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2000 Annual Report

Financial Statements

Bank Insurance Fund

Federal Deposit Insurance Corporation

Bank Insurance Fund Statements of Financial Position at December 31
Dollars in Thousands
empty cell 2000 1999
Cash and cash equivalents $156,396 $164,455
Investment in U.S. Treasury obligations, net: (Note 3)
Held-to-maturity securities 22,510,892 23,949,655
Available-for-sale securities 7,421,597 4,288,410
Interest receivable on investments and other assets, net 552,671 467,070
Receivables from bank resolutions, net (Note 4) 349,589 743,011
Assets acquired from assisted banks and terminated receiverships, net (Note 5) 11,727 20,750
Property and equipment, net (Note 6) 303,438 260,040
Total Assets $31,306,310 $29,893,391
Liabilities
Accounts payable and other liabilities $165,972 $148,821
Contingent liabilities for: (Note 7)
Anticipated failure of insured institutions 141,355 307,000
Assistance agreements 234 10,910
Litigation losses 21,922 10,000
Asset securitization guarantees 1,605 2,477
Total Liabilities 331,088 479,208
Commitments and off-balance-sheet exposure (Note 12)
Fund Balance
Accumulated net income 30,755,569 29,494,950
Unrealized gain/(loss) on available-for-sale securities, net (Note 3) 219,653 (80,767)
Total Fund Balance 30,975,222 29,414,183
Total Liabilities and Fund Balance $31,306,310 $29,893,391
The accompanying notes are an integral part of these financial statements.


Bank Insurance Fund Statements of Income and Fund Balance for the Years Ended
December 31
Dollars in Thousands
  2000 1999
Interest on U.S. Treasury obligations $1,827,404 $1,733,603
Assessments (Note 8) 45,091 33,333
Interest on advances and subrogated claims 7,616 20,626
Revenue from assets acquired from assisted banks and terminated receiverships 10,077 11,484
Other revenue 15,676 16,556
Total Revenue 1,905,864 1,815,602
Expenses and Losses
Operating expenses 772,918 730,394
Provision for insurance losses (Note 9) (152,962) 1,168,749
Expenses for assets acquired from assisted banks and terminated receiverships 16,659 18,778
Interest and other insurance expenses 8,630 4,126
Total Expenses and Losses 645,245 1,922,047
Net Income (Loss) 1,260,619 (106,445)
Unrealized gain/(loss) on available-for-sale securities, net
(Note 3)
300,420 (91,682)
Comprehensive Income (Loss) 1,561,039 (198,127)
Fund Balance - Beginning 29,414,183 29,612,310
Fund Balance - Ending $30,975,222 $29,414,183
The accompanying notes are an integral part of these financial statements.


Bank Insurance Fund Statements of Cash Flows for the Years Ended December 31
Dollars in Thousands
  2000 1999
Cash provided by:
Interest on U.S. Treasury obligations $1,775,552 $1,848,536
Recoveries from bank resolutions 755,936 426,348
Recoveries on conversion of benefit plan 0 175,720
Recoveries from assets acquired from assisted banks and terminated receiverships 45,070 46,390
Assessments 48,518 34,692
Miscellaneous receipts 13,279 19,029
Cash used by:
Operating expenses (742,733) (722,096)
Disbursements for bank resolutions (388,276) (1,333,622)
Disbursements for assets acquired from assisted banks and terminated receiverships (22,994) (27,756)
Miscellaneous disbursements (1,974) (7,542)
Net Cash Provided by Operating Activities (Note 15) 1,482,378 459,699
Cash Flows From Investing Activities
Cash provided by:
Maturity of U.S. Treasury obligations, held-to-maturity 2,560,000 2,120,000
Maturity and sale of U.S. Treasury obligations, available-for-sale 430,000 1,060,000
Cash used by:
Purchase of property and equipment (60,761) (70,886)
Purchase of U.S. Treasury obligations, held-to-maturity (1,239,157) (1,596,859)
Purchase of U.S. Treasury obligations, available-for-sale (3,180,519) (3,925,143)
Net Cash Used by Investing Activities (1,490,437) (2,412,888)
Net Decrease in Cash and Cash Equivalents (8,059) (1,953,189)
Cash and Cash Equivalents - Beginning 164,455 2,117,644
Cash and Cash Equivalents - Ending $156,396 $164,455
The accompanying notes are an integral part of these financial statements.


NOTES TO THE FINANCIAL STATEMENTS
December 31, 2000 and 1999

1. Legislative History and Operations of the Bank Insurance Fund
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Legislative History
The U.S. Congress created the Federal Deposit Insurance Corporation (FDIC) through enactment of the Banking Act of 1933. The FDIC was created to restore and maintain public confidence in the nation's banking system.

