Financial Audit: Federal Deposit Insurance Corporation Funds'
2004 and 2003 Financial Statements (11-FEB-05, GAO-05-281).
GAO is required to annually audit the financial statements of the
Bank Insurance Fund (BIF), Savings Association Insurance Fund
(SAIF), and FSLIC Resolution Fund (FRF), which are administered
by the Federal Deposit Insurance Corporation (FDIC). GAO is
responsible for obtaining reasonable assurance about whether
FDIC's financial statements for BIF, SAIF, and FRF are presented
fairly in all material respects, in conformity with U.S.
generally accepted accounting principles, and whether FDIC
maintained effective internal control over financial reporting
and compliance. Also, GAO is responsible for testing FDIC's
compliance with selected laws and regulations. Created in 1933 to
insure bank deposits and promote sound banking practices, FDIC
plays an important role in maintaining public confidence in the
nation's financial system. In 1989, legislation to reform the
federal deposit insurance system created three funds to be
administered by FDIC: BIF and SAIF, which protect bank and
savings deposits, and FRF, which was created to close out the
business of the former Federal Savings and Loan Insurance
Corporation.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-05-281
ACCNO: A17577
TITLE: Financial Audit: Federal Deposit Insurance Corporation
Funds' 2004 and 2003 Financial Statements
DATE: 02/11/2005
SUBJECT: Financial statement audits
Internal controls
Reporting requirements
Bank Insurance Fund
FSLIC Resolution Fund
Savings Association Insurance Fund
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GAO-05-281
United States Government Accountability Office
GAO Report to the Congress
February 2005
FINANCIAL AUDIT
Federal Deposit Insurance Corporation Funds' 2004 and 2003 Financial Statements
a
GAO-05-281
[IMG]
February 2005
FINANCIAL AUDIT
Federal Deposit Insurance Corporation Funds' 2004 and 2003 Financial Statements
What GAO Found
In GAO's opinion, FDIC fairly presented the 2004 and 2003 financial
statements for the three funds it administers-the Bank Insurance Fund, the
Savings Association Insurance Fund, and the FSLIC Resolution Fund. GAO
also found that FDIC had effective internal control over financial
reporting and compliance for each fund. GAO did not find reportable
instances of noncompliance with the laws and regulations it tested.
In prior years, GAO reported on weaknesses in FDIC's information system
controls, which were described as a reportable condition. Specifically,
FDIC had not adequately restricted access to critical financial programs
and data, provided sufficient network security, or established a
comprehensive program to monitor access activities. A primary reason for
FDIC's information system control weaknesses was that the corporation had
not established a comprehensive information security program to manage
computer security. During the past several years, FDIC has made progress
in correcting information system control weaknesses, and in 2004, FDIC
made substantial progress in correcting most of the weaknesses that GAO
identified in prior years, including taking steps to fully establish a
comprehensive information security program. These improvements, combined
with the progress reported last year, enabled GAO to conclude that the
remaining issues related to information system controls no longer
constitute a reportable condition.
FDIC's implementation of new financial systems in the coming year will
significantly change its information systems environment and the related
information systems controls necessary for their effective operation.
Consequently, continued management commitment to an effective information
security program will be essential to ensure that the corporation's
financial and sensitive information will be adequately protected in this
new environment.
GAO did not identify any reportable conditions during its 2004 audits.
However, GAO noted other less significant matters involving FDIC's
internal controls, including information system controls. GAO will be
reporting separately to FDIC management on these matters.
United States Government Accountability Office
Contents
Transmittal Letter 1
Auditor's Report 3
Opinion on BIF's Financial Statements 3
Opinion on SAIF's Financial Statements 3
Opinion on FRF's Financial Statements 3
Opinion on Internal Control 4
Compliance with Laws and Regulations 5
Objectives, Scope, and Methodology 5
FDIC Comments and Our Evaluation 7
Bank Insurance Fund's Financial Statements
Balance Sheets 8 Statements of Income and Fund Balance 9 Statements of
Cash Flows 10 Notes to the Financial Statements 11
Savings Association Insurance Balance Sheets Statements of Income 25 25 26
Fund's and Fund Balance
Financial Statements Statements of Cash Flows 27
Notes to the Financial Statements 28
FSLIC Resolution 44
Fund's Financial Balance Sheets Statements of Income 44 45
and Accumulated Deficit
Statements Statements of Cash Flows 46
Notes to the Financial Statements 47
Appendixes
Appendix I: Comments from the Federal Deposit Insurance Corporation 56
Appendix II: GAO Contacts and Staff Acknowledgments 57 GAO Contacts 57
Acknowledgments 57
Page i GAO-05-281 FDIC Funds' 2004 and 2003 Financial Statements
Contents
Abbreviations
BIF Bank Insurance Fund
CFO Chief Financial Officer
FDIC Federal Deposit Insurance Corporation
FMFIA Federal Managers' Financial Integrity Act
FRF FSLIC Resolution Fund
FSLIC Federal Savings and Loan Insurance Corporation
SAIF Savings Association Insurance Fund
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.
