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Federal Deposit
Insurance Corporation

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

2014 Annual Report

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V. Financial Section

Deposit Insurance Fund (DIF)

FEDERAL DEPOSIT INSURANCE CORPORATION
DEPOSIT INSURANCE FUND BALANCE SHEET AT DECEMBER 31
Dollars in Thousands
       2014      2013
Assets
Cash and cash equivalents $1,914,520 $3,543,270
Investment in U.S. Treasury obligations, net (Note 3) 49,805,846 38,510,500
Assessments receivable, net (Note 8) 2,003,424 2,227,735
Interest receivable on investments and other assets, net 651,894 511,428
Receivables from resolutions, net (Note 4) 18,181,498 16,344,991
Property and equipment, net (Note 5) 372,419 377,223
Total Assets $72,929,601 $61,515,147
Liabilities
Accounts payable and other liabilities $291,006 $300,575
Liabilities due to resolutions (Note 6) 7,799,279 12,625,982
Postretirement benefit liability (Note 13) 243,419 193,591
Contingent liabilities for:
Anticipated failure of insured institutions (Note 7) 1,814,770 1,198,960
Litigation losses (Note 7) 950 5,200
Total Liabilities 10,149,424 14,324,308
Commitments and off-balance-sheet exposure (Note 14)
Fund Balance
Accumulated Net Income 62,786,786 47,186,974
Accumulated Other Comprehensive Income
Unrealized gain on U.S. Treasury investments, net (Note 3) 51,142 20,215
Unrealized postretirement benefit loss (Note 13) (57,751) (16,350)
Total Accumulated Other Comprehensive Income (6,609) 3,865
Total Fund Balance 62,780,177 47,190,839
Total Liabilities and Fund Balance $72,929,601 $61,515,147

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

Deposit Insurance Fund (DIF)

FEDERAL DEPOSIT INSURANCE CORPORATION
DEPOSIT INSURANCE FUND STATEMENT OF INCOME AND FUND BALANCE
FOR THE YEARS ENDED DECEMBER 31
Dollars in Thousands
       2014      2013
Revenue
Assessments (Note 8) $8,656,082 $9,734,173
Interest on U.S. Treasury obligations 281,924 103,363
Other revenue (Note 9) 27,059 163,154
Gain on sale of trust preferred securities (Note 10) 0 458,176
Total Revenue 8,965,065 10,458,866
Expenses and Losses
Operating expenses (Note 11) 1,664,344 1,608,717
Provision for insurance losses (Note 12) (8,305,577) (5,659,388)
Insurance and other expenses 6,486 4,799
Total Expenses and Losses (6,634,747) (4,045,872)
Net Income 15,599,812 14,504,738
Other Comprehensive Income
Unrealized (loss) gain on U.S. Treasury investments, net 30,927 (13,604)
Unrealized postretirement benefit loss (Note 13) (41,401) 44,097
Unrealized gain (loss) on trust preferred securities (Note 10) 0 (302,159)
Total Other Comprehensive Loss (10,474) (271,666)
Comprehensive Income 15,589,338 14,233,072
Fund Balance - Beginning 47,190,839 32,957,767
Fund Balance - Ending $62,780,177 $47,190,839

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

Deposit Insurance Fund (DIF)

FEDERAL DEPOSIT INSURANCE CORPORATION
DEPOSIT INSURANCE FUND STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
Dollars in Thousands
       2014      2013
Operating Activities
Provided by:
Assessments $8,873,123 $7,111,902
Interest on U.S. Treasury obligations 1,450,939 1,080,157
Dividends and interest on trust preferred securities 0 154,393
Recoveries from financial institution resolutions 4,099,804 5,696,453
Miscellaneous receipts 78,558 79,773
Used by:
Operating expenses (1,586,858) (1,558,229)
Disbursements for financial institution resolutions (1,860,014) (3,857,214)
Refunds of prepaid assessments (Note 8) 0 (5,850,135)
Miscellaneous disbursements (15,385) (17,228)
Net Cash Provided by Operating Activities 11,040,167 2,839,872
Investing Activities
Provided by:
Maturity of U.S. Treasury obligations 17,158,275 27,704,523
Sale of trust preferred securities (Note 10) 0 2,420,000
Used by:
Purchase of property and equipment (55,295) (57,390)
Purchase of U.S. Treasury obligations (29,771,897) (32,464,096)
Net Cash (Used) by Investing Activities (12,668,917) (2,396,963)
Net (Decrease) Increase in Cash and Cash Equivalents (1,628,750) 442,909
Cash and Cash Equivalents - Beginning 3,543,270 3,100,361
Cash and Cash Equivalents - Ending $1,914,520 $3,543,270

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

Notes to the Financial Statements

DEPOSIT INSURANCE FUND

December 31, 2014 and 2013

1. 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 FDIC’s operations are generally found in the Federal Deposit Insurance (FDI) Act, as amended (12 U.S.C. 1811, et seq).  In accordance with the FDI Act, the FDIC, as administrator of the Deposit Insurance Fund (DIF), insures the deposits of banks and savings associations (insured depository institutions).  In cooperation with other federal and state agencies, the FDIC promotes the safety and soundness of insured depository institutions (IDIs) by identifying, monitoring, and addressing risks to the DIF.  Commercial banks, savings banks and savings associations (known as “thrifts”) are supervised by either the FDIC, the Office of the Comptroller of the Currency, or the Federal Reserve Board. 

In addition to being the administrator of the DIF, the FDIC is the administrator of the FSLIC Resolution Fund (FRF).  The FRF is a resolution fund responsible for the sale of the remaining assets and the satisfaction of the liabilities associated with the former Federal Savings and Loan Insurance Corporation (FSLIC) and the former Resolution Trust Corporation.  The FDIC maintains the DIF and the FRF separately to support their respective functions.

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the FDIC also manages the Orderly Liquidation Fund (OLF).  Established as a separate fund in the U.S. Treasury (Treasury), the OLF is inactive and unfunded until the FDIC is appointed as receiver for a covered financial company.  A covered financial company is a failing financial company (for example, a bank holding company or nonbank financial company) for which a systemic risk determination has been made as set forth in section 203 of the Dodd-Frank Act. 

