F E D E R A L D E P O S I T I N S U R A N C E C O R P O R A T I O N 25

CHAPTER ONE

MANAGEMENT’S

DISCUSSION AND ANALYSIS

CH

M

D

The Year in Review

The year 2008 proved to be an extremely busy time

for the FDIC. In addition to the normal course of

business, the Corporation had a major role in

creating and implementing government initiatives

associated with the Temporary Liquidity Guarantee

Program (TLGP) and the Troubled Asset Relief

Program. Also, additional resources were needed in

response to the increased workload resulting from

resolving numerous bank failures. The FDIC

continued its work on high-profile policy issues and

published numerous Notices of Proposed

Rulemaking (NPRs) throughout the year, seeking

comment from the public. The Corporation also

continued to focus on a strong supervisory

program. The FDIC continued expansion of financial education programs with the creation of Money

Smart for young adults. The FDIC also sponsored

and co-sponsored major conferences and participated in local and global outreach initiatives.

Highlighted in this section are the Corporation’s

2008 accomplishments in each of its three major

business lines – Insurance, Supervision and

Consumer protection, and Receivership Management – as well as its program support areas.

Insurance

The FDIC insures bank and savings association

deposits. As insurer, the FDIC must continually

evaluate and effectively manage how changes in the

economy, the financial markets and the banking

system affect the adequacy and the viability of the

Deposit Insurance Fund.

Temporary Liquidity

Guarantee Program

On October 13, 2008, the Secretary of the

Treasury, in consultation with the President and

acting upon the recommendations of the FDIC

Board of Directors and the Board of Governors of

the Federal Reserve System, made a systemic risk

determination under section 13(c)(4)(G) of the

Federal Deposit Insurance Act (FDIA). The next

day, the FDIC announced and implemented the

Temporary Liquidity Guarantee Program. The

TLGP consists of two components: an FDIC

guarantee of certain newly issued senior unsecured

debt (the debt guarantee program) and an FDIC

guarantee in full of non-interest bearing

transaction accounts (the transaction account

program). Coverage under both components of the

TLGP was provided without charge to all eligible

entities for the first 30 days.
26 2 0 0 8 A N N U A L R E P O R T

After issuing an interim final rule on October 23,

2008, the FDIC received more than 700 comments.

Based on those comments, the FDIC made several

significant changes to the final rule, which the

FDIC adopted on November 21, 2008.

The final rule provided that, under the debt

guarantee program, the FDIC will guarantee in

full, through maturity or June 30, 2012, whichever

comes earlier, senior unsecured debt issued by a

participating entity between October 14, 2008, and

June 30, 2009, up to a maximum of 125 percent of

the par value of the entity’s senior unsecured debt

that was outstanding as of the close of business

September 30, 2008, and that was scheduled to

mature on or before June 30, 2009. Banks, thrifts,

bank holding companies, and certain thrift holding

companies were eligible to participate. In a change

from the original terms of the debt guarantee program, the final rule excluded, effective December 5,

2008, all debt with a term of 30 days or less from

the definition of senior unsecured debt. The FDIC

began charging institutions participating in the

debt guarantee program for debt issued on or after

November 13, 2008, a fee based on the amount and

term of the debt issued. Fees range from 50 to 100

basis points on an annualized basis, depending on

the term of the debt.

The final rule also provided that, under the transaction account program, the FDIC will guarantee

in full all domestic noninterest-bearing transaction

deposit accounts held at participating banks and

thrifts through December 31, 2009, regardless of

dollar amount. The guarantee also covers negotiable order of withdrawal accounts (NOW accounts)

at participating institutions – provided the

institution commits to maintaining interest rates

on the account at no more than 0.50 percent – and

Interest on Lawyers Trust Accounts (IOLTAs) and

functional equivalents. The FDIC will assess

participating institutions a 10 basis point annual

rate surcharge on covered accounts that are not

otherwise insured.

The final rule required all institutions to elect

whether or not to participate in one or both of

the two components of the TLGP by December 5,

2008. As of December 31, 2008, approximately

56 percent of all eligible entities had opted in

to the Debt Guarantee Program and 64 financial

entities – 39 insured depository institutions and

25 bank and thrift holding companies and nonbank affiliates – had $224 billion in guaranteed

debt outstanding. Approximately 87 percent of

FDIC-insured institutions opted in to the

Transaction Account Guarantee Program, with

insured institutions reporting 522,862 noninterest-bearing transaction accounts over

$250,000. These accounts totaled $814 billion,

of which $684 billion in deposit accounts was

guaranteed under the program.

The TLGP does not rely on the taxpayer or the

Deposit Insurance Fund to achieve its goals.

Participants in the program must pay assessments

for coverage. If fees do not cover costs in the TLGP,

the FDIC will impose a special assessment under

the systemic risk provisions of the Federal Deposit

Insurance Act.

Restoration Plan and Rulemaking

on Assessments

Recent and anticipated bank failures significantly

increased Deposit Insurance Fund losses, resulting

in a decline in the reserve ratio. As of December 31,

2008, the reserve ratio stood at 0.36 percent, down

from 0.76 percent at September 30, 1.01 percent at

June 30, and 1.19 percent as of March 31. The

Federal Deposit Insurance Reform Act of 2005

(the Reform Act) requires that the FDIC’s Board of

Directors adopt a restoration plan when the Deposit

Insurance Fund’s reserve ratio falls below 1.15 percent or is expected to within six months.

On October 7, 2008, the FDIC Board adopted a

restoration plan to raise the reserve ratio to at least

1.15 percent within five years and a proposed rule

that would raise assessment rates beginning

January 1, 2009, and make other changes to the

assessment system effective April 1, 2009. The other

changes were primarily to ensure that riskier institutions will bear a greater share of the proposed

increase in assessments. On December 16, 2008, the

Board adopted a final rule raising assessment rates

for the first quarter of 2009. On February 27, 2009,

the Board amended the restoration plan to extend

its horizon from five years to seven years due to

extraordinary circumstances. It also adopted a final

rule setting rates beginning the second quarter of

2009 and making other changes to the risk-based

pricing system.
F E D E R A L D E P O S I T I N S U R A N C E C O R P O R A T I O N 27

C( GS DSCUSSOD SS

Rates for the First Quarter of 2009

On December 16, 2008, the FDIC adopted a final

rule raising risk-based assessment rates uniformly

by seven basis points for the first quarter 2009

assessment period. The higher revenue will be

reflected in the fund balance as of March 31, 2009.

Assessment rates for the first quarter of 2009 will

range from 12 to 50 basis points. Institutions in the

lowest risk category – Risk Category I – will pay

between 12 and 14 basis points.

Changes to Risk-Based Assessments

Effective the Second Quarter of 2009

Effective April 1, 2009, the final rule adopted on

February 27, 2009, widens the range of rates overall

and within Risk Category I. Initial base assessment

rates will range between 12 and 45 basis points –

12 to 16 basis points for Risk Category I. The

initial base rates for Risk Categories II, III, and IV

will be 22, 32 and 45 basis points, respectively. An

institution’s total base assessment rate may be less

than or greater than its initial base rate as a result

of additional adjustments (discussed below). For

Risk Category I, total base assessment rates may be

as low as seven basis points or as high as 24 basis

points. A Risk Category IV institution could have

a total base assessment rate as high as 77.5 basis

points (see chart on page 29).

Large Risk Category I Institutions

Beginning in the second quarter of 2009, the

assessment rate for a large institution with a debt

rating will depend on (1) long-term debt ratings, (2)

the weighted average CAMELS1 component rating,

and (3) the rate determined from the financial

ratios method, the method used for smaller banks.

Each of the three components will receive a onethird weight. The maximum amount of the rate

adjustment for large banks based on additional

information about risks will be increased from 1⁄2

basis point to one basis point.

The FDIC anticipates that incorporating the

financial ratios method into the large bank method

assessment rate will result in a more accurate distribution of initial assessment rates and in timelier

assessment rate responses to changing risk profiles,

while retaining the market and supervisory perspectives that debt and CAMELS ratings provide.

DISTRIBUTION OF INSTITUTIONS AND DOMESTIC DEPOSITS AMONG

RISK CATEGORIES

QUARTER ENDING DECEMBER 31, 2008

Dollars in billions

Risk Category

Annual Rate in

Basis Points

Number of

Institutions

Percent of

Total

Institutions

Domestic

Deposits

Percent of

Total Domestic

Deposits

I – Minimum 5 1,515 18.2% $2,826 37.7%

I – Middle

I – Middle

5.01 – 6.00

6.01 – 6.99

2,069

1,521

24.9%

18.3%

1,562

783

20.8%

10.4%

I – Maximum 7 2,131 25.6% 860 11.5%

II 10 807 9.7% 1,338 17.8%

III 28 223 2.7% 101 1.3%

IV 43 48 0.6% 35 0.5%

Note: Institutions are categorized based on supervisory ratings, debt ratings and financial data as of December 31, 2008. Rates do not reflect the

application of assessment credits. Percentages may not add to 100 percent due to rounding.

1 The CAMELS component ratings represent either the adequacy of Capital, thequality of Assets, the capability of Management, thequality andlevel ofEarnings, the adequacy of Liquidity, andthe

Sensitivity to market risk, andranges from “1” (strongest) to “5” (weakest).
28 2 0 0 8 A N N U A L R E P O R T

Brokered Deposits

For institutions in Risk Category I, the financial

ratios method will include a new financial ratio

that may increase the rate of an institution relying

significantly on brokered deposits to fund rapid

asset growth. This will only apply to institutions

with brokered deposits (less reciprocal deposits)

2 of

more than 10 percent of domestic deposits and

cumulative asset growth of more than 40 percent

over the last four years, adjusted for mergers and

acquisitions. Like the other financial ratios used to

determine rates in Risk Category I, a small change

in the value of the new ratio may lead to only a

small rate change, and it would not cause an

institution’s rate to fall outside of the 12-16 basis

point initial range. A number of costly institution

failures, including some recent failures, had experienced rapid asset growth before failure and had

funded this growth through brokered deposits.

For institutions in risk categories II, III, or IV, the

FDIC proposes to increase an institution’s assessment rate above its initial rate if its ratio of brokered

deposits to domestic deposits is greater than 10

percent, regardless of the rate of asset growth. Such

an increase would be capped at 10 basis points. As

an institution’s financial condition weakens, significant reliance on brokered deposits tends to increase

its risk profile. Insured institutions – particularly

weaker ones – typically pay higher rates of interest

on brokered deposits. When an institution becomes

noticeably weaker or its capital declines, the market

or statutory restrictions may limit its ability to

attract, renew or roll over these deposits, which can

create significant liquidity challenges. Also, significant reliance on brokered deposits tends to greatly

decrease the franchise value of a failed institution.

Secured Liabilities

For institutions in any risk category, assessment

rates will rise above initial rates for institutions

relying significantly on secured liabilities.

Assessment rates will increase for institutions with

a ratio of secured liabilities to domestic deposits of

greater than 25 percent, with a maximum increase

of 50 percent above the rate before such adjustment.

Secured liabilities generally include Federal Home

Loan Bank advances, repurchase agreements,

secured Federal Funds purchased, and other

secured borrowings.

The exclusion of secured liabilities can lead to

inequity. An institution with secured liabilities in

place of another’s deposits pays a smaller deposit

insurance assessment, even if both pose the same

risk of failure and would cause the same losses to

the FDIC in the event of failure. Substituting

secured liabilities for deposits can also lower an

institution’s franchise value in the event of a failure,

which increases the FDIC’s losses, all else equal.

Furthermore, substituting secured liabilities for

unsecured liabilities (including subordinated debt)

raises the FDIC’s loss in the event of failure without

providing increased assessment revenue.

