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2001 Annual Report


Financial Statements


Bank Insurance Fund

Bank Insurance Fund Statements of Financial Position at December 31
Dollars in Thousands
ell 2001 2000
Cash and cash equivalents $1,436,613 $156,396
Investment in U.S. Treasury obligations, net: (Note 3)
Held-to-maturity securities 20,477,568 22,510,892
Available-for-sale securities 9,685,367 7,421,597
Interest receivable on investments and other assets, net 547,101 564,398
Receivables from bank resolutions, net (Note 4) 79,155 349,589
Property and equipment, net (Note 5) 303,969 303,438
Total Assets $32,529,773 $31,306,310
Liabilities
Accounts payable and other liabilities $134,990 $165,972
Contingent liabilities for: (Note 6)
Anticipated failure of insured institutions 1,911,000 141,355
Litigation losses 37,123 21,922
Other contingencies 7,835 1,839
Total Liabilities 2,090,948 331,088
Commitments and off-balance-sheet exposure (Note 10)
Fund Balance
Accumulated net income 30,192,903 30,755,569
Unrealized gain on available-for-sale securities, net (Note 3) 245,922 219,653
Total Fund Balance 30,438,825 30,975,222
Total Liabilities and Fund Balance $32,529,773 $31,306,310
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
  2001 2000
Interest on U.S. Treasury obligations $1,834,768 $1,827,404
Assessments (Note 7) 47,777 45,091
Realized gain on sale of U.S. Treasury obligations 78,227 0
Other revenue 35,964 33,369
Total Revenue 1,996,736 1,905,864
Expenses and Losses
Operating expenses 785,855 772,918
Provision for insurance losses (Note 8) 1,756,321 (152,962)
Interest and other insurance expenses 17,226 25,289
Total Expenses and Losses 2,559,402 645,245
Net (Loss)/Income (562,666) 1,260,619
Unrealized gain on available-for-sale securities, net
(Note 3)
26,269 300,420
Comprehensive (Loss)/Income (536,397) 1,561,039
Fund Balance - Beginning 30,975,222 29,414,183
Fund Balance - Ending $30,438,825 $30,975,222
The accompanying notes are an integral part of these financial statements.

 

Bank Insurance Fund Statements of Cash Flows for the Years Ended December 31
Dollars in Thousands
  2001 2000
Cash provided by:
Interest on U.S. Treasury obligations $1,913,936 $1,775,552
Recoveries from bank resolutions 368,603 755,936
Assessments 47,075 48,518
Miscellaneous receipts 38,422 58,349
Cash used by:
Operating expenses (729,635) (742,733)
Disbursements for bank resolutions (84,651) (388,276)
Miscellaneous disbursements (21,696) (24,968)
Net Cash Provided by Operating Activities (Note 13) 1,532,054 1,482,378
Cash Flows From Investing Activities
Cash provided by:
Maturity of U.S. Treasury obligations, held-to-maturity 3,320,000 2,560,000
Maturity and sale of U.S. Treasury obligations, available-for-sale 2,398,572 430,000
Cash used by:
Purchase of property and equipment (61,189) (60,761)
Purchase of U.S. Treasury obligations, held-to-maturity (1,418,875) (1,239,157)
Purchase of U.S. Treasury obligations, available-for-sale (4,490,345) (3,180,519)
Net Cash Used by Investing Activities (251,837) (1,490,437)
Net Increase (Decrease) in Cash and Cash Equivalents 1,280,217 (8,059)
Cash and Cash Equivalents - Beginning 156,396 164,455
Cash and Cash Equivalents - Ending $1,436,613 $156,396
The accompanying notes are an integral part of these financial statements.

 

NOTES TO THE FINANCIAL STATEMENTS
December 31, 2001 and 2000

1. Legislative History and Operations of the Bank Insurance Fund

Legislative History

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

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) was enacted to reform, recapitalize, and consolidate the federal deposit insurance system. The FIRREA created the Bank Insurance Fund (BIF), the Savings Association Insurance Fund (SAIF), and the FSLIC Resolution Fund (FRF). It also designated the FDIC as the administrator of these funds. All three funds are maintained separately to carry out their respective mandates.