The Dodd-Frank Act (Public Law 111-203) granted the FDIC authority to establish a widely available program to guarantee obligations of solvent IDIs or solvent depository institution holding companies (including affiliates) upon the systemic risk determination of a liquidity event during times of severe economic distress.  The program would not be funded by the DIF but rather by fees and assessments paid by all participants in the program.  If fees are insufficient to cover losses or expenses, the FDIC must impose a special assessment on participants as necessary to cover the shortfall.  Any excess funds at the end of the liquidity event program would be deposited in the General Fund of the Treasury. 

The Dodd-Frank Act also created the Financial Stability Oversight Council (FSOC) of which the Chairman of the FDIC is a member and expanded the FDIC’s responsibilities to include supervisory review of resolution plans (known as living wills) and backup examination authority for systemically important bank holding companies and nonbank financial companies.  The living wills provide for an entity’s rapid and orderly resolution in the event of material financial distress or failure.

OPERATIONS OF THE DIF

The primary purposes of the DIF are to (1) insure the deposits and protect the depositors of IDIs and (2) resolve failed IDIs upon appointment of the FDIC as receiver in a manner that will result in the least possible cost to the DIF.

The DIF is primarily funded from deposit insurance assessments.  Other available funding sources, if necessary, are borrowings from the Treasury, the Federal Financing Bank (FFB), Federal Home Loan Banks, and IDIs.   The FDIC has borrowing authority of $100 billion from the Treasury and a Note Purchase Agreement with the FFB, not to exceed $100 billion, to enhance the DIF’s ability to fund deposit insurance. 

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 Treasury.  The MOL for the DIF was $162.0 billion and $146.0 billion as of December 31, 2014 and 2013, respectively. 

OPERATIONS OF RESOLUTION ENTITIES

The FDIC is responsible for managing and disposing of the assets of failed institutions in an orderly and efficient manner.  The assets held by receiverships, pass-through conservatorships, and bridge institutions (collectively, resolution entities), and the claims against them, are accounted for separately from the DIF assets and liabilities to ensure that proceeds from these entities are distributed according to applicable laws and regulations.  Therefore, income and expenses attributable to resolution entities are accounted for as transactions of those entities.  The FDIC bills resolution entities for services provided on their behalf.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL

These financial statements include the financial position, results of operations, and cash flows of the DIF and are presented in accordance with U.S. generally accepted accounting principles (GAAP).  These statements do not include reporting for assets and liabilities of resolution entities because these entities are legally separate and distinct, and the DIF does not have any ownership or beneficial interests in them.  Periodic and final accounting reports of resolution entities are furnished to courts, supervisory authorities, and others upon request.

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 potential 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 (including shared-loss agreements); guarantee obligations for structured transactions; the postretirement benefit obligation; and the estimated losses for anticipated failures, litigation, and representations and indemnifications. 

CASH EQUIVALENTS

Cash equivalents are short-term, highly liquid investments consisting primarily of U.S. Treasury Overnight Certificates.

INVESTMENT IN U.S. TREASURY OBLIGATIONS

The FDI Act requires that the DIF funds 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 Treasury must approve all such investments in excess of $100,000 and has granted the FDIC approval to invest the DIF funds only in U.S. Treasury obligations that are purchased or sold exclusively through the Bureau of the Fiscal Service’s Government Account Series program.

The DIF’s investments in U.S. Treasury obligations are classified as available-for-sale.  Securities designated as available-for-sale are shown at fair value.  Unrealized gains and losses are reported as other comprehensive income.  Realized gains and losses are included in the Statement of Income and Fund Balance as components of net income.  Income on securities is calculated and recorded daily using the effective interest or straight-line method depending on the maturity of the security. 

REVENUE RECOGNITION FOR ASSESSMENTS

Assessment revenue is recognized for the quarterly period of insurance coverage 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, certain changes in supervisory examination ratings for larger institutions, as well as modest assessment base growth and average assessment rate adjustment factors.  At the subsequent quarter-end, the estimated revenue amounts are adjusted when actual assessments for the covered period are determined for each institution (see Note 8). 

CAPITAL ASSETS AND DEPRECIATION

The FDIC buildings are depreciated on a straight-line basis over a 35- to 50-year estimated life.  Building improvements are capitalized and depreciated over the estimated useful life of the improvements.  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 useful life include mainframe equipment; furniture, fixtures, and general equipment; and internal-use software.  Computer equipment is depreciated on a straight-line basis over a three-year estimated useful life.

REPORTING ON VARIABLE INTEREST ENTITIES

The FDIC receiverships engaged in structured transactions, some of which resulted in the issuance of note obligations that were guaranteed by the FDIC, in its corporate capacity. As the guarantor of note obligations for several structured transactions, the FDIC, in its corporate capacity, holds an interest in many variable interest entities (VIEs).  The FDIC conducts a qualitative assessment of its relationship with each VIE as required by Accounting Standards Codification (ASC) Topic 810, Consolidation.  These assessments are conducted to determine if the FDIC, in its corporate capacity, has (1) power to direct the activities that most significantly affect the economic performance of the VIE and (2) an obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.  When a variable interest holder has met both of these characteristics, the enterprise is considered the primary beneficiary and must consolidate the VIE.  In accordance with the provisions of ASC 810, an assessment of the terms of the legal agreement for each VIE was conducted to determine whether any of the terms had been activated or modified in a manner that would cause the FDIC, in its corporate capacity, to be characterized as a primary beneficiary.  In making that determination, consideration was given to which, if any, activities were significant to each VIE.  Often, the right to service collateral, to liquidate collateral, or to unilaterally dissolve the limited liability company (LLC) or trust was determined to be the most significant activity.  In other cases, it was determined that the structured transactions did not include such significant activities and that the design of the entity was the best indicator of which party was the primary beneficiary.

