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1999 Annual Report

Bank Insurance Fund

Federal Deposit Insurance Corporation

Bank Insurance Fund Statements of Financial Position at December 31

Dollars in Thousands

1999

1998

Assets

Cash and cash equivalents

$

164,455

$

2,117,644

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

28,238,065

26,125,695

(Market value of investments at December 31, 1999 and December 31, 1998
was $27.9 billion and $27.5 billion, respectively)

Interest receivable on investments and other assets, net

467,070

657,636

Receivables from bank resolutions, net (Note 4)

743,011

747,948

Assets acquired from assisted banks and terminated receiverships, net (Note 5)

20,750

27,373

Property and equipment, net (Note 6)

260,040

209,613

Total Assets

$

29,893,391

$

29,885,911

Liabilities

Accounts payable and other liabilities

$

148,821

$

197,034

Contingent liabilities for: (Note 7)

Anticipated failure of insured institutions

307,000

32,000

Assistance agreements

10,910

15,125

Litigation losses

10,000

22,301

Asset securitization guarantees

2,477

7,141

Total Liabilities

479,208

273,601

Commitments and off-balance-sheet exposure (Note 12)

Fund Balance

Accumulated net income

29,494,950

29,601,395

Unrealized (loss)/gain on available-for-sale securities, net
(Note 3)

(80,767)

10,915

Total Fund Balance

29,414,183

29,612,310

Total Liabilities and Fund Balance

$

29,893,391

$

29,885,911

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

Federal Deposit Insurance Corporation

Bank Insurance Fund Statements of Income and Fund Balance for the Years Ended
December 31

Dollars in Thousands

1999

1998

Revenue

Interest on U.S. Treasury obligations

$

1,733,603

$

1,674,344

Assessments (Note 8)

33,333

21,688

Interest on advances and subrogated claims

20,626

67,350

Gain on conversion of benefit plan (Note 11)

0

200,532

Revenue from assets acquired from assisted banks and terminated receiverships

11,484

20,926

Other revenue

16,556

15,422

Total Revenue

1,815,602

2,000,262

Expenses and Losses

Operating expenses

730,394

697,604

Provision for insurance losses (Note 9)

1,168,749

(37,699)

Expenses for assets acquired from assisted banks and terminated receiverships

18,778

29,803

Interest and other insurance expenses

4,126

1,831

Total Expenses and Losses

1,922,047

691,539

Net (Loss) Income

(106,445)

1,308,723

Unrealized (loss)/gain on available-for-sale securities, net (Note 3)

(91,682)

11,039

Comprehensive (Loss) Income

(198,127)

1,319,762

Fund Balance - Beginning

29,612,310

28,292,548

Fund Balance - Ending

$

29,414,183

$

29,612,310

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

Federal Deposit Insurance Corporation

Bank Insurance Fund Statements of Cash Flows for the Years Ended December 31

Dollars in Thousands

1999

1998

Cash Flows From Operating Activities

Cash provided by:

Interest on U.S. Treasury obligations

$

1,848,536

$

1,788,937

Recoveries from bank resolutions

426,348

881,802

Recoveries on conversion of benefit plan

175,720

0

Recoveries from assets acquired from assisted banks and terminated receiverships

46,390

54,207

Assessments

34,692

22,931

Miscellaneous receipts

19,029

27,990

Cash used by:

Operating expenses

(722,096)

(711,020)

Disbursements for bank resolutions

(1,333,622)

(420,691)

Disbursements for assets acquired from assisted banks and terminated receiverships

(27,756)

(37,391)

Miscellaneous disbursements

(7,542)

(7,959)

Net Cash Provided by Operating Activities (Note 15)

459,699

1,598,806

Cash Flows From Investing Activities

Cash provided by:

Maturity of U.S. Treasury obligations, held-to-maturity

2,120,000

5,850,000

Maturity and sale of U.S. Treasury obligations, available-for-sale

1,060,000

185,456

Cash used by:

Purchase of property and equipment

(70,886)

(51,058)