Unsecured Debt and Tier I Capital

Institutions will receive a lower rate if they have

long-term unsecured debt, including senior

unsecured and subordinated debt with a remaining

maturity of one year or more. For a large institution, the rate reduction would be determined by

multiplying the institution’s long-term unsecured

debt as a percentage of domestic deposits by

40 basis points. The maximum allowable rate

reduction would be five basis points. For a small

institution (those with less than $10 billion in

assets), the unsecured debt adjustment would

also include a certain amount of Tier I capital.

The percentage of Tier I capital qualifying for

inclusion in the unsecured debt adjustment

gradually increases for greater amounts of Tier I

capital exceeding five percent Tier I leverage

ratio threshold.

3

When an institution fails, holders of unsecured

claims, including subordinated debt, receive

distributions from the receivership estate only if all

secured claims, administrative claims and deposit

claims have been paid in full. Consequently, greater

amounts of long-term unsecured claims provide a

cushion that can reduce the FDIC’s loss in the event

of a failure.

2 Certain deposits that an insureddepository institution receives through adepositplacement network on a reciprocalbasis wouldbe excludedfrom the adjustedbrokereddeposit ratio in Risk

category I. They would notbe excluded, however, from thebrokereddeposit adjustment applicable to risk categories II, III, andIV.

3 For a Tier I leverage ratiobetween 5percent and6percent, 10percent of Tier I capital within this range wouldqualify for theunsecureddebt adjustment; for a Tier I leverage ratiobetween 6

percent and7percent, 20percent of Tier I capital within this range wouldqualify; for a Tier I leverage ratiobetween 7percent and8percent, 30percent of Tier I capital within this range would

qualify; andso forth. Thus, all Tier I capital above a 14percent leverage ratio wouldqualify for inclusion in theunsecured debt adjustment.
F E D E R A L D E P O S I T I N S U R A N C E C O R P O R A T I O N 29

C( GS DSCUSSOD SS

Summary of Base Rate Determination

For second quarter 2009, the minimum and maximum initial base assessment rates, range of possible

rate adjustments, and minimum and maximum

total base rates are as follows:

Base Rates and Actual Rates

The rates adopted by the Board are both base rates

and actual rates. The FDIC would continue to have

the authority to adopt actual rates that were higher

or lower than total base assessment rates without

the necessity of further notice and comment

rulemaking, provided that: (1) the Board could not

increase or decrease rates from one quarter to the

next by more than three basis points without

further notice-and-comment rulemaking; and (2)

cumulative increases and decreases could not be

more than three basis points higher or lower than

the total base rates without further notice-andcomment rulemaking.

Center for Financial Research

The Center for Financial Research (CFR) was

founded by the Corporation in 2004 to encourage

and support innovative research on topics that are

important to the FDIC’s role as deposit insurer and

bank supervisor. During 2008, the CFR

co-sponsored three major research conferences.

The 18th Annual Derivatives Securities and Risk

Management Conference, which the FDIC

co-sponsored with Cornell University’s Johnson

Graduate School of Management and the University

of Houston’s Bauer College of Business, was held in

April 2008 at the FDIC’s Virginia Square facility.

The conference attracted over 100 researchers from

around the world. Conference presentations

focused on technical and mathematical aspects

of risk measurement and securities pricing, and

included several presentations on Basel II

related topics.

The CFR and The Journal for Financial Services

Research (JFSR) hosted the eighth Annual Bank

Research Conference in September with over 100

attendees. The conference included the presentation

of six papers and focused on issues in securitization

and credit risk transfer. Experts discussed analyses

on a range of topics, including liquidity issues,

lessons learned from the collapse of the auction rate

municipal bond market, the laying off of credit risk,

and the subprime credit crisis of 2007.

Risk

Category I

Risk

Category II

Risk

Category III

Risk

Category IV

Initial Base Assessment Rate 12 – 16 22 32 45

Unsecured Debt Adjustment -5 – 0 -5 – 0 -5 – 0 -5 – 0

Secured Liability Adjustment 0 – 8 0 – 11 0 – 16 0 – 22.5

Brokered Deposit Adjustment 0 – 10 0 – 10 0 – 10

Total Base Assessment Rate 7 – 24 17 – 43 27 – 58 40 – 77.5
30 2 0 0 8 A N N U A L R E P O R T

The CFR and the Federal Reserve Bank of

Cleveland co-sponsored the “Identifying and

Resolving Financial Crises” conference in April

2008. Papers were presented and discussed on

topics including the theory and evidence on the

resolution of financial firms, identifying policies

that lead to contagion or correlated risk, and

contingency planning for crises.

The CFR hosted its annual Fall Workshop in

October, which included two all-day sessions with

research paper presentations and discussions. The

Workshop was attended by about 85 researchers

and policy makers. Twelve CFR working papers

were completed and published through November

2008 on topics dealing with deposit insurance, risk

measurement, credit contagion, and the global

syndicated loan market.

Consumer Research

The FDIC has pursued a research agenda that

explores consumer financing products and trends,

supports FDIC consumer policy initiatives and

supervisory objectives, and proactively uses FDIC

research results to identify and address major risks

in the consumer protection area. As part of this

agenda, the FDIC has prepared a series of articles

for the FDIC Quarterly on the unbanked, the

underserved, and alternative financial services.

During the year, two articles were completed

within this series. One article, “Building Assets,

Building Relationships: Bank Strategies for

Encouraging Lower-Income Households to Save”

was published in the fourth quarter 2007 FDIC

Quarterly (2008 Volume 2, Number 1). This article

describes some savings strategies and products that

banks have used to build profitable relationships

that also benefit lower-income consumers. Another

article, “An Introduction to the FDIC’s Small-Dollar

Loan Pilot Program,” was issued electronically on

August 10, 2008, and published in the second quarter 2008 FDIC Quarterly (2008, Volume 2, Number

3). The article summarizes the key parameters of

the pilot, the small-dollar loan program proposals

that participating banks described in their

applications, and the first quarter 2008 results.

International Outreach

Growing concerns surrounding the weakening

global economy made 2008 a significant and active

year for the FDIC’s international activities. The

failure of Northern Rock in the United Kingdom in

February 2008 began an upward trend in FDIC

consultations with foreign governments considering

developing, modernizing, or otherwise strengthening their deposit insurance systems. Efforts

included arranging and conducting training

sessions, technical assistance missions and foreign

visits, leadership roles in international organizations and participating in bilateral consultations

with foreign regulators.

With FDIC’s Vice Chairman as President of the

International Association of Deposit Insurers

(IADI) and Chair of the IADI Executive Council,

the FDIC had a critical role in fulfilling IADI’s

mission throughout the year. In October 2008, the

FDIC hosted the seventh annual IADI Conference

Participants in the International Association of Deposit Insurers conference.
F E D E R A L D E P O S I T I N S U R A N C E C O R P O R A T I O N 31

C( GS DSCUSSOD SS

and Annual General Meeting. The conference

themes, Financial Stability and Economic Inclusion,

provided an excellent platform for over 250 distinguished presenters and guests from 60 countries to

discuss the issues facing global banking and the

economy and what steps can be taken by deposit

insurers to promote financial stability and inclusion

around the world. As Chair of the IADI Training

and Conference Standing Committee, the FDIC

developed and hosted an executive training

program designed to promote core principles and

best practices of resolutions management for 39

individuals from 25 countries. The Cross Border

Resolution Group (CBRG) of the Basel Committee

on Bank Supervision (BCBS), co-chaired by the

FDIC, continued its work analyzing national legal

and policy regimes for crisis management and resolution of cross-border banks, presenting an interim

report to the Basel Committee in December. A

subgroup of the CBRG, also co-chaired by the

FDIC, in collaboration with IADI and European

Forum of Deposit Insurers (EFDI) began work this

year to develop an internally agreed-upon set of

Recommended Core Principles for Effective

Deposit Insurance Systems.

As a member of the Association of Supervisors of

Banks in the Americas (ASBA) Board of Directors,

the FDIC championed the importance of financial

education and highlighted the success of its Money

Smart program as a means of promoting healthy

economic and banking growth in the Americas.

The FDIC’s leadership within ASBA also included

providing technical training to ASBA members on

supervision of operational risk, bank supervision

and resolution. In 2008, the FDIC continued to

build its relationship with the EFDI and participated in a joint EFDI/FDIC conference in Dublin

on Financial Integration and the Safety Net.

The FDIC entered into a number of Memoranda of

Understanding (MOU) this year, three regarding

information sharing between bank supervisors of

Hong Kong, Mexico and Spain, as well as technical

assistance agreements with Colombia’s deposit

insurer, Fondo De Garantias De Instituciones

Financieras (FOGAFIN), and the United Kingdom’s

(UK) Financial Services Authority (FSA). The MOU

with the UK provides for formal information-sharing and contingency planning arrangements in

connection with cross-border banking activities in

the U.S. and the UK. The FDIC’s consultation with

the UK has included numerous discussions

to share detailed information on the FDIC’s

experience in resolution management and asset disposition and consultation on key components of

proposed legal changes to the resolution regime for

banks in the UK. In addition, the FDIC Chairman

met with the FSA Chairman, the Deputy to the

Exchequer of Her Majesty’s Treasury, the Governor

of the Bank of England and the CEO of the

Financial Services Compensation Scheme (FSCS) to

continue the dialogue and exchange of information.

In its continuing commitment to fostering sound

banking in China, the FDIC and the People’s Bank

of China co-sponsored a seminar on rural finance

held at the FDIC’s Dallas Regional Office. The seminar provided 55 participants from both countries,

including rural finance experts in banking, financial regulation, and academia, with an opportunity

to share experiences and engage each other in a

dialogue on the challenges, best practices, and

innovations in rural finance in their countries

today. The FDIC also traveled to China to participate in the U.S.-China Bilateral Bank Supervisors

meetings, hosted by the China Banking Regulatory

Commission (CBRC).

Supervision and

Consumer Protection

Supervision and consumer protection are

cornerstones of the FDIC’s efforts to ensure the

stability of and public confidence in the nation’s

financial system. The FDIC’s supervision program

promotes the safety and soundness of FDIC-supervised insured depository institutions, protects

consumers’ rights, and promotes community

investment initiatives.

Examination Program

The FDIC’s strong bank examination program is

the core of its supervisory program. As of

December 31, 2008, the Corporation was the

primary federal regulator for 5,116 FDIC-insured

state-chartered institutions that are not members of

the Federal Reserve System (generally referred to as

“state non-member” institutions). Through safety

and soundness, consumer compliance and

Community Reinvestment Act (CRA), and other

specialty examinations, the FDIC assesses an
32 2 0 0 8 A N N U A L R E P O R T

institution’s operating condition, management

practices and policies, and compliance with applicable laws and regulations. The FDIC also educates

bankers and consumers on matters of interest and

addresses consumer questions and concerns.

During 2008, the Corporation conducted 2,416

statutorily required safety and soundness

examinations, including a review of Bank Secrecy

Act compliance, and all required follow-up examinations for FDIC-supervised problem institutions

within prescribed time frames. The FDIC also

conducted 1,826 CRA/compliance examinations

(1,509 joint CRA/compliance examinations, 313

compliance-only examinations,

4 and 4 CRA-only

examinations) and 3,028 specialty examinations.

All CRA/compliance examinations were also

conducted within the time frames established by

FDIC policy, including required follow-up examinations of problem institutions. The accompanying

table compares the number of examinations, by

type, conducted in 2006 – 2008.