The conclusion of these analyses was that the FDIC, in its corporate capacity, has not engaged in any activity that would cause the FDIC to be characterized as a primary beneficiary to any VIE with which it was involved as of December 31, 2014 and 2013.  Therefore, consolidation is not required for the 2014 and 2013 DIF financial statements.  In the future, the FDIC, in its corporate capacity, may become the primary beneficiary upon the activation of provisional contract rights that extend to the FDIC if payments are made on guarantee claims.  Ongoing analyses will be required to monitor consolidation implications under ASC 810.

The FDIC’s involvement with VIEs is fully described in Note 7.

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.

DISCLOSURE ABOUT RECENT RELEVANT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606).  The ASU will require an entity to recognize revenue based on the amount it expects to be entitled for the transfer of promised goods or services.  For the DIF, the new standard is effective for annual periods beginning after December 15, 2017.  The FDIC does not expect this new ASU to have a material impact on the DIF.

Other recent accounting pronouncements have been deemed not applicable or material to the financial statements as presented.

3. INVESTMENT IN U.S. TREASURY OBLIGATIONS

Investments in U.S. Treasury obligations, totaled $49.8 billion as of December 31, 2014, and $38.5 billion as of December 31, 2013.  As of December 31, 2014 and 2013, the DIF held $2.5 billion and $4.6 billion, respectively, of Treasury Inflation-Protected Securities (TIPS), which are indexed to increases or decreases in the Consumer Price Index for All Urban Consumers (CPI-U).

INVESTMENT IN U.S. TREASURY OBLIGATIONS AT DECEMBER 31, 2014
Dollars in Thousands
Maturity Yield at
Purchase1
Face
Value
Net
Carrying
Amount
Unrealized
Holding
Gains
Unrealized
Holding
Losses
Fair
Value
U.S. Treasury notes and bonds
Within 1 year 0.28% $12,450,000 $12,861,127 $2,291 $(4,516) $12,858,902
After 1 year through 5 years 0.91% 33,901,209 34,393,283 86,212 (5,759) 34,473,736
U.S. Treasury Inflation-Protected Securities
Within 1 year -1.03% 1,500,000 1,759,237 0 (17,120) 1,742,117
After 1 year through 5 years -0.43% 700,000 741,057 0 (9,966) 731,091
Total   $48,551,209 $49,754,704 $88,503 $(37,361)2 $49,805,846

1 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 2.0 percent, issued by the Congressional Budget Office and Blue Chip Economic Indicators in early 2014.

2 The unrealized losses occurred as a result of temporary changes in market interest rates. These unrealized losses occurred over a period of less than a year. The FDIC does not intend to sell the securities and is not likely to be required to sell them before their maturity date, thus, the FDIC does not consider these securities to be other than temporarily impaired at December 31, 2014. The aggregate related fair value of securities with unrealized losses was $19.0 billion as of December 31, 2014.

INVESTMENT IN U.S. TREASURY OBLIGATIONS AT DECEMBER 31, 2013
Dollars in Thousands
Maturity Yield at
Purchase1
Face
Value
Net
Carrying
Amount
Unrealized
Holding
Gains
Unrealized
Holding
Losses
Fair
Value
U.S. Treasury notes and bonds
Within 1 year 0.23% $14,300,000 $14,552,418 $4,167 $(31) $14,556,554
After 1 year through 5 years 0.70% 18,351,209 19,382,202 24,408 (14,013) 19,392,597
U.S. Treasury Inflation-Protected Securities
Within 1 year -0.86% 2,150,000 2,464,330 1,050 (1,130) 2,464,250
After 1 year through 5 years -0.99% 1,800,000 2,091,335 5,788 (24) 2,097,099
Total   $36,601,209 $38,490,285 $35,413 $(15,198)2 $38,510,500

1 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 2.0 percent, based on figures issued by the Congressional Budget Office and Blue Chip Economic Indicators in early 2013.

2The unrealized losses occurred as a result of temporary changes in market interest rates. These unrealized losses occurred over a period of less than a year. The FDIC does not intend to sell the securities and is not likely to be required to sell them before their maturity date, thus, the FDIC does not consider these securities to be other than temporarily impaired at December 31, 2013.

4. RECEIVABLES FROM RESOLUTIONS, NET

RECEIVABLES FROM RESOLUTIONS,
NET AT DECEMBER 31
Dollars in Thousands
  2014      2013     
Receivables from closed banks $98,360,904 $106,291,226
Allowance for losses (80,179,406) (89,946,235)
Total $18,181,498 $16,344,991

 

The receivables from resolutions result from DIF payments to cover obligations to insured depositors (subrogated claims), advances to resolution entities for working capital, and administrative expenses paid on behalf of resolution entities.  Any related allowance for loss represents the difference between the funds advanced and/or obligations incurred and the expected repayment.  Estimated future payments on losses incurred on assets sold to an acquiring institution under a shared-loss agreement (SLA) are factored into the computation of the expected repayment.  Assets held by DIF resolution entities (including structured transaction-related assets; see Note 7) are the main source of repayment of the DIF’s receivables from resolutions. 

As of December 31, 2014, the FDIC had 481 active receiverships, including 18 established in 2014.  The DIF resolution entities held assets with a book value of $29.7 billion as of December 31, 2014, and $38.4 billion as of December 31, 2013 (including $22.0 billion and $27.1 billion, respectively, of cash, investments, receivables due from the DIF, and other receivables).  Ninety-nine percent of the current asset book value of $29.7 billion is held by resolution entities established since the beginning of 2008.

Estimated cash recoveries from the management and disposition of assets that are used to determine the allowance for losses are based on asset recovery rates from several sources, including actual or pending institution-specific asset disposition data, failed institution-specific asset valuation data, aggregate asset valuation data on several recently failed or troubled institutions, sampled asset valuation data, and empirical asset recovery data based on failures since 1990.  Methodologies for determining the asset recovery rates incorporate estimating future cash recoveries, net of applicable liquidation cost estimates, and discounting based on market-based risk factors applicable to a given asset’s type and quality. The resulting estimated cash recoveries are then used to derive the allowance for loss on the receivables from these resolutions.