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) was enacted to reform, recapitalize, and consolidate the federal deposit insurance system. The FIRREA created the Bank Insurance Fund (BIF), the Savings Association Insurance Fund (SAIF), and the FSLIC Resolution Fund (FRF). It also designated the FDIC as the administrator of these funds. All three funds 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. The FRF is a resolution fund responsible for winding up the affairs of the former Federal Savings and Loan Insurance Corporation (FSLIC) and liquidating the assets and liabilities transferred from the former Resolution Trust Corporation (RTC).

Pursuant to FIRREA, 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. The Federal Deposit Insurance Act (FDI Act), Section 5(d)(3), provides that 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. The FDI Act, Section 5(d)(2)(G), allows SAIF-member thrifts to convert to a bank charter and retain their SAIF membership. These institutions are referred to as Sasser financial institutions. The Home Owners’ Loan Act (HOLA), Section 5(o), allows BIF-member banks to convert to a thrift charter and retain their BIF membership. These institutions are referred to as HOLA thrifts.

Other Significant Legislation
The Competitive Equality Banking Act of 1987 established the Financing Corporation (FICO) as a mixed-ownership government corporation whose sole purpose was to function as a financing vehicle for the FSLIC.

The Omnibus Budget Reconciliation Act of 1990 (1990 OBR Act) and the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) made changes to the FDIC's assessment authority (see Note 8) and borrowing authority. The FDICIA also requires the FDIC to: 1) resolve failing institutions in a manner that will result in the least possible cost to the deposit insurance funds and 2) maintain the insurance funds at 1.25 percent of insured deposits or a higher percentage as circumstances warrant.

The Deposit Insurance Funds Act of 1996 (DIFA) was enacted to provide for: 1) the capitalization of the SAIF to its designated reserve ratio (DRR) of 1.25 percent by means of a one-time special assessment on SAIF-insured deposits; 2) the expansion of the assessment base for payments of the interest on obligations issued by the FICO to include all FDIC-insured banks and thrifts; 3) beginning January 1, 1997, the imposition of a FICO assessment rate on BIF-assessable deposits that is one-fifth of the rate for SAIF-assessable deposits through the earlier of December 31, 1999, or the date on which the last savings association ceases to exist; 4) the payment of the annual FICO interest obligation of approximately $790 million on a pro rata basis between banks and thrifts on the earlier of January 1, 2000, or the date on which the last savings association ceases to exist; 5) authorization of BIF assessments only if needed to maintain the fund at the DRR; 6) the refund of amounts in the BIF in excess of the DRR with such refund not to exceed the previous semiannual assessment; 7) assessment rates for SAIF members not lower than the assessment rates for BIF members with comparable risk; and 8) the merger of the BIF and the SAIF on January 1, 1999, if no insured depository institution is a savings association on that date. Congress did not enact legislation to either merge the BIF and the SAIF or to eliminate the thrift charter.

The Gramm-Leach-Bliley Act (GLBA), was enacted on November 12, 1999, in order to modernize the financial services industry (banks, brokerages, insurers, and other financial services providers). The GLBA lifts restrictions on affiliations among banks, securities firms, and insurance companies. It also expands the financial activities permissible for financial holding companies and insured depository institutions, their affiliates and subsidiaries.

Recent Legislative Initiatives
Congress continues to focus on legislative proposals that would affect the deposit insurance funds. The FDIC has proposed an initiative to reform the deposit insurance system. Some of the proposals, such as deposit insurance pricing and determining deposit insurance levels, may have a significant impact on the BIF and the SAIF, if enacted into law. However, these proposals continue to vary and FDIC management cannot predict which provisions, if any, will ultimately be enacted.

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 failed institutions, including managing and liquidating their assets. In addition, the FDIC, acting on behalf of the BIF, examines state-chartered banks that are not members of the Federal Reserve System. Further, the FDIC can also provide assistance to failing banks and monitor compliance with assistance agreements.

The BIF is primarily funded from interest earned on investments in U.S. Treasury obligations and BIF assessment premiums. Additional funding sources are U.S. Treasury and Federal Financing Bank (FFB) borrowings, if necessary. The 1990 OBR Act established the FDIC's authority to borrow working capital from the FFB on behalf of the BIF and the SAIF. The FDICIA increased the FDIC's authority to borrow for insurance losses from the U.S. Treasury, on behalf of the BIF and the SAIF, from $5 billion to $30 billion.

The FDICIA also established a limitation on obligations that can be incurred by the BIF, known as the maximum obligation limitation (MOL). As of December 31, 2000 and December 31, 1999, the MOL for the BIF was $53.2 billion and $51.8 billion, respectively.

