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2007 Annual Report

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IV. Financial Statements and Notes

Deposit Insurance Fund

Deposit Insurance Fund Balance Sheet at December 31
Dollars in Thousands
  2007 2006
Assets    
Cash and cash equivalents $4,244,547 $2,953,995
Investment in U.S. Treasury obligations, net: (Note 3)    
Held-to-maturity securities 38,015,174 37,184,214
Available-for-sale securities 8,572,800 8,958,566
Assessments receivable, net (Note 7) 244,581 0
Interest receivable on investments and other assets, net 768,292 747,715
Receivables from resolutions, net (Note 4) 808,072 538,991
Property and equipment, net (Note 5) 351,861 376,790
Total Assets $53,005,327 $50,760,271
Liabilities    
Accounts payable and other liabilities $151,857 $154,283
Postretirement benefit liability (Note 11) 116,158 129,906
Contingent liabilities for: (Note 6)    
Anticipated failure of insured institutions 124,276 110,775
Litigation losses 200,000 200,000
Total Liabilities 592,291 594,964
Commitments and off-balance-sheet exposure (Note 12)    
Fund Balance    
Accumulated net income 52,034,503 49,929,226
Unrealized gain on available-for-sale securities, net (Note 3) 358,908 233,822
Unrealized postretirement benefit gain (Note 11) 19,625 2,259
Total Fund Balance 52,413,036 50,165,307
Total Liabilities and Fund Balance $53,005,327 $50,760,271

The accompanying notes are an integral part of these financial statements.


Deposit Insurance Fund Statement of Income
and Fund Balance for the Years Ended December 31
Dollars in Thousands
  2007 2006
Revenue
Interest on U.S. Treasury obligations $2,540,061 $2,240,723
Assessments (Note 7) 642,928 31,945
Exit fees earned (Note 8) 0 345,295
Other revenue 13,244 25,565
Total Revenue 3,196,233 2,643,528
Expenses and Losses
Operating expenses (Note 9) 992,570 950,618
Provision for insurance losses (Note 10) 95,016 (52,097)
Insurance and other expenses 3,370 5,843
Total Expenses and Losses 1,090,956 904,364
Net Income 2,105,277 1,739,164
Unrealized gain/(loss) on available-for-sale securities, net (Note 3) 125,086 (172,718)
Unrealized postretirement benefit gain (Note 11) 17,366 2,259
Comprehensive Income 2,247,729 1,568,705
Fund Balance - Beginning 50,165,307 48,596,602
Fund Balance - Ending $52,413,036 $50,165,307

The accompanying notes are an integral part of these financial statements.


Deposit Insurance Fund Statement of Cash Flows for the Years Ended December 31
Dollars in Thousands
  2007 2006
Operating Activities
Net Income: $2,105,277 $1,739,164
Adjustments to reconcile net income to net cash provided by operating activities:    
Amortization of U.S. Treasury obligations 571,267 599,274
Treasury inflation-protected securities (TIPS) inflation adjustment (313,836) (109,394)
Depreciation on property and equipment 63,115 52,919
Loss on retirement of property and equipment 153 0
Provision for insurance losses 95,016 (52,097)
Terminations/adjustments of work-in-process accounts 0 433
Exit fees earned 0 (345,295)
Unrealized gain on postretirement benefits 17,366 0
Change In Operating Assets and Liabilities:
Decrease in unamortized premium & discount of U.S. Treasury obligations (restricted) 0 1,359
(Increase) in assessments receivable, net (244,581) 0
(Increase) in interest receivable and other assets (20,442) (14,635)
(Increase)/Decrease in receivables from resolutions (350,309) 147,258
(Decrease) in accounts payable and other liabilities (39,580) (166,822)
(Decrease)/Increase in postretirement benefit liability (13,748) 129,906
Increase in exit fees and investment proceeds held in escrow 0 3,639
Net Cash Provided by Operating Activities 1,869,698 1,985,709
Investing Activities
Provided by:
Maturity of U.S. Treasury obligations, held-to-maturity 6,401,000 5,955,000
Maturity of U.S. Treasury obligations, available-for-sale 1,225,000 845,000
Used by:
Purchase of property and equipment (1,607) (11,721)
Purchase of U.S. Treasury obligations, held-to-maturity (7,706,117) (9,050,372)
Purchase of U.S. Treasury obligations, available-for-sale (497,422) 0
Net Cash Used by Investing Activities (579,146) (2,262,093)
Net Increase/(Decrease) in Cash and Cash Equivalents 1,290,552 (276,384)
Cash and Cash Equivalents - Beginning 2,953,995 3,230,379
Cash and Cash Equivalents - Ending $4,244,547 $2,953,995

