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2012 Annual Report

IV. Financial Statements and Notes

Deposit Insurance Fund (DIF)

Federal Deposit Insurance Corporation
Deposit Insurance Fund Balance Sheet at December 31
Dollars in Thousands

 

2012

2011

Assets

Cash and cash equivalents

$3,100,361

$3,277,839

Cash and investments - restricted - systemic risk (Note 16)
(Includes cash/cash equivalents of $0 at December 31, 2012 and $1,627,073 at December 31, 2011)

0

4,827,319

Investment in U.S. Treasury obligations, net (Note 3)

34,868,688

33,863,245

Trust preferred securities (Note 5)

2,263,983

2,213,231

Assessments receivable, net (Note 9)

1,006,852

282,247

Receivables and other assets - systemic risk (Note 16)

0

1,948,151

Interest receivable on investments and other assets, net

433,592

488,179

Receivables from resolutions, net (Note 4)

23,119,554

28,548,396

Property and equipment, net (Note 6)

392,880

401,915

Total Assets

$65,185,910

$75,850,522

Liabilities

 

 

Accounts payable and other liabilities

$349,620

$374,164

Unearned revenue - prepaid assessments (Note 9)

1,576,417

17,399,828

Refunds of prepaid assessments (Note 9)

5,675,199

0

Liabilities due to resolutions (Note 7)

21,173,785

32,790,512

Debt Guarantee Program liabilities - systemic risk (Note 16)

0

117,027

Deferred revenue - systemic risk (Note 16)

0

6,639,954

Postretirement benefit liability (Note 13)

224,225

187,968

Contingent liabilities for:

 

 

Anticipated failure of insured institutions (Note 8)

3,220,697

6,511,321

Systemic risk (Note 16)

0

2,216

Litigation losses (Note 8)

8,200

1,000

Total Liabilities

32,228,143

64,023,990

Commitments and off-balance-sheet exposure (Note 14)

Fund Balance

Accumulated Net Income

32,682,237

11,560,990

Accumulated Other Comprehensive Income

 

 

Unrealized gain on U.S. Treasury investments, net (Note 3)

33,819

47,697

Unrealized postretirement benefit loss (Note 13)

(60,448)

(33,562)

Unrealized gain on trust preferred securities (Note 5)

302,159

251,407

Total Accumulated Other Comprehensive Income

275,530

265,542

Total Fund Balance

32,957,767

11,826,532

Total Liabilities and Fund Balance

$65,185,910

$75,850,522

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

 

2012

2011

Revenue

Assessments (Note 9)

$12,397,022

$13,498,587

Interest on U.S. Treasury obligations

159,214

127,621

Systemic risk revenue (Note 16)

(161,135)

(131,141)

Other revenue (Note 10)

6,127,211

2,846,929

Total Revenue

18,522,312

16,341,996

Expenses and Losses

 

 

Operating expenses (Note 11)

1,777,513

1,625,351

Systemic risk expenses (Note 16)

(161,135)

(131,141)

Provision for insurance losses (Note 12)

(4,222,595)

(4,413,629)

Insurance and other expenses

7,282

3,996

Total Expenses and Losses

(2,598,935)

(2,915,423)

Net Income

21,121,247

19,257,419

Other Comprehensive Income

 

 

Unrealized (loss) gain on U.S. Treasury investments, net

(13,878)

20,999

Unrealized postretirement benefit loss (Note 13)

(26,886)

(15,059)

Unrealized gain (loss) on trust preferred securities (Note 5)

50,752

(84,587)

Total Other Comprehensive Income (Loss)

9,988

(78,647)

Comprehensive Income

21,131,235

19,178,772

Fund Balance - Beginning

11,826,532

(7,352,240)

Fund Balance - Ending

$32,957,767

$11,826,532

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

 

2012

2011

Operating Activities

Net Income:

$21,121,247

$19,257,419

Adjustments to reconcile net income to net cash (used by) operating activities:

Amortization of U.S. Treasury obligations

854,195

388,895

Treasury Inflation-Protected Securities inflation adjustment

(98,050)

(25,307)

Depreciation on property and equipment

76,365

77,720

Loss on retirement of property and equipment

14

1,326

Provision for insurance losses

(4,222,595)

(4,413,629)

Unrealized Loss on postretirement benefits

(26,886)

(15,059)

Change in Operating Assets and Liabilities (Net of Provision for Losses):

(Increase) in assessments receivable, net

(724,605)

(64,354)

Decrease (Increase) in interest receivable and other assets

51,181

(227,962)

Decrease (Increase) in receivables from resolutions

6,371,418

(5,802,003)

Decrease in receivables - systemic risk

1,948,151

321,271

(Decrease) in accounts payable and other liabilities

(24,543)

(140,123)

Increase in postretirement benefit liability

36,258

22,094

(Decrease) in contingent liabilities - systemic risk

(2,216)

(117,777)

(Decrease) in contingent liabilities - litigation losses

0

(276,000)

(Decrease) Increase in liabilities due to resolutions

(11,616,727)

2,278,635

(Decrease) Increase in Debt Guarantee Program liabilities - systemic risk

(117,027)