Page ii GAO-05-281 FDIC Funds' 2004 and 2003 Financial Statements
Comptroller General of the United States
United States Government Accountability Office Washington, D.C. 20548
February 11, 2005
The President of the Senate The Speaker of the House of Representatives
This report presents our opinions on whether the financial statements of
the Bank Insurance Fund (BIF), the Savings Association Insurance Fund
(SAIF), and the FSLIC Resolution Fund (FRF) are presented fairly for the
years ended December 31, 2004 and 2003. These financial statements are the
responsibility of the Federal Deposit Insurance Corporation (FDIC), the
administrator of the three funds. This report also presents (1) our
opinion on the effectiveness of FDIC's internal control over financial
reporting and compliance for each of the funds as of December 31, 2004,
and (2) our evaluation of FDIC's compliance with selected laws and
regulations during 2004.
The provisions of section 17(d) of the Federal Deposit Insurance Act, as
amended (12 U.S.C. 1827(d)), require GAO to conduct an annual audit of
BIF, SAIF, and FRF in accordance with U.S. generally accepted government
auditing standards. These provisions also stipulate that GAO report on the
results of its annual audit of the three funds' financial statements no
later than July 15 of the year following the year under audit, or 6 1/2
months after the end of the reporting period. However, for the second
consecutive year, and at the request of FDIC management, GAO completed its
audits of the three funds' financial statements within 45 days of the end
of the reporting period. The achievement of such a significant
acceleration in the reporting time frames would not have been possible
without the tremendous cooperation and dedicated efforts of both FDIC
management and staff and the GAO team conducting the audits.
We are sending copies of this report to the Chairman and Ranking Minority
Member of the Senate Committee on Banking, Housing, and Urban Affairs; the
Chairman and Ranking Minority Member of the House Committee on Financial
Services; the Chairman of the Board of Directors of the Federal Deposit
Insurance Corporation; the Chairman of the Board of Governors of the
Federal Reserve System; the Comptroller of the Currency; the Director of
the Office of Thrift Supervision; the Secretary of the Treasury; the
Director of the Office of Management and Budget; and other interested
parties. In addition, this report will be available at no charge on GAO's
Web site at http://www.gao.gov.
Page 1 GAO-05-281 FDIC Funds' 2004 and 2003 Financial Statements
This report was prepared under the direction of Steven J. Sebastian,
Director, Financial Management and Assurance, who can be reached on (202)
512-3406 or [email protected]. If I can be of further assistance, please
call me at (202) 512-5500.
David M. Walker Comptroller General of the United States
Page 2 GAO-05-281 FDIC Funds' 2004 and 2003 Financial Statements
Comptroller General of the United States
United States Government Accountability Office Washington, D.C. 20548
To the Board of Directors The Federal Deposit Insurance Corporation
We have audited the balance sheets as of December 31, 2004, and 2003, for
the three funds administered by the Federal Deposit Insurance Corporation
(FDIC), the related statements of income and fund balance (accumulated
deficit), and the statements of cash flows for the years then ended. In
our audits of the Bank Insurance Fund (BIF), the Savings Association
Insurance Fund (SAIF), and the FSLIC Resolution Fund (FRF), we found
o the financial statements of each fund are presented fairly, in all
material respects, in conformity with U.S. generally accepted accounting
principles;
o FDIC had effective internal control over financial reporting and
compliance with laws and regulations for each fund; and
o no reportable noncompliance with laws and regulations we tested.
The following sections discuss our conclusions in more detail. They also
present information on the scope of our audits and our evaluation of FDIC
management's comments on a draft of this report.
Opinion on BIF's The financial statements, including the accompanying
notes, present fairly, in all material respects, in conformity with U.S.
generally accepted
Financial Statements accounting principles, BIF's financial position as of
December 31, 2004, and 2003, and the results of its operations and its
cash flows for the years then ended.
Opinion on SAIF's The financial statements, including the accompanying
notes, present fairly, in all material respects, in conformity with U.S.
generally accepted
Financial Statements accounting principles, SAIF's financial position as
of December 31, 2004, and 2003, and the results of its operations and its
cash flows for the years then ended.
Opinion on FRF's The financial statements, including the accompanying
notes, present fairly, in all material respects, in conformity with U.S.
generally accepted
Financial Statements accounting principles, FRF's financial position as of
December 31, 2004,
Page 3 GAO-05-281 FDIC Funds' 2004 and 2003 Financial Statements
and 2003, and the results of its operations and its cash flows for the
years then ended.