As of December 31, 2008, there were 252 insured

institutions with total assets of $159.4 billion

designated as problem institutions for safety and

soundness purposes (defined as those institutions

having a composite CAMELS5 rating of “4” or “5”),

compared to the 77 problem institutions with total

assets of $22.2 billion on December 31, 2007. This

constituted a 227 percent year-over-year increase in

the number of problem institutions and a

618 percent increase in problem institution assets.

In 2008, 67 institutions with aggregate assets of

$383.3 billion were removed from the list of

problem financial institutions, while 243 institutions with aggregate assets of $532.6 billion were

added to the list of problem financial institutions.

Washington Mutual, the single largest failure in

history, with $307.0 billion in assets, was added to

the list and resolved in 2008. The FDIC is the

primary federal regulator for 170 of the 252

problem institutions.

4 Compliance-only examinations are conductedfor most institutions at or near the mid-pointbetween joint compliance-CRA examinationsunder the Community Reinvestment Act of 1977, as

amendedby the Gramm-Leach-Bliley Act of 1999. CRA examinations of 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 ratingof “Outstanding” and no more than once every four years if they receive a CRA ratingof “Satisfactory” on their most recent examination.

5 The CAMELS composite ratingrepresents the adequacy ofCapital, thequality of Assets, the capability of Management, thequality andlevel ofEarnings, the adequacy of Liquidity, andthe

Sensitivity to market risk, andranges from “1” (strongest) to “5” (weakest).

y

FDIC EXAMINATIONS 2006 – 2008

2008 2007 2006

Safety and Soundness:

State Non-member Banks 2,225 2,039 2,184

Savings Banks 186 213 201

Savings Associations 1 3 2

National Banks 2 0 0

State Member Banks 2 3 1

Subtotal – Safety and Soundness Examinations 2,416 2,258 2,388

CRA/Compliance Examinations:

Compliance - Community Reinvestment Act 1,509 1,241 777

Compliance-only 313 528 1,177

CRA-only 4 4 5

Subtotal CRA/Compliance Examinations 1,826 1,773 1,959

Specialty Examinations:

Trust Departments 451 418 468

Data Processing Facilities 2,577 2,523 2,584

Subtotal-Specialty Examinations 3,028 2,941 3,052

Total 7,270 6,972 7,399
F E D E R A L D E P O S I T I N S U R A N C E C O R P O R A T I O N 33

C( GS DSCUSSOD SS

During 2008, the Corporation issued the following

formal and informal corrective actions to address

safety and soundness concerns: 83 Cease and Desist

Orders, one Temporary Cease and Desist Order,

and 210 Memoranda of Understanding. Of these

actions issued, 10 Cease and Desist Orders and 29

Memoranda of Understanding were issued based,

in part, on apparent violations of the Bank

Secrecy Act.

As of December 31, 2008, 140 FDIC-supervised

institutions were assigned a “4” rating for safety and

soundness and 30 institutions were assigned a

“5” rating.

Of the “4”-rated institutions, 126 were examined

in 2008, and formal or informal enforcement

actions are in process or have been finalized to

address the FDIC’s examination findings. Twenty

eight “5”-rated institutions were examined and the

remaining two were in the process of being examined in 2008 and completed in February 2009.

As of December 31, 2008, 16 FDIC-supervised

institutions were assigned a “4” rating for

compliance and no institutions were assigned a “5”

rating. In total, nine of the “4”-rated institutions

were examined in 2008; the remaining seven were

examined prior to 2008 and involved either appeals

or referrals to other agencies. These 16 institutions

are under informal enforcement actions (3) or

Cease and Desist Orders (six are final and six are in

process), with one in process of appealing the

examination. The Corporation has issued or is

pursuing enforcement actions to address the

examination findings for all 170 of the problem

institutions for which it is the primary federal regulator. These actions include 159 Cease and Desist

Orders and 11 Memoranda of Understanding.

Troubled Asset Relief Program’s

Capital Purchase Program

The FDIC has worked with the Treasury

Department to process applications for the

Troubled Asset Relief Program’s (TARP) Capital

Purchase Program (CPP). The TARP CPP, funded

at $250 billion in 2008, is designed to strengthen

the capital of financial institutions and enhance

their ability to make credit available to consumers

and businesses. (An additional $100 billion was

forwarded to the AIG and auto industries.) All

U.S. bank holding companies, banks, and thrifts

are eligible to participate in the CPP by making an

application to their primary federal regulator. The

FDIC has processed 1,600 CPP applications from

state non-member institutions. It is expected that

all TARP CPP capital infusions will be completed

by mid 2009.

Joint Examination Teams

The FDIC used joint compliance/risk management

examination teams (JETs) to assess risks associated

with new, nontraditional and/or high-risk products

being offered by FDIC-supervised institutions. The

JET approach recognizes that to fully understand

the potential risks inherent in certain products and

services, the expertise of both compliance and risk

management examiners is required. The JET

approach has three primary objectives:

To enhance the effectiveness of the FDIC’s

supervisory examinations in unique situations;

To leverage the skills of examiners who have

experience with emerging and alternative loan

and deposit products; and

To ensure that similar supervisory issues

identified in different areas of the country are

addressed consistently.

In 2008, the FDIC used JETs within institutions

involved in significant subprime or nontraditional

mortgage activities; institutions affiliated with or

utilizing third parties to conduct significant

consumer lending activities, especially in the credit

card area; institutions offering refund anticipation

loans (RAL) products; and institutions for which

the FDIC has received a high volume of consumer

complaints or complaints with serious allegations

of improper conduct by banks.

Large Complex Financial

Institution Program

The FDIC’s Large Complex Financial Institution

Program addresses the unique challenges associated

with the supervision, insurance and potential

resolution of large and complex financial institutions. With the challenges posed by economic and

market developments in 2008, large institutions

have been significantly affected. The FDIC’s ability

to analyze and respond to risks in these institutions

is of particular importance as they make up a

significant share of the banking industry’s assets.

The focus of the program is to ensure a consistent

 ́

 ́

 ́
34 2 0 0 8 A N N U A L R E P O R T

C( GS DSCUSSOD SS

approach to large-bank supervision and risk

analysis on a national basis and to provide a quick

response to risks that are identified in large

institutions. This is achieved through extensive

cooperation with the FDIC regional offices, other

FDIC divisions and offices, and the other banking

and thrift regulators.

In 2008, the Large Insured Depository Institution

(LIDI) Program implemented a comprehensive

process to standardize data capture and reporting.

Under this program, supervisory staff throughout

the nation performs comprehensive quantitative

and qualitative risk analysis of institutions with

assets over $10 billion, or under this threshold at

regional discretion. This information has been

instrumental in providing the basis for supervisory

actions, supporting insurance assessments and

resolution planning.

The LIDI Program continued to assess internal and

industry preparedness relative to Basel II capital

rules and was actively involved in domestic and

international discussions intended to ensure

effective implementation of the New Capital

Accord. This included participation in numerous

supervisory working group meetings with foreign

regulatory authorities to address Basel II

home-host issues.

Bank Secrecy Act/

Anti-Money Laundering

The FDIC pursued a number of Bank Secrecy Act

(BSA), Counter-Financing of Terrorism (CFT) and

Anti-Money Laundering (AML) initiatives in 2008.

International AML/CFT Initiatives

The FDIC conducted three training sessions in

2008 for 49 central bank representatives from

Jordan, Kuwait, Paraguay, Qatar, Saudi Arabia,

Senegal, Thailand, and the West Africa Central

Bank. The training focused on AML/CFT controls,

the AML examination process, customer due

diligence, suspicious activity monitoring and

foreign correspondent banking. The sessions also

included presentations from the Federal Bureau of

Investigation on combating terrorist financing, and

the Financial Crimes Enforcement Network

(FinCEN) on the role of financial intelligence units

in detecting and investigating illegal activities.

In addition to hosting on-site AML/CFT instruction, the FDIC participated in the second annual

U.S.-Latin America Private Sector Dialogue in

Miami, Florida. The focus of this Treasury

Department initiative is to provide a forum for

discussing common issues related to money

laundering and terrorist financing. The FDIC also

participated in a seminar focusing on Islamic

Banking hosted by Perbadanan Insurans Deposit

Malaysia (PIDM) in Kuala Lumpur, Malaysia.

Additionally, the FDIC traveled to Uruguay to

provide instruction focused on AML/CFT

practices to approximately 40 regulators from the

Banco Central del Uruguay. Also presented was

an overview of the FDIC’s role as a supervisor

to approximately 100 bankers and

government officials.

Basel AML/CFT

The FDIC also participates on the Basel AML/CFT

committee. In 2008, the committee published views

on supervisory expectations relating to

transparency in payment messages, particularly in

anticipation of changes to technical standards for

cross-border wire transfers.

Money Services Business Project

As part of the FDIC’s Money Services Business

(MSB) Project, the FDIC continued to work on

establishing information-sharing agreements with

state authorities responsible for examining MSBs.

The agreements allow for the exchange of

information relating to MSB supervision and

provide for a formal information-sharing process.

The agreements were developed to limit regulatory

redundancies by providing relevant supervisory

information for MSB customers with banking relationships at FDIC-supervised financial institutions.

Additionally, the agreements provide assistance to

each agency in promoting opportunities to learn

from the other’s industry expertise.

Based on challenges faced by the MSB industry in

obtaining and maintaining banking services, the

FDIC partnered with several state MSB supervisors.

Information gained is intended to streamline the

BSA/AML examination process for financial

institutions serving the MSB industry. To date,

agreements have been signed with state representatives from New York, Pennsylvania and Texas.
F E D E R A L D E P O S I T I N S U R A N C E C O R P O R A T I O N 35

C( GS DSCUSSOD SS

Minority Depository Institution

(MDI) Activities

The FDIC continues to seek avenues for improving

communication and interaction with MDIs, and

responding to concerns.

In July of 2008, the FDIC issued a Financial

Institution Letter (FIL) aimed at enhancing

procedures for providing technical assistance to

MDIs. Although the FDIC routinely contacts MDIs

to offer return visits and technical assistance

following the conclusion of each examination, the

FIL expanded the guidelines to encourage banks to

initiate contact to request technical assistance at

any time. The guidance specifically delineates that

the FDIC can assist in reviewing and offering

feedback and recommendations on a variety of

matters, including:

Proposed written policies for major operational

areas, such as the lending, investment, and funds

management functions;

Proposed strategic plans;

Proposed budgets;

Proposed applications or notices for new

branches and/or new activities; and

Any other operational matters where MDI bank

management would like FDIC input.

Also, as suggested by MDIs, the guidance provides

that the institutions can contact any region, regardless of its geographic location, to initiate discussions

for technical assistance.

During 2008, the FDIC provided technical

assistance to 54 MDIs on a broad range of topics,

including strategies for addressing BSA deficiencies, strengthening budget processes, and revising

and developing policies. The FDIC also held

discussions on the de novo application process with

prospective organizers of new minority banks.

In partnership with the Puerto Rico Bankers

Association, the FDIC hosted a Compliance

seminar in San Juan in December 2008. The

seminar focused on pertinent compliance-related

matters, including the Fair and Accurate Credit

Transaction Act implementation, unfair and

deceptive practices, and recent changes to the

FDIC’s examination procedures.

 ́

 ́

 ́

 ́

 ́

In response to comments provided by MDIs, the

FDIC launched a program for enhanced peer group

reviews and comparisons, specifically targeted for

MDIs. This custom peer report is designed to

facilitate comparison of an institution’s

performance with that of all MDIs that meet the

FDIC’s definition, as well as all FDIC-insured institutions. The custom peer report contains earnings,

capital, asset quality, and liquidity performance

measures, which should assist MDIs in comparing

performance against similar institutions.

