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2006 Annual Report

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IV. Financial Statements and Notes

Deposit Insurance Fund (DIF)

Deposit Insurance Fund Balance Sheet at December 31
Dollars in Thousands
  2006 2005
Cash and cash equivalents $2,953,995 $3,209,444
Cash and other assets: Restricted for SAIF-member exit fees (Note 8) (Includes cash and cash equivalents of $20.9 million at December 31, 2005) 0 341,656
Investment in U.S. Treasury obligations, net: (Note 3)
  Held-to-maturity securities 37,184,214 34,253,237
  Available-for-sale securities 8,958,566 9,987,223
Interest receivable on investments and other assets, net 747,715 737,566
Receivables from resolutions, net (Note 4) 538,991 533,474
Property and equipment, net (Note 5) 376,790 378,064
Total Assets $50,760,271 $49,440,664
Liabilities
Accounts payable and other liabilities $154,283 $296,540
Postretirement benefit liability (Note 11) 129,906 0
Contingent liabilities for: (Note 6)
  Anticipated failure of insured institutions 110,775 5,366
  Litigation losses and other 200,000 200,500
SAIF-member exit fees and investment proceeds held in escrow (Note 8) 0 341,656
Total Liabilities 594,964 844,062
Commitments and off-balance-sheet exposure (Note 12)
Fund Balance
Accumulated net income 49,929,226 48,190,062
Unrealized gain on available-for-sale securities, net (Note 3) 233,822 406,540
Unrealized postretirement benefit gain (Note 11) 2,259 0
Total Fund Balance 50,165,307 48,596,602
Total Liabilities and Fund Balance $50,760,271 $49,440,664
The accompanying notes are an integral part of these financial statements.

 

Deposit Insurance Fund Statement of Income and Fund Balance for the Years Ended
December 31
Dollars in Thousands
  2006 2005
Interest on U.S. Treasury obligations $2,240,723 $2,341,505
Exit fees earned (Note 8) 345,295 0
Assessments (Note 7) 31,945 60,884
Other revenue 25,565 18,073
Total Revenue 2,643,528 2,420,462
Expenses and Losses
Operating expenses (Note 9) 950,618 965,652
Provision for insurance losses (Note 10) (52,097) (160,170)
Insurance and other expenses 5,843 3,821
Total Expenses and Losses 904,364 809,303
Net Income 1,739,164 1,611,159
Unrealized loss on available-for-sale securities, net (172,718) (521,350)
Unrealized postretirement benefit gain 2,259 0
Comprehensive Income 1,568,705 1,089,809
Fund Balance - Beginning 48,596,602 47,506,793
Fund Balance - Ending $50,165,307 $48,596,602
The accompanying notes are an integral part of these financial statements.

 

Deposit Insurance Fund Statement of Cash Flows for the Years Ended December 31
Dollars in Thousands
  2006 2005
  Net Income: $1,739,164 $1,611,159
    Adjustments to reconcile net income to net cash provided by operating activities:
    Amortization of U.S. Treasury obligations 599,274 834,118
    Treasury inflation-protected securities (TIPS) inflation     adjustment (109,394) (345,023)
    Depreciation on property and equipment 52,919 56,006
    Provision for losses (52,097) (160,170)
    Terminations/adjustments of work-in-process accounts 433 178
    Exit fees earned (345,295) 0
  Change In Operating Assets and Liabilities:
    Decrease/(Increase) in unamortized premium & discount of     U.S. Treasury obligations (restricted) 1,359 (6,565)
    (Increase)/Decrease in interest receivable and other assets (14,635) 5,590
    Decrease in receivables from resolutions 147,258 348,173
    (Decrease)/Increase in accounts payable and other liabilities (166,822) 27,145
    Increase in postretirement benefit liability 129,906 0
    (Decrease) in contingent liabilities for litigation losses 0 (182)
    Increase in exit fees and investment proceeds held in escrow 3,639 28,556
Net Cash Provided by Operating Activities 1,985,709 2,398,985
Investing Activities
  Provided by:
    Maturity of U.S. Treasury obligations, held-to-maturity 5,955,000 8,220,000
    Maturity of U.S. Treasury obligations, available-for-sale 845,000 1,830,000
  Used by:
    Purchase of property and equipment (11,721) (47,197)
    Purchase of U.S. Treasury obligations, held-to-maturity (9,050,372) (11,693,984)
Net Cash Used by Provided by Investing Activities (2,262,093) (1,691,181)
Net (Decrease)/Increase in Cash and Cash Equivalents (276,384) (707,804)
Cash and Cash Equivalents - Beginning 3,230,379 2,522,575
  Unrestricted Cash and Cash Equivalents - Ending 2,953,995 3,209,444
  Restricted Cash and Cash Equivalents - Ending 0 20,935
Cash and Cash Equivalents - Ending $2,953,995 $3,230,379
The accompanying notes are an integral part of these financial statements.