Receivership Operations
The FDIC is responsible for managing and disposing of the assets of failed institutions in an orderly and efficient manner. The assets held by receivership entities, and the claims against them, are accounted for separately from BIF assets and liabilities to ensure that liquidation proceeds are distributed in accordance with applicable laws and regulations. Also, the income and expenses attributable to receiverships are accounted for as transactions of those receiverships. Liquidation expenses paid by the BIF on behalf of the receiverships are recovered from those receiverships.

 

2. Summary of Significant Accounting Policies line

General
These financial statements pertain to the financial position, results of operations, and cash flows of the BIF and are presented in accordance with generally accepted accounting principles (GAAP). These statements do not include reporting for assets and liabilities of closed banks for which the FDIC acts as receiver or liquidating agent. Periodic and final accountability reports of the FDIC's activities as receiver or liquidating agent are furnished to courts, supervisory authorities, and others as required.

Use of Estimates
FDIC 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.

Cash Equivalents
Cash equivalents are short-term, highly liquid investments with original maturities of three months or less. Cash equivalents consist primarily of Special U.S. Treasury Certificates.

Investments in U.S. Treasury Obligations
Investments in U.S. Treasury obligations are recorded pursuant to the Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that securities be classified in one of three categories: held-to-maturity, available-for-sale, or trading. The BIF does not designate any securities as trading. Securities designated as held-to-maturity are shown at amortized cost. Amortized cost is the face value of securities plus the unamortized premium or less the unamortized discount. Amortizations are computed on a daily basis from the date of acquisition to the date of maturity. Securities designated as available-for-sale are shown at market value, which approximates fair value. Unrealized gains and losses are included in Comprehensive Income. Realized gains and losses are included in the Statements of Income and Fund Balance as components of Net Income. Interest on both types of securities is calculated on a daily basis and recorded monthly using the effective interest method.

Allowance for Losses on Receivables From Bank Resolutions and Assets Acquired from Assisted Banks and Terminated Receiverships
The BIF records a receivable for the amounts advanced and/or obligations incurred for resolving failing and failed banks. The BIF also records as an asset the amounts paid for assets acquired from assisted banks and terminated receiverships. Any related allowance for loss represents the difference between the funds advanced and/or obligations incurred and the expected repayment. The latter is based on estimates of discounted cash recoveries from the assets of assisted or failed banks, net of all applicable estimated liquidation costs.

Cost Allocations Among Funds
Operating expenses not directly charged to the funds are allocated to all funds administered by the FDIC using workload-based-allocation percentages. These percentages are developed during the annual corporate planning process and through supplemental functional analyses.

Postretirement Benefits Other Than Pensions
The FDIC established an entity to provide the accounting and administration of postretirement benefits on behalf of the BIF, the SAIF, and the FRF. Each fund has fully paid its liability for these benefits directly to the entity. The BIF’s prepaid or accrued postretirement benefit cost is presented in the BIF’s Statements of Financial Position.

Disclosure About Recent Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS No. 133," was issued in June 2000. For entities that adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" prior to June 15, 2000, Statement 138 is effective for all fiscal quarters beginning after June 15, 2000. SFAS No. 138 amends Statement 133 principally for certain issues relating to hedging transactions. The adoption of these statements has no material quantitative or qualitative impact on the BIF’s Statements of Financial Position, Income and Fund Balance, and Cash Flows.

In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities; a replacement of SFAS No. 125." This statement applies to securitization transactions where the transferor has continuing involvement with the transferred assets or the transferee. SFAS No. 140 is effective for transfers occurring after March 31, 2001. However, disclosure requirements for existing securitizations are effective for fiscal years ending after December 15, 2000. BIF’s disclosures for its securitization transactions, which conform to the SFAS No. 140 requirements, are discussed in Notes 7 and 12.

Other recent accounting pronouncements were evaluated and deemed to be not applicable to the financial statements.

Depreciation
The FDIC has designated the BIF as administrator of property and equipment used in its operations. Consequently, the BIF includes the cost of these assets in its financial statements and provides the necessary funding for them. The BIF charges the other funds usage fees representing an allocated share of its annual depreciation expense. These usage fees are recorded as cost recoveries, which reduce operating expenses.

The Washington, D.C. office buildings and the L. William Seidman Center in Arlington, Virginia, are depreciated on a straight-line basis over a 50-year estimated life. The San Francisco condominium offices are depreciated on a straight-line basis over a 35-year estimated life. Leasehold improvements are capitalized and depreciated over the lesser of the remaining life of the lease or the estimated useful life of the improvements, if determined to be material. Capital assets depreciated on a straight-line basis over a five-year estimated life include mainframe equipment; furniture, fixtures, and general equipment; and internal-use software. Personal computer equipment is depreciated on a straight-line basis over a three-year estimated life.