In July of 2008, the FDIC hosted the third annual

Interagency Minority Depository Institution

National Conference in Chicago, Illinois. The

theme of the conference was “Know Your Business,

Grow Your Business.” The event drew over 250

attendees, representing an increase in participation

of 47 percent from the previous year. In addition to

presentations by senior officials from all federal

banking regulatory authorities, industry experts

and regulators, the program covered the state of the

economy as it relates to mortgage markets, the

current credit environment, and the process of

bidding on distressed banks. An MDI bankers’

panel discussed strategies for identifying opportunities for success in the current environment. The

program also included workshops on commercial

real estate trends and best practices, troubled debt

restructuring, the development of profitable lines of

business, SBA-guaranteed lending programs, and

the Community Development Financial Institution

Fund certification process. Feedback from the

attendees was overwhelmingly positive.

In the third quarter of 2008, the FDIC launched a

series of quarterly conference calls with FDICsupervised MDIs, covering relevant regulatory

topics. The initial call was held in September 2008,

and covered funding risks associated with banks’

dependence on brokered and above-market rate

deposits. The second call was held in November

2008, and covered the Temporary Liquidity

Guarantee Program and the Treasury Department’s

Capital Purchase Program. The third was held in

December 2008, and covered accounting issues.

The new conference call series has been well

received by the MDIs, with participation averaging

approximately 75 bankers for each event.
36 2 0 0 8 A N N U A L R E P O R T

Capital Standards

The FDIC continued to be actively involved in

domestic and international discussions intended to

ensure capital standards adequately support the

safe and sound operation of banks. This included

participation in a number of supervisory working

group meetings with foreign regulatory authorities.

On June 26, 2008, the FDIC Board and the Federal

Reserve Board of Governors approved the

publication of the Basel II Standardized Approach

Notice of Proposed Rulemaking (NPR). The NPR

was published in the Federal Register on July 29,

2008, with comments due October 27, 2008.

Because of the priority of dealing with the current

market turmoil and an unexpected delay in many

banks’ plans for implementing the advanced

approaches, the agencies deferred finalizing the

Standardized Framework NPR. Only one

institution began Basel II Parallel Run in 2008. The

FDIC will compile and analyze the information as

it becomes available through public and

supervisory sources.

The FDIC is involved in Basel Committee work

teams to develop proposals that would strengthen

each of the three pillars of the Basel II framework.

The FDIC also is working with another subgroup of

the Basel Committee to develop a proposal to

strengthen the market risk capital requirements.

The FDIC worked with other U.S. financial regulators to complete final guidance on the supervisory

review process (Pillar 2) for banks using the

advanced approaches of Basel II. The final

guidance includes several refinements to the draft

guidance that are intended to address weaknesses

revealed by the market turmoil. This guidance was

published in the Federal Register on July 31, 2008.

The FDIC finalized the Goodwill Net of Associated

Deferred Tax Liability rule for regulatory capital on

December 16, 2008, and jointly issued the Final

Rule with the other federal banking agencies. This

Final Rule allows goodwill, which must be deducted

from Tier I capital, to be reduced by the amount of

any associated deferred tax liability. The new rule

continues to adhere to the statutory requirement

that all of a bank’s exposure to goodwill will be

deducted from capital. The final rule took effect

January 29, 2009. However, a bank may elect to

apply this final rule for regulatory capital reporting

purposes as of December 31, 2008. The federal

banking agencies decided not to extend similar

treatment to other intangible assets currently

required to be deducted fully from Tier I capital.

Guidance Issued

During 2008, the FDIC issued and participated in

the issuance of guidance in several areas as

described below:

Commercial Real Estate Guidance

In response to deteriorating trends in construction

and development (C&D) lending and other commercial real estate (CRE) sectors, the FDIC issued

“Managing Commercial Real Estate Concentrations

in a Challenging Environment” on March 17, 2008.

The guidance re-emphasizes the importance of

strong capital and allowance for loan and lease loss

levels and robust credit risk management practices

for institutions with concentrated CRE exposures.

The guidance further encourages institutions to

continue making C&D and CRE credit available in

their communities using prudent lending standards.

Liquidity Risk Management

In 2008, disruptions in the credit and capital

markets exposed weaknesses in many banks’ liquidity risk measurement and management systems. To

address these concerns, the FDIC issued guidance

highlighting the importance of liquidity risk

management at FDIC-supervised institutions. This

guidance noted that institutions using wholesale

funding, securitizations, brokered deposits and

other high-rate funding strategies should measure

liquidity risk using pro forma cash flows/scenario

analysis and should have contingency funding plans

in place that address relevant bank-specific and

systemic stress events. The guidance further states

that institutions using volatile, credit sensitive, or

concentrated funding sources are generally

expected to hold capital above regulatory minimum

levels to compensate for the elevated levels of

liquidity risk present in their operations.

Third-Party Risk

On June 6, 2008, the FDIC issued “Guidance for

Managing Third-Party Risk” which identifies

sound practices that can help banks avoid

significant safety-and-soundness and compliance

problems that may be associated with some

third-party relationships. This guidance describes

potential risks arising from third-party relationships and outlines risk management principles that

financial institutions may tailor to suit the
F E D E R A L D E P O S I T I N S U R A N C E C O R P O R A T I O N 37

C( GS DSCUSSOD SS

complexity and risk potential of their significant

third-party relationships. On November 7, 2008,

the FDIC issued “Guidance on Payment Processor

Relationships” which identifies potential risks and

recommended controls associated with

relationships with entities that process payments

for telemarketers and other merchant clients.

Trust

In 2008, the FDIC completed significant revisions

and additions to the FDIC Trust Examination

Manual. Most notably, substantial material was

added to the sections covering employee benefit

plans, the Employee Retirement Income Security

Act of 1974, the Gramm-Leach-Bliley Act, and

Regulation R exceptions and exemptions for banks

from the definition of “broker” in the Securities

Exchange Act of 1934.

Government-Sponsored Enterprises

The Federal Housing Finance Agency placed

Fannie Mae and Freddie Mac into conservatorship

on September 7, 2008. The FDIC believes these

government-sponsored enterprises are important to

the home mortgage market and, along with the

other federal banking agencies, issued a statement

on September 7, 2008, indicating that it will work

with institutions with significant holdings of

Fannie Mae or Freddie Mac common and preferred

shares in relation to their capital.

Home Equity Lines of Credit

The FDIC completed an Issues Review of the

emerging practice of lenders suspending or

terminating home equity lines of credit due to

substantially decreased collateral values. Several

consumer protection regulations, including Truth

in Lending, and fair lending laws bear on this

practice. As a result, on June 26, 2008, the FDIC

issued “Home Equity Lines of Credit: Consumer

Protection and Risk Management Considerations

When Changing Credit Limits and Suggested Best

Practices” to remind FDIC-supervised financial

institutions that if, for risk management purposes,

they decide to reduce or suspend home equity lines

of credit, certain legal requirements designed to

protect consumers must be followed.

Other Real Estate

Continued weakness in the housing market and the

rapid rise in foreclosures increased the potential for

higher levels of other real estate held by FDICsupervised institutions. Accordingly, on July 1,

2008, the FDIC issued “Other Real Estate:

Guidance on Other Real Estate” to remind bank

management of the importance of developing and

implementing policies and procedures for acquiring, holding, and disposing of other real estate.

Hope for Homeowners

As a member of the Board of Directors of the

HOPE for Homeowners Program, the FDIC joined

the Departments of Housing and Urban

Development, Treasury and the Federal Reserve in

establishing requirements and standards for the

Program that are not otherwise specified in the

legislation, and prescribing necessary regulations

and guidance to implement those requirements and

standards.

Regulatory Relief

In 2008, the FDIC issued 12 Financial Institution

Letters that provided guidance to help financial

institutions and facilitate recovery in areas

damaged by severe storms, tornadoes, flooding,

and other natural disasters. Areas within Alabama,

Arkansas, Florida, Indiana, Iowa, Louisiana,

Mississippi, Missouri, Nebraska, Tennessee, Texas,

and Wisconsin were affected.

Other Guidance Issued

The FDIC also contributed to the release of guidance on Subprime Mortgage Product Illustrations

and on Identity Theft Red Flags regulations and

examination procedures, and changes to the Truth

in Lending Act and the Home Mortgage Disclosure

Act regulations relating to higher-priced mortgages.
38 2 0 0 8 A N N U A L R E P O R T

Monitoring Potential Risks from New

Consumer Products and Developing a

Supervisory Response Program

The FDIC is revising the former Underwriting

Survey, completed by examiners at the conclusion

of each examination to aid in identifying new

products and emerging risks. This will provide

examiners the opportunity to submit information

to a central database at the conclusion of each

examination. Policy staff will monitor and analyze

this real-time examiner input and use the

information to formulate policy guidance to allow

supervisory strategies as appropriate.

The FDIC completed an Issues Review of reverse

mortgages that outlined the types of products and

features, as well as risks, from both a consumer and

safety-and-soundness perspective. The results of

this review will be used in the ongoing FFIEC

Consumer Compliance Task Force project on

reverse mortgages. As part of the Issues Review, the

FDIC also participated in an examination of a

specialized reverse mortgage lender.

Regulatory Reporting Revisions

The FDIC, jointly with the Office of the

Comptroller of the Currency and the Federal

Reserve Board, implemented revisions to the

Consolidated Reports of Condition and Income

(Call Report) in first quarter 2008. These revisions

included new data related to residential mortgages

(such as restructured troubled mortgages, mortgages in foreclosure, and mortgage repurchases and

indemnifications) and expanded data on trading

assets and liabilities and fair value measurements.

In September 2008, the three agencies requested

comment on proposed Call Report revisions that

would take effect on a phased-in basis in March,

June, and December 2009. Certain revisions

address areas in which the banking industry has

experienced heightened risk as a result of market

turmoil and illiquidity and weakening economic

and credit conditions. The reporting changes

include new data on real estate construction loans

with interest reserves, structured financial products

such as collateralized debt obligations, commercial

mortgage-backed securities, pledged loans, and

fiduciary assets and income. Selected institutions

would report additional data on recurring fair value

measurements, credit derivatives, and over-thecounter derivative exposures. The agencies made

limited modifications to the proposed changes in

response to comments received. In November 2008,

the FDIC and the other banking agencies obtained

emergency approval from the U.S. Office of

Management and Budget to collect data in the

regulatory reports for all insured institutions

beginning in December 2008 to support the

quarterly assessment process for the FDIC’s

Transaction Account Guarantee Program.

Promoting Economic Inclusion

The FDIC pursued a number of initiatives in 2008

to facilitate underserved populations using mainstream banking services rather than higher cost,

non-bank alternatives and to ensure protection of

consumers in the provision of these services.

Alliance for Economic Inclusion

The goal of the FDIC’s Alliance for Economic

Inclusion (AEI) initiative is to collaborate with

financial institutions, community organizations,

local, state and federal agencies, and other partners

in select markets to launch broad-based coalitions

to bring unbanked and underserved consumers

into the financial mainstream.

The FDIC expanded its AEI efforts during 2008 to

increase measurable results in the areas of new

bank accounts, small-dollar loan products,

remittance products, and delivery of financial

education to more underserved consumers. During

2008, over 200 banks and organizations joined AEI

nationwide, bringing the total number of AEI

members to 924. More than 56,000 new bank

accounts were opened during 2008, bringing the

total number of bank accounts opened through the

AEI to 90,000. During 2008 approximately 43,000

consumers received financial education through

the AEI, bringing the total number of consumers

educated to 73,000. Also, 53 banks were in the

process of offering or developing small-dollar loans

as part of the AEI and 34 banks were offering

remittance products at the end of 2008.
F E D E R A L D E P O S I T I N S U R A N C E C O R P O R A T I O N 39

C( GS DSCUSSOD SS

The FDIC launched the tenth AEI initiative in

Rochester, New York, on May 15. The launch was

held in partnership with the New York State

Banking Superintendent, Mayor of Rochester, and

other partners. As a result of the FDIC’s leadership

and initial success with AEI in its ten primary

markets, the FDIC was asked to provide technical

assistance to several other cities that are launching

city-wide campaigns to increase access by the

underserved to mainstream financial services.