1. Legislation and Operations of the Deposit Insurance Fund
 

Overview
The Federal Deposit Insurance Corporation (FDIC) is the independent deposit insurance agency created by Congress in 1933 to maintain stability and public confidence in the nation's banking system. Provisions that govern the operations of the FDIC are generally found in the Federal Deposit Insurance (FDI) Act, as amended, (12 U.S.C. 1811, et seq). In carrying out the purposes of the FDI Act, as amended, the FDIC insures the deposits of banks and savings associations (insured depository institutions), and in cooperation with other federal and state agencies promotes the safety and soundness of insured depository institutions by identifying, monitoring and addressing risks to the deposit insurance fund. An active institution's primary federal supervisor is generally determined by the institution's charter type. Commercial and savings banks are supervised by the FDIC, the Office of the Comptroller of the Currency, or the Federal Reserve Board, while thrifts are supervised by the Office of Thrift Supervision.

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

The DIF is an insurance fund responsible for protecting insured bank and thrift depositors from loss due to institution failures. The FRF is a resolution fund responsible for the sale of remaining assets and satisfaction of liabilities associated with the former Federal Savings and Loan Insurance Corporation and the Resolution Trust Corporation.

Recent Legislation
The Federal Deposit Insurance Reform Act of 2005 (Reform Act [Title II, Subtitle B of Public Law 109-171, 120 Stat. 9]) was enacted on February 8, 2006. Companion legislation, the Federal Deposit Insurance Reform Conforming Amendments Act of 2005 (Public Law 109-173, 119 Stat. 3601), was enacted on February 15, 2006. In addition to merging the BIF and the SAIF, the legislation: 1) requires the deposit of funds into the DIF for SAIF-member exit fees that had been restricted and held in escrow; 2) provides FDIC with greater discretion to charge insurance assessments and to impose more sensitive risk-based pricing; 3) annually permits the designated reserve ratio to vary between 1.15 and 1.50 percent of estimated insured deposits, thereby eliminating the statutorily fixed designated reserve ratio of 1.25 percent; 4) generally requires the declaration and payment of dividends from the DIF if the reserve ratio of the DIF equals or exceeds 1.35 percent of estimated insured deposits at the end of a calendar year; 5) grants a one-time assessment credit for each eligible insured depository institution or its successor based on an institution's proportionate share of the aggregate assessment base of all eligible institutions at December 31, 1996; and 6) immediately increases coverage for certain retirement accounts to $250,000 and allows the FDIC to increase all deposit insurance coverage, under certain circumstances, to reflect inflation every five years beginning January 1, 2011. See Note 7 for a more detailed discussion of these reforms.

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

The DIF is primarily funded from: 1) interest earned on investments in U.S. Treasury obligations and 2) deposit insurance assessments. Additional funding sources, if necessary, are borrowings from the U.S. Treasury, Federal Financing Bank, Federal Home Loan Banks, and insured depository institutions. The FDIC has borrowing authority from the U.S. Treasury up to $30 billion for insurance purposes on behalf of the DIF. On December 15, 2006, the FDIC entered into a Note Purchase Agreement with the Federal Financing Bank in an amount not exceeding $40 billion. The Note Purchase Agreement, if needed, will enhance DIF's ability to fund large deposit insurance obligations and deal with large institution resolutions.

A statutory formula, known as the Maximum Obligation Limitation (MOL), limits the amount of obligations the DIF can incur to the sum of its cash, 90 percent of the fair market value of other assets, and the amount authorized to be borrowed from the U.S. Treasury. The MOL for the DIF was $79.7 billion and $78.2 billion as of December 31, 2006 and 2005, respectively.