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.

 

3. Investment in U.S. Treasury Obligations, Net
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Cash received by the BIF is invested in non-marketable Government Account Series (GAS) market-based U.S. Treasury securities with maturities exceeding three months. As of December 31, 2000 and December 31, 1999, the book value of investments in U.S. Treasury Obligations, net, was $29.9 billion and $28.2 billion, respectively. The book value is computed by adding the amortized cost of the held-to-maturity securities to the market value of the available-for-sale securities. In 2000, the FDIC purchased $1.3 billion of Treasury inflation-indexed securities (TIIS) for the BIF. These securities are indexed to increases or decreases in the Consumer Price Index (CPI).

U.S. Treasury Obligations at December 31, 2000
Dollars in Thousands
Maturity Yield at Purchase a Face Value Amortized Cost Unrealized Holding Gains Unrealized Holding Losses Market Value
Held-to-Maturity
Less than one year 5.69% $3,020,000 b $3,024,645 $6,851 $(598) $3,030,898
1-3 years 6.19% 5,965,000 6,178,310 104,475 0 6,282,785
3-5 years 6.59% 4,955,000 5,020,380 264,712 (169) 5,284,923
5-10 years 5.64% 8,068,506 8,287,557 266,541 (26,826) 8,527,272
Total empty cell $22,008,506 $22,510,892 $642,579 $(27,593) $23,125,878
Available-for-Sale
Less than
one year
5.59% $775,000 $776,417 $194 $(1,053) $775,558
1-3 years 6.40% 1,315,000 1,294,613 28,692 0 1,323,305
3-5 years 6.30% 960,000 981,289 39,830 0 1,021,119
5-10 years 4.80% 4,254,527 4,149,625 151,990 0 4,301,615
Total empty cell $7,304,527 $7,201,944 $220,706 $(1,053) $7,421,597
Total Investment in U.S. Treasury Obligations, Net
Total empty cell $29,313,033 $29,712,836 $863,285 $(28,646) $30,547,475
a. For Treasury inflation-indexed securities (TIIS), the yields in the above table include their real yields at purchase, not their effective yields. Effective yields on TIIS include a weighted average of Bloomberg's calculation of yield with an inflation assumption. The inflation assumption of 3.4% was the latest year-over-year increase in the Consumer Price Index (CPI) on November 30, 2000. These effective yields are 7.15% and 7.51% for TIIS classified as held-to-maturity and available-for-sale, respectively.

b. Includes one Treasury note totaling $200 million which matured on Sunday, December 31, 2000. Settlement occured on the next business day, January 2, 2001.


U.S. Treasury Obligations at December 31, 1999
Dollars in Thousands
Maturity Yield at Purchase a Face
Value
Amortized Cost Unrealized Holding Gains Unrealized Holding Losses Market
Value
Less than one year 6.02% $2,560,000 $2,561,679 $3,087 $(2,468) $2,562,298
1-3 years 6.06% 6,540,000 6,669,580 7,233 (32,331) 6,644,482
3-5 years 6.45% 4,805,000 5,052,441 18,300 (17,217) 5,053,524
5-10 years 5.88% 9,439,053 9,665,955 58,403 (374,526) 9,349,832
Total empty cell $23,344,053 $23,949,655 $87,023 $(426,542) $23,610,136
Available-for-Sale
Less than
one year
5.62% $430,000 $431,206 $48 $(94) $431,160
1-3 years 5.36% 625,000 631,662 0 (7,001) 624,661
3-5 years 6.00% 445,000 454,254 0 (6,391) 447,863
5-10 years 5.15% 2,977,452 2,852,055 0 (67,329) 2,784,726
Total empty cell $4,477,452 $4,369,177 $48 $(80,815) $4,288,410
Total Investment in U.S. Treasury Obligations, Net
Total empty cell $27,821,505 $28,318,832 $87,071 $(507,357) $27,898,546
a. For Treasury inflation-indexed securities (TIIS), the yields in the above table include their real yields at purchase, not their effective yields. Effective yields on TIIS include a weighted average of Bloomberg's calculation of yield with an inflation assumption. The inflation assumption of 2.6% was the latest year-over-year increase in the Consumer Price Index (CPI) on December 14, 1999. These effective yields are 6.44% and 6.70% for TIIS classified as held-to-maturity and available-for-sale, respectively.

As of December 31, 2000 and 1999, the unamortized premium, net of the unamortized discount, was $400 million and $497 million, respectively.