The BIF and the SAIF are insurance funds responsible for protecting insured bank and thrift depositors from loss due to institution failures. The FRF is a resolution fund responsible for winding up the affairs of the former Federal Savings and Loan Insurance Corporation (FSLIC) and liquidating the assets and liabilities transferred from the former Resolution Trust Corporation (RTC).

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

In addition to traditional banks and thrifts, several other categories of institutions exist. The Federal Deposit Insurance Act (FDI Act), Section 5(d)(3), provides that a member of one insurance fund may, with the approval of its primary federal supervisor, merge, consolidate with, or acquire the deposit liabilities of an institution that is a member of the other insurance fund without changing insurance fund status for the acquired deposits. These institutions with deposits insured by both insurance funds are referred to as Oakar financial institutions. The FDI Act, Section 5(d)(2)(G), allows SAIF-member thrifts to convert to a bank charter and retain their SAIF membership. These institutions are referred to as Sasser financial institutions. The Home Owners’ Loan Act (HOLA), Section 5(o), allows BIF-member banks to convert to a thrift charter and retain their BIF membership. These institutions are referred to as HOLA thrifts.


Other Significant Legislation

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

The Omnibus Budget Reconciliation Act of 1990 (1990 OBR Act), the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), and the Deposit Insurance Funds Act of 1996 (DIFA) made changes to the FDIC’s assessment authority (see Note 7) and borrowing authority. The FDICIA also requires the FDIC to: 1) resolve failing institutions in a manner that will result in the least possible cost to the deposit insurance funds and 2) maintain the insurance funds at 1.25 percent of estimated insured deposits or a higher percentage as circumstances warrant.

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


Recent Legislative Initiatives


Legislation on deposit insurance reform was introduced during February 2002 in the House and Senate. The legislative proposals include merging BIF and SAIF, modifying restrictions on charging risk-based insurance premiums, implementing assessment credits and rebates, changing the designated reserve ratio from a fixed 1.25 percent of estimated insured deposits to a range, increasing deposit insurance coverage for all accounts (including higher coverage for retirement accounts), and indexing the insurance limit to inflation. These provisions may have a significant impact on the BIF and the SAIF, if enacted into law. FDIC management cannot predict which provisions, if any, will ultimately be enacted.


Operations of the BIF


The primary purpose of the BIF is to: 1) insure the deposits and protect the depositors of BIF-insured institutions and 2) resolve failed institutions, including managing and disposing of 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.

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 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 established a limitation on obligations that can be incurred by the BIF, known as the Maximum Obligation Limitation (MOL). As of December 31, 2001 and December 31, 2000, the MOL for the BIF was $55.4 billion and $53.2 billion, respectively.


Receivership Operations


The FDIC is responsible for managing and disposing of the assets of failed institutions in an orderly and efficient manner. The assets held by receivership entities, and the claims against them, are accounted for separately from BIF assets and liabilities to ensure that receivership 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. Expenses paid by the BIF on behalf of the receiverships are recovered from those receiverships.


2. Summary of Significant Accounting Policies

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. 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


FDIC management makes estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Where it is reasonably possible that changes in estimates will cause a material change in the financial statements in the near term, the nature and extent of such changes in estimates have been disclosed.


Cash Equivalents


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


Investments in U.S. Treasury Obligations


BIF 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 Statements of Income and Fund Balance as components of Net Income. Interest on both types of securities is calculated on a daily basis and recorded monthly using the effective interest method.


Allowance for Losses on Receivables From Bank Resolutions


The BIF records a receivable for the amounts advanced and/or obligations incurred for resolving failing and failed banks. Any related allowance for loss represents the difference between the funds advanced and/or obligations incurred and the expected repayment. The latter is based on estimates of discounted cash recoveries from the assets of assisted or failed banks, net of all applicable estimated liquidation costs.