Opinion on Internal Control
FDIC management maintained, in all material respects, effective internal
control over financial reporting (including safeguarding assets) and
compliance as of December 31, 2004, that provided reasonable but not
absolute assurance that misstatements, losses, or noncompliance material
in relation to FDIC's financial statements of each fund would be prevented
or detected on a timely basis. Our opinion is based on criteria
established under 31 U.S.C. 3512 (c), (d) [Federal Managers' Financial
Integrity Act (FMFIA)].
In prior years, we reported on weaknesses we identified in FDIC's
information system controls, which we described as a reportable
condition.1 Specifically, FDIC had not adequately restricted access to
critical financial programs and data, provided sufficient network
security, or established a comprehensive program to monitor access
activities. A primary reason for FDIC's information system control
weaknesses was that the corporation had not established a comprehensive
information security program to manage computer security. During the past
several years, FDIC has made progress in correcting information system
control weaknesses and in 2004, FDIC made substantial progress in
correcting most of the weaknesses we identified in prior years, including
taking steps to fully establish a comprehensive information security
program. These improvements, combined with the progress we reported last
year, enabled us to conclude that the remaining issues related to
information system controls no longer constitute a reportable condition.
FDIC's implementation of new financial systems2 in the coming year will
significantly change its information systems environment and the related
information systems controls necessary for their effective operation.
Consequently, continued management commitment to an effective information
security program will be essential to ensure that the
1Reportable conditions involve matters coming to the auditor's attention
that, in the auditor's judgment, should be communicated because they
represent significant deficiencies in the design or operation of internal
control and could adversely affect FDIC's ability to meet the control
objectives described in this report.
2During 2005 FDIC anticipates implementing a new, integrated financial
environment to support the financial management needs of the corporation.
Page 4 GAO-05-281 FDIC Funds' 2004 and 2003 Financial Statements
corporation's financial and sensitive information will be adequately
protected in this new environment.
We did not identify any reportable conditions during our 2004 audits.
However, we noted other less significant matters involving FDIC's internal
controls, including information system controls. We will be reporting
separately to FDIC management on these matters.
Compliance with Laws Our tests for compliance with selected provisions of
laws and regulations disclosed no instances of noncompliance that would be
reportable under
and Regulations U.S. generally accepted government auditing standards.
However, the objective of our audits was not to provide an opinion on
overall compliance with laws and regulations. Accordingly, we do not
express such an opinion.
Objectives, Scope, and Methodology
FDIC management is responsible for (1) preparing the annual financial
statements in conformity with U.S. generally accepted accounting
principles; (2) establishing, maintaining, and assessing internal control
to provide reasonable assurance that the broad control objectives of FMFIA
are met; and (3) complying with applicable laws and regulations.
We are responsible for obtaining reasonable assurance about whether (1)
the financial statements are presented fairly, in all material respects,
in conformity with U.S. generally accepted accounting principles; and (2)
management maintained effective internal control, the objectives of which
are the following:
o financial reporting-transactions are properly recorded, processed, and
summarized to permit the preparation of financial statements in conformity
with U.S. generally accepted accounting principles, and assets are
safeguarded against loss from unauthorized acquisition, use, or
disposition; and
o compliance with laws and regulations-transactions are executed in
accordance with laws and regulations that could have a direct and material
effect on the financial statements.
Page 5 GAO-05-281 FDIC Funds' 2004 and 2003 Financial Statements
We are also responsible for testing compliance with selected provisions of
laws and regulations that could have a direct and material effect on the
financial statements.
In order to fulfill these responsibilities, we
o examined, on a test basis, evidence supporting the amounts and
disclosures in the financial statements;
o assessed the accounting principles used and significant estimates made
by management;
o evaluated the overall presentation of the financial statements;
o obtained an understanding of internal control related to financial
reporting (including safeguarding assets) and compliance with laws and
regulations;
o tested relevant internal controls over financial reporting and
compliance, and evaluated the design and operating effectiveness of
internal control;
o considered FDIC's process for evaluating and reporting on internal
control based on criteria established by FMFIA; and
o tested compliance with laws and regulations, including selected
provisions of the Federal Deposit Insurance Act, as amended, and the Chief
Financial Officers Act of 1990.
We did not evaluate all internal controls relevant to operating objectives
as broadly defined by FMFIA, such as those controls relevant to preparing
statistical reports and ensuring efficient operations. We limited our
internal control testing to controls over financial reporting and
compliance. Because of inherent limitations in internal control,
misstatements due to error or fraud, losses, or noncompliance may
nevertheless occur and not be detected. We also caution that projecting
our evaluation to future periods is subject to the risk that controls may
become inadequate because of changes in conditions or that the degree of
compliance with controls may deteriorate.