4. Receivables from Bank Resolutions, Net
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The bank resolution process takes different forms depending on the unique facts and circumstances surrounding each failing or failed institution. Payments for institutions that fail are made to cover obligations to insured depositors and represent claims by the BIF against the receiverships’ assets. There were six bank failures in 2000 and seven in 1999, with assets at failure of $378 million and $1.4 billion, respectively, and BIF outlays of $301.7 million and $1.2 billion, respectively.

Assets held by the FDIC in its receivership capacity for closed BIF-insured institutions are the main source of repayment of the BIF’s receivables from closed banks. As of December 31, 2000 and 1999, BIF receiverships held assets with a book value of $510.9 million and $1.9 billion, respectively (including cash and miscellaneous receivables of $337 million and $524 million at December 31, 2000 and 1999, respectively). The estimated cash recoveries from the management and disposition of these assets that are used to derive the allowance for losses are based in part on a statistical sampling of receivership assets. These estimated recoveries are regularly evaluated, but remain subject to uncertainties because of potential changes in economic conditions. These factors could cause the BIF's and other claimants’ actual recoveries to vary from the level currently estimated.

Receivables from Bank Resolutions, Net at December 31
Dollars in Thousands
  2000 1999
Assets from open bank assistance $1,240 $105,655
Allowance for losses (1,240) (4,196)
Net Assets From Open Bank Assistance 0 101,459
Receivables from closed banks 9,083,357 15,673,843
Allowance for losses (8,733,768) (15,032,291)
Net Receivables From Closed Banks 349,589 641,552
Total $349,589 $743,011



5. Assets Acquired from Assisted Banks and Terminated Receiverships, Net
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The BIF has acquired assets from certain troubled and failed banks by either purchasing an institution's assets outright or purchasing the assets under the terms specified in each resolution agreement. In addition, the BIF can purchase assets remaining in a receivership to facilitate termination. The methodology to estimate cash recoveries from these assets, which is used to derive the related allowance for losses, is similar to that for receivables from bank resolutions (see Note 4). The estimated cash recoveries are based upon a statistical sampling of the assets but only include expenses for the disposition of the assets to represent liquidating value.

The BIF recognizes revenue and expenses on these acquired assets. Revenue consists primarily of interest earned on assets in liquidation. Expenses are recognized for the disposition and administration of these assets.


Assets Acquired from Assisted Banks and Terminated Receiverships, Net at December 31
Dollars in Thousands
  2000 1999
Assets acquired from assisted banks and terminated receiverships $55,745 $105,136
Allowance for losses (44,018) (84,386)
Total $11,727 $20,750



6. Property and Equipment, Net
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Property and Equipment, Net at December 31
Dollars in Thousands
  2000 1999
Land $29,631 $29,631
Buildings 168,996 159,188
PC/LAN/WAN equipment 46,030 27,748
Application software 73,041 29,671
Mainframe equipment 7,370 5,569
Furniture, fixtures, and general equipment 19,972 10,596
Telephone equipment 3,357 1,771
Work in Progress - Application software 36,934 48,961
Accumulated depreciation (81,893) (53,095)
Total $303,438 $260,040

The depreciation expense was $28.8 million and $12.3 million for 2000 and 1999, respectively.


7. Contingent Liabilities for:
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Anticipated Failure of Insured Institutions
The BIF records a contingent liability and a loss provision for banks (including Oakar and Sasser financial institutions) that are likely to fail, absent some favorable event such as obtaining additional capital or merging, when the liability becomes probable and reasonably estimable.

The contingent liabilities for anticipated failure of insured institutions as of December 31, 2000 and 1999, were $141 million and $307 million, respectively. The contingent liability is derived in part from estimates of recoveries from the management and disposition of the assets of these probable bank failures. Therefore, these estimates are subject to the same uncertainties as those affecting the BIF's receivables from bank resolutions (see Note 4).

Several recent bank failures have involved some degree of fraud, which adds uncertainty to estimates of loss and recovery rates. These uncertainties, along with potential changes in economic conditions, could affect the ultimate cost to the BIF from probable failures.

There are other banks where the risk of failure is less certain, but still considered reasonably possible. Should these banks fail, the BIF could incur additional estimated losses ranging from $1 million to $639 million.

The accuracy of these estimates will largely depend on future economic conditions. The FDIC's Board of Directors (Board) has the statutory authority to consider the contingent liability for anticipated failures of insured institutions when setting assessment rates.

Assistance Agreements
The contingent liabilities for assistance agreements resulted from several large transactions where problem assets were purchased by an acquiring institution under an agreement that calls for the FDIC to pay losses incurred for indemnification and litigation.

Litigation Losses
The BIF records an estimated loss for unresolved legal cases to the extent 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 $75 million are reasonably possible.