Cost Allocations Among Funds


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


Disclosure About Recent Accounting Pronouncements


Recent accounting pronouncements were evaluated and deemed to be not applicable to the financial statements as presented.


Depreciation


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

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


Related Parties


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


Reclassifications


Reclassifications have been made in the 2000 financial statements to conform to the presentation used in 2001.


3. Investment in U.S. Treasury Obligations, Net

Cash not required to meet the liquidity needs of the BIF is invested in U.S. Treasury obligations with maturities exceeding three months. As of December 31, 2001 and December 31, 2000, the book value of investments in U.S. Treasury obligations, net, was $30.2 billion and $29.9 billion, respectively. The book value is computed by adding the amortized cost of the held-to-maturity securities to the market value of the available-for-sale securities. As of December 31, 2001, the FDIC held $5.5 billion of Treasury inflation-indexed securities (TIIS) for the BIF. These securities are indexed to increases or decreases in the Consumer Price Index (CPI).

During 2001, FDIC purchased $1.1 billion of callable U.S. Treasury securities for the BIF. These securities are designated as either held-to-maturity or available-for-sale, with the premiums being amortized to the first call date. 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. On February 15, 2002, $525 million of these securities were called at par, with no loss to the BIF.

In 2001, the BIF reported a gross realized gain of $78 million on the sale of securities designated as available-for-sale. Proceeds from the sales were $1.5 billion. Specific identification was used to determine cost of the securities sold in computing the realized gain.

U.S. Treasury Obligations at December 31, 2001
Dollars in Thousands
Maturity Yield at Purchase (a) Face Value Net Carrying Amount Unrealized Holding Gains Unrealized Holding Losses Market Value
Held-to-Maturity
Within 1 year 5.77% $3,625,000 $3,666,801 $71,147 $(25) $3,737,923
After 1 year through 5 years 6.40% 10,345,000 10,516,640 752,345 (2,193) 11,266,792
After 5 years through 10 years 5.24% 6,101,008 6,294,127 208,045 0 6,502,172
Total empty cell $20,071,008 $20,477,568 $1,031,537 $(2,218) $21,506,887
Available-for-Sale
Within 1 year 4.57% $1,050,000 $1,056,197 $10,721 $0 $1,066,918
After 1 year through 5 years 5.54% 3,385,000 3,454,666 156,271 0 3,610,937
After 5 years through 10 years 3.78% 4,911,545 4,928,582 103,950 (25,020) 5,007,512
Total empty cell $9,346,545 $9,439,445 $270,942 $(25,020) $9,685,367
Total Investment in U.S. Treasury Obligations, Net
Total empty cell $29,417,553 $29,917,013 $1,302,479 $(27,238) $31,192,254
(a) For TIIS, the yields in the above table include their real yields at purchase, not their effective yields. Effective yields on TIIS include a weighted average of Bloomberg’s calculation of yield with a long-term inflation assumption of 2.5% annually, as measured by the Consumer Price Index (CPI).

U.S. Treasury Obligations at December 31, 2000
Dollars in Thousands
Maturity Yield at Purchase (a) Face Value Net Carrying Amount Unrealized Holding Gains Unrealized Holding Losses Market Value
Held-to-Maturity
Within 1 year 5.73% $3,320,000 (b) $3,324,498 $8,686 $(598) $3,332,586
After 1 year through 5 years 6.37% 10,620,000 10,898,837 367,352 (169) 11,266,020
After 5 years through 10 years 5.64% 8,068,506 8,287,557 266,541 (26,826) 8,527,272
Total empty cell $22,008,506 $22,510,892 $642,579 $(27,593) $23,125,878
Available-for-Sale
Within 1 year 5.73% $925,000 $925,962 $1,493 $(1,053) $926,402
After 1 year through 5 years 6.35% 2,125,000 2,126,357 67,223 0 2,193,580
After 5 years through 10 years 4.80% 4,254,527 4,149,625 151,990 0 4,301,615
Total empty cell $7,304,527 $7,201,944 $220,706 $(1,053) $7,421,597
Total Investment in U.S. Treasury Obligations, Net
Total empty cell $29,313,033 $29,712,836 $863,285 $(28,646) $30,547,475
(a) For TIIS, the yields in the above table include their real yields at purchase, not their effective yields. Effective yields on TIIS include a weighted average of Bloomberg’s calculation of yield with a long-term inflation assumption of 2.5% annually, as measured by the Consumer Price Index (CPI).

