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Federal Deposit
Insurance Corporation

Each depositor insured to at least $250,000 per insured bank

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2005 Annual Report

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IV. Financial Statements and Notes

Bank Insurance Fund Balance Sheets at December 31
Dollars in Thousands
  2005 2004
Cash and cash equivalents $2,411,828 $1,822,005
Investment in U.S. Treasury obligations, net: (Note 3)
  Held-to-maturity securities 24,678,611 22,637,330
  Available-for-sale securities 7,620,733 9,470,605
Interest receivable on investments and other assets, net 546,202 601,498
Receivables from bank resolutions, net (Note 4) 299,317 375,303
Property and equipment, net (Note 5) 378,064 357,106
Total Assets $35,934,755 $35,263,847
Accounts payable and other liabilities $265,687 $268,680
Contingent liabilities for: (Note 6)
  Anticipated failure of insured institutions 1,591 8,261
  Litigation losses and other 200,435 200,301
Total Liabilities 467,713 477,242
Commitments and off-balance-sheet exposure (Note 11)
Fund Balance
Accumulated net income 35,168,698 34,096,676
Unrealized gain on available-for-sale securities, net (Note 3) 298,344 689,929
Total Fund Balance 35,467,042 34,786,605
Total Liabilities and Fund Balance $35,934,755 $35,263,847
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
  2005 2004
Interest on U.S. Treasury obligations $1,713,316 $1,552,576
Assessments (Note 7) 52,570 95,268
Other revenue 17,587 27,553
Total Revenue 1,783,473 1,675,397
Expenses and Losses
Operating expenses (Note 8) 846,183 822,381
Provision for insurance losses (Note 9) -138,181 (269,368)
Insurance and other expenses 3,449 5,606
Total Expenses and Losses 711,451 558,619
Net Income 1,072,022 1,116,778
Unrealized loss on available-for-sale securities, net -391,585 (112,368)
Comprehensive Income 680,437 1,004,410
Fund Balance - Beginning 34,786,605 33,782,195
Fund Balance - Ending $35,467,042 $34,786,605
The accompanying notes are an integral part of these financial statements.


Bank Insurance Fund Statement of Cash Flows for the Years Ended December 31
Dollars in Thousands
  2005 2004
  Net Income: $1,072,022 $1,116,778
    Adjustments to reconcile net income to net cash provided by operating activities:
    Amortization of U.S. Treasury obligations 613,971 737,439
    Treasury inflation-indexed securities (TIIS) inflation adjustment -257,829 (181,650)
    Depreciation on property and equipment 55,989 54,424
    Provision for losses -138,181 (269,368)
    Terminations/adjustments of work-in-process accounts 178 817
  Change In Operating Assets and Liabilities:
    (Increase) in interest receivable and other assets -3,398 (36,433)
    Decrease in receivables from bank resolutions 211,955 218,693
    Increase in accounts payable and other liabilities 21,860 15,819
    (Decrease) in contingent liabilities for litigation losses and other -182 (1,047)
Net Cash Provided by Operating Activities 1,576,385 1,655,472
Investing Activities
  Provided by:
    Maturity of U.S. Treasury obligations, held-to-maturity 6,290,000 3,365,000
    Maturity of U.S. Treasury obligations, available-for-sale 1,560,000 5,810,000
  Used by:
    Purchase of property and equipment -47,197 (104,502)
    Purchase of U.S. Treasury obligations, held-to-maturity -8,789,136 (10,026,597)
    Purchase of U.S. Treasury obligations, available-for-sale 0 (1,421,649)
Net Cash Used by Provided by Investing Activities -986,333 (2,377,748)
Net Decrease in Cash and Cash Equivalents 590,052 (722,276)
Cash and Cash Equivalents - Beginning 1,821,776 2,544,281
Cash and Cash Equivalents - Ending $2,411,828 $1,822,005
The accompanying notes are an integral part of these financial statements.