In addition, two cases are currently pending in the U.S. Court of Federal Claims against the United States for actions taken by the FDIC in supervising two BIF-insured, state-chartered mutual savings banks. These two cases allege that the FDIC’s conduct in supervising these institutions breached agreements, which caused state regulators to close the institutions. The Court has not yet ruled on the question of whether any agreements were breached. However, should such a determination be made and the court award either damages or restitution, it is possible that the BIF would be responsible for payment of such an award. At this time, it is not possible to estimate a potential loss to the BIF from these two cases.

Asset Securitization Guarantees
As part of the FDIC’s efforts to maximize the return from the sale or disposition of assets from bank resolutions, the FDIC has securitized some receivership assets. To facilitate the securitizations, the BIF provided limited guarantees to cover certain losses on the securitized assets up to a specified maximum. In exchange for backing the limited guarantees, the BIF received assets from the receiverships in an amount equal to the expected exposure under the guarantees. At December 31, 2000 and 1999, the BIF had a contingent liability under the guarantees of $1.6 million and $2.5 million, respectively.

 

8. Assessments
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The 1990 OBR Act removed caps on assessment rate increases and authorized the FDIC to set assessment rates for BIF members semiannually, to be applied against a member's average assessment base. The FDICIA: 1) required the FDIC to implement a risk-based assessment system; 2) authorized the FDIC to increase assessment rates for BIF-member institutions as needed to ensure that funds are available to satisfy the BIF's obligations; 3) required the FDIC to build and maintain the reserves in the insurance funds to 1.25 percent of insured deposits; and 4) authorized the FDIC to increase assessment rates more frequently than semiannually and impose emergency special assessments as necessary to ensure that funds are available to repay U.S. Treasury borrowings.

The FDIC uses a risk-based 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, using a two-step process based first on capital ratios and then on other relevant information. The assessment rate averaged approximately 0.14 cents and 0.11 cents per $100 of assessable deposits for 2000 and 1999, respectively. On November 7, 2000, the Board voted to retain the BIF assessment schedule at the annual rate of 0 to 27 cents per $100 of assessable deposits for the first semiannual period of 2001. The Board reviews premium rates semiannually.

Since May 1995, the BIF has maintained a capitalization level at or higher than the DRR of 1.25 percent of insured deposits. As of December 31, 2000, the capitalization level for BIF is 1.35 percent of estimated insured deposits.

The DIFA (see Note 1) provided, among other things, for the elimination of the mandatory minimum assessment formerly provided for in the FDI Act. It also provided for the expansion of the assessment base for payments of the interest on obligations issued by the FICO to include all FDIC-insured institutions (including banks, thrifts, and Oakar and Sasser financial institutions). It also made the FICO assessment separate from regular assessments, effective on January 1, 1997.

BIF-insured banks began paying a FICO assessment on January 1, 1997. From January 1, 1997, through December 31, 1999, the FICO assessment rate on BIF-assessable deposits was one-fifth the rate for SAIF-assessable deposits. Beginning on January 1, 2000, the annual FICO interest obligations of approximately $790 million will be paid on a pro rata basis using the same rate for banks and thrifts.

The FICO assessment has no financial impact on the BIF. The FICO assessment is separate from the regular assessments and is imposed on banks and thrifts, not on the insurance funds. The FDIC, as administrator of the BIF and the SAIF, is acting solely as a collection agent for the FICO. During 2000 and 1999, $635 million and $364 million, respectively, was collected from banks and remitted to the FICO.

 

9. Provision for Insurance Losses
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Provision for insurance losses was negative $153 million for 2000 and $1.2 billion for 1999. The following chart lists the major components of the provision for insurance losses.

Provision for Insurance Losses for the Years Ended December 31
Dollars in Thousands
  2000 1999
Open bank assistance $(2,956) $(6,280)
Closed banks (20,098) 325,836
Assets acquired from assisted banks and terminated receiverships 336 (10,977)
Total Valuation Adjustments (22,718) 308,579
Contingent Liabilities Adjustments:
Anticipated failure of insured institutions (133,645) 849,000
Assistance agreements (533) 8,792
Litigation losses 3,964 2,294
Asset securitization guarantees (30) 84
Total Contingent Liabilities Adjustments (130,244) 860,170
Total $(152,962) $1,168,749



10. Pension Benefits, Savings Plans, and Accrued Annual Leave
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Eligible FDIC employees (permanent and term employees with appointments exceeding one year) are covered by either the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS). The CSRS is a defined benefit plan, which is offset with the Social Security System in certain cases. Plan benefits are determined on the basis of years of creditable service and compensation levels. The CSRS-covered employees also can contribute to the tax-deferred Federal Thrift Savings Plan (TSP).

