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1997 Annual Report

Notes to the Financial Statement
Bank Insurance Fund
December 31, 1997 and 1996

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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 three funds. All three funds are maintained separately to carry out their respective mandates.

The BIF and the SAIF are insurance funds responsible for protecting depositors in operating banks and thrift institutions from loss due to failure of the institution. 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. Deposits of SAIF-member institutions are generally insured by the SAIF; SAIF members are predominantly thrifts supervised by the Office of Thrift Supervision (OTS). The Oakar amendment to the Federal Deposit Insurance Act (FDI Act) allows BIF and SAIF members to acquire deposits insured by the other insurance fund without changing insurance fund coverage for the acquired deposits. These institutions with deposits insured by both insurance funds are referred to as Oakars or Oakar institutions. “Sasser” banks are SAIF members that have converted to a bank charter in accordance with Section 5(d)(2)(G) of the FDI Act.

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 9) and borrowing authority (see “Operations of the BIF” below). The FDICIA also requires the FDIC to: 1) resolve troubled 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 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 approximately $790 million annual FICO interest obligation on a pro rata basis between banks and thrifts on the earlier of December 31, 1999, 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 designated reserve ratio; 6) the refund of amounts in the BIF in excess of the designated reserve ratio with such refund not to exceed the previous semi-annual assessment; and 7) the merger of the BIF and the SAIF on January 1, 1999, if no insured depository institution is a savings association on that date.

Operations of the BIF

The primary purpose of the BIF is to: 1) insure the deposits and protect the depositors of BIF-insured banks and 2) resolve failed banks, 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 and provides and monitors assistance to troubled banks.

The BIF is primarily funded from the following sources: 1) interest earned on investments in U.S. Treasury obligations; 2) BIF assessment premiums; 3) income earned on and funds received from the management and disposition of assets acquired from failed banks; and 4) 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). At December 31, 1997, the MOL for the BIF was $50 billion.

The VA, HUD and Independent Agencies Appropriations Act, 1998, Public Law 105-65, appropriated $34 million for fiscal year 1998 (October 1,1997, through September 30,1998) for operating expenses incurred by the Office of Inspector General (OIG). The Act mandates that the funds are to be derived from the BIF, the SAIF, and the FRF. In prior years, the OIG funding was not submitted to Congress as part of the appropriation process.


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2. Summary of Significant Accounting Policies
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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

The BIF considers cash equivalents to be short-term, highly liquid investments with original maturities of three months or less.

Investments in U.S. Treasury Obligations

Investments in U.S. Treasury Obligations are recorded pursuant to the provisions of the Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). SFAS 115 requires that securities be classified in one of three categories: held-to-maturity, available-for-sale, or trading. Securities designated as held-to-maturity are intended to be held to maturity and 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. Beginning in 1997, the BIF designated a portion of its securities as available-for-sale. These securities are shown at fair value with unrealized gains and losses included in the fund balance. Realized gains and losses are included in other revenue when applicable. Interest on both types of securities is calculated on a daily basis and recorded monthly using the effective interest method. The BIF does not have any securities classified as trading.

Allowance for Losses on Receivables From Bank Resolutions and
Assets Acquired From Assisted Banks and Terminated Receiverships

The BIF records as a receivable the amounts advanced and/or obligations incurred for resolving troubled 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 estimated liquidation costs.

Receivership Operations

The FDIC is responsible for managing and disposing of the assets of failed institutions in an orderly and efficient manner. The assets, and the claims against them, are accounted for separately 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 incurred by the BIF on behalf of the receiverships are recovered from those receiverships.

Cost Allocations Among Funds

Certain operating expenses (including personnel, administrative, and other indirect expenses) not directly charged to each fund under the FDIC's management are allocated based on percentages developed during the business planning process. The cost of furniture, fixtures, and equipment purchased by the FDIC on behalf of the three funds under its administration is allocated among these funds on a similar basis. The BIF expenses its share of these allocated costs at the time of acquisition because of their immaterial amounts.

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 pays its liabilities for these benefits directly to the entity. The BIF's remaining net postretirement benefits liability for the plan is recognized in the BIF's Statement of Financial Position.

Disclosure About Recent Financial Accounting Standards Board Pronouncements

In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." Comprehensive income includes net income as well as certain types of unrealized gain or loss. The only component of SFAS No. 130 that impacts the BIF is unrealized gain or loss on securities classified as avaiable-for-sale which is presented in the BIF’s Statement of Financial Position and the Statement of Income and Fund Balance. The FDIC adopted SFAS No. 130 effective on January 1, 1997.