Purchase of U.S. Treasury obligations, held-to-maturity

(1,596,859)

(4,478,337)

Purchase of U.S. Treasury obligations, available-for-sale

(3,925,143)

(1,206,430)

Net Cash (Used by) Provided by Investing Activities

(2,412,888)

299,631

Net (Decrease) Increase in Cash and Cash Equivalents

(1,953,189)

1,898,437

Cash and Cash Equivalents - Beginning

2,117,644

219,207

Cash and Cash Equivalents - Ending

$

164,455

$

2,117,644

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

 

NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999 and 1998

1. Legislative History and Operations of the Bank Insurance Fund
line
Legislative History

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

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

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

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

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

 

Other Significant Legislation

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

The Omnibus Budget Reconciliation Act of 1990 (1990 OBR Act) and the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) made changes to the FDIC’s assessment authority (see Note 8) and borrowing authority. The FDICIA also requires the FDIC to: 1) resolve failing institutions in a manner that will result in the least possible cost to the deposit insurance funds and 2) maintain the insurance funds at 1.25 percent of insured deposits or a higher percentage as circumstances warrant.

The Deposit Insurance Funds Act of 1996 (DIFA) was enacted to provide for: 1) the capitalization of the SAIF to its designated reserve ratio (DRR) of 1.25 percent by means of a one-time special assessment on SAIF-insured deposits; 2) the expansion of the assessment base for payments of the interest on obligations issued by the FICO to include all FDIC-insured banks and thrifts; 3) beginning January 1, 1997, the imposition of a FICO assessment rate on BIF-assessable deposits that is one-fifth of the rate for SAIF-assessable deposits through the earlier of December 31, 1999, or the date on which the last savings association ceases to exist; 4) the payment of the annual FICO interest obligation of approximately $790 million on a pro rata basis between banks and thrifts on the earlier of January 1, 2000, or the date on which the last savings association ceases to exist; 5) authorization of BIF assessments only if needed to maintain the fund at the DRR; 6) the refund of amounts in the BIF in excess of the DRR with such refund not to exceed the previous semiannual assessment; 7) assessment rates for SAIF members not lower than the assessment rates for BIF members with comparable risk; and 8) the merger of the BIF and the SAIF on January 1, 1999, if no insured depository institution is a savings association on that date. As of December 31, 1999, Congress did not enact legislation to either merge the BIF and the SAIF or to eliminate the thrift charter.

The Gramm-Leach-Bliley Act (GLBA), (Public Law 106-102), was enacted on November 12, 1999, in order to modernize the financial service industry that includes banks, brokerages, insurers, and other financial services providers. The GLBA will, among other changes, lift restrictions on affiliations among banks, securities firms, and insurance companies. It will also expand the financial activities permissible for financial holding companies and insured depository institutions, their affiliates and subsidiaries. The GLBA provides for a greater degree of functional regulation of securities and insurance activities conducted by banks and their affiliates. The GLBA also governs affiliations of thrifts that are in financial holding companies and provides for functional regulation of such thrifts’ affiliates.

 

Recent Legislative Initiatives

Congress continues to focus on legislative proposals that would affect the deposit insurance funds. Some of these proposals, such as the merger of the BIF and the SAIF and the rebate of the insurance funds, may have a significant impact on the BIF and the SAIF, if enacted into law. However, these proposals continue to vary and FDIC management cannot predict which provisions, if any, will ultimately be enacted.

 

Operations of the BIF

The primary purpose of the BIF is to: 1) insure the deposits and protect the depositors of BIF-insured institutions and 2) resolve failed institutions, including managing and liquidating their assets. In addition, the FDIC, acting on behalf of the BIF, examines state-chartered banks that are not members of the Federal Reserve System. Further, the FDIC can also provide assistance to failing banks and monitor compliance with assistance agreements.