The FERS is a three-part plan consisting of a basic defined benefit plan that provides benefits based on years of creditable service and compensation levels, Social Security benefits, and the TSP. Automatic and matching employer contributions to the TSP are provided up to specified amounts under the FERS.

Although the BIF contributes a portion of pension benefits for eligible employees, it does not account for the assets of either retirement system. The BIF 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.

Eligible FDIC employees also may participate in a FDIC-sponsored tax-deferred 401(k) savings plan with matching contributions. The BIF pays its share of the employer's portion of all related costs.

The BIF’s pro rata share of the Corporation’s liability to employees for accrued annual leave is approximately $36.0 million and $38.2 million at December 31, 2000 and 1999, respectively.

Pension Benefits and Savings Plans Expenses for the Years Ended December 31
Dollars in Thousands
  2000 1999
Civil Service Retirement System $11,503 $10,270
Federal Employees Retirement System (Basic Benefit) 30,454 28,449
FDIC Savings Plan 19,202 17,215
Federal Thrift Savings Plan 12,154 11,018
Total $73,313 $66,952



11. Postretirement Benefits Other Than Pensions
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The FDIC provides certain dental and life insurance coverage for its eligible retirees, the retirees’ beneficiaries, and covered dependents. Retirees eligible for life insurance coverage are those who have qualified due to: 1) immediate enrollment upon appointment or five years of participation in the plan and 2) eligibility for an immediate annuity. Dental coverage is provided to all retirees eligible for an immediate annuity.

The life insurance program, underwritten by Metropolitan Life Insurance Company, provides basic coverage at no cost to retirees and allows converting optional coverages to direct-pay plans. Dental care is underwritten by Connecticut General Life Insurance Company and provides coverage at no cost to retirees.

Postretirement Benefits Other Than Pensions
Dollars in Thousands
  2000 1999
Fair value of plan assets (a) $75,696 $71,286
Less: Benefit obligation 67,995 75,275
Over/(Under) Funded Status of the Plans $7,701 $(3,989)
Prepaid (accrued) postretirement benefit cost recognized in the Statements of Financial Position $3,618 $(3,989)
Expenses and Cash Flows for the Period Ended December 31
Net periodic benefit cost $3,945 $2,468
Employer contributions 1,604 1,111
Benefits paid 1,604 1,111
Weighted-Average Assumptions at December 31
Discount rate 5.25% 4.50%
Expected return on plan assets 5.25% 4.50%
Rate of compensation increase 6.30% 3.00%
(a) Invested in U.S. Treasury obligations.

Total dental coverage trend rates were assumed to be 7% per year, inclusive of general inflation.
Dental costs were assumed to be subject to an annual cap of $2,000.

 

12. Commitments and Off-Balance-Sheet Exposure
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Commitments

Leases
The BIF's allocated share of the FDIC’s lease commitments totals $138.4 million for future years. The lease agreements contain escalation clauses resulting in adjustments, usually on an annual basis. The allocation to the BIF of the FDIC’s future lease commitments is based upon current relationships of the workloads among the BIF, the SAIF, and the FRF. Changes in the relative workloads could cause the amounts allocated to the BIF in the future to vary from the amounts shown below. The BIF recognized leased space expense of $38.1 million and $41.5 million for the years ended December 31, 2000 and 1999, respectively.

Lease Commitments
Dollars in Thousands
2001 2002 2003 2004 2005 2006/Thereafter
$36,547 $34,802 $25,635 $16,192 $10,770 $14,424


Off-Balance-Sheet Exposure

Asset Securitization Guarantees
As discussed in Note 7, the BIF provided certain limited guarantees to facilitate securitization transactions. The table below gives the maximum off-balance-sheet exposure the BIF has under these guarantees.

Asset Securitization Guarantees at December 31
Dollars in Thousands
  2000 1999
Maximum exposure under the limited guarantees $406,690 $448,881
Less: Guarantee claims paid (inception-to-date) (33,730) (32,716)
Less: Amount of exposure recognized as a contingent liability
(see Note 7)
(1,605) (2,477)
Maximum Off-Balance-Sheet Exposure Under the Limited Guarantees $371,355 $413,688


Deposit Insurance

As of December 31, 2000, deposits insured by the BIF totaled approximately $2.3 trillion. This would be the accounting loss if all depository institutions were to fail and the acquired assets provided no recoveries.