In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The FDIC intends to adopt SFAS No. 131 effective on January 1, 1998; however, management anticipates that the BIF, as a non-publicly held enterprise, will not be affected by SFAS No. 131.

Other recent pronouncements issued by the FASB are not applicable to the financial Statements.

Depreciation

The FDIC has designated the BIF as administrator of buildings owned and 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 a rental fee representing an allocated share of its annual depreciation expense.

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.

Related Parties

The nature of related parties and a description of related party transactions are disclosed throughout the financial statements and footnotes.

Reclassifications

Reclassifications have been made in the 1996 financial statements to conform to the presentation used in 1997.


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3. Investment in U.S. Treasury Obligations, Net
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All cash received by the BIF is invested in U.S. Treasury obligations with maturities exceeding three months unless the cash is used: 1) to defray operating expenses; 2) for outlays related to assistance to banks and liquidation activities; or 3) for investments in U.S. Treasury one-day special certificates that are included in the cash and cash equivalents line item. Prior to 1997, all investments were designated "held-to-maturity" (see Note 2).

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U.S. Treasury Obligations at December 31, 1997
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U.S. Treasury Obligations at December 31, 1997 graphic


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U.S. Treasury Obligations at December 31, 1996
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U.S. Treasury Obligations at December 31, 1996


In 1997, the unamortized premium, net of unamortized discount, was $589 million. In 1996, the unamortized premium, net of unamortized discount, was $93 million.


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4. Receivables From Bank Resolutions, Net
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The FDIC resolution process takes different forms depending on the unique facts and circumstances surrounding each failing or failed institution. Payments to prevent a failure are made to operating institutions when cost and other criteria are met. Such payments may facilitate a merger or allow a troubled institution to continue operations. Payments for institutions that fail are made to cover the institution's obligation to insured depositors and represent a claim by the BIF against the receiverships' assets. There was only one bank failure in 1997.

The FDIC, as receiver for failed banks, engages in a variety of strategies at the time of failure to maximize the return from the sale or disposition of assets. A failed bank acquirer can purchase selected assets at the time of resolution and assume full ownership, benefit, and risk related to such assets. The receiver may also engage in other types of transactions as circumstances warrant. As described in Note 2, an allowance for loss is established against the receivable from bank resolutions.

As of December 31, 1997 and 1996, the FDIC, in its receivership capacity for BIF-insured institutions, held assets with a book value of $2.5 billion and $7.3 billion, respectively (including cash and miscellaneous receivables of $1 billion and $3.9 billion at December 31, 1997 and 1996, respectively). These assets represent a significant source of repayment of the BIF's receivables from bank resolutions. 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. The sample was constructed to produce a statistically valid result. These estimated recoveries are regularly evaluated, but remain subject to uncertainties because of potential changes in economic conditions. These factors could affect the BIF's and other claimants' actual recoveries from the level currently estimated.

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Receivables From Bank Resolutions, Net at December 31
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Receivables From Bank Resolutions, Net at December 31


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5. Assets Acquired From Assisted Banks and Terminated Receiverships, Net
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The BIF acquires 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 used to derive the allowance for losses for assets acquired from assisted banks and terminated receiverships is the same as that for receivables from bank resolutions.

The BIF recognizes income and expenses on these assets. Income consists primarily of the portion of collections on performing mortgages and commercial loans related to interest earned. Expenses are recognized for administering the management and liquidation of these assets.

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Assets Acquired From Assisted Banks and Terminated Receiverships, Net at December 31
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Assets Acquired From Assisted Banks and Terminated Receiverships, Net at December 31


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6. Property and Buildings, Net
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Property and Buildings, Net at December 31
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Property and Buildings, Net at December 31


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7. Estimated Liabilities for:
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Anticipated Failure of Insured Institutions

The BIF records an estimated 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, in the period when the liability is considered probable and reasonably estimable.

The estimated liabilities for anticipated failure of insured institutions as of December 31, 1997 and 1996, were $11 million and $75 million, respectively. The estimated liability is derived in part from estimates of recoveries from the management and disposition of the assets of these probable bank failures. Therefore, they are subject to the same uncertainties as those affecting the BIF’s receivables from bank resolutions (see Note 4). This could affect the ultimate costs to the BIF from probable bank 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 of about $197 million.