The BIF is primarily funded from the following sources: 1) interest earned on investments in U.S. Treasury obligations and 2) BIF assessment premiums. Additional funding sources are U.S. Treasury and Federal Financing Bank (FFB) borrowings, if necessary. The 1990 OBR Act established the FDIC’s authority to borrow working capital from the FFB on behalf of the BIF and the SAIF. The FDICIA increased the FDIC’s authority to borrow for insurance losses from the U.S. Treasury, on behalf of the BIF and the SAIF, from $5 billion to $30 billion.

The FDICIA also established a limitation on obligations that can be incurred by the BIF, known as the maximum obligation limitation (MOL). At December 31, 1999, the MOL for the BIF was $51.8 billion.

 

Receivership Operations

The FDIC is responsible for managing and disposing of the assets of failed institutions in an orderly and efficient manner. The assets held by receivership entities, and the claims against them, are accounted for separately from BIF assets and liabilities to ensure that liquidation proceeds are distributed in accordance with applicable laws and regulations. Also, the income and expenses attributable to receiverships are accounted for as transactions of those receiverships. Liquidation expenses paid by the BIF on behalf of the receiverships are recovered from those receiverships.

 

 

2. Summary of Significant Accounting Policies line
General

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

 

Use of Estimates

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

 

Cash Equivalents

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

 

Investments in U.S. Treasury Obligations

Investments in U.S. Treasury obligations are recorded pursuant to the Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that securities be classified in one of three categories: held-to-maturity, available-for-sale, or trading. 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. Securities designated as available-for-sale are shown at fair value with unrealized gains and losses included in Comprehensive Income. Realized gains and losses are included in the Statements of Income and Fund Balance as components of Net Income. Interest on both types of securities is calculated on a daily basis and recorded monthly using the effective interest method. The BIF does not designate any securities as trading.

 

Allowance for Losses on Receivables From Bank Resolutions and Assets Acquired from Assisted Banks and Terminated Receiverships

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

 

Cost Allocations Among Funds

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

 

Postretirement Benefits Other Than Pensions

The FDIC established an entity to provide the accounting and administration of postretirement benefits on behalf of the BIF, the SAIF, and the FRF. Each fund pays its liabilities for these benefits directly to the entity. The BIF’s unfunded net postretirement benefits liability is presented in the BIF’s Statements of Financial Position.

 

Disclosure About Recent Accounting Standard Pronouncements

In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 132, "Employers’ Disclosures about Pensions and Other Postretirement Benefits." The Statement standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable. Although changes in the BIF’s disclosures for postretirement benefits have been made, the impact is not material.

In March 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This Statement requires the development or purchase cost of internal-use software to be treated as a capital asset. The FDIC adopted this Statement effective January 1, 1998. This asset is presented in the "Property and equipment, net" line item in the BIF’s Statements of Financial Position (see Note 6).

Other recent pronouncements are not applicable to the financial statements.

 

Depreciation

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

Prior to January 1, 1998, only buildings owned by the Corporation were capitalized and depreciated. On January 1, 1998, FDIC began capitalizing the development and purchase cost of internal-use software in accordance with the requirements of SOP 98-1. The FDIC also began to capitalize the cost of furniture, fixtures, and general equipment. These costs were expensed in prior years on the basis that the costs were immaterial. The expanded capitalization policy had no material impact on the financial position or operations of the BIF.

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

 

Related Parties

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

 

Reclassifications

Reclassifications have been made in the 1998 financial statements to conform to the presentation used in 1999.

 

3. Investment in U.S. Treasury Obligations, Netline
Cash received by the BIF is invested in U.S. Treasury obligations with maturities exceeding three months unless cash is needed to meet the liquidity needs of the fund. The BIF’s current portfolio includes securities classified as held-to-maturity and available-for-sale. The BIF also invests in Special U.S. Treasury Certificates that are included in the "Cash and cash equivalents" line item.

In 1999, the FDIC purchased $1.9 billion (adjusted par value) of Treasury inflation-indexed securities (TIIS) for the BIF. Unlike a traditional Treasury security, the par value of a TIIS is indexed to and increases with the Consumer Price Index (CPI). Hence, these securities provide a measure of protection for the BIF in the event of unanticipated inflation.