Asset Putbacks
Upon resolution of a failed bank, the assets are placed into receivership and may be sold to an acquirer under an agreement that certain assets may be resold, or "putback," to the receivership. The values and time limits for these assets to be putback are defined within each agreement. It is possible that the BIF could be called upon to fund the purchase of any or all of the "unexpired putbacks" at any time prior to expiration. The FDIC’s estimate of the volume of assets subject to repurchase under existing agreements is $73 million. The actual amount subject to repurchase should be significantly lower because the estimate does not reflect subsequent collections on or sales of assets kept by the acquirer. It also does not reflect any decrease due to acts by the acquirers which might disqualify assets from repurchase eligibility. Repurchase eligibility is determined by the FDIC when the acquirer initiates the asset putback procedures. The FDIC projects that a total of $2.2 million in book value of assets will be putback.


13. Concentration of Credit Risk
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As of December 31, 2000, the BIF had $9.1 billion in gross receivables from bank resolutions and $55.7 million in gross assets acquired from assisted banks and terminated receiverships. An allowance for loss of $8.7 billion and $44.0 million, respectively, has been recorded against these assets. The liquidating entities’ ability to make repayments to the BIF is largely influenced by the economy of the area in which they are located. The BIF's estimated maximum exposure to possible accounting loss for these assets is shown in the table below.

Concentration of Credit Risk at December 31, 2000
Dollars in Millions
  Southeast Southwest Northeast Midwest Central West Total
Receivables from bank resolutions, net $174 $6 $39 $9 $63 $58 $349
Assets acquired from assisted banks and terminated receiverships, net 0 12 0 0 0 0 12
Total $174 $18 $39 $9 $63 $58 $361



14. Disclosures About the Fair Value of Financial Instruments
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Cash equivalents are short-term, highly liquid investments and are shown at current value. The fair market value of the investment in U.S. Treasury obligations is disclosed in Note 3 and is based on current market prices. The carrying amount of interest receivable on investments, short-term receivables, and accounts payable and other liabilities approximates their fair market value. This is due to their short maturities or comparisons with current interest rates.

The net receivables from bank resolutions primarily include the BIF’s subrogated claim arising from payments to insured depositors. The receivership assets that will ultimately be used to pay the corporate subrogated claim are valued using discount rates that include consideration of market risk. These discounts ultimately affect the BIF’s allowance for loss against the net receivables from bank resolutions. Therefore, the corporate subrogated claim indirectly includes the effect of discounting and should not be viewed as being stated in terms of nominal cash flows.

Although the value of the corporate subrogated claim is influenced by valuation of receivership assets (see Note 4), such receivership valuation is not equivalent to the valuation of the corporate claim. Since the corporate claim is unique, not intended for sale to the private sector, and has no established market, it is not practicable to estimate its fair market value.

The FDIC believes that a sale to the private sector of the corporate claim would require indeterminate, but substantial discounts for an interested party to profit from these assets because of credit and other risks. In addition, the timing of receivership payments to the BIF on the subrogated claim does not necessarily correspond with the timing of collections on receivership assets. Therefore, the effect of discounting used by receiverships should not necessarily be viewed as producing an estimate of market value for the net receivables from bank resolutions.

The majority of the net assets acquired from assisted banks and terminated receiverships (except real estate) is comprised of various types of financial instruments, including investments, loans and accounts receivables. Like receivership assets, assets acquired from assisted banks and terminated receiverships are valued using discount rates that include consideration of market risk. However, assets acquired from assisted banks and terminated receiverships do not involve the unique aspects of the corporate subrogated claim, and therefore the discounting can be viewed as producing a reasonable estimate of fair market value.

 

15. Supplementary Information Relating to the Statements of Cash Flows
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Reconciliation of Net Income to Net Cash Provided by Operating Activities for the Years Ended December 31
Dollars in Thousands
  2000 1999
Net Income $1,260,619 $(106,445)
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Provision for insurance losses (152,962) 1,168,749
Amortization of U.S. Treasury obligations 128,875 164,880
TIIS inflation adjustment (93,204) (26,930)
Depreciation on property and equipment 28,799 12,288
Retirement of capitalized equipment 1,152 4,476
Change in Assets and Liabilities:
(Increase) Decrease in interest receivable on investments and
other assets
(85,516) 188,322
Decrease (Increase) in receivables from bank resolutions 602,712 (311,671)
Decrease in assets acquired from assisted banks and
terminated receiverships
8,686 17,599
Increase (Decrease) in accounts payable and other liabilities 5,244 (45,219)
(Decrease) in contingent liabilities for anticipated failure of
insured institutions
(219,000) (574,000)
(Decrease) in contingent liabilities for assistance agreements (10,143) (13,007)
Increase (Decrease) in contingent liabilities for litigation losses 7,958 (14,595)
(Decrease) in contingent liabilities for asset securitization guarantees (842) (4,748)
Net Cash Provided by Operating Activities $1,482,378 $459,699


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Last Updated 04/04/2002 communications@fdic.gov