87,693

(Decrease) in unearned revenue - prepaid assessments

(15,823,411)

(12,657,206)

(Decrease) in deferred revenue - systemic risk

(6,513,828)

(2,399,644)

Increase in refunds of prepaid assessments

5,675,199

0

Net Cash (Used) by Operating Activities

(3,035,860)

(3,704,011)

Investing Activities

Provided by:

 

 

Maturity of U.S. Treasury obligations

32,132,623

12,976,273

Sale of U.S. Treasury obligations

2,554,781

0

Used by:

 

 

Purchase of property and equipment

(67,344)

(64,896)

Purchase of U.S. Treasury obligations

(33,388,751)

(36,409,429)

Net Cash Provided (Used) by Investing Activities

1,231,309

(23,498,052)

Net (Decrease) in Cash and Cash Equivalents

(1,804,551)

(27,202,063)

Cash and Cash Equivalents - Beginning

4,904,912

32,106,975

Unrestricted Cash and Cash Equivalents - Ending

3,100,361

3,277,839

Restricted Cash and Cash Equivalents - Ending

0

1,627,073

Cash and Cash Equivalents - Ending

$3,100,361

$4,904,912

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

Notes to the Financial Statements

Deposit Insurance Fund December 31, 2012 and 2011

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 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, the FDIC, as administrator of the Deposit Insurance Fund (DIF), insures the deposits of banks and savings associations (insured depository institutions) from loss due to institution failures. In cooperation with other federal and state agencies, the FDIC promotes the safety and soundness of insured depository institutions 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.

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

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the FDIC is the manager of 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 failing financial company, such as 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 granted the FDIC authority to establish a widely available program to guarantee obligations of solvent insured depository institutions (IDIs) or solvent depository institution holding companies (including affiliates) upon the systemic 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 limits the FDIC’s systemic risk determination authority under section 13 of the FDI Act to IDIs for which the FDIC has been appointed receiver. Prior to this change, the authority permitted open bank assistance and the creation of the Temporary Liquidity Guarantee Program (TLGP) that expired on December 31, 2012 (see Note 16).

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 (unless a systemic risk determination is made).

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 $132.9 billion and $114.4 billion as of December 31, 2012 and 2011, 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 in accordance with applicable laws and regulations. Accordingly, income and expenses attributable to resolution entities are accounted for as transactions of those entities. Resolution entities 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 accordance with U.S. generally accepted accounting principles (GAAP). As permitted by the Federal Accounting Standards Advisory Board’s Statement of Federal Financial Accounting Standards 34, The Hierarchy of Generally Accepted Accounting Principles, Including the Application of Standards Issued by the Financial Accounting Standards Board, the FDIC prepares financial statements in accordance with standards promulgated by the Financial Accounting Standards Board (FASB). 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 interests in them. Periodic and final accountability 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 valuation of trust preferred securities; the assessments receivable and associated revenue; the allowance for loss on receivables from resolutions (including shared-loss agreements); guarantee obligations for structured transactions; refunds of prepaid assessments; 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 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 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 Public Debt’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 on a daily basis 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, and a modest assessment base growth factor. 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 9).

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 useful 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 useful life.

Reporting on Variable Interest Entities

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 (see Note 8, Contingent Liabilities for: FDIC Guaranteed Debt of Structured Transactions). As the guarantor of note obligations for several structured transactions, the FDIC in its corporate capacity is the holder of a variable interest in a number of 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 impact 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 which 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 results of each analysis identified a party other than the FDIC in its corporate capacity as 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 in its corporate capacity to be characterized as a primary beneficiary to any VIE with which it was involved as of December 31, 2012 and 2011. Therefore, consolidation is not required for the 2012 and 2011 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 Corporation if payments are made on guarantee claims. Ongoing analyses will be required in order to monitor consolidation implications under ASC 810.

The FDIC’s involvement with VIEs, in its corporate capacity, is fully described in Note 8.

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

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

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

As of December 31, 2012 and 2011, investments in U.S. Treasury obligations, net, were $34.9 billion and $33.9 billion, respectively. As of December 31, 2012 and 2011, the DIF held $5.3 billion and $5.0 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). During 2012, the FDIC sold securities designated as available-for-sale for total proceeds of $2.6 billion. The gross realized gains and losses on these sales were $878 thousand and $241 thousand, respectively, which resulted in a total net gain of $637 thousand. The cost of these securities sold was determined based on specific identification. Since these securities were purchased on behalf of the TLGP, the realized gain was recognized in the “Deferred revenue - systemic risk” line item on the Balance Sheet.

Total Investment in U.S. Treasury Obligations, Net at December 31, 2012
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

0.34%

$24,800,000

$25,228,393

$19,871

$0

$25,248,264

After 1 year through 5 years

0.32%

4,050,000

4,341,814

4,569

0

4,346,383

U.S. Treasury Inflation-Protected Securities

Within 1 year

-0.86%

1,650,000

1,813,291

0

(9,788)2

1,803,503

After 1 year through 5 years

-0.87%

2,900,000

3,451,371

19,167

0

3,470,538

Total

 

$33,400,000

$34,834,869

$43,607

$(9,788)

$34,868,688

1For 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 2012.