The accompanying notes are an integral part of these financial statements.


1. Legislation and Operations of the Deposit 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 (insured depository institutions), 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 fund. An active institution's primary federal supervisor is generally determined by the institution's charter type. Commercial and savings banks are supervised by the FDIC, the Office of the Comptroller of the Currency, or the Federal Reserve Board, while thrifts are supervised by the Office of Thrift Supervision.

The Deposit Insurance Fund (DIF) was established on March 31, 2006 as a result of the merger of the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). The FDIC is the administrator of the DIF and the FSLIC Resolution Fund (FRF). These funds are maintained separately to carry out their respective mandates.

The DIF is an insurance fund responsible for protecting insured bank and thrift depositors from loss due to institution failures. 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.

Recent Legislation
The Federal Deposit Insurance Reform Act of 2005 (Title II, Subtitle B of Public Law 109-171, 120 Stat. 9) and the Federal Deposit Insurance Reform Conforming Amendments Act of 2005 (Public Law 109-173, 119 Stat. 3601) were enacted in February 2006. Pursuant to this legislation (collectively, the Reform Act), the BIF and the SAIF were merged as discussed above. Additionally, as a result of the Reform Act, the FDIC immediately increased coverage for certain retirement accounts to $250,000 and required the deposit of funds into the DIF for SAIF-member exit fees that had been restricted and held in escrow. Furthermore, the Reform Act: 1) provides the FDIC with greater discretion to charge insurance assessments and to impose more sensitive risk-based pricing; 2) annually permits the designated reserve ratio to vary between 1.15 and 1.50 percent of estimated insured deposits, thereby eliminating the statutorily fixed designated reserve ratio of 1.25 percent; 3) generally requires the declaration and payment of dividends from the DIF if the reserve ratio of the DIF equals or exceeds 1.35 percent of estimated insured deposits at the end of a calendar year; 4) grants a one-time assessment credit for each eligible insured depository institution or its successor based on an institution's proportionate share of the aggregate assessment base of all eligible institutions at December 31, 1996; and 5) allows the FDIC to increase all deposit insurance coverage, under certain circumstances, to reflect inflation every five years beginning January 1, 2011. See Note 7 for additional discussion on the reforms related to Assessments.

Operations of the DIF
The primary purpose of the DIF is to: 1) insure the deposits and protect the depositors of DIF-insured institutions and 2) resolve DIF-insured failed institutions upon appointment of FDIC as receiver in a manner that will result in the least possible cost to the DIF.

The DIF is primarily funded from: 1) interest earned on investments in U.S. Treasury obligations and 2) deposit insurance assessments. Additional funding sources, if necessary, are borrowings from the U.S. Treasury, Federal Financing Bank, Federal Home Loan Banks, and insured depository institutions. The FDIC has borrowing authority from the U.S. Treasury up to $30 billion and a Note Purchase Agreement with the Federal Financing Bank not to exceed $40 billion to enhance DIF's ability to fund deposit insurance obligations.