For failed institutions resolved using a whole bank purchase and assumption transaction with an accompanying SLA, the projected future shared-loss payments on the covered assets sold to the acquiring institution under the agreement are considered in determining the allowance for loss on the receivables from these resolutions.  The shared-loss cost projections are based on the covered assets’ intrinsic value, which is determined using financial models that consider the quality, condition and type of covered assets, current and future market conditions, risk factors, and estimated asset holding periods.  For year-end 2014, the shared-loss cost estimates were updated for all 281 active SLAs.  The updated shared-loss cost projections for the larger agreements were primarily based on new third-party valuations estimating the cumulative loss of covered assets.  The updated shared-loss cost projections on the remaining agreements were based on a random sample of institutions selected for new third-party loss estimations, and valuation results from the sampled institutions were aggregated and extrapolated to the non-sampled institutions by asset type and performance status.

Also reflected in the allowance for loss calculation are end-of-agreement SLA “true-up” recoveries.  True-up recoveries are projected to be received at expiration in accordance with the terms of the SLA, if actual losses at expiration are lower than originally estimated.

Note that estimated asset recoveries are regularly evaluated during the year, but remain subject to uncertainties because of potential changes in economic and market conditions, which may cause the DIF’s actual recoveries to vary significantly from current estimates.

WHOLE BANK PURCHASE AND ASSUMPTION TRANSACTIONS WITH SHARED-LOSS AGREEMENTS

Since the beginning of 2008, the FDIC resolved 304 failures using whole bank purchase and assumption resolution transactions with accompanying SLAs on total assets of $216.5 billion purchased by the financial institution acquirers.  The acquirer typically assumes all of the deposits and purchases essentially all of the assets of a failed institution.  The majority of the commercial and residential loan assets are purchased under an SLA, where the FDIC agrees to share in future losses and recoveries experienced by the acquirer on those assets covered under the agreement.  The FDIC uses SLAs to keep assets in the private sector and to minimize disruptions to loan customers.

Losses on the covered assets of failed institutions are shared between the acquirer and the FDIC, in its receivership capacity, when losses occur through the sale, foreclosure, loan modification, or charge-off of loans under the terms of the SLA.  The majority of the agreements cover commercial and single-family loans over a five- to ten-year shared-loss period, respectively, with the receiver covering 80 percent of the losses incurred by the acquirer and the acquiring institution covering 20 percent.  Prior to March 26, 2010, most SLAs included a threshold amount, above which the receiver covered 95 percent of the losses incurred by the acquirer.  Recoveries by the acquirer on covered commercial and single-family SLA losses are also shared over an eight- to ten-year period, respectively.  Note that future recoveries on SLA losses are not factored into the DIF allowance for loss calculation because the amount and timing of such receipts are not determinable.

The estimated shared-loss liability is accounted for by the receiver and is included in the calculation of the DIF’s allowance for loss against the corporate receivable from the resolution.  As shared-loss claims are asserted and proven, DIF receiverships satisfy these shared-loss payments using available liquidation funds and/or by drawing on amounts due from the DIF for funding the deposits assumed by the acquirer (see Note 6).

Receiverships with SLAs made cumulative shared-loss payments totaling $28.2 billion, (comprised of $31.8 billion in losses, net of $3.6 billion of recoveries) as of year-end 2014 and $26.4 billion (comprised of $29.1 billion in losses, net of $2.7 billion of recoveries) as of year-end 2013.  Estimates of additional payments, net of true-up recoveries, by DIF receiverships over the duration of the SLAs were $3.9 billion on total remaining covered assets of $54.6 billion at December 31, 2014, and $12.3 billion on total remaining covered assets of $78.2 billion as of December 31, 2013. 

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the DIF to concentrations of credit risk are receivables from resolutions.  The repayment of these receivables is primarily influenced by recoveries on assets held by DIF receiverships and payments on the covered assets under SLAs.  The majority of the remaining assets in liquidation ($7.7 billion) and current shared-loss covered assets ($54.6 billion), which together total $62.3 billion, are concentrated in commercial loans ($22.0 billion), residential loans ($31.0 billion), and structured transaction-related assets as described in Note 7 ($5.2 billion).  Most of the assets originated from failed institutions located in California ($20.5 billion), Florida ($7.2 billion), Puerto Rico ($7.2 billion), Alabama ($4.6 billion), Illinois ($3.8 billion), and Georgia ($3.6 billion).

5. PROPERTY AND EQUIPMENT, NET

PROPERTY AND EQUIPMENT,
NET AT DECEMBER 31
Dollars in Thousands
  2014   2013  
Land $37,352 $37,352
Buildings (including leasehold improvements) 326,067 314,775
Application software (includes work-in-process) 142,907 149,115
Furniture, fixtures, and equipment 104,761 142,621
Accumulated depreciation (238,668) (266,640)
Total $372,419 $377,223

The depreciation expense was $60 million and $73 million for 2014 and 2013, respectively.

6. LIABILITIES DUE TO RESOLUTIONS

As of December 31, 2014 and 2013, the DIF recorded liabilities totaling $7.8 billion and $12.6 billion, respectively, to resolution entities representing the agreed-upon value of assets transferred from the receiverships, at the time of failure, to the acquirers/bridge institutions for use in funding the deposits assumed by the acquirers/bridge institutions.  Ninety-one percent of these liabilities are due to failures resolved under whole-bank purchase and assumption transactions, most with an accompanying SLA.  The DIF satisfies these liabilities either by sending cash directly to the receivership to fund shared-loss and other expenses or by offsetting receivables from resolutions when the receivership declares a dividend.

In addition, as of December 31, 2014 and 2013, the DIF recorded liabilities of $12 million and $29 million, respectively, in unpaid deposit claims related to multiple receiverships, which are offset by receivables included in the “Receivables from resolutions, net” line item on the Balance Sheet.  The DIF pays these liabilities when the claims are approved. 