 

U.S. Treasury Obligations at December 31, 1999
Dollars in Thousands

Maturity

Stated Yield at Purchase (a)

Face Value

Amortized Cost

Unrealized Holding Gains

Unrealized Holding Losses

Market Value

Held-to-Maturity

Less than one year

6.02%

$

2,560,000

$

2,561,679

$

3,087

$

(2,468)

$

2,562,298

1-3 years

6.06%

6,540,000

6,669,580

7,233

(32,331)

6,644,482

3-5 years

6.45%

4,805,000

5,052,441

18,300

(17,217)

5,053,524

5-10 years

5.88%

9,439,053

9,665,955

58,403

(374,526)

9,349,832

Total

$

23,344,053

$

23,949,655

$

87,023

$

(426,542)

$

23,610,136

Available-for-Sale

Less than one year

5.62%

$

430,000

$

431,206

$

48

$

(94)

$

431,160

1-3 years

5.36%

625,000

631,662

0

(7,001)

624,661

3-5 years

6.00%

445,000

454,254

0

(6,391)

447,863

5-10 years

5.15%

2,977,452

2,852,055

0

(67,329)

2,784,726

Total

$

4,477,452

$

4,369,177

$

48

$

(80,815)

$

4,288,410

Total Investment in U.S. Treasury Obligations, Net

Total

$

27,821,505

$

28,318,832

$

87,071

$

(507,357)

$

27,898,546


(a) For Treasury inflation-indexed securities (TIIS), the yields in the above table include their stated real yields at purchase, not their effective yields. Effective yields on TIIS would include the stated real yield at purchse plus an inflation adjustment of 2.6%, which was the latest year-over-year increase in the CPI as reported by the Bureau of Labor Statistics on December 14,1999. These effective yields are 6.44% and 6.70% for TIIS classified as held-to-maturity and available-for-sale, respectively.

 

U.S. Treasury Obligations at December 31, 1998
Dollars in Thousands

Maturity

Stated Yield at Purchase

Face Value

Amortized Cost

Unrealized Holding Gains

Unrealized Holding Losses

Market Value

Held-to-Maturity

Less than one year

5.57%

$

2,120,000

$

2,133,448

$

10,597

$

0

$

2,144,045

1-3 years

6.04%

5,525,000

5,564,524

148,112

0

5,712,636

3-5 years

6.19%

5,965,000

6,345,044

322,126

0

6,667,170

5-10 years

6.01%

10,295,000

10,566,047

864,116

0

11,430,163

Total

$

23,905,000

$

24,609,063

$

1,344,951

$

0

$

25,954,014

Available-for-Sale

Less than one year

5.09%

$

940,000

$

946,726

$

4,947

$

0

$

951,673

1-3 years

5.63%

550,000

558,991

5,968

0

564,959

Total

$

1,490,000

$

1,505,717

$

10,915

$

0

$

1,516,632

Total Investment in U.S. Treasury Obligations, Net

Total

$

25,395,000

$

26,114,780

$

1,355,866

$

0

$

27,470,646

 

There were no available-for-sale securities sold during 1999. One available-for-sale security was sold during 1998, which resulted in a realized gain of $224 thousand. Proceeds from this sale were $186 million. This gain was included in the "Other revenue" line item. The cost of the security sold was determined on a specific identification basis.

As of December 31, 1999 and 1998, the book value of Investment in U.S. Treasury obligations net, is $28.2 billion and $26.1 billion, respectively. The book value is computed by adding the amortized cost of the held-to-maturity securities to the market value of the available-for-sale securities.

As of December 31, 1999, the unamortized premium, net of the unamortized discount, was $497 million. As of December 31, 1998, the unamortized premium, net of the unamortized discount, was $720 million.

 

 

4. Receivables from Bank Resolutions, Net line
The bank resolution process takes different forms depending on the unique facts and circumstances surrounding each failing or failed institution. Payments for institutions that fail are made to cover obligations to insured depositors and represent claims by the BIF against the receiverships’ assets. There were seven bank failures in 1999 and three in 1998, with assets at failure of $1.4 billion and $370 million, respectively, and BIF outlays of $1.2 billion and $286.1 million, respectively.