A statutory formula, known as the Maximum Obligation Limitation (MOL), limits the amount of obligations the DIF can incur to the sum of its cash, 90 percent of the fair market value of other assets, and the amount authorized to be borrowed from the U.S. Treasury. The MOL for the DIF was $83.6 billion and $79.7 billion as of December 31, 2007 and 2006, 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 DIF assets and liabilities to ensure that receivership proceeds are distributed in accordance with applicable laws and regulations. Accordingly, income and expenses attributable to receiverships are accounted for as transactions of those receiverships. Receiverships are billed by the FDIC for services provided on their behalf.

2. Summary of Significant Accounting Policies

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

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 the assessments receivable and associated revenue, the allowance for loss on receivables from resolutions, the estimated losses for anticipated failures and litigation, and the postretirement benefit obligation.

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.

Investment in U.S. Treasury Obligations
DIF funds are required to be invested in obligations of the United States or in obligations guaranteed as to principal and interest by the United States; the Secretary of the U.S. Treasury must approve all such investments in excess of $100,000. The Secretary has granted approval to invest DIF funds only in U.S. Treasury obligations that are purchased or sold exclusively through the Bureau of the Public Debt's Government Account Series (GAS) program.

DIF's investments in U.S. Treasury obligations are either classified as held-to-maturity or available-for-sale based on the FDIC's assessment of funding needs. 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, except for callable U.S. Treasury securities, which are amortized to the first call date. 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 Statement of Income and Fund Balance as components of Net Income. Income on both types of securities is calculated and recorded on a daily basis using the effective interest method.

Revenue Recognition for Assessments
Prior to 2007, insurance assessments were fully paid in advance on the last day of each quarter for the next quarter and recorded as unearned assessment revenue. One-third of the amount was recognized monthly as assessment income during the quarter in accordance with GAAP.

The Reform Act granted the FDIC discretion in the manner assessments are determined and collected from insured depository institutions. As a result, the FDIC now collects deposit insurance premiums at the end of the quarter following the period of insurance coverage. Consequently, assessment revenue for the insured period is recognized based on an estimate. The estimate is derived from an institution's risk-based assessment rate and assessment base for the prior quarter; adjusted for the current quarter's available assessment credits, any changes in supervisory examination and debt issuer ratings for larger institutions, and a modest deposit insurance growth factor.

The estimated revenue amounts are adjusted when actual premiums are collected at quarter end. Total assessment income recognized for the year includes estimated revenue for the October-December assessment period. See Note 7 for additional information on assessments.

Capital Assets and Depreciation
The FDIC buildings are depreciated on a straight-line basis over a 35 to 50 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.

Disclosure about Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, in September 2006. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The Statement does not require any new fair value measurements. FDIC will adopt SFAS No. 157 effective January 1, 2008 on a prospective basis. Management does not expect the Statement to have a material impact on the financial statements.

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

As of December 31, 2007 and 2006, investments in U.S. Treasury obligations, net, were $46.6 billion and $46.1 billion, respectively. As of December 31, 2007, the DIF held $9.6 billion of Treasury inflation-protected securities (TIPS). These securities are indexed to increases or decreases in the Consumer Price Index for All Urban Consumers (CPI-U). Additionally, the DIF held $4.3 billion of callable U.S. Treasury bonds at December 31, 2007. Callable U.S. Treasury bonds may be called five years prior to the respective bonds' stated maturity on their semi-annual coupon payment dates upon 120 days notice.