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 TIPS and is not likely to be required to sell them before their maturity in 2013, thus, the FDIC does not consider these securities to be other than temporarily impaired at December 31, 2012.

Total Investment in U.S. Treasury Obligations, Net at December 31, 2011
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

0.27%

$24,500,0002

$24,889,547

$17,842

$(93)

$24,907,296

After 1 year through 5 years

0.93%

3,900,000

3,923,428

38,778

0

3,962,206

U.S. Treasury Inflation-Protected Securities

Within 1 year

0.51%

1,200,000

1,537,664

659

(8)

1,538,315

After 1 year through 5 years

-0.92%

3,050,000

3,464,909

0

(9,481)

3,455,428

Total

 

$32,650,000

$33,815,548

$57,279

$(9,582)3

$33,863,245


1For 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 1.8 percent, based on figures issued by the Congressional Budget Office and Blue Chip Economic Indicators in early 2011.

2Includes one Treasury note totaling $1.8 billion which matured on Saturday, December 31, 2011. Settlement occurred on the next business day, January 3, 2012.

3All 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. Unrealized losses related to the TIPS converted to unrealized gains by January 31, 2012, and unrealized losses related to the U.S. Treasury notes and bonds existed on just one security that matured with no unrealized loss on January 31, 2012, and thus the FDIC does not consider these securities to be other than temporarily impaired at December 31, 2011.

4. Receivables from Resolutions, Net

Receivables from Resolutions, Net at December 31
Dollars in Thousands

 

2012

2011

Receivables from closed banks

$116,940,999

$121,369,428

Allowance for losses

(93,821,445)

(92,821,032)

Total

$23,119,554

$28,548,396

The receivables from resolutions result from payments made by the DIF 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 8) are the main source of repayment of the DIF’s receivables from resolutions.

As of December 31, 2012, there were 463 active receiverships, including 51 established in 2012. As of December 31, 2012 and 2011, DIF resolution entities held assets with a book value of $53.5 billion and $71.4 billion, respectively (including $36.5 billion and $50.5 billion, respectively, of cash, investments, receivables due from the DIF, and other receivables). Ninety-nine percent of the current asset book value of $53.5 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 as far back as 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 and recoveries 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 2012 financial reporting, the shared-loss cost estimates were updated for the majority (93% or 276) of the 298 active shared-loss agreements; the remaining 22 were based on recent loss estimates. 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 remaining agreements were stratified by receivership age. A random sample of institutions within each age stratum was selected for new third-party loss estimations, and valuation results from the sample institutions were aggregated and extrapolated to institutions within the like age stratum based on asset type and performance status.

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. Continuing economic uncertainties could 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 301 failures using whole bank purchase and assumption resolution transactions with accompanying SLAs on total assets of $214.6 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. SLAs are used by the FDIC to keep assets in the private sector and to minimize disruptions to loan customers.

Losses on the covered assets are shared between the acquirer and the FDIC in its receivership capacity of the failed institution when losses occur through the sale, foreclosure, loan modification, or write-down of loans in accordance with the terms of the SLA. The majority of the agreements cover a five- to 10-year period with the receiver covering 80 percent of the losses incurred by the acquirer and the acquiring bank 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. As mentioned above, 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 7).

As of December 31, 2012, 286 receiverships have made shared-loss payments totaling $23.3 billion. In addition, DIF receiverships are estimated to pay an additional $18.1 billion over the duration of these SLAs on $103.7 billion in total remaining covered assets.

Concentration of Credit Risk

Financial instruments that potentially subject the DIF to concentrations of credit risk are receivables from resolutions. The repayment of the DIF’s receivables from resolutions is primarily influenced by recoveries on assets held by DIF receiverships and payments on the covered assets under SLAs. The majority of the $120.7 billion in remaining assets in liquidation ($17.0 billion) and current shared-loss covered assets ($103.7 billion) are concentrated in commercial loans ($60.0 billion), residential loans ($43.6 billion), securities ($3.1 billion), and structured transaction-related assets as described in Note 8 ($12.1 billion). Most of the assets in these asset types originated from failed institutions located in California ($34.3 billion), Florida ($14.1 billion), Puerto Rico ($10.9 billion), Illinois ($10.5 billion), Georgia ($9.8 billion) and Alabama ($9.0 billion).

5. 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. In consideration for its portion of the shared-loss guarantee at inception, the FDIC received $3.025 billion of Citigroup’s preferred stock. All shares of the preferred stock were subsequently converted to Citigroup Capital XXXIII trust preferred securities (TruPs) with a liquidation amount of $1,000 per security and a distribution rate of 8 percent per annum payable quarterly. The principal amount is due in 2039.