We did not test compliance with all laws and regulations applicable to
FDIC. We limited our tests of compliance to those laws and regulations
Page 6 GAO-05-281 FDIC Funds' 2004 and 2003 Financial Statements
that could have a direct and material effect on the financial statements
for the year ended December 31, 2004. We caution that noncompliance may
occur and not be detected by these tests and that such testing may not be
sufficient for other purposes.
We performed our work in accordance with U.S. generally accepted
government auditing standards.
FDIC Comments and Our Evaluation
In commenting on a draft of this report, FDIC's Chief Financial Officer
(CFO) was pleased to receive unqualified opinions on BIF's, SAIF's, and
FRF's 2004 and 2003 financial statements and to note that there were no
material weaknesses identified during the 2004 audits. FDIC's CFO also
stated that FDIC management is committed to ensuring the continued success
of an effective and strong information security program. The CFO said FDIC
will remain focused on accomplishing the work needed to face the new
security challenges in the coming year. The complete text of FDIC's
comments is reprinted in appendix I.
David M. Walker Comptroller General of the United States
January 31, 2005
Page 7 GAO-05-281 FDIC Funds' 2004 and 2003 Financial Statements
Bank Insurance Fund's Financial Statements
Balance Sheets
Page 8 GAO-05-281 FDIC Funds' 2004 and 2003 Financial Statements Bank Insurance
Fund's Financial Statements
Statements of Income and Fund Balance
Page 9 GAO-05-281 FDIC Funds' 2004 and 2003 Financial Statements Bank Insurance
Fund's Financial Statements
Statements of Cash Flows
Bank Insurance Fund's Financial Statements
Notes to the Financial Statements
1. Legislation and Operations of the Bank Insurance Fund
Overview
The Federal Deposit Insurance Corporation (FDIC) is the independent
deposit insurance agency created by Congress in 1933 to maintain stability
and public confidence in the nation's banking system. Provisions that
govern the operations of the FDIC are generally found in the Federal
Deposit Insurance (FDI) Act, as amended, (12 U.S.C. 1811, et seq). In
carrying out the purposes of the FDI Act, as amended, the FDIC insures the
deposits of banks and savings associations, and in cooperation with other
federal and state agencies promotes the safety and soundness of insured
depository institutions by identifying, monitoring and addressing risks to
the deposit insurance funds. The FDIC is the administrator of the Bank
Insurance Fund (BIF), the Savings Association Insurance Fund (SAIF), and
the FSLIC Resolution Fund (FRF), which are maintained separately to carry
out their respective mandates. The BIF and the SAIF are insurance funds
responsible for protecting insured bank and thrift depositors from loss
due to institution failures. These insurance funds must be maintained at
not less than 1.25 percent of estimated insured deposits or a higher
percentage as circumstances warrant. The FRF is a resolution fund
responsible for the sale of remaining assets and satisfaction of
liabilities associated with the former Federal Savings and Loan Insurance
Corporation (FSLIC) and the Resolution Trust Corporation.
An active institution's insurance fund membership and primary federal
supervisor are generally determined by the institution's charter type.
Deposits of BIF-member institutions are generally insured by the BIF; BIF
members are predominantly commercial and savings banks supervised by the
FDIC, the Office of the Comptroller of the Currency, or the Federal
Reserve Board. Deposits of SAIF-member institutions are generally insured
by the SAIF; SAIF members are predominantly thrifts supervised by the
Office of Thrift Supervision.
In addition to traditional banks and thrifts, several other categories of
institutions exist. A member of one insurance fund may, with the approval
of its primary federal supervisor, merge, consolidate with, or acquire the
deposit liabilities of an institution that is a member of the other
insurance fund without changing insurance fund status for the acquired
deposits. These institutions with deposits insured by both insurance funds
are referred to as Oakar financial institutions. In addition, SAIF-member
thrifts can convert to a bank charter and retain their SAIF membership.
These institutions are referred to as Sasser financial institutions.
Likewise, BIF-member banks can convert to a thrift charter and retain
their BIF membership.
Operations of the BIF
The primary purpose of the BIF is to: 1) insure the deposits and protect
the depositors of BIF-insured institutions and 2) resolve BIF-insured
failed institutions upon appointment of FDIC as receiver in a manner that
will result in the least possible cost to the BIF. In addition, the FDIC,
acting on behalf of the BIF, examines state-chartered banks that are not
members of the Federal Reserve System.
Page 11 GAO-05-281 FDIC Funds' 2004 and 2003 Financial Statements Bank Insurance
Fund's Financial Statements Bank Insurance Fund's Financial Statements Bank
Insurance Fund's Financial Statements Bank Insurance Fund's Financial Statements
Bank Insurance Fund's Financial Statements Bank Insurance Fund's Financial
Statements Bank Insurance Fund's Financial Statements
Bank Insurance Fund's Financial Statements
The accuracy of these estimates will largely depend on future economic and
market conditions. The FDIC's Board of Directors has the statutory
authority to consider the contingent liability from anticipated failures
of insured institutions when setting assessment rates.