1. Legislation and Operations of the Bank Insurance Fund

The Federal Deposit Insurance Corporation (FDIC) is the independent deposit insurance agency created by Congress in 1933 to maintain stability and public confidence in the nation's banking system. Provisions that govern the operations of the FDIC are generally found in the Federal Deposit Insurance (FDI) Act, as amended, (12 U.S.C. 1811, et seq). In carrying out the purposes of the FDI Act, as amended, the FDIC insures the deposits of banks and savings associations, and in cooperation with other federal and state agencies promotes the safety and soundness of insured depository institutions by identifying, monitoring and addressing risks to the deposit insurance funds. The FDIC is the administrator of the Bank Insurance Fund (BIF), the Savings Association Insurance Fund (SAIF), and the FSLIC Resolution Fund (FRF), which are maintained separately to carry out their respective mandates. The BIF and the SAIF are insurance funds responsible for protecting insured bank and thrift depositors from loss due to institution failures. These insurance funds must be maintained at not less than 1.25 percent of estimated insured deposits or a higher percentage as circumstances warrant. The FRF is a resolution fund responsible for the sale of remaining assets and satisfaction of liabilities associated with the former Federal Savings and Loan Insurance Corporation (FSLIC) and the Resolution Trust Corporation.

An active institution's insurance fund membership and primary federal supervisor are generally determined by the institution's charter type. Deposits of BIF-member institutions are generally insured by the BIF; BIF members are predominantly commercial and savings banks supervised by the FDIC, the Office of the Comptroller of the Currency, or the Federal Reserve Board. Deposits of SAIF-member institutions are generally insured by the SAIF; SAIF members are predominantly thrifts supervised by the Office of Thrift Supervision.

In addition to traditional banks and thrifts, several other categories of institutions exist. A member of one insurance fund may, with the approval of its primary federal supervisor, merge, consolidate with, or acquire the deposit liabilities of an institution that is a member of the other insurance fund without changing insurance fund status for the acquired deposits. These institutions with deposits insured by both insurance funds are referred to as Oakar financial institutions. In addition, SAIF-member thrifts can convert to a bank charter and retain their SAIF membership. These institutions are referred to as Sasser financial institutions. Likewise, BIF-member banks can convert to a thrift charter and retain their BIF membership.

Operations of the BIF
The primary purpose of the BIF is to: 1) insure the deposits and protect the depositors of BIF-insured institutions and 2) resolve BIF-insured failed institutions upon appointment of FDIC as receiver in a manner that will result in the least possible cost to the BIF. In addition, the FDIC, acting on behalf of the BIF, examines state-chartered banks that are not members of the Federal Reserve System.

The BIF is primarily funded from: 1) interest earned on investments in U.S. Treasury obligations and 2) deposit insurance assessments. Additional funding sources are U.S. Treasury and Federal Financing Bank (FFB) borrowings, if necessary. The FDIC has borrowing authority from the U.S. Treasury up to $30 billion for insurance purposes on behalf of the BIF and the SAIF.

A statutory formula, known as the Maximum Obligation Limitation (MOL), limits the amount of obligations the BIF 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 BIF was $57.2 billion and $57.0 billion as of December 31, 2005 and 2004, 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 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.

Recent Legislative Initiatives
During 2005, Congress considered deposit insurance reform legislation which, if enacted, would materially change future financial statements. The legislation was contained in the conference report to reconciliation legislation, S. 1932, adopted by the Senate in December and at the close of the year was awaiting action by the House. A companion technical corrections bill, H.R. 4636, was passed by both the House and the Senate and is cleared for action by the President. The legislation: 1) merges the BIF and the SAIF into a new fund, the Deposit Insurance Fund (DIF); 2) annually permits the designated reserve ratio to vary between 1.15 and 1.50 of estimated insured deposits, thereby eliminating the fixed designated reserve ratio of 1.25; 3) requires the declaration of dividends from the DIF for the full amount of the reserve ratio in excess of 1.50 percent or, if less than 1.50 percent, one-half of the amount between 1.35 and 1.50 percent; 4) grants a one-time assessment credit for each eligible institution or its successor based on an institution's proportionate share of the aggregate assessment base at December 31, 1996; and 5) immediately increases coverage for certain retirement accounts to $250,000 and indexes all deposit insurance coverage every five years beginning January 1, 2011.

2. Summary of Significant Accounting Policies

These financial statements pertain to the financial position, results of operations, and cash flows of the BIF 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 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 allowance for loss on receivables from bank 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
BIF 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 BIF 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.

BIF's investments in U.S. Treasury obligations are either classified as held-to-maturity or available-for-sale. 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 anticipated 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.

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

Capital Assets and 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 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
Recent accounting pronouncements have been adopted or deemed to be not applicable to the financial statements as presented.