U.S. Treasury Obligations at December 31, 2007
Dollars in Thousands
Maturity
(a)
Yield at Purchase
(b)
Face Value Net Carrying Amount Unrealized Holding Gains Unrealized Holding Losses
(c)
Market Value
U.S. Treasury notes and bonds
Within 1 year 4.49% $5,600,000 $5,651,699 $30,313 $(469) $5,681,543
After 1 year through 5 years 4.50% 12,920,000 13,310,856 416,031 0 13,726,887
After 5 years through 10 years 4.81% 11,550,000 12,856,888 764,723 0 13,621,611
After 10 years 5.02% 3,500,000 4,626,945 286,889 0 4,913,834
U.S. Treasury inflation-protected securities
Within 1 year 3.86% 258,638 258,620 349 0 258,969
After 1 year through 5 years 3.16% $1,288,950 $1,310,166 $52,927 $0 $1,363,093
Total   $35,117,588 $38,015,174 $1,551,232 $(469) $39,565,937
Available-For-Sale
U.S. Treasury notes and bonds
After 1 year through 5 years 4.79% $500,000 $498,260 $10,100 $0 $508,360
U.S. Treasury inflation-protected securities
Within 1 year 3.92% 1,700,545 1,700,397 2,325 0 1,702,722
After 1 year through 5 years 3.75% 6,004,277 6,015,235 346,483 0 6,361,718
Total   $8,204,822 $8,213,892 $358,908 $0 $8,572,800
Total Investment in U.S. Treasury Obligations, Net
Total   $43,322,410 $46,229,066 $1,910,140 $(469) $48,138,737
(a) For purposes of this table, all callable securities are assumed to mature on their first call dates. Their yields at purchase are reported as their yield to first call date.

(b) For TIPS, the yields in the above table are stated at their real yields at purchase, not their effective yields. Effective yields on TIPS include a long-term annual inflation assumption as measured by the CPI-U. The long-term CPI-U consensus forecast is 2.2 percent, based on figures issued by the Congressional Budget Office and Blue Chip Economic Indicators in early 2007.

(c) All unrealized losses occurred as a result of changes in market interest rates. FDIC has the ability and intent to hold the related securities until maturity. As a result, all unrealized losses are considered temporary. However, all of the $469 thousand reported as total unrealized losses is recognized as unrealized losses occurring over a period of 12 months or longer with a market value of $1.1 billion applied to the affected securities.

 
U.S. Treasury Obligations at December 31, 2006
Dollars in Thousands
Maturity
(a)
Yield at Purchase
(b)
Face Value Net Carrying Amount Unrealized Holding Gains Unrealized Holding Losses
(c)
Market Value
U.S. Treasury notes and bonds
Within 1 year 4.58% $6,401,000 $6,448,905 $3,389 $(20,704) $6,431,590
After 1 year through 5 years 4.47% 15,500,000 16,276,424 91,703 (196,635) 16,171,492
After 5 years through 10 years 4.68% 9,025,000 9,690,085 36,025 (42,270) 9,683,840
After 10 years 5.01% 2,445,000 3,247,814 57,589 (3,227) 3,302,176
U.S. Treasury inflation-protected securities
After 1 year through 5 years 3.83% 926,751 926,844 21,185 0 948,029
After 5 years through 10 years 2.41% 568,345 594,142 0 (778) 593,364
Total   $34,866,096 $37,184,214 $209,891 $(263,614) $37,130,491
Available-For-Sale
U.S. Treasury notes and bonds
Within 1 year 3.85% $1,225,000 $1,269,835 $0 $(9,208) $1,260,627
U.S. Treasury inflation-protected securities
After 1 year through 5 years 3.80% 7,443,478 7,454,909 243,030 0 7,697,939
Total   $8,668,478 $8,724,744 $243,030 ($9,208) $8,959,566
Total Investment in U.S.Treasury Obligations, Net
Total   $43,534,574 $45,908,958 $452,921 ($272,822) $46,089,057
(a) For purposes of this table, all callable securities are assumed to mature on their first call dates. Their yields at purchase are reported as their yield to first call date.

(b) For TIPS, the yields in the above table are stated at their real yields at purchase, not their effective yields. Effective yields on TIPS include a long-term annual inflation assumption as measured by the CPI-U. The long-term CPI-U consensus forecast is 2.2 percent, based on figures issued by the Congressional Budget Office and Blue Chip Economic Indicators in early 2006.