On December 23, 2009, Citigroup terminated the guarantee agreement, citing improvements in its financial condition. The FDIC incurred no loss from the guarantee prior to the termination of the agreement. In connection with the early termination of the agreement, the FDIC agreed to reduce its portion of the $3.025 billion in TruPs by $800 million. However, pursuant to an agreement between the Treasury and the FDIC, the Treasury agreed to return $800 million in TruPs on behalf of the FDIC from its portion of Citigroup TruPs holdings received as a result of the shared-loss agreement. The FDIC retained the $800 million of Citigroup TruPs as security in the event payments were required to be made by the DIF for guaranteed debt instruments issued by Citigroup and its affiliates under the TLGP. Because no payments were required prior to expiration of the TLGP on December 31, 2012, the FDIC transferred the $800 million in Citigroup TruPs and $183 million in related dividends and interest to the Treasury.

The remaining $2.225 billion (liquidation amount) of TruPs is classified as available-for-sale debt securities in accordance with FASB ASC Topic 320, Investments – Debt and Equity Securities. At December 31, 2012, the fair value of the TruPs was $2.264 billion (see Note 15). An unrealized holding gain of $302 million is included in accumulated other comprehensive income.

6. Property and Equipment, Net

Property and Equipment, Net at December 31
Dollars in Thousands

 

2012

2011

Land

$37,352

$37,352

Buildings (including leasehold improvements)

313,221

316,129

Application software (includes work-in-process)

135,059

130,718

Furniture, fixtures, and equipment

152,280

159,120

Accumulated depreciation

(245,032)

(241,404)

Total

$392,880

$401,915

The depreciation expense was $76 million and $78 million for 2012 and 2011, respectively.

7. Liabilities Due to Resolutions

As of December 31, 2012 and 2011, the DIF recorded liabilities totaling $21.1 billion and $32.7 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 directly sending cash to the receivership to fund shared-loss and other expenses or by offsetting receivables from resolutions when the receivership declares a dividend.

In addition, there was $56 million and $80 million in unpaid deposit claims related to multiple receiverships as of December 31, 2012 and 2011, respectively. The DIF pays these liabilities when the claims are approved.

8. 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.

Banking industry performance continued to recover in 2012 at a gradual, steady pace. According to the quarterly financial data submitted by IDIs, the industry reported total net income of $107.4 billion for the first three quarters of 2012, an increase of 14.9% over the first three quarters of 2011. Improving credit performance, which has led to lower loan loss provisions, has been primarily responsible for most of the improvement in earnings. Losses to the DIF from failures that occurred in 2012 fell short of the amount reserved at the end of 2011, as the aggregate number and size of institution failures in 2012 were less than anticipated. The removal from the reserve of institutions that did fail in 2012, as well as projected favorable trends in bank supervisory downgrade and failure rates, all contributed to a decline by $3.3 billion to $3.2 billion in the contingent liability for anticipated failures of insured institutions at December 31, 2012.

In addition to these recorded contingent liabilities, the FDIC has identified risk 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 up to $6.3 billion for year-end 2012 as compared to $10.2 billion for year-end 2011. The actual losses, if any, will largely depend on future economic and market conditions and could differ materially from this estimate.

During 2012, 51 institutions failed with combined assets at the date of failure of $11.8 billion. Supervisory and market data suggest that the financial performance of the banking industry should continue to improve over the coming year.  However, ongoing asset quality problems and limited opportunities for earnings growth will continue to be sources of stress on the industry. In addition, two key risks continue to weigh on the economic outlook. First, uncertain prospects for the European economy have increased volatility in the global financial markets, which could trigger increased volatility in the U.S. financial markets and adversely affect the U.S. economy. Second, the outcome of continued negotiations on the federal debt limit and the federal budget in 2013 could significantly affect the U.S. economy and, in turn, IDIs. The FDIC continues to evaluate the ongoing risks to affected institutions in light of existing economic and financial conditions, and the extent to which such risks will continue to 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 $8 million and $1 million for the DIF as of December 31, 2012 and 2011, respectively, and has determined that there are no reasonably possible losses from unresolved cases.