Related Parties
The nature of related parties and a description of related party transactions are discussed in Note 1 and disclosed throughout the financial statements and footnotes.

Reclassifications have been made in the 2004 financial statements to conform to the presentation used in 2005. These reclassifications include the reallocation of amounts from "Provision for insurance losses" to "Insurance and other expenses" for assets acquired from assisted banks and terminated receiverships. The reclassifications had no impact on the prior year's net income or fund balance.

3. Investment in U.S. Treasury Obligations, Net
As of December 31, 2005 and 2004, the book value of investments in U.S. Treasury obligations, net, was $32.3 billion and $32.1 billion, respectively. As of December 31, 2005, the BIF held $6.5 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 BIF held $5.4 billion of callable U.S. Treasury bonds at December 31, 2005. 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.


4. Receivables From Bank Resolutions, Net
The receivables from bank resolutions include payments made by the BIF 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 BIF receiverships are the main source of repayment of the BIF's receivables from closed banks. As of December 31, 2005, there were 24 active receiverships, with no failures in the current year.

As of December 31, 2005 and 2004, BIF receiverships held assets with a book value of $356 million and $504 million, respectively (including cash, investments, and miscellaneous receivables of $251 million and $269 million at December 31, 2005 and 2004, respectively). The estimated cash recoveries from the management and disposition of these assets that are used to derive the allowance for losses are based on a sampling of receivership assets in liquidation. The sampled assets are generally valued by estimating future cash recoveries, net of applicable liquidation cost estimates, and then discounting these net cash recoveries using current market-based risk factors based on a given asset's type and quality. Resultant recovery estimates are extrapolated to the non-sampled assets in order to derive the allowance for loss on the receivable. These estimated recoveries are regularly evaluated, but remain subject to uncertainties because of potential changes in economic and market conditions. Such uncertainties could cause the BIF's actual recoveries to vary from the level currently estimated.

5. Property and Equipment, Net

6. Contingent Liabilities for:

Anticipated Failure of Insured Institutions
The BIF records a contingent liability and a loss provision for BIF-insured institutions (including Oakar and Sasser financial 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, 2005 and 2004, the contingent liabilities for anticipated failure of insured institutions were $2 million and $8 million, respectively.

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 BIF should potentially vulnerable financial institutions ultimately fail. This risk results from the presence of various high-risk banking business activities that are particularly vulnerable to adverse economic and market conditions. Due to the uncertainty surrounding such conditions in the future, there are institutions other than those with losses included in the contingent liability for which the risk of failure is less certain, but still considered reasonably possible. As a result of these risks, the FDIC believes that it is reasonably possible that the BIF could incur additional estimated losses up to approximately $0.3 billion.

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

There remains uncertainty about the effect of the 2005 hurricane season on the deposit insurance fund balances. The economic dislocations as well as the potential adverse effects on collateral values and the repayment capacity of borrowers resulting from the hurricanes may stress the balance sheets of a few, small institutions that are located in the areas of greatest devastation. The FDIC continues to evaluate the risks to affected institutions in light of economic conditions, the amount of insurance proceeds that will protect institution collateral, and the level of government disaster relief. At this point, however, the FDIC cannot estimate the impact of such risks on the insurance funds.

Litigation Losses
The BIF records an estimated loss for unresolved legal cases to the extent that those losses are considered probable and reasonably estimable. In addition to the amount recorded as probable, the FDIC has determined that losses from unresolved legal cases totaling $1.2 million are reasonably possible.

Other Contingencies

Representations and Warranties
As part of the FDIC's efforts to maximize the return from the sale of assets from bank resolutions, representations and warranties, and guarantees 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 $3.4 billion as of December 31, 2005. There were no contingent liabilities from any of the outstanding claims asserted in connection with representations and warranties at December 31, 2005 and 2004, respectively.

In addition, future losses on representations and warranties, and guarantees could be incurred over the remaining life of the loans sold, which is generally 20 years or more. Consequently, the FDIC believes it is possible that additional losses may be incurred by the BIF from the universe of outstanding contracts with unasserted representation and warranty claims. However, because of the uncertainties surrounding the timing of when claims may be asserted, the FDIC is unable to reasonably estimate a range of loss to the BIF from outstanding contracts with unasserted representation and warranty claims.