(c) All unrealized losses occurred as a result of changes in market interest rates. FDIC has the ability and intent to hold the related securities until maturity. As a result, all unrealized losses are considered temporary. However, of the $273 million reported as total unrealized losses, $237 million is recognized as unrealized losses occuring over a period of 12 months or longer with a market value of $13.3 billion applied to the affected securities.

As of December 31, 2007 and 2006, the unamortized premium, net of the unamortized discount, was $2.9 billion and $2.4 billion, respectively.

4. Receivables From Resolutions, Net

The receivables from resolutions include payments made by the DIF to cover obligations to insured depositors, advances to receiverships for working capital, and administrative expenses paid on behalf of receiverships. Any related allowance for loss represents the difference between the funds advanced and/or obligations incurred and the expected repayment. Assets held by DIF receiverships are the main source of repayment of the DIF's receivables from closed banks and thrifts. As of December 31, 2007, there were 22 active receiverships, including three failures in the current year.

As of December 31, 2007 and 2006, DIF receiverships held assets with a book value of $1.2 billion and $655 million, respectively (including cash, investments, and miscellaneous receivables of $363 million and $348 million at December 31, 2007 and 2006, respectively). The estimated cash recoveries from the management and disposition of assets that are used to derive the allowance for losses are based on a sampling of receivership assets in liquidation. Sampled assets were generally valued by estimating future cash recoveries, net of applicable liquidation cost estimates, and then discounted using current market-based risk factors applicable to a given asset's type and quality. Resultant recovery estimates were extrapolated to the non-sampled assets in order to derive the allowance for loss on the receivable. Estimated asset recoveries are regularly evaluated, but remain subject to uncertainties because of potential changes in economic and market conditions. Such uncertainties could cause the DIF's actual recoveries to vary from current estimates.

Receivables From Resolutions, Net at December 31
Dollars in Thousands
  2007 2006
Receivables from closed banks $4,991,003 $4,650,025
Allowance for losses (4,182,931) (4,111,034)
Total $808,072 $538,991

As of December 31, 2007, the DIF allowance for loss was $4.18 billion, representing 84 percent of the gross receivable. Of the remaining 16 percent of the gross receivable, the amount of credit risk is limited since 60 percent of the $808 million net receivable will be repaid from receivership cash, investments, and a promissory note fully secured by a letter of credit. The majority of the remaining 40 percent will be repaid from assets classified as or supported by real estate mortgages. Although estimated asset recoveries are regularly evaluated, the impact of any additional credit risk exposure, due to ongoing conditions in the housing market, is uncertain at this time.

5. Property and Equipment, Net

Property and Equipment, Net at December 31
Dollars in Thousands
  2007 2006
Land $37,352 $37,352
Buildings (including leasehold improvements) 276,626 284,871
Application software (includes work-in-process) 145,693 232,206
Furniture, fixtures, and equipment 71,138 145,635
Accumulated depreciation (178,948) (323,274)
Total $351,861 $376,790

The depreciation expense was $63 million and $53 million for December 31, 2007 and 2006, respectively.

6. Contingent Liabilities for:

Anticipated Failure of Insured Institutions
The DIF records a contingent liability and a loss provision for DIF-insured institutions that are likely to fail within one year of the reporting date, absent some favorable event such as obtaining additional capital or merging, when the liability becomes probable and reasonably estimable.

The contingent liability is derived by applying expected failure rates and loss rates to institutions based on supervisory ratings, balance sheet characteristics, and projected capital levels. In addition, institution-specific analysis is performed on those institutions where failure is imminent absent institution management resolution of existing problems, or where additional information is available that may affect the estimate of losses. As of December 31, 2007 and 2006, the contingent liabilities for anticipated failure of insured institutions were $124.3 million and $110.8 million, respectively, including an estimated liability for one small institution that failed on January 25, 2008.

In addition to these recorded contingent liabilities, the FDIC has identified additional risk in the financial services industry that could result in an additional loss to the DIF should potentially vulnerable insured institutions ultimately fail. As a result of these risks, the FDIC believes that it is reasonably possible that the DIF could incur additional estimated losses up to approximately $1.7 billion. The actual losses if any will largely depend on future economic and market conditions and could differ materially from this estimate.