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

As of December 31, 2001 and 2000, the unamortized premium, net of the unamortized discount, was $499 million and $400 million, respectively.


4. Receivables from Bank Resolutions, Net

The bank resolution process takes different forms depending on the unique facts and circumstances surrounding each failing or failed institution. Payments for institutions that fail are made to cover obligations to insured depositors and represent claims by the BIF against the receiverships’ assets. There were three bank failures in 2001 and six in 2000, with assets at failure of $54 million and $378 million, respectively, and BIF outlays of $49.5 million and $301.7 million, respectively.

Assets held by the FDIC in its receivership capacity for closed BIF-insured institutions are the main source of repayment of the BIF’s receivables from closed banks. As of December 31, 2001 and 2000, BIF receiverships held assets with a book value of $154.6 million and $510.9 million, respectively (including cash and miscellaneous receivables of $71.9 million and $337 million at December 31, 2001 and 2000, respectively). The estimated cash recoveries from the management and disposition of these assets that are used to derive the allowance for losses are based in part on a statistical sampling of receivership assets. These estimated recoveries are regularly evaluated, but remain subject to uncertainties because of potential changes in economic conditions. Such uncertainties could cause the BIF’s and other claimants’ actual recoveries to vary from the level currently estimated.

Receivables from Bank Resolutions, Net at December 31
Dollars in Thousands
  2001 2000
Receivables from closed banks $5,368,970 $9,083,357
Allowance for losses (5,289,815) (8,733,768)
Total $79,155 $349,589


5. Property and Equipment, Net



Property and Equipment, Net at December 31
Dollars in Thousands
  2001 2000
Land $29,631 $29,631
Buildings 175,265 168,996
Application software (includes work-in-process) 131,104 109,975
Furniture, fixtures, and equipment 93,593 76,729
Accumulated depreciation (125,624) (81,893)
Total $303,969 $303,438

The depreciation expense was $44.7 million and $28.8 million for 2001 and 2000, respectively.


6. Contingent Liabilities for:

Anticipated Failure of Insured Institutions

The BIF records a contingent liability and a loss provision for banks (including Oakar and Sasser financial institutions) that are likely to fail 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 historical loss rates to groups of institutions with certain shared characteristics. In addition, institution-specific analysis is performed on those banks where failure is imminent absent institution management resolution of existing problems. As of December 31, 2001 and 2000, the contingent liabilities for anticipated failure of insured institutions were $1.9 billion and $141 million, respectively.

In addition to these recorded contingent liabilities, the FDIC has identified increasing risk in the financial services industry that could result in a material loss to the BIF should the potentially vulnerable financial institutions ultimately fail. This risk is evidenced by higher levels of problem bank assets, deteriorating credit quality, weaker supervisory ratings, and the increased presence of various new banking business models that have not been tested in a recession.

Due to increased risk in the industry and uncertainty surrounding future economic and financial conditions, there are other banks for which the risk of failure is less certain, but still considered reasonably possible. Should these banks fail, the BIF could incur additional estimated losses up to $5.1 billion.

The accuracy of these estimates will largely depend on future economic 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.


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 totaling $74 million from unresolved legal cases are reasonably possible.