7. Assessments
In compliance with provisions of the FDI Act, as amended, the FDIC uses a 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 based on capital ratios and supervisory examination data. Due to the continuing health of the banking industry, the majority of the financial institutions are not assessed. Of those assessed, the assessment rate averaged approximately 11 cents and 22 cents per $100 of assessable deposits for 2005 and 2004, respectively. During 2005 and 2004, $53 million and $95 million were recognized as assessment income from BIF-member institutions, respectively. On November 8, 2005, 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 2006. The Board reviews assessment rates semiannually to ensure that funds are available to satisfy the BIF's obligations. If necessary, the Board may impose more frequent rate adjustments or emergency special assessments.

The FDIC is required to maintain the insurance funds at a designated reserve ratio (DRR) of not less than 1.25 percent of estimated insured deposits (or a higher percentage as circumstances warrant). If the reserve ratio falls below the DRR, the FDIC is required to set semiannual assessment rates that are sufficient to increase the reserve ratio to the DRR not later than one year after such rates are set, or in accordance with a recapitalization schedule of fifteen years or less. As of September 30, 2005, the BIF reserve ratio was 1.25 percent of estimated insured deposits.

Assessments are also levied on institutions for payments of the interest on obligations issued by the Financing Corporation (FICO). The FICO was established as a mixed-ownership government corporation to function solely as a financing vehicle for the FSLIC. The annual FICO interest obligation of approximately $790 million is paid on a pro rata basis using the same rate for banks and thrifts. The FICO assessment has no financial impact on the BIF and is separate from the regular deposit insurance assessments. The FDIC, as administrator of the BIF, acts solely as a collection agent for the FICO. During 2005 and 2004, $620 million and $631 million, respectively, were collected from BIF-member institutions and remitted to the FICO.

8. Operating Expenses
Operating expenses were $846 million for 2005, compared to $821 million for 2004. The chart below lists the major components of operating expenses.

9. Provision for Insurance Losses
Provision for insurance losses was a negative $138 million for 2005 and a negative $281 million for 2004. The following chart lists the major components of the provision for insurance losses.

10. Employee Benefits

Pension Benefits, Savings Plans and Postemployment Benefits
Eligible FDIC employees (permanent and term employees with appointments exceeding one year) are covered by the federal government retirement plans, either the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS). Although the 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 up to five percent. The BIF pays its share of the employer's portion of all related costs.

The FDIC offered a voluntary employee buyout program to a majority of its employees during 2004 and conducted a reduction-in-force (RIF) during 2005 in an effort to further reduce identified staffing excesses. Consequently, 578 employees left or will leave the FDIC as a result of the buyout program and an additional 62 employees left due to the RIF. Termination benefits included compensation of fifty percent of the current salary for voluntary departures and severance pay for employees that left due to the RIF. The total cost of the buyout program and the RIF to the FDIC was $32.6 million, with BIF's share totaling $28 million, which is included in the "Operating expenses" line item for 2005 and 2004.

Postretirement Benefits Other Than Pensions
The FDIC provides certain life and dental 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. The life insurance program provides basic coverage at no cost to retirees and allows converting optional coverages to direct-pay plans. Dental coverage is provided to all retirees eligible for an immediate annuity.

At December 31, 2005 and 2004, the BIF's net postretirement benefit liability recognized in the "Accounts payable and other liabilities" line item in the Balance Sheet was $110 million and $104 million, respectively. In addition, the BIF's expense for these benefits in 2005 and 2004 was $9.0 million and $9.3 million, respectively, which is included in the current and prior year's operating expenses. Key actuarial assumptions used in the accounting for the plan include the discount rate, the rate of compensation increase, and the dental coverage trend rate.

11. Commitments and Off-Balance-Sheet Exposure


Leased Space
The BIF's allocated share of the FDIC's lease commitments totals $78.6 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 and the SAIF. 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 $34 million and $36 million for the years ended December 31, 2005 and 2004, respectively.

Off-Balance-Sheet Exposure:

Deposit Insurance
As of September 30, 2005, deposits insured by the BIF totaled approximately $2.8 trillion. This would be the accounting loss if all depository institutions were to fail and the acquired assets provided no recoveries.

12. Disclosures About the Fair Value of Financial Instruments
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, due to their short maturities and/or comparability 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.

Last Updated 4/10/2006

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