The accuracy of these estimates will largely depend on future economic conditions. The FDIC Board has the statutory authority to consider the estimated liability from anticipated failures of insured institutions when setting assessment rates.

Assistance Agreements

The estimated 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 absorb credit losses and pay related costs for funding and asset administration, plus an incentive fee.

Litigation Losses

The BIF records an estimated loss for unresolved legal cases to the extent those losses are considered probable and reasonably estimable. The estimated liability for litigation losses is $14 million and $15 million at December 31, 1997 and 1996, respectively. In addition to the amount recorded as probable, the FDIC's Legal Division has determined that losses from unresolved legal cases totaling $320 million are reasonably possible

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, 1997 and 1996, the BIF had an estimated liability under the guarantees of $28 million and $44 million, respectively.

During 1996, the BIF refined its liability estimation process and returned to receiverships $91.6 million in cash (including interest of $8.4 million) received for backing the limited guarantee. The BIF made this one-time refund as a result of lowering the estimate of expected exposure under one of the guarantees. To determine the maximum exposure under the limited guarantees, please refer to the chart in Note 13.


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8. Provision for Insurance Losses
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Provision for insurance losses was a negative $504 million and a negative $325 million for 1997 and 1996, respectively. Reductions to various allowance for losses and estimated liabilities account for the negative loss provision. The following chart lists the major components of the reduction in provision for insurance losses

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Provision for Insurance Losses
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Provision for Insurance Losses


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9. 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.

In May 1995, the BIF reached the FDICIA mandated capitalization level of 1.25 percent of 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). On January 1, 1997, BIF-insured banks began paying a FICO assessment. The FICO assessment rate on BIF-assessable deposits is one-fifth of the rate for SAIF-assessable deposits. On the earlier of December 31, 1999, or the date on which the last savings association ceases to exist, the approximately $790 million annual FICO interest obligation will be paid on a pro rata basis between banks and thrifts.

The FICO assessment has no financial impact on the BIF since the FICO assessment is separate from the regular assessment, and the FICO assessment is imposed on banks and not on the BIF. The FDIC, as administrator of the BIF, is acting solely as a collection agent for the FICO. During 1997, $338 million was collected from banks and remitted to the FICO.

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 FDIC Board of Directors (Board) reviews premium rates semiannually. The average assessment rate for 1997 was 0.08 cents per $100 of assessable deposits.

On November 12, 1997, the Board voted to retain the BIF assessment schedule of 0 to 27 cents per $100 of assessable deposits (annual rates) for the first semiannual period of 1998.


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10. Other Revenue
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Included in other revenue is interest on subrogated claims and advances to financial institutions. This interest totaled $22 million and $231 million for 1997 and 1996, respectively (including $10 million and $205 million in post-insolvency interest for 1997 and 1996, respectively). Certain BIF receiverships may have residual funds remaining after paying all higher priority claims. Once those claims have been paid, the BIF and other claimants are eligible to receive interest on their claims against the receivers to the extent funds are available. Due to the uncertainty of collection, post-insolvency interest is recognized as income when received.


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11. Pension Benefits, Savings Plans, Postemployment Benefits and Accrued Annual Leave
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Eligible FDIC employees (all permanent and temporary employees with appointments exceeding one year) are covered by either the Civil Service Retirement System (CSRS) or the Federal Employee 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 (OPM).

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

Due to a substantial decline in the FDIC’s workload, the Corporation developed a staffing reduction program, a component of which is a voluntary separation incentive plan, or buyout. Corporate-wide buyout plans have been offered to eligible employees. The buyouts have not had a material effect on the BIF.

The BIF's pro rata share of the Corporation's liability to employees for accrued annual leave is approximately $35.7 million and $38.9 million at December 31, 1997 and 1996, respectively.

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Pension Benefits and Savings Plans Expenses
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Pension Benefits and Savings Plans Expenses


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12. Postretirement Benefits Other than Pensions line graphic

The FDIC provides certain health, dental, and life insurance coverage for its eligible retirees, the retirees’ beneficiaries, and covered dependents. Retirees eligible for health and/or 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 FDIC is self-insured for hospital/medical, prescription drug, mental health, and chemical dependency coverage. Additional risk protection was purchased through stop-loss and fiduciary liability insurance. All claims are administered on an administrative services only basis with the hospital/ medical claims administered by Aetna Life Insurance Company, the mental health, and chemical dependency claims administered by OHS Foundation Health Psychcare Inc., and the prescription drug claims administered by Caremark.