7. 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, absent some favorable event such as obtaining additional capital or merging, when the liability is probable and reasonably estimable. The contingent liability is derived by applying expected failure rates and loss rates to the institutions based on supervisory ratings, balance sheet characteristics, and projected capital levels.

The banking industry’s financial condition and performance continued to improve in 2014.  According to the quarterly financial data submitted by DIF-insured institutions, the industry reported total net income of $116.0 billion for the first nine months of 2014, an increase of 1.1 percent over the comparable period one year ago.  The industry’s capital levels also continued to improve, and noncurrent loans declined, as the industry’s ratio of noncurrent loans-to-total loans fell to its lowest level since the second quarter of 2008.

Losses to the DIF from failures that occurred in 2014 were lower than the contingent liability at the end of 2013, as the aggregate number and size of institution failures in 2014 were less than anticipated.  However, the contingent liability increased from $1.2 billion at December 31, 2013 to $1.8 billion at December 31, 2014, as the effect of an increase in the failure rates for certain institutions contributing to the contingent liability more than offset the removal of the liability for institutions that failed in 2014.

In addition to the recorded contingent liabilities, the FDIC has identified risks in the financial services industry that could result in additional losses 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 of approximately $1.7 billion as of December 31, 2014, as compared to $3.0 billion as of year-end 2013.  The actual losses, if any, will largely depend on future economic and market conditions and could differ materially from this estimate.

During 2014, 18 institutions failed with combined assets of $2.9 billion at the date of failure.  Recent trends in supervisory ratings and market data suggest that the financial performance and condition of the banking industry should continue to improve over the coming year.  However, exposure to interest rate risk, reliance on short-term sources of funding, and limited opportunities for revenue growth will continue to stress the industry.  Additionally, key risks continue to weigh on the economic outlook as well, including the impact of rising interest rates as they return to more normal levels; fiscal challenges at federal, state, and local levels; and global economic risks.  The FDIC continues to evaluate ongoing risks to affected institutions in light of existing economic and financial conditions, and the extent to which such risks may put stress on the resources of the insurance fund.

Litigation Losses

The DIF records an estimated loss for unresolved legal cases to the extent that those losses are considered probable and reasonably estimable.  The FDIC recorded probable litigation losses of $950 thousand and $5 million for the DIF as of December 31, 2014 and 2013, respectively. In addition, the FDIC has determined that there are no reasonably possible losses from unresolved cases at year-end 2014, compared to $125 thousand at year-end 2013.

Other Contingencies

IndyMac Federal Bank Representation and Indemnification Contingent Liability

On March 19, 2009, the FDIC as receiver for IndyMac Federal Bank (IMFB) and certain subsidiaries (collectively, Sellers) sold substantially all of the assets, which included mortgage loans and servicing rights, of IMFB and its respective subsidiaries to OneWest Bank and its affiliates (the “Acquirers”).   The Sellers made certain representations customarily made by commercial parties in similar transactions.  The FDIC, in its corporate capacity, guaranteed the receivership’s indemnification obligations under the sale agreements.  Until the periods for asserting claims under these arrangements have expired and all indemnification claims are quantified and paid, losses could continue to be incurred by the receivership and, in turn, the DIF.

Under the sales agreements, the Acquirers have rights to assert claims to recover losses incurred as a result of third-party claims and breaches of representations.  Assets sold subject to representation and warranty indemnification total $171.6 billion.  The IndyMac receivership has paid cumulative claims totaling $21 million through December 31, 2014, and $15 million through December 31, 2013. Additional quantified claims asserted and under review have been accrued in the amount of $6 million and $7 million as of December 31, 2014 and 2013, respectively.  The FDIC is evaluating the likelihood of additional losses for alleged breaches as follows:

In addition to the alleged breaches discussed above, the FDIC believes it is likely that additional losses will be incurred.  However quantifying the contingent liability associated with the liabilities to investors and indemnification for breaches of sale agreement representations is subject to a number of uncertainties, including market conditions, the occurrence of borrower defaults and resulting foreclosures and losses.  Because of these and other uncertainties that surround the liability associated with the quantification of possible losses, the FDIC has determined that, while additional losses are probable, the amount is not currently estimable.

Purchase and Assumption Indemnification

In connection with purchase and assumption agreements for resolutions, the FDIC in its receivership capacity generally indemnifies the purchaser of a failed institution’s assets and liabilities in the event a third party asserts a claim against the purchaser unrelated to the explicit assets purchased or liabilities assumed at the time of failure.  The FDIC, in its corporate capacity, is a secondary guarantor if a receivership is unable to pay.  These indemnifications generally extend for a term of six years after the date of institution failure.  The FDIC is unable to estimate the maximum potential liability for these types of guarantees as the agreements do not specify a maximum amount and any payments are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time.  During 2014 and 2013, the FDIC, in its corporate capacity, made no indemnification payments under such agreements, and no amount has been accrued in the accompanying financial statements with respect to these indemnification guarantees.

FDIC Guaranteed Debt of Structured Transactions

The FDIC as receiver uses three types of structured transactions to dispose of certain performing and non-performing residential mortgage loans, commercial loans, construction loans, and mortgage-backed securities held by the receiverships.  The three types of structured transactions are (1) limited liability companies (LLCs), (2) securitizations, and (3) structured sale of guaranteed notes (SSGNs). 

LLCs

Under the LLC structure, the FDIC, in its receivership capacity, contributes a pool of assets to a newly formed LLC and offers for sale, through a competitive bid process, some of the equity in the LLC.  The day-to-day management of the LLC transfers to the highest bidder, along with the purchased equity interest. 

The LLCs issued notes to the receiverships to partially fund the purchased assets.  In many instances, the FDIC, in its corporate capacity, guaranteed notes issued by the LLCs.  This guarantee covers the timely payment of principal and interest due on the notes.  In exchange for the guarantee, the DIF receives a guarantee fee from the LLCs.  If the FDIC is required to perform under the guarantee, it acquires an interest in the cash flows of the LLC equal to the amount of guarantee payments made plus accrued interest.  Equity holders receive cash flows from the LLCs once all expenses have been paid, the guaranteed notes have been satisfied, and the FDIC has been reimbursed for any guarantee payments.   