Receivership Operations
The FDIC is responsible for managing and disposing of the assets of failed institutions in an orderly and efficient manner. The assets held by receivership entities, and the claims against them, are accounted for separately from DIF assets and liabilities to ensure that receivership proceeds are distributed in accordance with applicable laws and regulations. Accordingly, income and expenses attributable to receiverships are accounted for as transactions of those receiverships. Receiverships are billed by the FDIC for services provided on their behalf.

2. Summary of Significant Accounting Policies

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

Merger of the Funds
The merger of the BIF and SAIF into the newly established DIF was accounted for by combining the carrying value of each Fund's assets and liabilities. Since this merger results in a new reporting entity, financial results of the newly formed DIF were retrospectively applied as though they had been combined at the beginning of the reporting year as well as for full prior year periods reported for comparative purposes.

Use of Estimates
Management makes estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Where it is reasonably possible that changes in estimates will cause a material change in the financial statements in the near term, the nature and extent of such changes in estimates have been disclosed. The more significant estimates include allowance for loss on receivables from resolutions, the estimated losses for anticipated failures and litigation, and the postretirement benefit obligation.

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

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

DIF's investments in U.S. Treasury obligations are either classified as held-to-maturity or available-for-sale. Securities designated as held-to-maturity are shown at amortized cost. Amortized cost is the face value of securities plus the unamortized premium or less the unamortized discount. Amortizations are computed on a daily basis from the date of acquisition to the date of maturity, except for callable U.S. Treasury securities, which are amortized to the first call date. Securities designated as available-for-sale are shown at market value, which approximates fair value. Unrealized gains and losses are included in Comprehensive Income. Realized gains and losses are included in the Statement of Income and Fund Balance as components of Net Income. Income on both types of securities is calculated and recorded on a daily basis using the effective interest method.

Capital Assets and Depreciation
The FDIC buildings are depreciated on a straight-line basis over a 35 to 50 year estimated life. Leasehold improvements are capitalized and depreciated over the lesser of the remaining life of the lease or the estimated useful life of the improvements, if determined to be material. Capital assets depreciated on a straight-line basis over a five-year estimated life include mainframe equipment; furniture, fixtures, and general equipment; and internal-use software. Personal computer equipment is depreciated on a straight-line basis over a three-year estimated life.

Disclosure about Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R). For FDIC's postretirement benefits other than pensions, this pronouncement amends the recognition and disclosure requirements of SFAS No. 106 and SFAS No. 132(R).

The pronouncement requires recognition of: 1) the funded status of the plan as an asset or liability, 2) the cumulative actuarial gains/losses and prior service costs/credits as accumulated comprehensive income, and 3) the changes in the actuarial gains/losses and prior service costs/credits for the period as other comprehensive income. The FDIC adopted SFAS No. 158 for the 2006 calendar year financial statements. As a result, the FDIC recognized the underfunded status (difference between the accumulated postretirement benefit obligation and the plan assets at fair value) as a liability and the cumulative actuarial gains/losses and prior service costs/credits are shown as accumulated other comprehensive income on the Balance Sheet. In addition, the changes in the actuarial gains/losses and prior service costs/credits for the period are recognized as other comprehensive income on the Statement of Income and Fund Balance. Prior to this change, the net postretirement benefit obligation (comprised of both the underfunded status and unrecognized actuarial gains/losses and prior service costs/credits) was recognized as a liability on the Balance Sheet.

Retrospective application is not permitted or required by the Statement. See Note 11 for specifics regarding postretirement benefits other than pensions.

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

3. Investment in U.S. Treasury Obligations, Net
As of December 31, 2006 and 2005, the book value of investments in U.S. Treasury obligations, net, was $46.1 billion and $44.2 billion, respectively. As of December 31, 2006, the DIF held $9.2 billion of Treasury inflation-protected securities (TIPS). These securities are indexed to increases or decreases in the Consumer Price Index for All Urban Consumers (CPI-U). Additionally, the DIF held $6.1 billion of callable U.S. Treasury bonds at December 31, 2006. Callable U.S. Treasury bonds may be called five years prior to the respective bonds' stated maturity on their semi-annual coupon payment dates upon 120 days notice.