Two major national AEI partnerships were also

signed during 2008. The first, with the National

Association of Affordable Housing Lenders

(NAAHL), expanded the two organizations’

collaboration in furtherance of economic inclusion.

The second, with the United Way of America,

strengthened mutual efforts to serve the

underserved through the United Way of America’s

Financial Stability Partnership.

During 2008, the FDIC included a component of its

foreclosure prevention efforts within the AEI. The

FDIC sponsored or co-sponsored more than 164

local outreach and training events, many in

partnership with NeighborWorks® America and its

affiliates. These sessions were designed to educate

at-risk homeowners about the availability of

foreclosure prevention counseling services and

other resources. A new Web page was also launched

to provide resources, tools and technical assistance

to consumers and others at risk of foreclosure or

involved in foreclosure prevention efforts.

Forum on Mortgage Lending for

Low- and Moderate-Income (LMI) Households

On July 8, 2008, the FDIC held a “Forum on

Mortgage LMI Households.” The purpose of the

forum was to explore a framework for LMI

mortgage lending in the future, in light of current

problems in the mortgage market. The forum

examined ways to encourage profitable, responsible,

and sustainable mortgage lending to lower-income

households and strategies to rejuvenate the

secondary market for these loans. Speakers at the

forum included Treasury Secretary Henry M.

Paulson, Federal Reserve Chairman Ben S.

Bernanke, and JPMorgan Chase Chairman and

CEO James Dimon.

On September 4, 2008, the FDIC issued a Financial

Institution Letter (FIL) for bankers and other

mortgage professionals to highlight best practices

discussed at the forum. These best practices

focused on the following:

Back-to-basics underwriting

Ensuring that incentives and compensation for

all parties to mortgage transactions are aligned

with the long-term outcome of the transactions

Improving mortgage transaction transparency

and due diligence

Expanding existing reasonable LMI mortgage

products and encouraging innovations

Fostering public/private partnerships

FDIC Advisory Committee on

Economic Inclusion

The FDIC’s Advisory Committee on Economic

Inclusion was established in 2006 and provides the

FDIC with advice and recommendations on

initiatives focused on expanding access to banking

services by underserved populations. This may

include reviewing basic retail financial services

such as check cashing, money orders, remittances,

stored value cards, short-term loans, savings

accounts, and other services that promote asset

accumulation and financial stability. Committee

members represent a cross-section of interests from

the banking industry, state regulatory authorities,

government, academia, consumer or public advocacy organizations and community-based groups.

The Advisory Committee met twice during 2008.

In March 2008, the meeting topic was “AssetBuilding Opportunities for Individuals and Banks.”

The meeting focused on policy approaches,

supervisory and regulatory strategies, and product

innovations to enhance household saving, particularly for LMI households. The Advisory Committee

also met after the LMI forum in July 2008, to

discuss the forum in general, and best practices

raised at the forum in particular that were later

issued in a FIL as discussed above. At that meeting,

the Chairman also announced the formation of an

FDIC working group to explore the feasibility of

prize-linked savings programs. Among other

things, this group is exploring whether the

operational, marketing, and distribution networks

of state lottery systems can be leveraged to

encourage saving.

 ́

 ́

 ́

 ́

 ́
40 2 0 0 8 A N N U A L R E P O R T

Affordable Small-Dollar Loan Guidelines

and Pilot Program

Many consumers, even those who have bank

accounts, turn to high-cost payday or other

non-bank lenders to quickly obtain small loans to

cover unforeseen circumstances. To help insured

institutions better serve an underserved and

potentially profitable market while enabling

consumers to transition away from reliance on

high-cost debt, the FDIC launched a two-year

small-dollar loan pilot project in February 2008.

The pilot is designed to review affordable and

responsible small-dollar loan programs offered by

insured financial institutions and assist the

banking industry by identifying and disseminating

information on replicable business models and best

practices for small-dollar loans, including ways to

offer small-dollar loan customers other mainstream

banking services.

The FDIC selected an initial group of 31 banks of

varied sizes and diverse locations and settings for

participation in the study. Banks in the pilot meet

the FDIC’s Small-Dollar Loan guidelines, and

several have already reported using the small-dollar

product as a cornerstone for profitable relationships.

After three quarters of data collection, participating

banks have also demonstrated innovative strategies

in areas such as underwriting, advertising and linking automatic savings features that could prove to

be replicable for other banks. These early results

provide some indication that banks can profitably

provide affordable alternatives to high-cost, shortterm credit. The FDIC will continue to explore

profitability and other noteworthy features of

participating bank programs as the pilot progresses.

FDIC Study of Bank

Overdraft Programs

In 2008, the FDIC completed a Study of Bank

Overdraft Programs, a two-part study that gathered

empirical data on the types, characteristics, and use

of overdraft programs operated by FDIC-supervised banks. The study was undertaken in response

to the growth in automated overdraft programs,

defined as programs in which the bank honors a

customer’s overdraft obligations using standardized

procedures to determine whether the non-sufficient

fund (NSF) transaction qualifies for overdraft

coverage. Data and information for the FDIC’s

study were gathered through a survey collection

representative of 1,171 FDIC-supervised institutions, and a separate data request of customer

account and transaction-level data from a smaller

set of 39 institutions.

The survey instrument was designed to obtain the

following types of information related to overdraft

programs: characteristics, features, and fees of

overdraft programs; transaction processing policies;

marketing and disclosure practices; internal

controls and monitoring practices; the role of

vendors and third parties in overdraft program

implementation; and NSF-related fee income and

growth. The customer account and transactionlevel data collection was designed to gather

information on the provision of overdraft services

on customer accounts, the occurrence of NSF

activity covered under automated overdraft

programs, and the characteristics of customer

accounts that tend to incur the highest volume of

overdraft fees. A final report was released in

February 2009. The FDIC believes that objective

information on these programs will help policymakers make better-informed policy decisions and

will help the public better understand the features

and costs related to automated overdraft programs.

National Survey of Banks’ Efforts

to Serve the Unbanked and

Underbanked

In 2008, the FDIC conducted the first of a series of

national surveys on banks’ efforts to serve the

unbanked and underbanked. For the purposes of

this survey effort, unbanked individuals and

families are those who rarely, if ever, held a

checking account, savings account, or other type of

transaction or check cashing account at an insured

depository institution in the conventional finance

system. Underbanked individuals and families are

those who have an account with an insured

depository institution but also rely on non-bank

alternative financial service providers for transaction services or high-cost credit products. The

survey was conducted in response to a mandate

under section 7 of the Federal Deposit Insurance

Reform Conforming Amendments Act of 2005

(Reform Act) which calls for the FDIC to conduct
F E D E R A L D E P O S I T I N S U R A N C E C O R P O R A T I O N 41

C( GS DSCUSSOD SS

ongoing surveys on efforts by insured depository

institutions to bring unbanked individuals and

families into the conventional finance system. This

initial survey effort had three objectives:

Identify and quantify the extent to which insured

depositories undertake outreach efforts, serve,

and meet the banking needs of the unbanked

and underbanked;

Identify challenges affecting the ability of

insured depository institutions to serve the

unbanked and underbanked, including but not

limited to cultural, language, identification

issues, and spatial/location issues; and

Identify innovative efforts depositories use to

serve the unbanked and underbanked, including

community storefronts, small-dollar loans,

basic banking accounts, remittances, and other

low-cost products and services used by the

unbanked and underbanked.

The study involved a survey of insured depository

institutions and development of a limited number

of case studies. The survey was administered to a

sample that was representative of all FDIC-insured

commercial banks and savings institutions having

standard retail banking operations. In-depth case

studies were conducted of 16 surveyed institutions

that were identified as offering innovative

approaches to serving unbanked and underbanked

individuals. The report was transmitted to

Congress in early 2009.

Household Survey of the Unbanked

and Underbanked

In January 2009, the U.S. Bureau of the Census

conducted, on behalf of the FDIC, the first National

Household Survey of the Unbanked and

Underbanked. The survey was conducted as a

supplement to Census’ Current Population Survey.

In addition to collecting accurate estimates of the

number of unbanked and underbanked households

in the U.S., the survey was designed to provide

insights into their demographic characteristics and

reasons why the households are unbanked and/or

underbanked. This effort is being undertaken in

response to the Reform Act, which calls for the

FDIC to provide an estimate of the size of the U.S.

unbanked market and to identify issues that cause

individuals and families to be unbanked. The FDIC

plans to release survey results during 2009.

 ́

 ́

 ́

Information Technology, Cyber Fraud

and Financial Crimes

The President’s Identity Theft Task Force, of which

the FDIC is a member, submitted its follow-up

report to the President in September 2008. The

report documents the efforts of the Task Force to

implement the 2007 Strategic Plan’s 31

recommendations concerning strengthening data

protection, improving consumer authentication,

assisting identity theft victims, and investigating,

prosecuting, and punishing identity thieves.

Other major accomplishments during 2008 in

combating identity theft included the following:

Assisted financial institutions in identifying and

shutting down approximately 1,223 “phishing”

Web sites. The term “phishing” – as in fishing for

confidential information – refers to a scam that

encompasses fraudulently obtaining and using

an individual’s personal or financial information.

Utilized a brand protection service provider

in taking down instances of abuse of the FDIC

name or logo. In 2008, 14 active sites were closed

(sites claiming to be FDIC or FDIC authorized).

Issued 219 Special Alerts to FDIC-supervised

institutions of reported cases of counterfeit or

fraudulent bank checks.

Issued, in conjunction with the other Federal

Financial Institution Examination Council

(FFIEC) agencies, examination procedures for

“Identity Theft Red Flags, Address Discrepancies, and Change of Address Regulations.” These

procedures are designed to assist financial institutions in complying with these new regulations

and to provide examiners with a consistent

methodology for assessing compliance. Examiners began reviewing bank compliance with the

new regulations on the mandatory compliance

date of November 1, 2008.

The FDIC conducts information technology

examinations at each safety and soundness

examination to ensure that institutions have

implemented adequate risk management practices

for the confidentiality, integrity, and availability of

the institution’s sensitive, material, and critical

information assets using the FFIEC Uniform

Rating System for Information Technology

(URSIT). The FDIC also participates in interagency examinations of significant technology

 ́

 ́

 ́

 ́
42 2 0 0 8 A N N U A L R E P O R T

service providers. In 2008, the FDIC conducted

2,577 information technology (IT) examinations at

financial institutions and technology service

providers. The FDIC also monitors significant

events such as data breaches and natural disasters

that may impact financial institution operations

or customers.

The FDIC updated its risk-focused IT examination

procedures for FDIC-supervised financial

institutions. The procedures include an updated IT

Officer’s Questionnaire which newly highlights risk

issues related to vendor management.

The FDIC and other FFIEC regulatory agencies

completed guidance concerning the risks associated with financial institutions’ use of remote

deposit capture technology. The guidance, which

discusses various risk mitigation techniques that

institutions should use, was issued in January 2009.