Other Contingencies

IndyMac Federal Bank Representation and Indemnification Contingent Liability

On March 19, 2009, the FDIC as receiver of IndyMac Federal Bank (IMFB) and certain subsidiaries (collectively, sellers) sold substantially all of the assets of IMFB and the respective subsidiaries, including mortgage loans and mortgage loan servicing rights, to OneWest Bank and its affiliates. To maximize sale returns, the sellers made certain representations customarily made by commercial parties regarding the assets and agreed to indemnify the acquirers for losses incurred as a result of breaches of such representations, losses incurred as a result of the failure to obtain contractual counterparty consents to the sale, and third party claims arising from pre-sale acts and omissions of the sellers or the failed bank. Although the representations and indemnifications were made by or are obligations of the sellers, the FDIC, in its corporate capacity, guaranteed the receivership’s indemnification obligations under the sale agreements. The representations relate generally to ownership of and right to sell the assets; compliance with applicable law in the origination of the loans; accuracy of the servicing records; validity of loan documents; and servicing of the loans serviced for others. Until the periods for asserting claims under these arrangements have expired and all indemnification claims quantified and paid, losses could continue to be incurred by the receivership and, in turn, the DIF, either directly, as a result of the FDIC corporate guaranty of the receivership’s indemnification obligations, or indirectly, as a result of a reduction in the receivership’s assets available to pay the DIF’s claims as subrogee for insured accountholders. The acquirers’ rights to assert claims to recover losses incurred as a result of breaches of loan seller representations extend out to March 19, 2019 for the Fannie Mae and Ginnie Mae reverse mortgage servicing portfolios (unpaid principal balance of $16.2 billion at December 31, 2012 compared to $16.7 billion at December 31, 2011), and March 19, 2014 for the Fannie Mae, Freddie Mac and Ginnie Mae mortgage servicing portfolios (unpaid principal balance of $34.3 billion at December 31, 2012 compared to $38.5 billion at December 31, 2011). The acquirers’ rights to assert claims to recover losses incurred as a result of other third party claims (including due to pre-March 19, 2009 acts or omissions) and breaches of servicer representations, including liability with respect to the Fannie Mae, Ginnie Mae and Freddie Mac portfolios as well as the private mortgage servicing portfolio and whole loans (unpaid principal balance of $53.9 billion at December 31, 2012 compared to $62.0 billion at December 31, 2011) expired on March 19, 2011. As of the expiration date of this claim period, notices relating to potential defects were received, but they require review to determine whether a valid defect exists and, if so, the identification and costing of possible cure actions. It is highly unlikely that all of these potential defects will result in losses.

The IndyMac receivership has paid a cumulative total of $14 million in approved claims through December 31, 2012 and a cumulative total of $5 million through December 31, 2011. Additional claims asserted, but under review, were accrued in the amount of $1 million as of December 31, 2012 and $2 million as of December 31, 2011. Alleged breaches of origination and servicing representations exist, and it is probable that the IndyMac receivership and its subsidiary Financial Freedom Senior Funding Corporation may incur up to $80 million in losses; these estimated losses have been accrued as of December 31, 2012. In addition, review and evaluation is in process for approximately $32 million in reasonably possible liabilities with respect to alleged breaches of representations and warranties. Potential losses relating to origination and servicing representations, which currently cannot be quantified, may also be incurred under other agreements with investors.

The FDIC believes it is likely that additional losses will be incurred, however quantifying the contingent liability associated with the representations and the indemnification obligations is subject to a number of uncertainties, including (1) borrower prepayment speeds, (2) the occurrence of borrower defaults and resulting foreclosures and losses, (3) the assertion by third party investors of claims with respect to loans serviced for them, (4) the existence and timing of discovery of breaches and the assertion of claims for indemnification for losses by the acquirer, (5) the compliance by the acquirer with certain loss mitigation and other conditions to indemnification, (6) third party sources of loss recovery (such as title companies and insurers), (7) the ability of the acquirer to refute claims from investors without incurring reimbursable losses, and (8) the cost to cure breaches and respond to third party claims. The difficulty in assessing losses is exacerbated further by the inability to use historical default and loss rates as a metric given recent economic events. Because of these and other uncertainties that surround the liability associated with indemnifications and the quantification of possible losses, the FDIC has determined that while additional losses are probable, the amount is not 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 2012 and 2011, 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. In many instances, the FDIC in its corporate capacity guarantees notes issued by the LLCs. In exchange for a guarantee, the DIF receives a guarantee fee in either 1) a lump-sum, up-front payment based on the estimated duration of the note or 2) a monthly payment based on a fixed percentage multiplied by the outstanding note balance. The terms of these guarantee agreements generally stipulate that all cash flows received from the entity’s collateral be used to pay, in the following order, 1) operational expenses of the entity, 2) the FDIC’s contractual guarantee fee, 3) the guaranteed notes (or, if applicable, fund the related defeasance account for payoff of the notes at maturity), and 4) the equity investors. If the FDIC is required to perform under these guarantees, it acquires an interest in the cash flows of the LLC equal to the amount of guarantee payments made plus accrued interest thereon. Once all expenses have been paid, the guaranteed notes have been satisfied, and the FDIC has been reimbursed for any guarantee payments, the equity holders receive any remaining cash flows.

Since 2009, private investors have 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 hold the remaining 50- to 60-percent equity interest in the LLCs and, in most cases, the guaranteed notes. The FDIC in its corporate capacity guarantees the timely payment of principal and interest due on the notes. The terms of the note guarantees extend until the earlier of 1) payment in full of the notes or 2) two years following the maturity date of the notes. The note with the longest term matures in 2020. 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.

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 1) senior and/or subordinated debt instruments and 2) 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 $5.7 billion in cash. The receiverships hold 100 percent of the subordinated debt instruments and owner trust or residual certificates. 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. In exchange for the guarantee, the DIF receives a monthly payment based on a fixed percentage multiplied by the outstanding note balance. These guarantee agreements generally stipulate that all cash flows received from the entity’s collateral be used to pay, in the following order, 1) operational expenses of the entity, 2) the FDIC’s contractual guarantee fee, 3) interest on the guaranteed notes, 4) principal of the guaranteed notes, and 5) the holders of the subordinated notes and owner trust or residual certificates. 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 thereon. Once all expenses have been paid, the guaranteed notes have been satisfied, and the FDIC has been reimbursed for any guarantee payments, the subordinated note holders and owner trust or residual certificates holders receive the remaining cash flows.