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

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

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

 

U.S. Treasury Obligations at December 31, 2005
Dollars in Thousands
Maturity
(d)
Yield at Purchase
(e)
Face Value Net Carrying Amount Unrealized Holding Gains Unrealized Holding Losses
(f)
Market Value
U.S. Treasury notes and bonds
Within 1 year $5.19% $5,920,000 $5,942,398 $29,554 $(18,187) $5,953,765
After 1 year through 5 years 4.47% 18,680,000 19,872,850 219,864 (187,672) 19,905,042
After 5 years through 10 years 4.53% 5,350,000 5,674,953 62,578 (13,184) 5,724,347
After 10 years 4.72% 1,420,000 1,848,524 31,668 0 1,880,192
U.S. Treasury inflation-protected securities
After 1 year through 5 years 3.83% 914,596 914,512 40,784 0 955,296
Total   $32,284,596 $34,253,237 $384,448 $(219,043) $34,418,642
Available-For-Sale
U.S. Treasury notes and bonds
Within 1 year $3.71% $845,000 $898,720 $696 $(6,870) $892,546
After 1 year through 5 years 3.86% 1,225,000 1,324,055 4,967 (16,448) 1,312,574
U.S. Treasury inflation-protected securities
After 1 year through 5 years 3.97% 5,119,864 5,122,414 280,679 0 5,403,093
After 5 year through 10 years 3.39% 2,225,975 2,235,494 143,516 0 2,379,010
Total   $9,415,839 $9,580,683 $429,858 $(23,318) $9,987,223
Total Investment in U.S.Treasury Obligations, Net
Total   $41,700,435 $43,833,920 $814,306 $(242,361) $44,405,865
(d) For purposes of this table, all callable securities are assumed to mature on their first call dates. Their yields at purchase are reported as their yield to first call date.

(e) For TIPS, the yields in the above table are stated at their real yields at purchase, not their effective yields. Effective yields on TIPS include a long-term annual inflation assumption as measured by the CPI-U. The long-term CPI-U consensus forecast is 2.2 percent, based on figures issued by the Congressional Budget Office and Blue Chip Economic Indicators in early 2005.

(f) All unrealized losses occurred as a result of changes in market interest rates. FDIC has the ability and intent to hold the related securities until maturity. As a result, all unrealized losses are considered temporary. However, of the $242 million reported as total unrealized losses, $116 million is recognized as unrealized losses occuring over a period of 12 months or longer with a market value of $5.0 billion applied to the affected securities.

As of December 31, 2006 and 2005, the unamortized premium, net of the unamortized discount, was $2.4 billion and $2.1 billion, respectively.

4. Receivables From Resolutions, Net
The receivables from resolutions include payments made by the DIF to cover obligations to insured depositors, advances to receiverships for working capital, and administrative expenses paid on behalf of receiverships. Any related allowance for loss represents the difference between the funds advanced and/or obligations incurred and the expected repayment. Assets held by DIF receiverships are the main source of repayment of the DIF's receivables from closed banks and thrifts. As of December 31, 2006, there were 25 active receiverships, with no failures in the current year.

As of December 31, 2006 and 2005, DIF receiverships held assets with a book value of $655 million and $745 million, respectively (including cash, investments, and miscellaneous receivables of $348 million and $370 million at December 31, 2006 and 2005, respectively). The estimated cash recoveries from the management and disposition of these assets that are used to derive the allowance for losses are based on a sampling of receivership assets in liquidation. Assets in the judgmental sample, which represents 97 percent of the asset book value for all active DIF receiverships, are generally valued by estimating future cash recoveries, net of applicable liquidation cost estimates, and then discounting these net cash recoveries using current market-based risk factors based on a given asset's type and quality. Resultant recovery estimates are extrapolated to the non-sampled assets in order to derive the allowance for loss on the receivable. These estimated recoveries are regularly evaluated, but remain subject to uncertainties because of potential changes in economic and market conditions. Such uncertainties could cause the DIF's actual recoveries to vary from the level currently estimated.

As of December 31, 2006, the DIF allowance for loss was $4.1 billion. The allowance for loss is equivalent to 88 percent of the gross receivable. Of the remaining 12 percent of the gross receivable, the amount of credit risk is limited since 89.1 percent of the receivable will be repaid from receivership cash, investments, and a promissory note fully secured by a letter of credit.