Litigation Losses
The BIF records an estimated loss for unresolved legal cases to the extent
that those losses are considered probable and reasonably estimable. In
addition to the amount recorded as probable, the FDIC has determined that
losses from unresolved legal cases totaling $51.5 million are reasonably
possible.
Other Contingencies
Representations and Warranties
As part of the FDIC's efforts to maximize the return from the sale of
assets
from bank resolutions, representations and warranties, and guarantees are
offered on certain loan sales. In general, the guarantees,
representations,
and warranties on loans sold relate to the completeness and accuracy of
loan
documentation, the quality of the underwriting standards used, the
accuracy
of the delinquency status when sold, and the conformity of the loans with
characteristics of the pool in which they were sold. The total amount of
loans
sold subject to unexpired representations and warranties, and guarantees
was
$3.8 billion as of December 31, 2004. There were no contingent liabilities
from
any of the outstanding claims asserted in connection with representations
and
warranties at December 31, 2004 and 2003, respectively.
In addition, future losses on representations and warranties, and
guarantees could be incurred over the remaining life of the loans sold,
which is generally 20 years or more. Consequently, the FDIC believes it is
possible that additional losses may be incurred by the BIF from the
universe of outstanding contracts with unasserted representation and
warranty claims. However, because of the uncertainties surrounding the
timing of when claims may be asserted, the FDIC is unable to reasonably
estimate a range of loss to the BIF from outstanding contracts with
unasserted representation and warranty claims.
7. Assessments
In compliance with provisions of the FDI Act, as amended, the FDIC uses a
riskbased assessment system that charges higher rates to those
institutions that pose greater risks to the BIF. To arrive at a risk-based
assessment for a particular institution, the FDIC places each institution
in one of nine risk categories based on capital ratios and supervisory
examination data. The majority of the financial institutions are not
assessed. Of those assessed, the assessment rate averaged approximately 22
cents and 20 cents per $100 of assessable deposits for 2004 and 2003,
respectively. During 2004 and 2003, $95 million and $80 million were
recognized as assessment income from BIF-member institutions,
respectively.
Page 19 GAO-05-281 FDIC Funds' 2004 and 2003 Financial Statements
Bank Insurance Fund's Financial Statements Bank Insurance Fund's Financial
Statements Bank Insurance Fund's Financial Statements Bank Insurance Fund's
Financial Statements Bank Insurance Fund's Financial Statements
Savings Association Insurance Fund's Financial Statements
Balance Sheets
Savings Association Insurance Fund's Financial Statements
Statements of Income and Fund Balance
Savings Association Insurance Fund's Financial Statements
Statements of Cash Flows
Savings Association Insurance Fund's Financial Statements
Notes to the Financial Statements
1. Legislation and Operations of the Savings Association Insurance Fund
Overview
The Federal Deposit Insurance Corporation (FDIC) is the independent
deposit insurance agency created by Congress in 1933 to maintain stability
and public confidence in the nation's banking system. Provisions that
govern the operations of the FDIC are generally found in the Federal
Deposit Insurance (FDI) Act, as amended, (12 U.S.C. 1811, et seq). In
carrying out the purposes of the FDI Act, as amended, the FDIC insures the
deposits of banks and savings associations, and in cooperation with other
federal and state agencies promotes the safety and soundness of insured
depository institutions by identifying, monitoring and addressing risks to
the deposit insurance funds. FDIC is the administrator of the Savings
Association Insurance Fund (SAIF), the Bank Insurance Fund (BIF), and the
FSLIC Resolution Fund (FRF), which are maintained separately to carry out
their respective mandates. The SAIF and the BIF are insurance funds
responsible for protecting insured thrift and bank depositors from loss
due to institution failures. These insurance funds must be maintained at
not less than 1.25 percent of estimated insured deposits or a higher
percentage as circumstances warrant. The FRF is a resolution fund
responsible for the sale of remaining assets and satisfaction of
liabilities associated with the former Federal Savings and Loan Insurance
Corporation (FSLIC) and the Resolution Trust Corporation.
An active institution's insurance fund membership and primary federal
supervisor are generally determined by the institution's charter type.
Deposits of SAIF-member institutions are generally insured by the SAIF;
SAIF members are predominantly thrifts supervised by the Office of Thrift
Supervision (OTS). Deposits of BIF-member institutions are generally
insured by the BIF; BIF members are predominantly commercial and savings
banks supervised by the FDIC, the Office of the Comptroller of the
Currency, or the Federal Reserve Board.
In addition to traditional thrifts and banks, several other categories of
institutions exist. A member of one insurance fund may, with the approval
of its primary federal supervisor, merge, consolidate with, or acquire the
deposit liabilities of an institution that is a member of the other
insurance fund without changing insurance fund status for the acquired
deposits. These institutions with deposits insured by both insurance funds
are referred to as Oakar financial institutions. In addition, SAIF-member
thrifts can convert to a bank charter and retain their SAIF membership.