In the event of note payment default, the FDIC as guarantor is entitled to exercise or cause the exercise of certain rights and remedies including (1) accelerating the payment of the unpaid principal amount of the notes, (2) selling the assets held as collateral, or (3) foreclosing on the equity interests of the debtor.  

Since 2009, private investors purchased a 40- to 50- percent ownership interest in the LLC structures for $1.6 billion in cash and the LLCs issued notes of $4.4 billion to the receiverships to partially fund the purchase of the assets.  The receiverships held the remaining 50- to 60- percent equity interest in the LLCs and, in most cases, the guaranteed notes.  At December 31, 2014, only one guaranteed note with an outstanding balance of $10 million remained, which matures in 2020.  At December 31, 2013, there were two guaranteed notes with outstanding balances totaling $99 million.

Securitizations and SSGNs

Securitizations and SSGNs (collectively, trusts) are transactions in which certain assets or securities from failed institutions are pooled and transferred into a trust structure.  The trusts issue senior and/or subordinated debt instruments and owner trust or residual certificates collateralized by the underlying mortgage-backed securities or loans. 

Since 2010, private investors purchased the senior notes issued by the trusts for $6.2 billion in cash and the receiverships hold the subordinated debt instruments and owner trust or residual certificates.  In exchange for a fee, the FDIC, in its corporate capacity, guarantees the timely payment of principal and interest due on the senior notes, the latest maturity of which is 2050.  If the FDIC is required to perform under its guarantees, it acquires an interest in the cash flows of the trust equal to the amount of guarantee payments made plus accrued interest.  The subordinated note holders and owner trust or residual certificates holders receive cash flows from the entity only after all expenses have been paid, the guaranteed notes have been satisfied, and the FDIC has been reimbursed for any guarantee payments.     

All Structured Transactions with FDIC Guaranteed Debt

Through December 31, 2014, the receiverships have transferred a portfolio of loans with an unpaid principal balance of $16.4 billion and mortgage-backed securities with a book value of $8.8 billion to 14 LLCs and 11 trusts.  The LLCs and trusts subsequently issued notes guaranteed by the FDIC in an original principal amount of $10.6 billion.  Since March 2013, there have been no new guarantee transactions.  As of December 31, 2014 and 2013, the DIF collected guarantee fees totaling $250 million and $231 million, respectively, and recorded a receivable for additional guarantee fees of $42 million and $66 million, respectively, included in the “Interest receivable on investments and other assets, net” line item on the Balance Sheet.  All guarantee fees are recorded as deferred revenue, included in the “Accounts payable and other liabilities” line item, and recognized as revenue primarily on a straight-line basis over the term of the notes.  As of December 31, 2014 and 2013, the amount of deferred revenue recorded was $42 million and $66 million, respectively.  The DIF records no other structured-transaction-related assets or liabilities on its balance sheet.

The estimated loss to the DIF from the guarantees is derived from an analysis of the net present value (using a discount rate of 3.3 percent) of the expected guarantee payments by the FDIC, reimbursements to the FDIC for guarantee payments, and guarantee fee collections.  It is reasonably possible that the DIF could be required to make a guarantee payment of approximately $29 million for an SSGN transaction at note maturity in 2020.  Any guarantee payment made would be fully reimbursed from the proceeds of the liquidation of the SSGN’s underlying collateral.  For all of the remaining transactions, the estimated cash flows from the LLC or trust assets provide sufficient coverage to fully pay the debts.  To date, the FDIC, in its corporate capacity, has not provided, and does not intend to provide, any form of financial or other type of support to a trust or LLC that it was not previously contractually required to provide.

As of December 31, 2014 and 2013, the maximum loss exposure was $10 million and $99 million for LLCs and $2.1 billion and $2.8 billion for trusts, respectively, representing the sum of all outstanding debt guaranteed by the FDIC. 

8. ASSESSMENTS

The framework for the FDIC deposit insurance assessment system is mandated by section 7 of the FDI Act, and the provisions for implementation are contained in part 327 of title 12 of the Code of Federal Regulations.  The FDI Act requires a risk-based assessment system and payment of assessments by all IDIs.

In response to the Dodd-Frank Act, the FDIC implemented several changes to the assessment system and developed a comprehensive, long-term fund management plan.  The plan is designed to restore and maintain a positive fund balance for the DIF even during a banking crisis and achieve moderate, steady assessment rates throughout any economic cycle.  Summarized below are actions taken to implement assessment system changes and provisions of the comprehensive plan.

Assessment Revenue

Annual assessment rates averaged approximately 6.8 cents per $100 of the assessment base and 7.8 cents per $100 of the assessment base for 2014 and 2013, respectively.  The assessment base is generally defined as the average consolidated total assets minus the average tangible equity (measured as Tier 1 capital) of the IDI during the assessment period.

In December 2009, a majority of IDIs prepaid $45.7 billion of estimated quarterly risk-based assessments to address the DIF’s liquidity need to pay for projected failures and to ensure that the deposit insurance system remained industry-funded.  For each interim quarter, an institution’s risk-based deposit insurance assessment was offset by the available amount of prepaid assessments.  The final offset of prepaid assessments occurred for the period ending March 31, 2013, and in June 2013, as required by regulation, the DIF refunded $5.9 billion of unused prepaid assessments to IDIs. 

The “Assessments receivable, net” line item on the Balance Sheet of $2.0 billion and $2.2 billion represents the estimated premiums due from IDIs for the fourth quarter of 2014 and 2013, respectively.  The actual deposit insurance assessments for the fourth quarter of 2014 will be billed and collected at the end of the first quarter of 2015.  During 2014 and 2013, $8.7 billion and $9.7 billion, respectively, were recognized as assessment revenue from institutions.

Reserve Ratio

As of September 30, 2014 and December 31, 2013, the DIF reserve ratio was 0.89 percent and 0.79 percent, respectively, of estimated insured deposits.