5. Property and Equipment, Net

Property and Equipment, Net at December 31
Dollars in Thousands
  2006 2005
Land $37,352 $37,352
Buildings (includes construction-in-process) 284,871 272,861
Application software (includes work-in-process) 259,744 241,424
Furniture, fixtures, and equipment 161,127 140,728
Accumulated depreciation (323,274) (273,789)
Retirements (43,030) (40,512)
Total $376,790 $378,064

The depreciation expense was $53 million and $56 million for December 31, 2006 and 2005, respectively.

6. Contingent Liabilities for:

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

The contingent liability is derived by applying expected failure rates and loss rates to institutions based on supervisory ratings, balance sheet characteristics, and projected capital levels. In addition, institution-specific analysis is performed on those institutions where failure is imminent absent institution management resolution of existing problems, or where additional information is available that may affect the estimate of losses. As of December 31, 2006 and 2005, the contingent liabilities for anticipated failure of insured institutions were $110.8 million and $5.4 million, respectively.

In addition to these recorded contingent liabilities, the FDIC has identified additional risk in the financial services industry that could result in an additional loss to the DIF should potentially vulnerable insured institutions ultimately fail. This risk results from the presence of various high-risk banking business activities that are particularly vulnerable to adverse economic and market conditions. Due to the uncertainty surrounding such conditions in the future, there are institutions other than those with losses included in the contingent liability for which the risk of failure is less certain, but still considered reasonably possible. As a result of these risks, the FDIC believes that it is reasonably possible that the DIF could incur additional estimated losses up to approximately $0.6 billion.

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

Litigation Losses
The DIF records an estimated loss for unresolved legal cases to the extent that those losses are considered probable and reasonably estimable. In addition to the amount recorded as probable, the FDIC has determined that losses from unresolved legal cases totaling $0.6 million are reasonably possible.

Other Contingencies

Representations and Warranties
As part of the FDIC's efforts to maximize the return from the sale of assets from bank and thrift resolutions, representations and warranties, and guarantees were offered on certain loan sales. In general, the guarantees, representations, and warranties on loans sold relate to the completeness and accuracy of loan documentation, the quality of the underwriting standards used, the accuracy of the delinquency status when sold, and the conformity of the loans with characteristics of the pool in which they were sold. The total amount of loans sold subject to unexpired representations and warranties, and guarantees was $8.1 billion as of December 31, 2006. There were no contingent liabilities from any of the outstanding claims asserted in connection with representations and warranties at December 31, 2006 and 2005, respectively.

In addition, future losses could be incurred until the contracts offering the representations and warranties, and guarantees have expired, some as late as 2032. Consequently, the FDIC believes it is possible that additional losses may be incurred by the DIF from the universe of outstanding contracts with unasserted representation and warranty claims. However, because of the uncertainties surrounding the timing of when claims may be asserted, the FDIC is unable to reasonably estimate a range of loss to the DIF from outstanding contracts with unasserted representation and warranty claims.

7. Assessments
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) required the FDIC to establish a risk-based assessment system, charging higher rates to those insured depository institutions that posed greater risks to the DIF. To arrive at a risk-based assessment for a particular institution, the FDIC placed each institution in one of nine risk categories based on capital ratios and supervisory examination data. Based on FDIC's evaluation of the institutions under the risk-based premium system and due to the limitations imposed by the Deposit Insurance Funds Act of 1996 (DIFA) and the continued health of the banking and thrift industries, most institutions were not charged an assessment for a number of years. In addition, the FDIC was required by statute to maintain the insurance funds at a designated reserve ratio (DRR) of not less than 1.25 percent of estimated insured deposits (or a higher percentage as circumstances warranted). Of the institutions assessed, the assessment rate averaged approximately 5 cents and 10 cents per $100 of assessable deposits for 2006 and 2005, respectively. During 2006 and 2005, $32 million and $61 million were recognized as assessment income from institutions, respectively.

The assessment process will significantly change as of January 1, 2007. The Reform Act (enacted in February 2006) and the implementing regulations (published in November 2006):

  • establish a range for the DRR from 1.15 to 1.50 percent of estimated insured deposits and eliminate the fixed DRR of 1.25 percent. The FDIC is required to annually publish the DRR and has, by regulation, set the DRR at 1.25 percent for 2007;
  • grant a one-time assessment credit of approximately $4.7 billion to certain eligible insured depository institutions (or their successors) based on the assessment base of the institution as of December 31, 1996, as compared to the combined aggregate assessment base of all eligible institutions; and
  • require the FDIC to annually determine if a dividend should be paid, based on the statutory requirements generally to declare dividends if: 1) the reserve ratio of the DIF exceeds 1.50 percent of estimated insured deposits, for the full amount in excess of the amount required to maintain the reserve ratio at 1.50 percent, or 2) if the reserve ratio equals or exceeds 1.35 percent of estimated insured deposits but is no greater than 1.50 percent, for one-half of the amount in excess of the amount required to maintain the reserve ratio at 1.35 percent.