During 2007, an increasingly difficult economic and credit environment challenged the soundness and profitability of some FDIC-insured institutions. The downturn in housing markets led to asset-quality problems and volatility in financial markets, which hurt banking industry performance and threatened the viability of some institutions that had significant exposure to higher risk residential mortgages. It is uncertain how long the effects of this downturn will last. While supervisory and market data suggest that the banking industry will continue to experience elevated levels of stress over the coming year, as of September 30, 2007, 99% of insured institutions met the highest regulatory capital ("well capitalized") standard. The FDIC continues to evaluate the risks to affected institutions in light of evolving economic conditions; however, the impact of such risks on the insurance fund cannot be reasonably estimated at this time.

Litigation Losses
The DIF records an estimated loss for unresolved legal cases to the extent that those losses are considered probable and reasonably estimable. In addition to the $200 million recorded as probable, the FDIC has determined that losses from unresolved legal cases totaling $0.6 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 and thrift resolutions, representations and warranties, and guarantees were 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 $8.1 billion as of December 31, 2007. There were no contingent liabilities from any of the outstanding claims asserted in connection with representations and warranties at December 31, 2007 and 2006, respectively.

In addition, future losses could be incurred until the contracts offering the representations and warranties, and guarantees have expired, some as late as 2032. Consequently, the FDIC believes it is possible that additional losses may be incurred by the DIF 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 DIF from outstanding contracts with unasserted representation and warranty claims.

7. Assessments

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) required the FDIC to establish a risk-based assessment system, charging higher rates to those insured depository institutions that posed greater risks to the DIF. To arrive at a risk-based assessment for a particular institution, the FDIC placed each institution in one of nine risk categories based on capital ratios and supervisory examination data. Based on FDIC's evaluation of the institutions under the risk-based premium system and due to the limitations imposed by the Deposit Insurance Funds Act of 1996 (DIFA) and the health of the banking and thrift industries, most institutions were not charged an assessment for a number of years. In addition, the FDIC was required by statute 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 warranted).

Effective January 1, 2007, the Reform Act continues to require a risk-based assessment system and allows the FDIC discretion in defining risk. By regulation, the FDIC has consolidated the number of assessment risk categories from nine to four. The four new categories continue to be defined based upon supervisory and capital evaluations. Other significant changes mandated by the Reform Act and the implementing regulations:

  • require payment of assessments by all insured depository institutions, eliminating the restriction on assessments for the best-rated institutions;
  • grant a one-time assessment credit of approximately $4.7 billion to certain eligible insured depository institutions (or their successors) based on the assessment base of the institution as of December 31, 1996, as compared to the combined aggregate assessment base of all eligible institutions;
  • establish a range for the DRR from 1.15 to 1.50 percent of estimated insured deposits and eliminate the fixed DRR of 1.25 percent. The FDIC is required to annually publish the DRR and has, by regulation, set the DRR at 1.25 percent for 2008. As of September 30, 2007, the DIF reserve ratio was 1.22% of estimated insured deposits;
  • require the FDIC to adopt a DIF restoration plan to return the reserve ratio to 1.15 percent generally within five years, if the reserve ratio falls below 1.15 percent or is expected to fall below 1.15 percent within six months.
  • require the FDIC to annually determine if a dividend should be paid, based on the statutory requirement generally to declare dividends if the reserve ratio exceeds 1.35 percent at the end of a calendar year. The Reform Act permits dividends for one-half of the amount required to maintain the reserve ratio at 1.35 percent when the reserve ratio is between 1.35 and 1.50 percent and all amounts required to maintain the reserve ratio at 1.50 percent when the reserve ratio exceeds 1.50 percent.