Additionally, two cases are currently pending before the U.S. Court of Federal Claims against the United States for actions taken by the FDIC in supervising two BIF-insured, state chartered mutual savings banks. These cases allege that the FDIC’s conduct in supervising these institutions breached agreements, which in turn caused state regulators to close these institutions. Although the court has yet to rule on whether any agreements were breached, the BIF has conservatively recorded a small probable loss for one of the cases. At this time, it is not possible to estimate a potential loss to the BIF from the second case.


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 loan sales. The total amount of loans sold subject to representations and warranties, and guarantees were $5.1 billion as of December 31, 2001. The estimated losses for the contingent liability from all outstanding claims asserted in connection with representations and warranties was $1.5 million at December 31, 2001.

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. 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

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 estimated insured deposits; and 4) authorized the FDIC to increase assessment rates more frequently than semiannually and impose emergency special assessments as necessary to ensure that funds are available to repay U.S. Treasury borrowings.

The FDIC uses a risk-based assessment system that charges higher rates to those institutions that pose greater risks to the BIF. To arrive at a risk-based assessment for a particular institution, the FDIC places each institution in one of nine risk categories, using a two-step process based first on capital ratios and then on other relevant information. The assessment rate averaged approximately 0.14 cents per $100 of assessable deposits for both 2001 and 2000. On October 23, 2001, the Board voted to retain the BIF assessment schedule at the annual rate of 0 to 0.27 cents per $100 of assessable deposits for the first semiannual period of 2002. The Board reviews premium rates semiannually.

As stated above, the FDICIA requires the FDIC to maintain the insurance funds at a designated reserve ratio (DRR) of 1.25 percent of estimated insured deposits (or a higher percentage as circumstances warrant). As of December 31, 2001, the BIF was 1.26 percent of estimated insured deposits. The FDICIA authorizes and mandates BIF assessments if needed to maintain the fund at the DRR or to return the fund to the DRR if it 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.

The DIFA 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), and it made the FICO assessment separate from regular assessments, effective on January 1, 1997.

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

The FICO assessment has no financial impact on the BIF. The FICO assessment is separate from the regular assessments and is imposed on banks and thrifts, not on the insurance funds. The FDIC, as administrator of the BIF and the SAIF, is acting solely as a collection agent for the FICO. During 2001 and 2000, $627 million and $635 million, respectively, was collected from banks and remitted to the FICO.


8. Provision for Insurance Losses

Provision for insurance losses was $1.8 billion for 2001 and negative $153 million for 2000. The following chart lists the major components of the provision for insurance losses.

Provision for Insurance Losses for the Years Ended December 31
Dollars in Thousands
  2001 2000
Open bank assistance $(856) $(2,956)
Closed banks (41,106) (20,098)
Other assets (72) 336
Total Valuation Adjustments (42,034) (22,718)
Contingent Liabilities Adjustments:
Anticipated failure of insured institutions 1,776,645 (133,645)
Litigation losses 16,095 3,964
Other contingencies 5,615 (563)
Total Contingent Liabilities Adjustments 1,798,355 (130,244)
Total $1,756,321 $(152,962)


9. Employee Benefits

Pension Benefits and Savings Plans

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

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

Although the BIF contributes a portion of pension benefits for eligible employees, it does not account for the assets of either retirement system. The BIF also does not have actuarial data for accumulated plan benefits or the unfunded liability relative to eligible employees. These amounts are reported on and accounted for by the U.S. Office of Personnel Management.

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

Pension Benefits and Savings Plans Expenses for the Years Ended December 31
Dollars in Thousands
  2001 2000
Civil Service Retirement System $11,205 $11,503
Federal Employees Retirement System (Basic Benefit) 29,562 30,454
FDIC Savings Plan 18,254 19,202
Federal Thrift Savings Plan 11,871 12,154
Total $70,892 $73,313


Accrued Annual Leave


The BIF’s pro rata share of the Corporation’s liability to employees for accrued annual leave is approximately $35.3 million and $36.0 million at December 31, 2001 and 2000, respectively.