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 FSLIC. The annual FICO interest obligation of approximately $790 million is paid on a pro rata basis using the same rate for banks and thrifts. The FICO assessment has no financial impact on the DIF and is separate from deposit insurance assessments. The FDIC, as administrator of the DIF, acts solely as a collection agent for the FICO. During 2006 and 2005, $788 million and $780 million, respectively, were collected and remitted to the FICO.

8. Exit Fees Earned
From the early to mid-1990s, the SAIF collected entrance and exit fees for conversion transactions when an insured depository institution converted from the BIF to the SAIF (resulting in an entrance fee) or from the SAIF to the BIF (resulting in an exit fee). Regulations approved by the FDIC's Board of Directors (Board) and published in the Federal Register on March 21, 1990, directed that: 1) exit fees paid to the SAIF be held in escrow, and 2) the Board and the Secretary of the Treasury will determine when it is no longer necessary to escrow such funds for the payment of interest on obligations previously issued by the FICO. These escrowed exit fees were invested in U.S. Treasury securities pending determination of ownership. The interest earned was also held in escrow and as a result of the above, the SAIF did not recognize exit fees or any interest earned as revenue.

The recent deposit insurance legislation removed the restriction on SAIF-member exit fees held in escrow and the funds were deposited into the general (unrestricted) fund of the DIF. The exit fees plus earned interest, a total of $345 million, are recognized as revenue at their carrying value on the Income Statement for 2006 and are classified on the Balance Sheet as a combination of Cash and cash equivalents, Investments in U.S. Treasury obligations, net, and Interest receivable on investments. At December 31, 2005, the exit fees and earned interest are shown on the Balance Sheet line items of Cash and other assets: Restricted for SAIF-member exit fees (an asset) and SAIF-member exit fees and investment proceeds held in escrow (a liability).


9. Operating Expenses
Operating expenses were $951 million for 2006, compared to $966 million for 2005. The chart below lists the major components of operating expenses.

Operating Expenses for the Years Ended December 31
Dollars in Thousands
  2006 2005
Salaries and benefits $619,452 $645,418
Outside services 124,045 113,416
Travel 49,408 45,732
Buildings and leased space 65,929 71,480
Software/Hardware maintenance 27,139 33,366
Depreciation of property and equipment 52,919 55,989
Other 22,124 21,959
Services billed to receiverships (10,398) (21,708)
Total $950,618 $965,652


10. Provision for Insurance Losses

Provision for insurance losses was a negative $52 million for 2006 and a negative $160 million for 2005. 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
  2006 2005
Closed banks and thrifts $(152,776) $(159,421)
Other assets (4,230) 3,762
Total Valuation Adjustments (157,006) (155,659)
Contingent Liabilities Adjustments:
Anticipated failure of insured institutions 105,409 (4,852)
Litigation losses (500) 200
Other contingencies 0 141
Total Contingent Liabilities Adjustments 104,909 (4,511)
Total $(52,097) $(160,170)

11. Employee Benefits

Pension Benefits, Savings Plans and Postemployment Benefits

Eligible FDIC employees (permanent and term employees with appointments exceeding one year) are covered by the federal government retirement plans, either the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS). Although the DIF contributes a portion of pension benefits for eligible employees, it does not account for the assets of either retirement system. The DIF also does not have actuarial data for accumulated plan benefits or the unfunded liability relative to eligible employees. These amounts are reported on and accounted for by the U.S. Office of Personnel Management.

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

Prior to 2006, the FDIC reduced its workforce with a voluntary buyout program, and to a lesser extent, reduction-in-force actions resulting in separation or severance payments. The 2006 and 2005 related costs for these reductions are included in the "Operating expenses" line item in the Income Statement.