These institutions are referred to as Sasser financial institutions.
Likewise, BIF-member banks can convert to a thrift charter and retain
their BIF membership.
Operations of the SAIF
The primary purpose of the SAIF is to: 1) insure the deposits and protect
the depositors of SAIF-insured institutions and 2) resolve SAIF-insured
failed institutions upon appointment of FDIC as receiver in a manner that
will result in the least possible cost to the SAIF.
Page 28 GAO-05-281 FDIC Funds' 2004 and 2003 Financial Statements
Savings Association Insurance Fund's Financial Statements
Savings Association Insurance Fund's Financial Statements
Savings Association Insurance Fund's Financial Statements
Savings Association Insurance Fund's Financial Statements
Savings Association Insurance Fund's Financial Statements
Savings Association Insurance Fund's Financial Statements
Savings Association Insurance Fund's Financial Statements
Savings Association Insurance Fund's Financial Statements
Savings Association Insurance Fund's Financial Statements
Savings Association Insurance Fund's Financial Statements
the quality of the underwriting standards used, the accuracy of the
delinquency status when sold, and the conformity of the loans with
characteristics of the pool in which they were sold. The total amount of
loans sold subject to unexpired representations and warranties, and
guarantees was $4.7 billion as of December 31, 2004. SAIF did not
establish a liability for all outstanding claims asserted in connection
with representations and warranties because the receiverships have
sufficient funds to pay for such claims.
In addition, future losses on representations and warranties, and
guarantees could be incurred over the remaining life of the loans sold,
which is generally 20 years or more. Consequently, the FDIC believes it is
possible that additional losses may be incurred by the SAIF from the
universe of outstanding contracts with unasserted representation and
warranty claims. However, because of the uncertainties surrounding the
timing of when claims may be asserted, the FDIC is unable to reasonably
estimate a range of loss to the SAIF from outstanding contracts with
unasserted representation and warranty claims.
7. Assessments
In compliance with provisions of the FDI Act, as amended, the FDIC uses a
risk-based assessment system that charges higher rates to those
institutions that pose greater risks to the SAIF. To arrive at a
risk-based assessment for a particular institution, the FDIC places each
institution in one of nine risk categories based on capital ratios and
supervisory examination data. The majority of the financial institutions
are not assessed. Of those assessed, the assessment rate averaged
approximately 8 cents and 14 cents per $100 of assessable deposits for
2004 and 2003, respectively. During 2004 and 2003, $9 million and $15
million were recognized as assessment income from SAIF-member
institutions, respectively. On November 15, 2004, the Board voted to
retain the SAIF assessment schedule at the annual rate of 0 to 27 cents
per $100 of assessable deposits for the first semiannual period of 2005.
The Board reviews assessment rates semiannually to ensure that funds are
available to satisfy the SAIF's obligations. If necessary, the Board may
impose more frequent rate adjustments or emergency special assessments.
The FDIC is required to maintain the insurance funds at a designated
reserve ratio (DRR) of not less than 1.25 percent of estimated insured
deposits (or a higher percentage as circumstances warrant). If the reserve
ratio falls below the DRR, the FDIC is required to set semiannual
assessment rates that are sufficient to increase the reserve ratio to the
DRR not later than one year after such rates are set, or in accordance
with a recapitalization schedule of fifteen years or less. As of September
30, 2004, the SAIF reserve ratio was 1.33 percent of estimated insured
deposits.
Assessments are also levied on institutions for payments of the interest
on obligations issued by the Financing Corporation (FICO). The FICO was
established as a mixed-ownership government corporation to function solely
as a financing vehicle for the FSLIC. The annual FICO interest obligation
of approximately $790 million is paid on a pro rata basis using the same
rate for banks and thrifts. The FICO assessment has no financial impact on
the SAIF and is separate from
Page 38 GAO-05-281 FDIC Funds' 2004 and 2003 Financial Statements
Savings Association Insurance Fund's Financial Statements
Savings Association Insurance Fund's Financial Statements
Savings Association Insurance Fund's Financial Statements
Savings Association Insurance Fund's Financial Statements
Savings Association Insurance Fund's Financial Statements
FSLIC Resolution Fund's Financial Statements;
Balance Sheets
FSLIC Resolution Fund's Financial Statements
Statements of Income and Accumulated Deficit
FSLIC Resolution Fund's Financial Statements
Statements of Cash Flows
FSLIC Resolution Fund's Financial Statements
Notes to the Financial Statements
1. Legislative History and Operations/Dissolution of the FSLIC Resolution
Fund
Legislative History
The Federal Deposit Insurance Corporation (FDIC) is the independent
deposit
insurance agency created by Congress in 1933 to maintain stability and
public
confidence in the nation's banking system. Provisions that govern the
operations
of the FDIC are generally found in the Federal Deposit Insurance (FDI)
Act, as
amended, (12 U.S.C. 1811, et seq). In carrying out the purposes of the FDI
Act,
as amended, the FDIC insures the deposits of banks and savings
associations,
and in cooperation with other federal and state agencies promotes the
safety
and soundness of insured depository institutions by identifying,
monitoring
and addressing risks to the deposit insurance funds established in the FDI
Act,
as amended. In addition, FDIC is charged with responsibility for the sale
of
remaining assets and satisfaction of liabilities associated with the
former
Federal Savings and Loan Insurance Corporation (FSLIC) and the Resolution
Trust Corporation (RTC).