As of December 31, 1999 and 1998, the FDIC, in its receivership capacity for BIF-insured institutions, held assets with a book value of $1.9 billion and $1.6 billion, respectively (including cash and miscellaneous receivables of $524 million and $480 million at December 31, 1999 and 1998, respectively). These assets represent a significant source of repayment of the BIF’s receivables from bank resolutions. The estimated cash recoveries from the management and disposition of these assets that are used to derive the allowance for losses are based in part on a statistical sampling of receivership assets. The sample was constructed to produce a statistically valid result. These estimated recoveries are regularly evaluated, but remain subject to uncertainties because of potential changes in economic conditions. These factors could cause the BIF’s and other claimants’ actual recoveries to vary from the level currently estimated.

 

Receivables from Bank Resolutions, Net at December 31

Dollars in Thousands

1999

1998

Assets from open bank assistance

$

105,655

$

112,045

Allowance for losses

(4,196)

(10,727)

Net Assets From Open Bank Assistance

101,459

101,318

Receivables from closed banks

15,673,843

18,656,746

Allowance for losses

(15,032,291)

(18,010,116)

Net Receivables From Closed Banks

641,552

646,630

Total

$

743,011

$

747,948

5. Assets Acquired from Assisted Banks and Terminated Receiverships, Netline
The BIF has acquired assets from certain troubled and failed banks by either purchasing an institution’s assets outright or purchasing the assets under the terms specified in each resolution agreement. In addition, the BIF can purchase assets remaining in a receivership to facilitate termination. The methodology to estimate cash recoveries from these assets, which is used to derive the related allowance for losses, is similar to that for receivables from bank resolutions (see Note 4). The estimated cash recoveries are based upon a statistical sampling of the assets but only include expenses for the disposition of the assets.

The BIF recognizes revenue and expenses on these acquired assets. Revenue consists primarily of interest earned on assets in liquidation and gain on the sale of owned real estate. Expenses are recognized for the management and liquidation of these assets.

Assets Acquired from Assisted Banks and Terminated Receiverships, Net at December 31

Dollars in Thousands

1999

1998

Assets acquired from assisted banks and terminated receiverships

$

105,136

$

169,712

Allowance for losses

(84,386)

(142,339)

Total

$

20,750

$

27,373

 

 

6. Property and Equipment, Netline

Property and Equipment, Net at December 31

Dollars in Thousands

1999

1998

Land

$

29,631

$

29,631

Buildings

159,188

152,078

PC/LAN/WAN equipment

27,748

15,612

Application software

29,671

1,892

Mainframe equipment

5,569

354

Furniture, fixtures, and general equipment

10,596

764

Telephone equipment

1,771

460

Work in Progress - Application software

48,961

49,630

Accumulated depreciation

(53,095)

(40,806)

Total

$

260,040

$

209,613

The depreciation expense was $12.3 million and $3.7 million for 1999 and 1998, respectively.

 

 

7. Contingent Liabilities for:line


Anticipated Failure of Insured Institutions

The BIF records a contingent liability and a loss provision for banks (including Oakar and Sasser financial institutions) that are likely to fail, absent some favorable event such as obtaining additional capital or merging, when the liability becomes probable and reasonably estimable.

The contingent liabilities for anticipated failure of insured institutions as of December 31, 1999 and 1998, were $307 million and $32 million, respectively. The contingent liability is derived in part from estimates of recoveries from the management and disposition of the assets of these probable bank failures. Therefore, these estimates are subject to the same uncertainties as those affecting the BIF’s receivables from bank resolutions (see Note 4).

Several recent bank failures have involved some degree of fraud, which adds uncertainty to estimates of loss and recovery rates. These uncertainties, along with potential changes in economic conditions, could affect the ultimate cost to the BIF from probable failures.

In addition to these recorded contingent liabilities, the FDIC has recently identified a small number of additional BIF-insured financial institutions that are likely to fail in the near future unless institution management can resolve existing problems. If these institutions fail, they may collectively cause a material loss to the BIF, but the amount of potential loss is not estimable at this time.