All Structured Transactions with FDIC Guaranteed Debt

Through December 31, 2012, 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 $8.1 billion to 14 LLCs and 9 trusts. The LLCs and trusts subsequently issued notes guaranteed by the FDIC in an original principal amount of $10.1 billion. As of December 31, 2012 and 2011, the DIF collected guarantee fees totaling $218 million and $203 million, respectively, and recorded a receivable for additional guarantee fees of $95 million and $106 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. At December 31, 2012 and 2011, the amount of deferred revenue recorded was $101 million and $134 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 percent) of the expected guarantee payments by the FDIC, reimbursements to the FDIC for guarantee payments, and guarantee fee collections. The FDIC believes that it is reasonably possible that the DIF could incur an estimated loss for one transaction of $5.7 million in 2020, net of expected guarantee fees of $4.2 million. This estimated loss may vary over time as conditions change. For all of the remaining transactions, the 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, 2012 and 2011, the maximum loss exposure was $2.2 billion and $3.7 billion for LLCs and $3.2 billion and $3.9 billion for trusts, respectively, representing the sum of all outstanding debt guaranteed by the FDIC in its corporate capacity. Some transactions have established defeasance accounts to pay off the notes at maturity. As of December 31, 2012 and 2011, a total of $1.6 billion and $2.2 billion, respectively, has been deposited into these accounts.

9. Assessments

The Dodd-Frank Act provided for significant assessment and capitalization reforms for the DIF. In response, 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.

Restoration Plan

In October 2010, the FDIC adopted a Restoration Plan to ensure that the ratio of the DIF fund balance to estimated insured deposits (reserve ratio) reaches 1.35 percent by September 30, 2020 in lieu of the previous target of 1.15 percent by the end of 2016. In addition, the Plan provides for the FDIC to 1) pursue rulemaking regarding the method that will be used to offset the impact of the increased reserve ratio on small institutions (less than $10 billion in assets) and 2) update, at least semiannually, its loss and income projections for the fund and, if needed, increase or decrease assessment rates, following notice-and-comment rulemaking, if required.

Designated Reserve Ratio

In December 2012, the FDIC adopted a final rule maintaining the designated reserve ratio (DRR) at 2 percent, effective January 1, 2013. The DRR is an integral part of the FDIC’s comprehensive, long-term management plan for the DIF and is viewed as a long-range, minimum target for the reserve ratio.

Calculation of Assessment

In February 2011, the FDIC adopted a final rule, effective on April 1, 2011, amending part 327 of title 12 of the Code of Federal Regulations to 1) redefine the assessment base used for calculating deposit insurance assessments from adjusted domestic deposits to average consolidated total assets minus average tangible equity (measured as Tier 1 capital); 2) change the assessment rate adjustments; 3) lower the initial base rate schedule and the total base rate schedule for all IDIs to collect approximately the same revenue for the DIF as would have been collected under the old assessment base; 4) suspend dividends indefinitely, and, in lieu of dividends, adopt lower assessment rate schedules when the reserve ratio reaches 1.15 percent, 2 percent, and 2.5 percent; and 5) change the risk-based assessment system for large IDIs (generally, those institutions with at least $10 billion in total assets). Specifically, the final rule eliminates risk categories and the use of long-term debt issuer ratings for large institutions and combines CAMELS ratings and certain forward-looking financial measures into two scorecards: one for most large institutions and another for large institutions that are structurally and operationally complex or that pose unique challenges and risks in case of failure (highly complex IDIs).

In October 2012, the FDIC adopted a final rule which amends and clarifies some definitions of higher-risk assets as used in the deposit insurance pricing scorecards for large and highly complex IDIs by 1) revising the definitions of certain higher-risk assets, specifically leveraged loans and subprime consumer loans, 2) clarifying when an asset must be identified as higher risk, and 3) clarifying the way securitizations are identified as higher risk. The goal of this final rule is to ensure that the assessment system captures the risk inherent in higher-risk assets without imposing an unnecessary reporting burden. The final rule will become effective on April 1, 2013 and provides that, until then, large and highly complex IDIs will continue to report higher-risk assets using existing guidance.

Assessment Revenue

Annual assessment rates averaged approximately 10.1 cents per $100 and 11.1 cents per $100 of the new assessment base (as described above) for all of 2012 and the last three quarters of 2011, respectively. The annual assessment rate averaged approximately 17.6 cents per $100 of the adjusted domestic deposits assessment base for the first quarter of 2011.

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 the fourth quarter 2009 and each subsequent quarter, an institution’s risk-based deposit insurance assessment was offset by the available amount of prepaid assessments, thereby reducing that institution’s prepaid assessment balance. By regulation, any remaining prepaid assessments must be refunded to the institutions after collection of the amount due on June 30, 2013. The final prepaid offset will occur in June 2013 for the assessment period ending March 31, 2013. Therefore, at December 31, 2012, the “Unearned revenue – prepaid assessments” line item on the Balance Sheet of $1.6 billion represents the final estimated prepaid offset and the “Refunds of prepaid assessments” line item reflects the estimate of $5.7 billion that will be returned to the institutions in June 2013. Though the combined total for both the prepaid offset and refunds will remain unchanged, the estimated amount for each component may vary considerably because of the uncertainty inherent in projecting the assessment rate and base for IDIs beyond the customary 90-day period.