The U.S. Congress created the FSLIC through the enactment of the National
Housing Act of 1934. The Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA) abolished the insolvent FSLIC, created
the FSLIC Resolution Fund (FRF), and transferred the assets and
liabilities
of the FSLIC to the FRF-except those assets and liabilities transferred to
the
RTC-effective on August 9, 1989.
The FIRREA was enacted to reform, recapitalize, and consolidate the
federal
deposit insurance system. In addition to the FRF, FIRREA created the Bank
Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF).
It also designated the FDIC as the administrator of these funds. All three
funds are maintained separately to carry out their respective mandates.
The FIRREA created the RTC to manage and resolve all thrifts previously
insured by the FSLIC for which a conservator or receiver was appointed
during
the period January 1, 1989, through August 8, 1992. Resolution
responsibility
was subsequently extended and ultimately transferred from the RTC to the
SAIF
on July 1, 1995. The FIRREA established the Resolution Funding Corporation
(REFCORP) to provide part of the initial funds used by the RTC for thrift
resolutions.
The RTC Completion Act of 1993 (RTC Completion Act) terminated the RTC
as of December 31, 1995. All remaining assets and liabilities of the RTC
were
transferred to the FRF on January 1,1996. Today, the FRF consists of two
distinct
pools of assets and liabilities: one composed of the assets and
liabilities of the
FSLIC transferred to the FRF upon the dissolution of the FSLIC
(FRF-FSLIC),
and the other composed of the RTC assets and liabilities (FRF-RTC). The
assets
of one pool are not available to satisfy obligations of the other.
Page 47 GAO-05-281 FDIC Funds' 2004 and 2003 Financial Statements
FSLIC Resolution Fund's Financial Statements
FSLIC Resolution Fund's Financial Statements
Use of Estimates
Management makes estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from these estimates. Where it is reasonably possible
that changes in estimates will cause a material change in the financial
statements in the near term, the nature and extent of such changes in
estimates have been disclosed. The more significant estimates include
allowance for losses on receivables from thrift resolutions and the
estimated losses for litigation.
Fair Value of Financial Instruments
Cash equivalents, which consist of Special U.S. Treasury Certificates, are
shortterm, highly liquid investments with original maturities of three
months or less and are shown at fair value. The carrying amount of
short-term receivables and accounts payable and other liabilities
approximates their fair market value, due to their short maturities.
The investment in securitization-related assets acquired from
receiverships consists of credit enhancement reserves. The credit
enhancement reserves, which resulted from swap transactions, are valued by
performing projected cash flow analyses using market-based assumptions
(see Note 3).
The net receivable from thrift resolutions is influenced by the underlying
valuation of receivership assets. This corporate receivable is unique and
the estimate presented is not indicative of the amount that could be
realized in a sale to the private sector. Such a sale would require
indeterminate, but substantial, discounts for an interested party to
profit from these assets because of credit and other risks. Consequently,
it is not practicable to estimate its fair market value.
Cost Allocations Among Funds
Operating expenses not directly charged to the FRF, the BIF, and the SAIF
are allocated to all funds using workload-based allocation percentages.
These percentages are developed during the annual corporate planning
process and through supplemental functional analyses.
Disclosure about Recent Accounting Pronouncements
Recent accounting pronouncements have been adopted or deemed to be not
applicable to the financial statements as presented.
Related Parties
The nature of related parties and a description of related party
transactions are discussed in Note 1 and disclosed throughout the
financial statements and footnotes.
Page 49 GAO-05-281 FDIC Funds' 2004 and 2003 Financial Statements
FSLIC Resolution Fund's Financial Statements
FSLIC Resolution Fund's Financial Statements
FSLIC Resolution Fund's Financial Statements
FSLIC Resolution Fund's Financial Statements
tax-exempt reimbursement. A provision in the Omnibus Budget Reconciliation
Act of 1993 (popularly referred to as the "Guarini legislation")
eliminated the tax deductions for these losses.