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.

The BIF expensed $3.3 million and $6.1 million for net periodic postretirement benefit costs for the years ended December 31, 1997 and 1996, respectively. For measurement purposes for 1997, the FDIC assumed the following: 1) a discount rate of 5.75 percent; 2) an average long-term rate of return on plan assets of 5.75 percent; 3) an increase in health costs in 1997 of 9.75 percent (inclusive of general inflation of 2.5 percent), decreasing to an ultimate rate in the year 2000 and thereafter of 7.75 percent; and 4) an increase in dental costs for 1997 and thereafter of 4.5 percent (in addition to general inflation). Both the assumed discount rate and health care cost rate have a significant effect on the amount of the obligation and periodic cost reported.

If the health care cost rate was increased one percent, the accumulated postretirement benefit obligation as of December 31, 1997, would have increased by 20.2 percent. The effect of this change on the aggregate of service and interest cost for 1997 would be an increase of 23.5 percent.

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Net Periodic Postretirement Benefit Cost
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Net Periodic Postretirement Benefit Cost


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Accumulated Postretirement Benefit Obligation and Funded Status at December 31
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Accumulated Postretirement Benefit Obligation and Funded Status at December 31


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13. Commitments and Off-Balance Sheet Exposure
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Commitments

Leases

The BIF's allocated share of the FDIC's lease commitments totals $188.5 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 among the three funds in future years could change the amount of the FDIC’s lease payments that will be allocated to the BIF. The BIF recognized leased space expense of $43.6 million and $39.9 million for the years ended December 31, 1997 and 1996, respectively.

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Lease Commitments
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Lease Commitments

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.

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Asset Securitization Guarantees at December 31
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Asset Securitization Guarantees at December 31


Concentration of Credit Risk

As of December 31, 1997, the BIF had $23.4 billion in gross receivables from bank resolutions and $256 million in assets acquired from assisted banks and terminated receiverships. An allowance for loss of $22.3 billion and $195 million, respectively, has been recorded against these assets. The liquidation 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 maximum exposure to possible accounting loss for these assets is shown in the table below

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Concentration of Credit Risk at December 31, 1997
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Concentration of Credit Risk at December 31, 1997

Other Off-Balance Sheet Risk

Deposit Insurance

As of December 31, 1997, deposits insured by the BIF totaled approximately $2.1 trillion. This would be the accounting loss if all depository institutions were to fail and the acquired assets provided no recoveries.


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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 receivable from bank resolutions primarily involves 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 receivable 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, 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 (investments, loans, accounts receivable, etc.) acquired from failed banks. 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.


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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
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Reconciliation of Net Income to Net Cash Provided by Operating Activities


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16. Year 2000 Compliance Expenses
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As part of its operations, the FDIC as administrator of the BIF is assessing, testing, modifying, or replacing as necessary its automated systems to ensure that these systems are Year 2000 compliant. As of December 31, 1997, the BIF has not incurred, nor does management anticipate that the BIF will incur, a material charge to earnings to ensure that its systems are Year 2000 compliant.

The BIF is also subject to a potential loss from banks that may fail if they are unable to become Year 2000 compliant in a timely manner. As of December 31, 1997, the potential liability, if any, is not estimable. During 1998, the FDIC will assess this potential liability.


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17. Subsequent Events
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Effective on January 4, 1998, all employees with five or more years until retirement were converted from the FDIC health plan to the Federal Employees Health Benefits (FEHB) program. This conversion resulted in a gain to the BIF. Assuming enabling legislation is passed in the future, this conversion will also affect all retirees and employees within five years of retirement.

As part of this conversion, the OPM will become responsible for postretirement health benefits for employees with five or more years until retirement at no cost to the BIF. If retirees and employees within five years of retirement are also converted in the future, the OPM will assume the BIF’s obligation for postretirement health benefits for those individuals at a fee to be negotiated between the FDIC and the OPM.

Assuming enabling legislation is passed, management does not expect there will be a material gain or loss upon disposition of the BIF's postretirement health benefits obligation for retirees or employees within five years of retirement.

Last Updated 02/19/1999 communications@fdic.gov