For those institutions that did not prepay assessments or whose prepaid assessments have been exhausted, the “Assessments receivable, net” line item on the Balance Sheet of $1.0 billion and $282 million as of December 31, 2012 and 2011, respectively, represents the estimated premiums due from IDIs for the fourth quarter of 2012 and 2011, respectively.

Reserve Ratio

As of September 30, 2012, the DIF reserve ratio was 0.35 percent 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. During 2012 and 2011, approximately $797 million and $795 million, respectively, was collected and remitted to the FICO.

10. Other Revenue

Other Revenue for the Years Ended December 31
Dollars in Thousands

 

2012

2011

Temporary Liquidity Guarantee Program revenue (Note 16)

$5,885,330

$2,569,579

Dividends and interest on Citigroup trust preferred securities (Note 5)

177,831

178,000

Guarantee fees for structured transactions (Note 8)

57,206

92,229

Other

6,844

7,121

Total

$6,127,211

$2,846,929

Temporary Liquidity Guarantee Program Revenue

Pursuant to a systemic risk determination in October 2008, the FDIC established the TLGP (see Note 16). In exchange for guarantees issued under the TLGP, the DIF received fees that were set aside, as deferred revenue, for potential TLGP losses. As losses occurred, the DIF recognized the losses as systemic risk expenses and offset the losses by recognizing an equivalent portion of the deferred revenue as systemic risk revenue. This accounting practice isolated systemic risk activities from the normal operating activities of the DIF. 

In accordance with FDIC policy, the DIF recognized revenue during the guarantee period when guarantee fees held were determined to be in excess of amounts needed to cover potential losses, and, for all remaining TLGP assets held as deferred revenue, upon expiration of the TLGP on December 31, 2012. As a result, the DIF recognized total revenue of $5.9 billion and $2.6 billion in 2012 and 2011, respectively.

11. Operating Expenses

Operating expenses were $1.8 billion and $1.6 billion for 2012 and 2011, respectively. The chart below lists the major components of operating expenses.

Operating Expenses for the Years Ended December 31
Dollars in Thousands

 

2012

2011

Salaries and benefits

$1,300,697

$1,320,991

Outside services

337,379

342,502

Travel

106,897

115,135

Buildings and leased space

91,631

93,630

Software/Hardware maintenance

63,108

58,981

Depreciation of property and equipment

76,365

77,720

Other

21,137

46,652

Subtotal

1,997,214

2,055,611

Services billed to resolution entities

(219,701)

(430,260)

Total

$1,777,513

$1,625,351

12. Provision for Insurance Losses

Provision for insurance losses was negative $4.2 billion for 2012, compared to negative $4.4 billion for 2011. The negative provision for 2012 primarily resulted from a reduction of $1.4 billion in the contingent loss reserve due to the improvement in the financial condition of institutions that were previously identified to fail and a decrease of $2.8 billion in the estimated losses for institutions that failed in the current and prior years.

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. These amounts are reported on and accounted for by the U.S. Office of Personnel Management (OPM).

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

 

2012

2011

Civil Service Retirement System

$5,960

$6,140

Federal Employees Retirement System (Basic Benefit)

97,517

95,846

FDIC Savings Plan

37,700

36,645

Federal Thrift Savings Plan

34,555

33,910

Total

$175,732

$172,541

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. The FEHB is administered and accounted for by the OPM. 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 dental 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, 2012 and 2011, the liability was $224 million and $188 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 $60 million and $34 million at December 31, 2012 and 2011, 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 2012 and 2011 were $14 million and $12 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 and prior service costs for 2012 and 2011 of $27 million and $15 million, respectively, are reported as other comprehensive income in the “Unrealized postretirement benefit loss” 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 3.75 percent, the rate of compensation increase of 4.0 percent, and the dental coverage trend rate of 5.6 percent. The discount rate of 3.75 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 $216 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 $54 million and $56 million for the years ended December 31, 2012 and 2011, respectively.

Leased Space Commitments
Dollars in Thousands

2013

2014

2015

2016

2017

2018/Thereafter

$52,160

$46,521

$36,496

$33,509

$29,068

$18,511

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, 2012 and December 31, 2011, estimated insured deposits for the DIF were $7.3 trillion and $7.0 trillion, respectively, including $1.5 trillion and $1.4 trillion, respectively, of noninterest-bearing transaction deposits that exceeded the basic limit of $250,000 per account. Under the Dodd-Frank Act, noninterest-bearing transaction deposits received unlimited deposit insurance coverage from December 31, 2010 through December 31, 2012. Upon expiration of this unlimited coverage on December 31, 2012, these deposits pose no further exposure to the DIF.