The assessment rate averaged approximately 5.5 cents and .05 cents per $100 of assessable deposits for 2007 and 2006, respectively. At December 31, 2007, the "Assessments Receivable, net" line item of $245 million represents the estimated gross premiums due from insured depository institutions for the fourth quarter of the year, net of $708 million in estimated one-time assessment credits. The actual deposit insurance assessments for the fourth quarter will be billed and collected at the end of the first quarter of 2008. During 2007 and 2006, $643 million and $32 million were recognized as assessment income from institutions, respectively.

Assessments Revenue for the Year Ended December 31
Dollars in Thousands
  2007
Gross assessments $3,730,886
Less: One-time assessment credits applied (3,087,958)
Assessments Revenue $642,928

Of the $4.7 billion in one-time assessment credits granted, $1.6 billion (34 percent) remained as of December 31, 2007. The use of assessment credits is limited to no more than 90 percent of the gross assessments for assessment periods that provide deposit insurance coverage in years 2008 through 2010. Credits are also restricted when the reserve ratio is less than 1.15 percent and for institutions that are not adequately capitalized or exhibit financial, operational or compliance weaknesses. The credits can only be used to offset future deposit insurance assessments and, therefore, do not represent a liability to the DIF. They are transferable among institutions, do not expire, and cannot be used to offset Financing Corporation (FICO) payments.

Assessments continue to be levied on institutions for payments of the interest on obligations issued by the 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 DIF and is separate from deposit insurance assessments. The FDIC, as administrator of the DIF, acts solely as a collection agent for the FICO. During 2007 and 2006, $785 million and $788 million, respectively, were collected and remitted to the FICO.

8. Exit Fees Earned

From the early to mid-1990s, the SAIF collected entrance and exit fees for conversion transactions when an insured depository institution converted from the BIF to the SAIF (resulting in an entrance fee) or from the SAIF to the BIF (resulting in an exit fee). The exit fees and interest earned were held in escrow pending determination of ownership. As a result, the SAIF did not recognize exit fees or any interest earned as revenue. The Reform Act removed the restriction on SAIF-member exit fees held in escrow and the funds were deposited into the general (unrestricted) fund of the DIF. The exit fees plus earned interest, a total of $345 million, were recognized as revenue at their carrying value for 2006.

9. Operating Expenses

Operating expenses were $993 million for 2007, compared to $951 million for 2006. The chart below lists the major components of operating expenses.

Operating Expenses for the Years Ended December 31
Dollars in Thousands
  2007 2006
Salaries and benefits $640,294 $619,452
Outside services 137,812 124,045
Travel 55,281 49,408
Buildings and leased space 61,377 65,929
Software/Hardware maintenance 28,542 27,139
Depreciation of property and equipment 63,115 52,919
Other 23,640 22,124
Services billed to receiverships (17,491) (10,398)
Total $992,570 $950,618

10. Provision for Insurance Losses

Provision for insurance losses was a positive $95 million for 2007 and a negative $52 million for 2006. 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
  2007 2006
Valuation Adjustments
Closed banks and thrifts 81,229 (152,776)
Other assets 286 (4,230)
Total Valuation Adjustments 81,515 (157,006)
Contingent Liabilities Adjustments:
Anticipated failure of insured institutions 13,501 105,409
Litigation losses 0 (500)
Total Contingent Liabilities Adjustments 13,501 104,909
Total $95,016 $(52,097)

11. Employee Benefits

Pension Benefits and Savings Plans
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 DIF contributes a portion of pension benefits for eligible employees, it does not account for the assets of either retirement system. The DIF 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 (OPM).

Eligible FDIC employees also may participate in a FDIC-sponsored tax-deferred 401(k) savings plan with matching contributions up to five percent. Under the Federal Thrift Savings Plan (TSP), FDIC provides FERS employees with an automatic contribution of 1 percent of pay and an additional matching contribution up to 4 percent of pay. CSRS employees also can contribute to the TSP. However, CSRS employees do not receive agency matching contributions.