The FDIC, in conjunction with the other FFIEC

agencies issued guidance to financial institutions to

enhance business continuity planning. On February

6, 2008, the FDIC, with the other FFIEC agencies,

issued “Interagency Statement on Pandemic

Planning” identifying actions that financial

institutions should consider to minimize the

adverse effects of a pandemic event. The Business

Continuity Planning booklet, part of the FFIEC IT

Examination Handbook series, was updated in

March 2008 to address emerging threats such as

pandemic planning and lessons learned from

Hurricanes Katrina and Rita as well as additional

testing guidelines. The guidance provides an

enterprise-wide approach to a financial institution’s

business continuity planning. The FDIC also

participated in and hosted the Roundtable on

Pandemic Planning sponsored by the FFIEC and

the American Bankers Association with

approximately 170 participants.

Consumer Complaints and Inquiries

The FDIC investigates consumer complaints

concerning FDIC-supervised institutions and

answers inquiries from the public about consumer

protection laws and banking practices. As of

December 31, 2008, the FDIC had received 14,169

written complaints, of which 6,267 involved

complaints against state non-member institutions.

The FDIC responded to over 96 percent of these

complaints within timeliness standards established

by corporate policy. The FDIC also responded to

3,588 written inquiries, of which 502 involved state

non-member institutions. In addition, the FDIC

responded to 4,789 written inquiries, of which 595

involved state non-member institutions. The FDIC

also responded to 7,536 telephone calls from the

public and members of the banking community in

which 4,211 were regarding state non-member

institutions.

Deposit Insurance Education

An important part of the FDIC’s deposit insurance

mission is ensuring that bankers and consumers

have access to accurate information about the

FDIC’s rules for deposit insurance coverage. The

FDIC has an extensive deposit insurance education

program consisting of seminars for bankers,

electronic tools for estimating deposit insurance

coverage, and written and electronic information

targeted for both bankers and consumers. The FDIC

also responds to thousands of telephone and written

inquiries each year from consumers and bankers

regarding FDIC deposit insurance coverage.

Directingthe Electronic Deposit Insurance Estimator andPublic Service Announcements

(PSA) campaign (l to r): Kathy Nagle, Tibby Fordand Andrew Gray showcase material,

includingtelevision PSAs.
F E D E R A L D E P O S I T I N S U R A N C E C O R P O R A T I O N 43

C( GS DSCUSSOD SS

Economic conditions in 2008 helped to spur a

significant interest by bank customers in learning

more about FDIC deposit insurance coverage. To

meet the increased public demand for deposit

insurance information, the FDIC implemented two

major initiatives to help raise public awareness of

the benefits and limitations of FDIC deposit

insurance coverage:

On June 16, 2008, in connection with the

observation of the FDIC’s 75th anniversary, the

FDIC embarked on a campaign to raise public

awareness regarding FDIC deposit insurance coverage. As part of this effort, the FDIC facilitated

a series of ads in selected national newspapers

and magazines encouraging consumers to learn

more about their FDIC insurance coverage. In

addition, the FDIC sent all insured institutions a

Portfolio of Deposit Insurance Coverage Resources

for Bankers, containing copies of several education tools and publications on deposit insurance

coverage; these products are designed to help

bank employees who answer depositor questions

about FDIC coverage.

In September 2008, the FDIC launched a second

major initiative to raise public awareness of the

benefits and limitations of federal deposit insurance. The goal of this campaign, which involves

a series of public service announcements for

television, radio and print media, is to encourage

bank customers to visit myFDICinsurance.gov,

where they can use “EDIE the Estimator.” “EDIE

the Estimator” is an online deposit insurance

calculator that has been available to the public for

a number of years but was simplified and made

more accessible as part of this campaign. The

public service announcements feature personal

finance expert Suze Orman, who donated her

time to this initiative. This campaign has been

highly successful and prompted the FDIC to

launch a Spanish language campaign, which also

includes an updated deposit insurance calculator,

in late 2008.

In addition to these significant public outreach

initiatives, the FDIC continued its efforts to educate

bankers who work with depositors about the rules

and requirements for FDIC insurance coverage. In

the summer of 2008, the FDIC conducted a series

of 12 nationwide telephone seminars for bankers on

deposit insurance coverage; these seminars were

very well received, with an estimated 66,000

 ́

 ́

bankers participating at approximately 22,000 bank

locations throughout the country. The FDIC also

continued to work with industry trade groups to

provide training for bank employees.

Deposit Insurance Coverage Inquiries

During 2008, the FDIC received 18,953 written

deposit insurance inquiries from consumers and

bankers. Of these inquiries, 99 percent received

responses from the FDIC within the timeframes

required by policy. This activity represents a 360

percent increase over 2007, where the FDIC

received 4,125 written deposit insurance inquiries.

In addition to written deposit insurance inquiries,

the FDIC received and responded to 81,979

telephone inquiries from consumer and bankers

during 2008. In contrast, the FDIC replied to

15,899 deposit insurance telephone inquiries for the

entire year in 2007. The 2008 activity represents a

416 percent increase over 2007.

Financial Education and

Community Development

In 2001, the FDIC – recognizing the need for

enhanced financial education across the country –

inaugurated its award-winning Money Smart

curriculum, which is now available in six languages,

large print and Braille versions for individuals with

visual impairments and a computer-based instruction version. Since its inception, over 1.8 million

individuals (including approximately 235,000 in

2008) had participated in Money Smart classes and

self-paced computer-based instruction.

Approximately 300,000 of these participants

subsequently established new banking relationships.

The FDIC extended the Money Smart program to

the age 12-21 audience with the creation of a

complementary program, “Money Smart for Young

Adults.” All eight modules of the new curriculum

are aligned with state educational standards, as well

as Jump$tart national financial literacy standards

and the National Council on Economics Education

national economics standards. Through year-end

2008, the FDIC had received orders for more than

20,000 copies of the new curriculum since its

launch on April 14, 2008. Over 40 outreach

activities have taken place to specifically promote

the curriculum, ranging from presentations and

resource tables at events targeted at teachers,
44 2 0 0 8 A N N U A L R E P O R T

outreach activities to school district curriculum

directors, and train-the-trainer sessions. Two new

nationwide partnerships were also signed to

facilitate the delivery of the new curriculum, one

with Operation Hope and the other with Campfire

USA, in addition to 33 local/regional partnerships.

Additionally, the FDIC developed a portable audio

format version of Money Smart that will be ready

for launch near mid 2009.

During 2008, the FDIC also undertook over 400

community development, technical assistance and

outreach activities and events. These activities were

designed to promote awareness of investment

opportunities to financial institutions, access to

capital within communities, knowledge-sharing

among the public and private sector, and wealthbuilding opportunities for families. Representatives

throughout the financial industry and their

stakeholders collaborated with the FDIC on a broad

range of initiatives structured to meet local and

regional needs for financial products and services,

credit, asset-building, affordable housing, small

business and micro-enterprise development and

financial education.

In particular, the FDIC engaged in a number of

activities as part of an effort to raise consumer

awareness of the importance of personal savings

and responsible financial management. A new Web

page was launched to provide technical assistance

and other resources to financial institutions,

community-based organizations, and others to

encourage the promotion of savings. The FDIC also

undertook several speaking opportunities

specifically on asset-building and the importance of

personal savings. Additionally, the FDIC participated in 19 local savings campaigns during the

2008 America Saves week to encourage consumers

to build wealth. FDIC’s involvement included

providing technical assistance and training, participating in the launch of a new Saves initiative, and

facilitating participants in the Saves initiatives in

several markets receiving copies of Money Smart.

Resolutions and

Receiverships

The FDIC has the unique mission of protecting

depositors of insured banks and savings

associations. No depositor has ever experienced a

loss on the insured amount of his or her deposit in

an FDIC-insured institution due to a failure. Once

an institution is closed by its chartering authority –

the state for state-chartered institutions, the Office

of the Comptroller of the Currency (OCC) for

national banks and the Office of Thrift Supervision

(OTS) for federal savings associations – and the

FDIC is appointed receiver, it is responsible for

resolving the failed bank or savings association.

The FDIC has at its disposal and employs a variety

of business practices to resolve a failed institution.

These business practices typically fall under work

associated with the resolution process or the

receivership process. Depending on the characteristics of the institution, the FDIC may recommend

several of these practices to ensure prompt and

smooth payment of deposit insurance to insured

depositors, to minimize impact on the Deposit

Insurance Fund, and to speed dividend payments to

creditors of the failed institution.

The resolution process involves valuing a failing

institution, marketing it, soliciting and accepting

bids for the sale of the institution, determining

which bid is least costly to the insurance fund, and

working with the acquiring institution through the

closing process.

In order to minimize disruption to the local community, the resolution process must be performed

quickly and as smoothly as possible. There are two

basic resolution methods: purchase and assumption

transactions and deposit payoffs. A third resolution

option, open bank assistance transactions, generally

can only be used in the event the bank’s failure

would result in systemic risk.
F E D E R A L D E P O S I T I N S U R A N C E C O R P O R A T I O N 45

C( GS DSCUSSOD SS

The purchase and assumption transaction (P&A) is

the most common resolution method used for

failing institutions. In a P&A, a healthy institution

assumes certain liabilities of the failed institution

and purchases certain assets of the failed institution.

Since each failing bank situation is different, P&A

transactions are structured to create the highest value

for the failed institution. Depending on the P&A

transaction, the acquirer may either acquire all or

only the insured portion of the deposits.

Deposit payoffs are only executed if a bid for a P&A

transaction is not the least costly to the fund or if

no bids are received, in which case the FDIC in its

corporate capacity as deposit insurer, makes sure

that the customers of the failed institution receive

the full amount of their insured deposits.

The receivership process involves performing the

closing functions at the failed institution, liquidating any remaining failed institution assets, and

distributing any proceeds of the liquidation to the

FDIC and other creditors of the receivership. In its

role as receiver, the FDIC has used a wide variety of

strategies and tools to manage and sell retained

assets. These include but are not limited to asset

sale and/or management agreements, partnership

agreements, and securitizations.

Financial Institution Failures

Due to the economic environment, the FDIC experienced a significant increase in the number and

size of institution failures as compared to previous

years. For the institutions that failed in 2008, the

FDIC successfully contacted all known qualified

and interested bidders to market these institutions.

Additionally, the FDIC marketed approximately

90 percent of the marketable assets of these institutions at the time of failure and made insured funds

available to all depositors within one business day

of the failure. There were no losses on insured

deposits and no appropriated funds were required

to pay insured deposits.

The chart below provides a comparison of failure

activity over the last three years.

* Total Assets andTotal Depositsdata arebasedupon the last Call Report filedby the

institution prior to failure.

During 2008, 25 financial institutions failed. They

are discussed below.

Douglass National Bank, Kansas City, Missouri,

was closed by the Office of the Comptroller of the

Currency (OCC) on January 25, 2008. At the time

of closure, Douglass National had $52.8 million in

total assets and $50.2 million in total deposits.

Liberty Bank and Trust Company, New Orleans,

Louisiana, assumed all deposits of Douglass

National and purchased $50.0 million in assets.

The estimated loss to the DIF is approximately

$6.5 million.

Hume Bank, Hume, Missouri, was closed by the

Commissioner of Missouri’s Division of Finance on

March 7, 2008. At the time of closure, Hume Bank

had $18.7 million in total assets and $13.6 million in

total deposits. Security Bank, Rich Hill, Missouri,

assumed the insured deposits of Hume Bank and

purchased $3.4 million in assets. The estimated loss

to the DIF is approximately $4.0 million.

ANB Financial, National Association, Bentonville,

Arkansas, was closed by the OCC on May 9, 2008.