Assessments Related to FICO

Assessments continue to be 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 former 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.  As of December 31, 2014 and 2013, approximately $793 million and $792 million, respectively, was collected and remitted to the FICO.

9. OTHER REVENUE

OTHER REVENUE FOR THE YEARS ENDED DECEMBER 31
Dollars in Thousands
  2014  2013  
Dividends and interest on Citigroup trust preferred securities (Note 10) $0 $124,726
Guarantee fees for structured transactions (Note 7) 19,662 33,051
Other 7,397 5,377
Total $27,059 $163,154

10. GAIN ON THE SALE OF TRUST PREFERRED SECURITIES

Pursuant to a systemic risk determination, the Treasury, the FDIC, and the Federal Reserve Bank of New York executed terms of a guarantee agreement on January 15, 2009, with Citigroup to provide loss protection on a pool of approximately $301.0 billion of assets that remained on the balance sheet of Citigroup.  On December 23, 2009, Citigroup terminated this guarantee agreement, citing improvements in its financial condition.  The FDIC did not incur any losses as a result of the guarantee and retained $2.225 billion (liquidation amount) of the $3.025 billion in trust preferred securities (TruPS) received as consideration for the period of guarantee coverage.  The DIF recorded the TruPS at their fair value and recognized revenue of $1.962 billion upon termination of the agreement.

To facilitate a sale of the retained TruPS, the FDIC exchanged the TruPS on September 9, 2013, for $2.420 billion (principal amount) of Citigroup marketable subordinated notes.  The exchange resulted in a realized gain to the DIF of $458 million, reported in the “Gain on sale of trust preferred securities” line item on the Statement of Income and Fund Balance.  FDIC reclassified the $458 million out of accumulated other comprehensive income to “Gain on sale of trust preferred securities,” representing the sum of unrealized gains recorded as of December 31, 2012, ($302 million) and holding gains arising during 2013 ($156 million).  The resulting net effect on the DIF Statement of Income and Fund Balance was a $156 million increase to the 2013 comprehensive income.

On September 10, 2013, the subordinated notes were sold to the institutional fixed income market for the principal amount of $2.420 billion, resulting in the recognition of $1.6 million for one day of accrued interest on the subordinated notes, which is included in the 2013 “Other revenue” line item on the Statement of Income and Fund Balance (see Note 9).  Also included in the 2013 “Other revenue” line item is $123.1 million for dividends and interest earned on the TruPS in 2013 prior to their disposition (see Note 9).

11. OPERATING EXPENSES

Operating expenses were $1.7 billion and $1.6 billion for 2014 and 2013, respectively.  The chart below lists the major components of operating expenses.

OPERATING EXPENSES
FOR THE YEARS ENDED DECEMBER 31
Dollars in Thousands
  2014    2013   
Salaries and benefits $1,252,167 $1,292,551
Outside services 263,649 326,040
Travel 93,720 96,056
Buildings and leased space 96,596 91,469
Software/Hardware maintenance 58,844 56,297
Depreciation of property and equipment 59,634 72,828
Other 28,999 29,505
Subtotal 1,853,609 1,964,746
Less: Services billed to resolution entities (189,265) (356,029)
Total 1,664,344 $1,608,717

12. PROVISION FOR INSURANCE LOSSES

The provision for insurance losses was a negative $8.3 billion for 2014, compared to negative $5.7 billion for 2013.  The negative provision for 2014 primarily resulted from a decrease of $9.1 billion in the estimated losses for institutions that failed in current and prior years, partially offset by an increase of $850 million in the contingent liability for anticipated failures due to the deterioration in the financial condition of certain troubled institutions.

As described in Note 4, the estimated recoveries from assets held by receiverships and estimated payments related to assets sold by receiverships to acquiring institutions under shared-loss agreements (SLAs) are used to derive the loss allowance on the receivables from resolutions.  The $9.1 billion reduction in the estimated losses from failures was primarily attributable to two components.  The first component was unanticipated recoveries of $1.8 billion in litigation settlements, professional liability claims, and tax refunds by the receiverships.  These are not recognized until the cash is received since significant uncertainties surround their recovery.

The second component of the reduction in the estimated losses from failures was a $6.7 billion decrease in the receiverships’ shared-loss liability that resulted from decreases in covered asset balances, lower future loss rate estimates, and unanticipated recoveries on SLA losses.  Covered asset balances decreased by $23.6 billion during 2014 with lower than anticipated losses.  These lower than anticipated losses were due to loan amortizations and pay-downs, resulting from the improvement in the condition of real estate markets where shared-loss assets are concentrated, and the expiration of 83 commercial asset shared-loss coverage agreements in 2014, thereby ending the loss claim period.   The reduction in future loss rate estimates resulted from the improvement in the real estate markets and the composition of the remaining covered asset portfolios, which primarily consist of performing single family assets.  These assets have historically experienced significantly lower losses than commercial assets.  Finally, unanticipated recoveries of approximately $958 million on previous shared-loss claims, which are not estimated due to their uncertainty, were received by the receiverships during 2014.

13. 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.  The U.S. Office of Personnel Management (OPM) reports on and accounts for these amounts.

Eligible FDIC employees also may participate in a FDIC-sponsored tax-deferred 401(k) savings plan with matching contributions up to 5 percent.  Under the Federal Thrift Savings Plan (TSP), the 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, but they do not receive agency matching contributions.

PENSION BENEFITS AND
SAVINGS PLANS EXPENSES
FOR THE YEARS ENDED DECEMBER 31
Dollars in Thousands
  2014   2013  
Civil Service Retirement System $4,698 $5,430
Federal Employees Retirement System (Basic Benefit) 99,954 99,553
FDIC Savings Plan 37,304 37,816
Federal Thrift Savings Plan 35,144 35,686
Total $177,100 $178,485

Postretirement Benefits other than Pensions

The DIF has no postretirement health insurance liability since all eligible retirees are covered by the Federal Employees Health Benefits (FEHB) program.  OPM administers and accounts for the FEHB.  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 coverage to direct-pay plans.  For the dental coverage, retirees are responsible for a portion of the premium.