There are other banks where the risk of failure is less certain, but still considered reasonably possible. Should these banks fail, the BIF could incur additional estimated losses ranging from $1 million to $205 million.

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

 

Year 2000 Anticipated Failures

The BIF is also subject to a potential loss from banks that may fail if they are unable to become Year 2000 compliant in a timely manner. In May 1997, the federal financial institution regulatory agencies developed a program to conduct uniform reviews of all FDIC-insured institutions’ Year 2000 readiness. The program assessed the five key phases of an institution’s Year 2000 conversion efforts: 1) awareness, 2) assessment, 3) renovation, 4) validation, and 5) implementation. The reviews classified each institution as Satisfactory, Needs Improvement, or Unsatisfactory. Performance was defined as Satisfactory when Year 2000 weaknesses were minor in nature and could be readily corrected within the program management framework.

In order to assess exposure to the BIF from Year 2000 potential failures, the FDIC evaluated all information relevant to such an assessment, to include multiple Year 2000 on-site examination results, institution capital levels and supervisory examination composite ratings, and other institution past and current financial characteristics. Based on data updated through December 31, 1999, all BIF-insured institutions have received a Satisfactory rating. As a result of this assessment, we conclude that, as of December 31, 1999, there are no probable or reasonably possible losses to the BIF from Year 2000 failures.

 

Assistance Agreements

The contingent liabilities for assistance agreements resulted from several large transactions where problem assets were purchased by an acquiring institution under an agreement that calls for the FDIC to absorb credit losses and pay related costs for funding and asset administration, plus an incentive fee.

 

Litigation Losses

The BIF records an estimated loss for unresolved legal cases to the extent 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 $83 million are reasonably possible.

 

Asset Securitization Guarantees

As part of the FDIC’s efforts to maximize the return from the sale or disposition of assets from bank resolutions, the FDIC has securitized some receivership assets. To facilitate the securitizations, the BIF provided limited guarantees to cover certain losses on the securitized assets up to a specified maximum. In exchange for backing the limited guarantees, the BIF received assets from the receiverships in an amount equal to the expected exposure under the guarantees. At December 31, 1999 and 1998, the BIF had a contingent liability under the guarantees of $2.5 million and $7.1 million, respectively. The maximum off-balance-sheet exposure under the limited guarantees is presented in Note 12.

 


8. Assessmentsline

The 1990 OBR Act removed caps on assessment rate increases and authorized the FDIC to set assessment rates for BIF members semiannually, to be applied against a member’s average assessment base. The FDICIA: 1) required the FDIC to implement a risk-based assessment system; 2) authorized the FDIC to increase assessment rates for BIF-member institutions as needed to ensure that funds are available to satisfy the BIF’s obligations; 3) required the FDIC to build and maintain the reserves in the insurance funds to 1.25 percent of insured deposits; and 4) authorized the FDIC to increase assessment rates more frequently than semiannually and impose emergency special assessments as necessary to ensure that funds are available to repay U.S. Treasury borrowings. Since May 1995, the BIF has maintained a capitalization level at or higher than the DRR of 1.25 percent of insured deposits. As of December 31, 1999, the capitalization level for BIF is 1.36 percent of estimated insured deposits.

The DIFA (see Note 1) provided, among other things, for the elimination of the mandatory minimum assessment formerly provided for in the FDI Act. It also provided for the expansion of the assessment base for payments of the interest on obligations issued by the FICO to include all FDIC-insured institutions (including banks, thrifts, and Oakar and Sasser financial institutions). It also made the FICO assessment separate from regular assessments, effective on January 1, 1997.

BIF-insured banks began paying a FICO assessment on January 1, 1997. The FICO assessment rate on BIF-assessable deposits is one-fifth the rate for SAIF-assessable deposits. The annual FICO interest obligation of approximately $790 million will be paid on a pro rata basis between banks and thrifts on the earlier of January 1, 2000, or the date on which the last savings association ceases to exist.