Postretirement Benefits Other Than Pensions


The FDIC provides certain dental and life insurance coverage for its eligible retirees, the retirees’ beneficiaries, and covered dependents. Retirees eligible for life insurance coverage are those who have qualified due to: 1) immediate enrollment upon appointment or five years of participation in the plan and 2) eligibility for an immediate annuity. Dental coverage is provided to all retirees eligible for an immediate annuity. The life insurance program 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 and at no cost to retirees. At December 31, 2001 and 2000, the BIF’s prepaid postretirement benefit cost recognized in the “Interest receivable on investments and other assets, net” line item in the Statements of Financial Position was $3.6 million.


10. Commitments and Off-Balance-Sheet Exposure

Commitments:

Leases


The BIF’s allocated share of the FDIC’s lease commitments totals $132 million for future years. The lease agreements contain escalation clauses resulting in adjustments, usually on an annual basis. The allocation to the BIF of the FDIC’s future lease commitments is based upon current relationships of the workloads among the BIF, the SAIF, and the FRF. Changes in the relative workloads could cause the amounts allocated to the BIF in the future to vary from the amounts shown below. The BIF recognized leased space expense of $38.5 million and $38.1 million for the years ended December 31, 2001 and 2000, respectively.

Lease Commitments
Dollars in Thousands
2002 2003 2004 2005 2006 2007/Thereafter
$38,250 $29,322 $20,451 $15,012 $13,172 $15,749

Off-Balance-Sheet Exposure:

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. The table below gives the maximum off-balance-sheet exposure the BIF has under these guarantees.

Asset Securitization Guarantees at December 31
Dollars in Thousands
  2001 2000
Maximum exposure under the limited guarantees $330,936 $406,690
Less: Guarantee claims paid (inception-to-date) (34,756) (33,730)
Less: Amount of exposure recognized as a contingent liability (3,966) (1,605)
Maximum Off-Balance-Sheet Exposure Under the Limited Guarantees $292,214 $371,355


Deposit Insurance

As of December 31, 2001, deposits insured by the BIF totaled approximately $2.4 trillion. This would be the accounting loss if all depository institutions were to fail and the acquired assets provided no recoveries.


11. Concentration of Credit Risk

Financial instruments that potentially subject the BIF to credit risk consist primarily of gross receivables from bank resolutions totaling $5.4 billion. The receivables from bank resolutions include payments made to cover obligations to insured depositors, advances to receiverships to provide working capital, and receivables for expenses paid by the BIF on behalf of receiverships. Assets held by the FDIC in its receivership capacity for closed BIF-insured institutions are the main source of repayment of the BIF's receivables from closed banks. An allowance for loss of $5.3 billion, or 99% of the gross receivable, was recorded as of December 31, 2001. Of the remaining one percent of the gross receivable, the amount of credit risk is limited since 59% of the receivership assets consist of cash and cash equivalents.


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.


13. Supplementary Information Relating to the Statements of Cash Flows

Reconciliation of Net Income to Net Cash Provided by Operating Activities for the Years Ended December 31
Dollars in Thousands
  2001 2000
Net (Loss)/Income $(562,666) $1,260,619
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Amortization of U.S. Treasury obligations 160,763 128,875
TIIS inflation adjustment (96,064) (93,204)
Gain on sale of U.S. Treasury obligations (78,227) 0
Depreciation on property and equipment 44,723 28,799
Retirement of capitalized equipment 1,568 1,152
Change in Assets and Liabilities:
Decrease (Increase) in interest receivable on investments and
other assets
17,273 (77,258)
Decrease in receivables from bank resolutions 270,434 393,422
(Decrease) Increase in accounts payable and other liabilities (16,591) 5,244
Increase (Decrease) in contingent liabilities for anticipated failure of
insured institutions
1,769,645 (165,645)
Increase (Decrease) in other contingencies 5,995 (11,548)
Increase in contingent liabilities for litigation losses 15,201 11,922
Net Cash Provided by Operating Activities $1,532,054 $1,482,378


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Last Updated 11/8/2002

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