At the time of closure, ANB Financial had

approximately $1.9 billion in total assets and $1.8

billion in total deposits. Pulaski Bank and Trust

Company, Little Rock, Arkansas, assumed the

insured deposits of ANB Financial and purchased

* Total Assets andTotal Depositsdata arebasedupon the last Call Report filedby the

FAILURE ACTIVITY 2006 – 2008

Dollars in billions

2008 2007 2006

Total Institutions 25 3 0

Total Assets of failed

Institutions*

$371.9 $2.6 $0

Total Deposits of failed

Institutions*

$234.3 $2.4 $0

Estimated loss to the DIF $17.9 $0.2 $0
46 2 0 0 8 A N N U A L R E P O R T

$228.5 million in assets. The estimated loss to the

DIF is approximately $819.4 million.

First Integrity, National Association, Staples,

Minnesota, was closed by the OCC on May 30,

2008. At the time of closure, First Integrity had

$52.9 million in total assets and $50.2 million in

total deposits. First International Bank and Trust,

Watford City, North Dakota, assumed all deposits

of First Integrity and purchased $34.9 million in

assets. The estimated loss to the DIF is approximately $10.1 million.

IndyMac Bank, F.S.B., Pasadena, California, was

closed by the Office of Thrift Supervision (OTS) on

July 11, 2008, and the FDIC was named

conservator. As conservator, the FDIC operated

IndyMac Bank as IndyMac Federal Bank, F.S.B. All

the insured deposits and substantially all the assets

of IndyMac Bank were transferred to IndyMac

Federal. At the time of closure, IndyMac Bank had

total assets of $30.7 billion and total deposits of

$18.9 billion. The estimated loss to the DIF is

approximately $10.7 billion.

First National Bank of Nevada, Reno, Nevada, and

First Heritage Bank, N.A., Newport Beach,

California, were closed by the OCC on July 25,

2008. At the time of closure, First National of

Nevada had $3.4 billion in total assets and $3.0

billion in total deposits. First Heritage Bank had

$255.4 million in total assets and $256.7 million in

total deposits. Mutual of Omaha Bank, Omaha,

Nebraska, assumed all the deposits of both institutions and purchased $246.0 million in assets. The

estimated loss to the DIF for these two institutions

is approximately $739.2 million.

First Priority Bank, Bradenton, Florida, was closed

by the Commissioner of the Florida Office of

Financial Regulation on August 1, 2008. At the

time of closure, First Priority had $258.6 million in

total assets and $226.7 million in total deposits.

SunTrust Bank, Atlanta, Georgia, assumed the

insured deposits of First Priority and purchased

$47.2 million in assets. The estimated loss to the

DIF is approximately $81.1 million.

The Columbian Bank and Trust Company,

Topeka, Kansas, was closed by the Kansas Bank

Commissioner on August 22, 2008. At the time of

closure, The Columbian Bank and Trust Company

had $735.1 million in total assets and $620.3

million in total deposits. Citizens Bank and Trust,

Chillicothe, Missouri, assumed the insured deposits

of The Columbian Bank and Trust Company and

purchased $53.4 million in assets. The estimated

loss to the DIF is approximately $232.1 million.

Integrity Bank, Alpharetta, Georgia, was closed by

the Georgia Department of Banking and Finance

on August 29, 2008. At the time of closure,

Integrity Bank had $1.1 billion in total assets and

$962.4 million in total deposits. Regions Bank,

Birmingham, Alabama, assumed all the deposits of

Integrity Bank and purchased $58 million in assets.

The estimated loss to the DIF is approximately

$210.8 million.

Silver State Bank, Henderson, Nevada, was closed

by the Nevada Financial Institutions Division on

September 5, 2008. At the time of closure, Silver

State Bank had $1.9 billion in total assets and $1.7

billion in total deposits. Nevada State Bank, Las

Vegas, Nevada, assumed the insured deposits of

Silver State Bank and purchased $66.7 million in

assets. The estimated loss to the DIF is

approximately $553.1 million.

Ameribank, Inc., Northfork, West Virginia, was

closed by the OTS on September 19, 2008. At the

time of closure, Ameribank, Inc. had $103.9 million

in total assets and $100.9 million in total deposits.

Pioneer Community Bank, Inc., Iaeger, West

IndyMac Federal CEO John Bovenzi at apress conferencepromoting“Home

Preservation Day.”
F E D E R A L D E P O S I T I N S U R A N C E C O R P O R A T I O N 47

C( GS DSCUSSOD SS

Virginia, assumed all the deposits for five branches

located in West Virginia. The Citizens Savings

Bank, Martins Ferry, Ohio, assumed all deposits of

the three branches in Ohio. The acquiring institutions purchased $18.7 million in assets. The

estimated loss to the DIF is approximately $33.4

million.

Washington Mutual Bank, the largest failure in

history, was closed by the OTS on September 25,

2008. At the time of closure, Washington Mutual

Bank had $307.0 billion in total assets and $188.3

billion in total deposits. JPMorgan Chase acquired

the banking operations of Washington Mutual

Bank in a facilitated transaction that fully protected

all depositors and caused no loss to the DIF.

Main Street Bank, Northville, Michigan, was closed

by the Michigan Office of Financial and Insurance

Regulation on October 10, 2008. At the time of closure, Main Street Bank had $112.4 million in total

assets and $98.9 million in total deposits. Monroe

Bank & Trust, Monroe, Michigan, assumed all the

deposits of Main Street Bank and purchased $15.0

million in assets. The estimated loss to the DIF is

approximately $32.0 million.

Meridian Bank, Eldred, Illinois, was closed by the

Illinois Department of Financial Professional

Regulation-Division of Banking on October 10,

2008. At the time of closure, Meridian Bank had

$38.2 million in total assets and $36.1 million in

total deposits. National Bank, Hillsboro, Illinois,

assumed all the deposits of Meridian Bank and

purchased $7.2 million in assets. The estimated loss

to the DIF is approximately $14.5 million.

Alpha Bank and Trust, Alpharetta, Georgia, was

closed by the Georgia Department of Banking and

Finance on October 24, 2008. At the time of

closure, Alpha Bank had $351.4 million in total

assets and $344.2 million in total deposits. Stearns

Bank, National Association, St. Cloud, Minnesota,

assumed the insured deposits of Alpha Bank and

purchased $16.8 million in assets. The estimated

loss to the DIF is approximately $159.9 million.

Freedom Bank, Bradenton, Florida, was closed by

the Commissioner of the Florida Office of Financial

Regulation on October 31, 2008. As of October 31,

2008, Freedom Bank had $270.8 million in total

assets and $256.8 million in total deposits. Fifth

Third Bank, Grand Rapids, Michigan, assumed all

the deposits of Freedom Bank and purchased $36

million in assets. The estimated loss to the DIF is

approximately $92.9 million.

Security Pacific Bank, Los Angeles, California,

was closed by the Commissioner of the California

Department of Financial Institutions on

November 7, 2008. At the time of closure, Security

Pacific had $528.0 million in total assets and

$456.5 million in total deposits. Pacific Western

Bank, Los Angeles, California, assumed all the

deposits of Security Pacific and purchased $36

million in assets. The estimated loss to the DIF is

approximately $175.5 million.

Franklin Bank, S.S.B., Houston, Texas, was closed

by the Texas Department of Savings and Mortgage

Lending on November 7, 2008. At the time of

closure, Franklin Bank had $5.1 billion in total

assets and $3.7 billion in total deposits. Prosperity

Bank, El Campo, Texas, assumed all the deposits of

Franklin Bank and purchased $724.3 million in

assets. The estimated loss to the DIF is approximately $1.4 billion.

The Community Bank, Loganville, Georgia, was

closed by the Georgia Department of Banking and

Finance on November 21, 2008. At the time of

closure, The Community Bank had $634.9 million

in total assets and $603.7 million in total deposits.

Bank of Essex, Tappahannock, Virginia, assumed

all the deposits of The Community Bank and

purchased $87.5 million in assets. The estimated

loss to the DIF is approximately $247.3 million.

Downey Savings and Loan Association, F.A.,

Newport Beach, California, was closed by the OTS

on November 21, 2008. At the time of closure,

Downey Savings and Loan had $12.8 billion in total

assets and $9.6 billion in total deposits. U.S. Bank,

National Association, Minneapolis, MN, assumed

all the deposits and purchased $12.3 billion in

assets. The estimated loss to the DIF is

approximately $1.4 billion.

PFF Bank & Trust, Pomona, California, was closed

by the OTS on November 21, 2008. At the time of

closure, PFF Bank had $3.7 billion in total assets

and $2.4 billion in total deposits. U.S. Bank,

National Association, Minneapolis, MN, assumed
48 2 0 0 8 A N N U A L R E P O R T

all the deposits and purchased $3.5 billion in assets.

The estimated loss to the DIF is approximately

$729.6 million.

First Georgia Community Bank, Jackson, Georgia,

was closed by the Georgia Department of Banking

and Finance on December 5, 2008. At the time of

closure, First Georgia Community Bank had

$256.3 million in total assets and $215.3 million in

total deposits. United Bank, Zebulon, Georgia,

assumed all the deposits of First Georgia

Community Bank and purchased $37.3 million in

assets. The estimated loss to the DIF is approximately $52.0 million.

Sanderson State Bank, Sanderson, Texas, was

closed by the Texas Department of Banking on

December 12, 2008. At the time of closure,

Sanderson State Bank had $38.2 million in total

assets and $32.0 million in total deposits. Pecos

County State Bank, Fort Stockton, Texas assumed

all deposits and purchased $13.0 million in assets.

The estimated loss to the DIF is approximately

$9.6 million.

Haven Trust Bank, Duluth, Georgia, was closed

by the Georgia Department of Banking and

Finance on December 12, 2008. At the time of

closure, Haven Trust had $559.6 million in total

assets and $498.7 million in total deposits. Branch

Banking & Trust (BB&T), Winston-Salem, NC,

assumed all deposits and purchased $69.0 million

in assets. The estimated loss to the DIF is

approximately $208.0 million.

Asset Management and Sales

As part of its resolution process, the FDIC makes

every effort to sell as many assets as possible to an

assuming institution and is generally successful.

Assets that do remain in the receivership are

evaluated and those that are determined to be

marketable are marketed to be sold within 90 days

of an institution’s failure.

In 2008, the book value of assets under management increased from $907.0 million to $15.1 billion.

The following chart shows beginning and ending

balances of assets by asset type.

Receivership Management Activities

The FDIC, as receiver, manages the failed banks

and their subsidiaries with the goal of expeditiously

winding up their affairs. The oversight and prompt

termination of receiverships help to preserve value

for the uninsured depositors and other creditors by

reducing overhead and other holding costs. Once

the assets of a failed institution have been sold and

the final distribution of any proceeds is made, the

FDIC terminates the receivership estate. The FDIC

terminated all 11 institutions for which all

impediments were resolved within prescribed

timeframes. In 2008, the number of receiverships

ASSETS IN INVENTORY BY ASSET TYPE

(Dollars in millions)

Asset Type

Assets in

Inventory

1/1/08

Assets in

Inventory

12/31/08

Securities $54 $467

Consumer Loans 29 204

Commercial Loans 18 2,985

Real Estate Mortgages 226 9,808

Other Assets/Judgments 530 703

Owned Assets 20 832

Net Investments in

Subsidiaries

30 108

Total $907 $15,107
F E D E R A L D E P O S I T I N S U R A N C E C O R P O R A T I O N 49

C( GS DSCUSSOD SS

under management increased by 40 percent due to

the increase in failure activity.

The following chart shows overall receivership

activity for the FDIC in 2008.

