-10 Year U.S. Treasury

Index of 9.05 percent for calendar

year 2002. The BIF and the SAIF

portfolio investments yielded returns

of 9.20 and 9.89 percent, which

exceeded the ML Index by 15 and

84 basis points, respectively. 

Deposit insurance assessment 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 assessment rate schedule, 91.5

percent of BIF-member institutions

and 90.1 percent of SAIF-member

institutions were in the lowest riskassessment category and paid no

deposit insurance assessment for

the first semiannual period of 2003.

Deposits insured by the FDIC

approached $3.4 trillion in 2002, 

as the number of insured institutions

fell below the 9,400 mark for the

first time. Insured deposits rose by

1.2 percent during the fourth quarter,

bringing the growth rate for the 

full year to 5.5 percent, the secondfastest annual growth rate in the

past 16 years. Insured deposits of

the 9,372 FDIC member institutions

rose by $177 billion in 2002, including

an $8.3 billion (4.3 percent) increase

in insured brokered deposits.
1.45

1.40

1.35

1.30

1.25 (target ratio)

0

20

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 estimated insured

deposits (compared to 1.25 percent

at September 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 of the SAIF 

was 1.37 percent at year-end 2002 

(compared to 1.38 percent at

September 30, 2002), up from 1.36

percent at year-end 2001. The balance

of the SAIF was $11.7 billion on

December 31, 2002. SAIF-insured

deposits were $860.4 billion 

at year-end 2002, having grown 

7.4 percent for the year. (See the

accompanying table on Insurance

Fund Reserve Ratios.)

Despite the relatively rapid growth of

insured deposits, insured institutions

continued to rely increasingly on

other funding alternatives. Insured

deposits as a percentage of domestic

liabilities continued a steady, 11-year

decline, falling to 49.9 percent at the

end of 2002, compared to 50.9 percent at the end of 2001. At year-end

2002, the ratio was 45 percent for

institutions with total assets greater

than $1 billion, and 71 percent for

smaller institutions. (See the accompanying tables on FDIC-insured

Deposits on page 19 and Risk Related

Premiums on page 21.)

During 2002, 11 FDIC-insured institutions failed. Ten of those institutions,

with combined assets of $2.5 billion,

were insured by the BIF. The other

institution, with assets of $50 million,

was insured by the SAIF. Losses 

for the 11 failures are estimated at

$630 million. In 2001, there were

four failures of insured institutions,

with total assets of $2.2 billion and

estimated losses of $445 million. The

contingent liabilities for anticipated

failures of BIF- and SAIF-insured 

institutions as of December 31, 2002,

were $1.0 billion and $90 million,

respectively.

12/96 12/97 12/98 12/99 12/00 12/01 3/02 6/02 9/02 12/02

Insurance Fund Reserve Ratios Percent of Insured Deposits

BIF

SAIF
21

Capital Investment Review

Committee

During 2002, the FDIC began managing its capital investments from 

a new vantage point. The FDIC 

created a Capital Investment Review

Committee (CIRC), dedicated to

reviewing and overseeing all major

information technology (IT) and 

non-IT investment initiatives with

estimated capital outlays of more

than $3 million, as well as certain

other projects that cost less but are

considered mission-critical to the

FDIC.

The purpose of the CIRC is to 

implement a systematic management

review process that supports budgeting for the FDIC’s capital investments and ensures the regular 

monitoring and proper management

of these investments, once funded.

The CIRC is responsible for reviewing

the major capital investment initiatives

funded in the new Investment Budget

as well as significant enhancements

and maintenance costs associated

with the FDIC’s current initiatives.

The investments reviewed by 

the CIRC include major computer

purchases, software application

developments, and office buildings. 

The CIRC determines whether 

the business case supporting the

proposed investment is sound, welljustified and appropriate for funding

consideration by the FDIC’s Board 

of Directors. The CIRC will also 

continue to monitor and report on

the status of approved investment

projects to the Board of Directors.

Risk-Related Premiums

The following 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 semiannual assessment period of 2003. Each institution is categorized based on its 

capitalization and a supervisory subgroup rating (A, B, or C), which is generally determined by on-site examinations. Assessment rates are basis points, cents per $100 of assessable deposits, per year.

BIF Supervisory Subgroups●

ABC

Well Capitalized:

Assessment Rate 0 3 17

Number of Institutions 7,470 (91.7%) 441 (5.4%) 97 (1.2%)

Adequately Capitalized:

Assessment Rate 3 10 24

Number of Institutions 106 (1.3%) 13 (0.2%) 10 (0.1%)

Undercapitalized:

Assessment Rate 10 24 27

Number of Institutions 1 (0.0%) 0 (0.0%) 5 (0.1%)

SAIF Supervisory Subgroups■

Well Capitalized:

Assessment Rate 0 3 17

Number of Institutions 1,113 (90.6%) 82 (6.7%) 18 (1.5%)

Adequately Capitalized:

Assessment Rate 3 10 24

Number of Institutions 7(0.6%) 4 (0.3%) 4 (0.3%)

Undercapitalized:

Assessment Rate 10 24 27

Number of Institutions 0 (0.0%) 0 (0.0%) 1 (0.1%)

BIF data exclude SAIF-member “Oakar” institutions that hold BIF-insured deposits. The assessment rate reflects the rate 

for BIF-assessable deposits, which remained the same throughout 2002.

SAIF data exclude BIF-member “Oakar” institutions that hold SAIF-insured deposits. The assessment rate reflects the rate

for SAIF-assessable deposits, which remained the same throughout 2002.

●

■

Corporate Budgeting

The FDIC has restructured its 

budget for 2003 to include separate

Operating and Investment Budgets.

The Operating Budget includes 

funding for both ongoing operations

of the Corporation and receivership

operations. The new Investment

Budget approved by the Board of

Directors is a composite of individual

budgets for major investment projects.

The Board approved a 2003

Corporate Operating Budget of

$1,070.5 million and a multi-year 

Investment Budget of $70.4 million.

Total estimated spending for 2003

will be approximately $1.1 billion, 

seven percent lower than 2002

spending. Almost two-thirds of 

projected 2003 spending will fund

personnel and related costs.