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 (Note 2), the investment in U.S. Treasury obligations (Note 3) and trust preferred securities (Note 5). The following tables present the DIF’s financial assets measured at fair value as of December 31, 2012 and 2011.

In exchange for prior shared-loss guarantee coverage provided to Citigroup, the FDIC and the Treasury received TruPs (see Note 5). At December 31, 2012, the fair value of the securities in the amount of $2.264 billion was classified as a Level 2 measurement based on an FDIC-developed model using observable market data for traded Citigroup securities to determine the expected present value of future cash flows. Key inputs include market yields on U.S. dollar interest rate swaps and discount rates for default, call, and liquidity risks that are derived from traded Citigroup securities and modeled pricing relationships.

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, refunds of prepaid assessments, 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.

Assets Measured at Fair Value at December 31, 2012
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

$3,091,778

 

 

$3,091,778

Available-for-Sale Debt Securities

 

 

 

 

Investment in U.S. Treasury obligations2

34,868,688

 

 

34,868,688

Trust preferred securities

 

$2,263,983

 

2,263,983

Total Assets

$37,960,466

$2,263,983

$0

$40,224,449


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

2The 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, 2011
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

$3,266,631

 

 

$3,266,631

Available-for-Sale Debt Securities

 

 

 

 

Investment in U.S. Treasury obligations2

33,863,245

 

 

33,863,245

Trust preferred securities

 

$2,213,231

 

2,213,231

Trust preferred securities held for UST (Note 5)

 

795,769

 

795,769

Total Assets

$37,129,876

$3,009,000

$0

$40,138,876


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

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

16. Systemic Risk Transactions

Pursuant to a systemic risk determination, the FDIC established the TLGP (codified in part 370 of title 12 of the Code of Federal Regulations) for IDIs, designated affiliates and certain holding companies on October 14, 2008, in an effort to counter the system-wide crisis in the nation’s financial sector. The DIF received fees in exchange for guarantees issued under the TLGP and set aside, as deferred revenue, all fees for potential TLGP losses. As systemic risk expenses were incurred, the DIF reduced deferred revenue and recognized an offsetting amount as systemic risk revenue. Also, DIF recognized systemic risk revenue when guarantee fees held were determined to be in excess of amounts needed to cover potential losses. As a result, systemic risk activities were isolated from the normal operating activities of the DIF.

At its inception, the TLGP consisted of two components: 1) the Transaction Account Guarantee Program (TAG) and 2) the Debt Guarantee Program (DGP). The TAG provided unlimited coverage for noninterest-bearing transaction accounts held by IDIs on all deposit amounts exceeding the fully insured limit of $250,000 through December 31, 2010. During its existence, the FDIC collected TAG fees of $1.2 billion. Total subrogated claims arising from obligations to depositors with noninterest-bearing transaction accounts were $8.8 billion, with estimated losses of $2.1 billion.

The DGP permitted participating entities to issue FDIC-guaranteed senior unsecured debt through October 31, 2009. The FDIC’s guarantee for all such debt expired no later than December 31, 2012. Through the end of the debt issuance period, the DIF collected $8.3 billion of guarantee fees and received additional fees of $1.2 billion from participating entities that elected to issue senior unsecured non-guaranteed debt. During the program, guaranteed debt issued totaled $618.0 billion and the FDIC paid $153 million in claims for principal and interest arising from the default of guaranteed debt obligations of six debt issuers.

The expiration of the guarantee period for the DGP on December 31, 2012 marked the conclusion of the TLGP.  As established under terms of the TLGP, all excess funds were transferred to the DIF.  Since inception, the DIF recognized total “Other revenue” of $8.5 billion (see Note 10). In 2012, the DIF received $5.2 billion of cash and a net receivable of $693 million included in “Receivables from resolutions, net”.  The net receivable represents estimated recoveries on payments under the TLGP to cover obligations. In 2011, the DIF received $2.6 billion of cash and U.S. Treasury obligations.

17. Subsequent Events

Subsequent events have been evaluated through February 14, 2013, the date the financial statements are available to be issued.

2013 Failures through February 14, 2013

Through February 14, 2013, two insured institutions failed in 2013 with total losses to the DIF estimated to be $43 million.

TLGP Summary (Inception through December 31, 2012)
Dollars in Thousands

Collections:

Transaction Account Guarantee Program fees

 

$1,156,332

Debt Guarantee Program fees

 

9,490,993

Interest earned on TLGP funds

 

42,293

Total TLGP Fees and Interest Earned

 

$10,689,618

Payments:

Transaction Account Guarantee Program claims

$(8,769,873)

 

Less: Receipts of receivership dividends

6,016,597

 

Net Transaction Account Guarantee Program claims

 

(2,753,276)

Debt Guarantee Program claims paid

 

(153,127)

TLGP operating expenses

 

(6,707)

Total TLGP Claims and Expenses Paid

 

$(2,913,110)

Cash Transferred to the DIF

 

7,776,508

Estimated Recovery on TAG Claims Paid

 

693,248

Excess TLGP Assets Transferred to the DIF

 

$8,469,756

 


Last Updated 07/09/2013 communications@fdic.gov