Pension Benefits and Savings Plans Expenses for the Years Ended December 31
Dollars in Thousands
  2007 2006
Civil Service Retirement System $6,698 $6,808
Federal Employees Retirement System (Basic Benefit) 40,850 38,915
FDIC Savings Plan 21,008 20,681
Federal Thrift Savings Plan 15,938 15,328
Severance Pay 59 39
Total $84,553 $81,771

Postretirement Benefits Other Than Pensions
The DIF has no postretirement health insurance liability, since all eligible retirees are covered by the Federal Employees Health Benefit (FEHB) program. FEHB is administered and accounted for by the OPM. In addition, OPM pays the employer share of the retiree's health insurance premiums.

The FDIC provides certain life and dental insurance coverage for its eligible retirees, the retirees' beneficiaries, and covered dependents. Retirees eligible for life and dental 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. The life insurance program provides basic coverage at no cost to retirees and allows converting optional coverages to direct-pay plans. For the dental coverage, retirees are responsible for a portion of the dental premium.

The DIF has elected not to fund the postretirement life and dental benefit liabilities. As a result, the DIF recognized the underfunded status (difference between the accumulated postretirement benefit obligation and the plan assets at fair value) as a liability. Since there are no plan assets, the plan's benefit liability is equal to the accumulated postretirement benefit obligation. At December 31, 2007 and 2006, the liability was $116.2 million and $129.9 million, respectively, which is recognized in the "Postretirement benefit liability" line item on the Balance Sheet. The cumulative actuarial gains/losses (changes in assumptions and plan experience) and prior service costs/credits (changes to plan provisions that increase or decrease benefits) were $19.6 million and $2.3 million at December 31, 2007 and 2006, respectively. These amounts are reported as accumulated other comprehensive income in the "Unrealized postretirement benefit gain" line item on the Balance Sheet.

The DIF's expenses for postretirement benefits for 2007 and 2006 were $7.2 million and $9.0 million, respectively, which are included in the current and prior year's operating expenses on the Statement of Income and Fund Balance. The changes in the actuarial gains/losses and prior service costs/credits for 2007 and 2006 of $17.4 million and $2.3 million, respectively, are reported as other comprehensive income in the "Unrealized postretirement benefit gain" line item. Key actuarial assumptions used in the accounting for the plan include the discount rate of 6 percent, the rate of compensation increase of 3.45 percent, and the dental coverage trend rate of 6.10 percent. The discount rate of 6 percent is based upon rates of return on high-quality fixed income investments whose cash flows match the timing and amount of expected benefit payments. For the year ended December 31, 2007, the discount rate was increased by 1.25 percent from the rate used in 2006, resulting in a decrease in the benefit liability of $24.3 million.

12. Commitments and Off-Balance-Sheet Exposure

Commitments:

Leased Space
 
The FDIC's lease commitments total $63.7 million for future years. The lease agreements contain escalation clauses resulting in adjustments, usually on an annual basis. The DIF recognized leased space expense of $22 million and $30 million for the periods ended December 31, 2007 and 2006, respectively.

Leased Space Commitments
Dollars in Thousands
2008 2009 2010 2011 2012 2013/Thereafter
$18,855 $15,529 $11,165 $8,488 $5,999 $3,637

Off-Balance-Sheet Exposure:

Deposit Insurance

As of September 30, 2007, the estimated insured deposits for DIF were $4.2 trillion. This estimate is derived primarily from quarterly financial data submitted by insured depository institutions to the FDIC. This estimate represents the accounting loss that would be realized if all insured depository institutions were to fail and the acquired assets provided no recoveries.

13. Disclosures About the Fair Value of Financial Instruments

Cash equivalents are short-term, highly liquid investments and are shown at fair 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, due to their short maturities and/or comparability with current interest rates.

The net receivables from resolutions primarily include the DIF'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 DIF's allowance for loss against the net receivables from 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 a 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 DIF 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 resolutions.


 


Last Updated 04/25/2008 communications@fdic.gov