RECEIVERSHIP ACTIVITY

Active Receiverships as of 1/1/08 35

New Receiverships 25

Receiverships Inactivated 11

Active Receiverships as of 12/31/08 49

Protecting Insured Depositors

With the increase in failure activity in 2008, the

FDIC’s focus on protecting deposits in institutions

that fail was of critical importance. Confidence in

the banking system hinges on deposit insurance

and no depositor experienced a loss on their

insured deposit in 2008.

The FDIC’s ability to attract healthy institutions

to assume deposits and purchase assets of failed

banks and savings associations at the time of

failure minimizes the disruption to customers and

allows some assets to be returned to the private

sector immediately. Assets remaining after

resolution are liquidated by the FDIC in an orderly

manner and the proceeds are used to pay creditors,

including depositors whose accounts exceeded the

insurance limit. During 2008, the FDIC paid

dividends of $302 million to depositors whose

accounts exceeded the insured limit(s). Effective

October 3, 2008, through December 31, 2009, the

standard maximum deposit insurance amount

increased from $100,000 to $250,000.

Professional Liability Recoveries

The FDIC staff works to identify potential claims

against directors, officers, accountants, appraisers,

attorneys and other professionals who may have

contributed to the failure of an insured financial

institution. Once a claim is deemed meritorious

and cost effective to pursue, the FDIC initiates legal

action against the appropriate parties. During the

year, the FDIC recovered approximately $31 million

from these professional liability claims/settlements.

In addition, as part of the sentencing process for

those convicted of criminal wrongdoing against

institutions that later failed, a court may order a

defendant to pay restitution or to forfeit funds or

property to the receivership. The FDIC, working in

conjunction with the U.S. Department of Justice,

collected more than $1.3 million in criminal

restitutions during the year. At the end of 2008, the

FDIC’s caseload was comprised of 77 professional

liability lawsuits (down from 84 at year-end 2007)

and 248 open investigations (up from 34). At

year-end, there were 638 active restitutions and

forfeiture orders (down from 687). This includes

261 Resolution Trust Corporation orders that the

FDIC inherited on January 1, 1996.

Effective Management of

Strategic Resources

The FDIC recognizes that it must effectively

manage its human, financial, and technological

resources in order to successfully carry out its

mission and meet the performance goals and

targets set forth in its annual performance plan.

The Corporation must align these strategic

resources with its mission and goals and deploy

them where they are most needed in order to

enhance its operational effectiveness and minimize

potential financial risks to the Deposit Insurance

Fund. Major accomplishments in improving the

Corporation’s operational efficiency and

effectiveness during 2008 follow.

Human Capital Management

The FDIC’s human capital management programs

are designed to attract, develop, reward and retain a

highly skilled, cross-trained, diverse and resultsoriented workforce. In 2008, the FDIC continued to

implement workforce planning and development

initiatives that emphasized hiring the additional

skill sets needed to address the increased number

of financial institution failures and institutions in

at-risk categories. The Corporation also deployed a

number of strategies to more fully engage all

employees in advancing the FDIC’s mission.

Succession Management

Baseline leadership competencies and gaps were

identified in 2006 and 2007 through review of an

Office of Personnel Management (OPM) competency assessment tool. To address the identified gaps
50 2 0 0 8 A N N U A L R E P O R T

and ensure that there are corporate managers who

are prepared to advance to executive level positions

as they become vacant, the Corporation implemented a pilot Corporate Executive Development

Program at the beginning of 2008. The program

provides for 18 months of intensive classroom and

on-the-job training to high-potential supervisors

and senior technical specialists.

Additionally, in 2008, the FDIC began drafting a

knowledge management strategic plan focused on

the full spectrum of knowledge management techniques for leadership’s review and consideration.

Strategic Workforce Planning

and Readiness

Over the past few years, the FDIC has been

preparing for an increase in retirements among its

aging workforce through increasing its entry-level

hiring into the Corporate Employee Program

(CEP). The CEP is a multi-year program designed

to cross-train new employees in several of the

FDIC’s major business lines. As of the end of 2008,

166 employees (530 since program inception)

entered the multi-year, multi-disciplined program.

The CEP provides a foundation across the full

spectrum of the Corporation’s business lines,

allowing for greater flexibility to respond to

changes in the financial services industry and in

meeting the Corporation’s staffing needs. In 2008,

the program successfully provided the FDIC those

flexibilities, as program participants were called

upon to assist with increased bank examination

activities, bank closing activities and deposit insurance claims efforts. In support of the Corporation’s

focus on consumer protection, the FDIC continued

delivery of the Advanced Compliance Examination

School (ACES) for commissioned compliance

examiners, to address current and complex

consumer compliance issues.

Also during 2008, the Corporation instituted an

“over-hire” initiative to double encumber a number

of critical positions. This program allows the FDIC

to train replacements for a smooth transition before

the incumbent retires. To address its more

immediate staffing needs, the FDIC reemployed

retired FDIC examiners, attorneys, and resolutions

and receiverships specialists; hired employees of

failed institutions in temporary positions; recruited

mid-career examiners who had developed their

skills in other agencies; recruited temporary loan

review specialists from the private sector; and

redeployed current FDIC employees with the

requisite skills from other parts of the Corporation.

Employee Engagement

The FDIC continually evaluates its human capital

programs and strategies to ensure that the

Corporation remains an employer of choice and all

of its employees are fully engaged and aligned with

the mission. The FDIC’s annual employee survey

incorporates and expands on the Federal Human

Capital Survey mandated by Congress. The 2007

survey found that while FDIC employees enjoy their

work, believe in the mission of the Corporation

and its importance, and are satisfied with their pay,

benefits, training and work environment, they

perceived problems with internal communications,

leadership, trust and employee empowerment.

To address these concerns, Chairman Bair

announced a corporate culture change initiative to

be driven by committees of employees, managers,

and employee representatives. The initiative

includes an overall steering committee that

provides direction and three teams that are

focusing on leadership, communications and

employee empowerment. The council and teams are

using input from employees and managers to

determine where the problems lie and how to

resolve them. In addition, the Chairman has held

quarterly call-in question and answer sessions for

Chairman Bairdiscusses the Culture Change Initiative at an October 7th meeting(next to her

are ActingCOO Art Murton andChief of Staff Jesse Villarreal).
F E D E R A L D E P O S I T I N S U R A N C E C O R P O R A T I O N 51

C( GS DSCUSSOD SS

all employees and maintains an anonymous e-mail

box for questions of concern to employees. The

2008 employee survey results will be used to mark

progress and further refine the goals of the culture

change initiative.

The Corporation has also negotiated interim

changes in its pay-for-performance (PFP) program

with the National Treasury Employees Union for

the 2008 performance period and is continuing to

negotiate and develop PFP and performance

management programs for 2009 and beyond.

Employee Learning and Growth

To further enhance readiness and flexibility, the

FDIC led the development of strategic readiness

simulation events that allowed the FDIC’s senior

leadership the opportunity to test and refine policy

and decision tools related to large and complex

institution failures. These exercises proved valuable

and timely as the FDIC faced and addressed real

financial industry stresses during the year.

Significant technical and just-in-time training was

provided in areas such as financial loan review,

legal functions, and contract oversight.

Information Technology Management

Information technology (IT) resources are one of

the most valuable assets available to the FDIC in

fulfilling its corporate mission. The FDIC

continued to improve its IT administration and

management practices in 2008.

The FDIC greatly enhanced its ability to effectively

manage IT projects, programs, and portfolios by

implementing the Enterprise Project Management

Project Server (EPMPS) system. EPMPS stores and

maintains IT project plans and associated project

data in a central repository and has established a

foundation for improving project and resource

management practice. EPMPS provides a

division-wide view of all portfolio project plans

down to the task level, providing transparency and

accountability to assist in identifying and isolating

problem areas and resource bottlenecks.

Enterprise Architecture

During 2008, the IT program continued to build on

the foundation that had been laid for a target

enterprise architecture, which is both economical

and supports effective portfolio management as

well as security and privacy programs. The overall

vision of the FDIC’s enterprise architecture is to

“provide an efficient, agile, flexible and cost-effective environment that optimally supports the

corporate strategic goals and objectives for all of

FDIC and its customers.” In 2008, the logical design

of the modernized infrastructure was completed

and guidelines were developed to provide for a

consistent look and feel for new applications.

Am I Insured? Web Site

In July 2008, the FDIC created an “Am I Insured?”

Web application in response to the IndyMac bank

closing. The “Am I Insured?” external Web site

allowed customers of IndyMac, the first of several

closed banks, to quickly check on whether or not

their account with IndyMac was fully insured. This

application simply informs the customers whether

or not they are fully insured and provides a contact

number to call for further information. No

personal or sensitive data are stored or retrieved as

a function of this new application and subsequent

banks that closed after IndyMac have also had

information added to allow customers to check on

their accounts.

Internet Program

The FDIC’s public Web site, www.fdic.gov, is a key

communication delivery method for the FDIC.

Each of the three major business lines - insurance,

supervision, and receivership management are

supported by the Internet program. In 2008, the

Brookings Institution ranked FDIC.gov 16th

among government web sites. This was by far the

most active year for FDIC.gov – 57 percent more

user sessions than 2007 and 86 percent more than

2006. Internet traffic to FDIC.gov increased

significantly since the IndyMac closing. The third

quarter was the busiest in the web site’s history

with over 377 million total hits.
52 2 0 0 8 A N N U A L R E P O R T

FDIC’s Web presence has evolved during 2008. The

“FDICchannel” was created on “Youtube” and hosts

16 videos. Youtube is the leading video sharing web

site. Video topics range from deposit insurance to

75th anniversary events. The FDICchannel has

received more than 58,000 views and potentially

provides outreach to younger consumers. The 75th

anniversary site and MyFDICinsurance.gov were

launched in 2008. In addition, the FDIC

implemented FDICSeguro.gov to provide a Spanish

language alternative to the deposit insurance

information provided on MyFDICinsurance.gov.

E-mail subscriptions to various FDIC.gov products

have increased 81 percent during 2008. At year-end,

the FDIC had over 440,000 subscriptions to its

products, including Financial Institution Letters,

Special Alerts and Supervisory Insights.

Securing the FDIC

The FDIC continued to enhance and expand its

Privacy Program in 2008 with an emphasis on

protecting personally identifiable information (PII)

from unauthorized collection, use, access, and

disclosure. Additionally, efforts to strengthen

controls over FDIC’s information systems and web

sites were continued to ensure that PII was

adequately safeguarded and that users of FDIC

applications were provided with adequate notice,

choice, and access. The FDIC Privacy Program also

executed a successful Privacy Awareness Week that

increased employee awareness of privacy responsibilities and issues, such as preventing identity theft

and limiting the use and disclosure of PII whenever

possible. Also, the FDIC Privacy Program

coordinated and implemented FDIC’s first

Corporate-wide Privacy Clean-Up Day, which

resulted in FDIC Field Offices and Headquarters

discarding a combined total of approximately 61⁄2

tons of paper. The FDIC Privacy Program also

conducted several physical Privacy Assessments/

Inspections of FDIC Regional and Area Offices

which resulted in the issuance of detailed reports to

management, identifying issues related to the security and protection of privacy information in public

office spaces. Of special note this year, the OIG

rated the agency’s privacy impact assessment

process “excellent” in its 2008 FISMA Report on

FDIC’s Information Security.

The FDIC’s Chief Information Security Officer

received the 2008 Association for Federal

Information Resources Management (AFFIRM)

Outstanding Federal Executive Award for

Leadership in Security and Privacy. AFFIRM recognizes outstanding leadership and management in

Government. The FDIC is the first recipient of this

new award, which recognizes the increasing

importance of information security and privacy.