Eight "Guarini" cases were filed seeking damages. Two "Guarini" cases have
concluded. In one, no damages were awarded and the second was settled for
$20,000. The U. S. Court of Federal Claims has entered judgments for the
plaintiffs in five of the remaining cases aggregating approximately $180
million. One judgment for $28.1 million has been affirmed by a panel of
the U.S. Court of Appeals for the Federal Circuit, but is not yet final.
Three cases are on appeal, and one will likely be appealed. One case is
still pending in the U. S. Court of Federal Claims and seeks damages in
the approximate amount of $247 million.
The FDIC believes that it is possible that substantial amounts may be paid
from the FRF-FSLIC as a result of the judgments and settlements from the
"Guarini litigation." However, because the litigation of damages
computation is still ongoing, the amount of the damages is not estimable
at this time.
Representations and Warranties
As part of the RTC's efforts to maximize the return from the sale of
assets from
thrift resolutions, representations and warranties, and guarantees were
offered
on certain loan sales. The majority of loans subject to these agreements
have
most likely been paid off or refinanced due to the current interest rate
climate
or the period for filing claims has expired. However, there is no
reporting
mechanism to determine the aggregate amount of remaining loans. Therefore,
the FDIC is unable to provide an estimate of maximum exposure to the FRF.
Based on the above and our history of claims processed, the FDIC believes
that
any future representation and warranty liability to the FRF would be
minimal.
5. Provision for Losses
The provision for losses was a negative $7 million and a negative $33
million
for 2004 and 2003, respectively. In 2004 and 2003, the negative provision
was primarily due to lower estimated losses for assets in liquidation.
6. Resolution Equity
As stated in the Legislative History section of Note 1, the FRF is
comprised of two distinct pools: the FRF-FSLIC and the FRF-RTC. The
FRF-FSLIC consists of the assets and liabilities of the former FSLIC. The
FRF-RTC consists of the assets and liabilities of the former RTC. Pursuant
to legal restrictions, the two pools are maintained separately and the
assets of one pool are not available to satisfy obligations of the other.
The following table shows the contributed capital, accumulated deficit,
and resulting resolution equity for each pool.
Page 53 GAO-05-281 FDIC Funds' 2004 and 2003 Financial Statements
FSLIC Resolution Fund's Financial Statements
FSLIC Resolution Fund's Financial Statements
7. Employee Benefits
Pension Benefits
Eligible FDIC employees (permanent and term employees with appointments
exceeding one year) are covered by the federal government retirement
plans, either the Civil Service Retirement System (CSRS) or the Federal
Employees Retirement System (FERS). Although the FRF contributes a portion
of pension benefits for eligible employees, it does not account for the
assets of either retirement system. The FRF also does not have actuarial
data for accumulated plan benefits or the unfunded liability relative to
eligible employees. These amounts are reported on and accounted for by the
U.S.Office of Personnel Management.
The FRF's pro rata share of pension-related expenses was $2.8 million and
$2.2 million, as of December 31, 2004 and 2003, respectively.
Postretirement Benefits Other Than Pensions
Beginning in 2003, the FRF no longer recorded a liability for the
postretirement benefits of life and dental insurance as a result of FDIC's
change in funding policy for these benefits and elimination of the
separate entity. In implementing this change, management decided not to
allocate either the plan assets or the revised net accumulated
postretirement benefit obligation (a long-term liability) to FRF due to
the expected dissolution of the Fund in the short-term. However, FRF does
continue to pay its proportionate share of the yearly claim expenses
associated with these benefits.
Page 55 GAO-05-281 FDIC Funds' 2004 and 2003 Financial Statements
Appendix I
Comments from the Federal Deposit Insurance Corporation
Appendix II
GAO Contacts and Staff Acknowledgments
GAO Contacts Steven J. Sebastian, (202) 512-3406 Julia B. Duquette, (202)
512-5131
Acknowledgments In addition to those named above, the following staff made
key contributions to this report: Edward R. Alexander Jr., Gerald L.
Barnes, Ronald A. Bergman, Teressa M. Broadie-Gardner, Sharon O. Byrd,
Mark J. Canter, Jason A. Carroll, Lon C. Chin, Gary P. Chupka, Debra M.
Conner, John C. Craig, Anh Dang, Kristi C. Dorsey, Danielle T. Free,
Edward M. Glagola Jr., Rosanna Guerrero, David B. Hayes, David W. Irvin,
Wing Y. Lam, Harold E. Lewis, Leena A. Mathew, Kevin C. Metcalfe, Timothy
J. Murray, Duc M. Ngo, Eugene E. Stevens, Charles M. Vrabel, Christopher
J. Warweg, LaShawnda K. Wilson, and Gregory J. Ziombra.
Paul S. Johnston from the FDIC Office of Inspector General also
contributed to this report.
(196016) Page 57 GAO-05-281 FDIC Funds' 2004 and 2003 Financial Statements
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