The FDIC has elected not to fund the postretirement life and dental benefit liabilities.  As a result, the DIF recognized the underfunded status (the 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, 2014 and 2013, the liability was $243 million and $194 million, respectively, which is recognized in the “Postretirement benefit liability” line item on the Balance Sheet.  The cumulative actuarial losses (changes in assumptions and plan experience) and prior service costs (changes to plan provisions that increase benefits) were $58 million and $16 million at December 31, 2014 and 2013, respectively.  These amounts are reported as accumulated other comprehensive income in the “Unrealized postretirement benefit loss” line item on the Balance Sheet. 

The DIF’s expenses for postretirement benefits for 2014 and 2013 were $14 million and $18 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 losses/gains and prior service costs for 2014 and 2013 of negative $41 million and $44 million, respectively, are reported as other comprehensive income in the “Unrealized postretirement benefit (loss) gain” line item on the Statement of Income and Fund Balance.  Key actuarial assumptions used in the accounting for the plan include the discount rate of 4.0 percent, the rate of compensation increase of 3.8 percent, and the dental coverage trend rate of 4.9 percent.  The discount rate of 4.0 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. 

14. COMMITMENTS AND OFF-BALANCE-SHEET EXPOSURE

Commitments:

Leased Space

The FDIC’s lease commitments total $203 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 $56 million and $52 million for 2014 and 2013, respectively.

LEASED SPACE COMMITMENTS
Dollars in Thousands
2015 2016 2017 2018 2019 2020/
Thereafter
$46,502 $45,842 $41,387 $30,900 $26,433 $12,291

Off-Balance-Sheet Exposure:

Deposit Insurance

Estimates of insured deposits are derived primarily from quarterly financial data submitted by IDIs to the FDIC and represent the accounting loss that would be realized if all IDIs were to fail and the acquired assets provided no recoveries.  As of September 30, 2014 and December 31, 2013, estimated insured deposits for the DIF were $6.1 trillion and $6.0 trillion, respectively.

15. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial assets recognized and measured at fair value on a recurring basis at each reporting date include cash equivalents (see Note 2) and the investment in U.S. Treasury obligations (see Note 3).  The following tables present the DIF’s financial assets measured at fair value as of December 31, 2014 and 2013.

ASSETS MEASURED AT FAIR VALUE AT DECEMBER 31, 2014
Dollars in Thousands
Fair Value Measurements Using
  Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Assets
at Fair Value
Assets    
Cash equivalents1 $1,900,105        $1,900,105    
Available-for-Sale Debt Securities 
Investment in U.S. Treasury obligations2 49,805,846        49,805,846   
Total Assets $51,705,951   $0 $0 $51,705,951   

1 Cash equivalents are Special U.S. Treasury Certificates with overnight maturities valued at prevailing interest rates established by the Bureau of the Fiscal Service.

2 The investment in U.S. Treasury obligations is measured based on prevailing market yields for federal government entities.

ASSETS MEASURED AT FAIR VALUE AT DECEMBER 31, 2013
Dollars in Thousands
Fair Value Measurements Using
  Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Assets
at Fair Value
Assets    
Cash equivalents1 $3,534,305        $3,534,305   
Available-for-Sale Debt Securities    
Investment in U.S. Treasury obligations2 38,510,500        38,510,500   
Total Assets $42,044,805    $0 $0 $42,044,805  

1 Cash equivalents are Special U.S. Treasury Certificates with overnight maturities valued at prevailing interest rates established by the Bureau of the Fiscal Service.

2 The investment in U.S. Treasury obligations is measured based on prevailing market yields for federal government entities.

Some of the DIF’s financial assets and liabilities are not recognized at fair value but are recorded at amounts that approximate fair value due to their short maturities and/or comparability with current interest rates.  Such items include interest receivable on investments, assessments receivable, other short-term receivables, and accounts payable and other liabilities.

The net receivables from resolutions primarily include the DIF’s subrogated claim arising from obligations to insured depositors.  The resolution entity 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 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 resolution entity assets (see Note 4), such 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 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 resolution entity payments to the DIF on the subrogated claim does not necessarily correspond with the timing of collections on resolution entity assets.  Therefore, the effect of discounting used by resolution entities should not necessarily be viewed as producing an estimate of fair value for the net receivables from resolutions.

16. INFORMATION RELATING TO THE STATEMENT OF CASH FLOWS

RECONCILIATION OF NET INCOME TO NET CASH FROM OPERATING ACTIVITIES
FOR THE YEARS ENDED DECEMBER 31
Dollars in Thousands
  2014     2013    
Operating Activities
Net Income: $15,599,812 $14,504,738
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of U.S. Treasury obligations 1,387,067 1,139,456
Treasury Inflation-Protected Securities inflation adjustment (37,865) (35,300)
Gain on sale of trust preferred securities 0 (458,176)
Depreciation on property and equipment 59,634 72,829
Loss on retirement of property and equipment 465 220
Provision for insurance losses (8,305,577) (5,659,388)
Unrealized (loss) gain on postretirement benefits (41,401) 44,097
Change in Assets and Liabilities:
Decrease (Increase) in assessments receivable, net 224,311 (1,220,883)
(Increase) in interest receivable and other assets (137,462) (75,014)
Decrease in receivables from resolutions 7,077,627 10,406,392
(Decrease) in accounts payable and other liabilities (9,569) (49,045)
Increase (Decrease) in postretirement benefit liability 49,828 (30,635)
(Decrease) in liabilities due to resolutions (4,826,703) (8,547,803)
(Decrease) in unearned revenue - prepaid assessments 0 (1,576,417)
(Decrease) in refunds of prepaid assessments 0 (5,675,199)
Net Cash Provided by Operating Activities $11,040,167 $2,839,872

17. SUBSEQUENT EVENTS

Subsequent events have been evaluated through February 5, 2015, the date the financial statements are available to be issued.

2015 Failures through Februrary 5, 2015

Through February 5, 2015, two insured institutions failed in 2015 with total losses to the DIF estimated to be $10 million.

 

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