Pension Benefits, Savings Plans Expenses and Postemployment Benefits for the Years Ended December 31
Dollars in Thousands
  2006 2005
Civil Service Retirement System $6,808 $7,632
Federal Employees Retirement System (Basic Benefit) 38,915 38,458
FDIC Savings Plan 20,681 20,886
Federal Thrift Savings Plan 15,328 15,228
Separation Incentive Payment 0 22,371
Severance Pay 39 2,733
Total $81,771 $107,308

Postretirement Benefits Other Than Pensions
The FDIC provides certain life and dental insurance coverage for its eligible retirees, the retirees' beneficiaries, and covered dependents. Retirees eligible for life insurance coverage are those who have qualified due to: 1) immediate enrollment upon appointment or five years of participation in the plan and 2) eligibility for an immediate annuity. The life insurance program provides basic coverage at no cost to retirees and allows converting optional coverages to direct-pay plans. Dental coverage is provided to all retirees eligible for an immediate annuity.

At December 31, 2006, the DIF's accumulated postretirement benefit obligation, representing the underfunded status of the plan, was $129.9 million, which is recognized in the "Postretirement benefit liability" line item on the Balance Sheet. The cumulative actuarial gains/losses (changes in assumptions and plan experience) and prior service costs/credits (changes to plan provisions that increase or decrease benefits) was $2.3 million at December 31, 2006, which is reported as accumulated other comprehensive income in the "Unrealized postretirement benefit gain" line item on the Balance Sheet. At December 31, 2005, the net postretirement benefit liability (the underfunded status adjusted for any unrecognized actuarial gains/losses and prior service costs/credits) of $126.7 million is recognized in the "Accounts payable and other liabilities" line item.

The DIF's expense for postretirement benefits in 2006 and 2005 was $9.0 million and $10.3 million, respectively, which is included in the current and prior year's operating expenses on the Statement of Income and Fund Balance. The changes in the actuarial gains/losses and prior service costs/credits for 2006 of $2.3 million are reported as other comprehensive income in the "Unrealized postretirement benefit gain" line item. Key actuarial assumptions used in the accounting for the plan include the discount rate of 4.75 percent, the rate of compensation increase of 4.00 percent, and the dental coverage trend rate of 6.70 percent. See Note 2 regarding the recent issuance of a relevant FASB accounting pronouncement.

12. Commitments and Off-Balance-Sheet Exposure

Commitments:

Leased Space

The FDIC's lease commitments total $62.9 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 $30 million and $39 million for the periods ended December 31, 2006 and 2005, respectively.

Leased Space Commitments
Dollars in Thousands
2007 2008 2009 2010 2011 2012/Thereafter
$21,491 $15,723 $13,552 $6,334 $3,727 $2,026

Off-Balance-Sheet Exposure:

Deposit Insurance

As of September 30, 2006, the estimated insured deposits for DIF were $4.1 trillion. This estimate is derived primarily from quarterly financial data submitted by insured depository institutions to the FDIC. This estimate represents the accounting loss that would be realized if all insured depository institutions were to fail and the acquired assets provided no recoveries.

12. Disclosures About the Fair Value of Financial Instruments
Cash equivalents are short-term, highly liquid investments and are shown at fair value. The fair market value of the investment in U.S. Treasury obligations is disclosed in Note 3 and is based on current market prices. The carrying amount of interest receivable on investments, short-term receivables, and accounts payable and other liabilities approximates their fair market value, due to their short maturities and/or comparability with current interest rates.

The net receivables from resolutions primarily include the DIF's subrogated claim arising from payments to insured depositors. The receivership assets that will ultimately be used to pay the corporate subrogated claim are valued using discount rates that include consideration of market risk. These discounts ultimately affect the DIF's allowance for loss against the net receivables from resolutions. Therefore, the corporate subrogated claim indirectly includes the effect of discounting and should not be viewed as being stated in terms of nominal cash flows.

Although the value of the corporate subrogated claim is influenced by valuation of receivership assets (see Note 4), such receivership valuation is not equivalent to the valuation of the corporate claim. Since the corporate claim is unique, not intended for sale to the private sector, and has no established market, it is not practicable to estimate 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 DIF on the subrogated claim does not necessarily correspond with the timing of collections on receivership assets. Therefore, the effect of discounting used by receiverships should not necessarily be viewed as producing an estimate of market value for the net receivables from resolutions.



Last Updated 3/29/2007 communications@fdic.gov