The FICO assessment has no financial impact on the BIF. The FICO assessment is separate from the regular assessments and is imposed on banks and thrifts, not on the insurance funds. The FDIC, as administrator of the BIF and the SAIF, is acting solely as a collection agent for the FICO. During 1999 and 1998, $364 million and $341 million, respectively, was collected from banks and remitted to the FICO.

The FDIC uses a risk-based assessment system that charges higher rates to those institutions that pose greater risks to the BIF. To arrive at a risk-based assessment for a particular institution, the FDIC places each institution in one of nine risk categories, using a two-step process based first on capital ratios and then on other relevant information. The assessment rate averaged approximately 0.11 cents and 0.8 cents per $100 of assessable deposits for 1999 and 1998, respectively. On November 8, 1999, the Board voted to retain the BIF assessment schedule at the annual rate of 0 to 27 cents per $100 of assessable deposits for the first semiannual period of 2000. The Board reviews premium rates semiannually.

9. Provision for Insurance Lossesline

Provision for insurance losses was $1.2 billion and a negative $38 million for 1999 and 1998, respectively. The large provision in 1999 was largely attributed to recognizing losses of $838 million for the resolution of current year bank failures. In 1998, the negative provision resulted primarily from decreased losses expected for assets in liquidation. 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

1999

1998

Valuation Adjustments:
Open bank assistance

$

(6,280)

$

(2,431)

Closed banks

325,836

(53,926)

Assets acquired from assisted banks and terminated receiverships

(10,977)

2,222

Total Valuation Adjustments

308,579

(54,135)

Contingent Liabilities:
Anticipated failure of insured institutions

849,000

29,000

Assistance agreements

8,792

(8,322)

Litigation losses

2,294

8,801

Asset securitization guarantees

84

(13,043)

Total Contingent Liabilities

860,170

16,436

Total

$

1,168,749

$

(37,699)

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

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

During 1998, there was an open season that allowed employees to switch from CSRS to FERS. This did not have a material impact on BIF’s operating expenses for 1998.

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

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

The BIF’s pro rata share of the Corporation’s liability to employees for accrued annual leave is approximately $38.2 million and $38.4 million at December 31, 1999 and 1998, respectively.

 

Pension Benefits and Savings Plans Expenses for the Years Ended December 31
Dollars in Thousands

1999

1998

CSRS/FERS Disability Fund

$

0

$

1,166

Civil Service Retirement System

10,270

10,477

Federal Employees Retirement System (Basic Benefit)

28,449

27,857

FDIC Savings Plan

17,215

17,534

Federal Thrift Savings Plan

11,018

10,991

Total

$

66,952

$

68,025

 

 

11. Postretirement Benefits Other Than Pensionsline

On January 2, 1998, the BIF’s obligation under SFAS No. 106, "Employers’ Accounting for Postretirement Benefits Other Than Pensions," for postretirement health benefits was reduced when over 6,500 FDIC employees enrolled in the Federal Employees Health Benefits (FEHB) Program for their future health insurance coverage. The OPM assumed the BIF’s obligation for postretirement health benefits for these employees at no initial enrollment cost.

In addition, legislation was passed that allowed the remaining 2,600 FDIC retirees and near-retirees (employees within five years of retirement) in the FDIC health plan to also enroll in the FEHB Program for their future health insurance coverage, beginning January 1, 1999. The OPM assumed the BIF’s obligation for postretirement health benefits for retirees and near retirees for a fee of $150 million. The OPM is now responsible for postretirement health benefits for all FDIC employees and covered retirees. The FDIC will continue to be obligated for dental and life insurance coverage for as long as the programs are offered and coverage is extended to retirees.

OPM’s assumption of the health care obligation constituted both a settlement and a curtailment as defined by SFAS No. 106. This conversion resulted in a gain of $201 million to the BIF in 1998.

 

Postretirement Benefits Other Than Pensions
Dollars in Thousands

1999

1998

Funded Status at December 31

Fair value of plan assets (a)

$

71,286

$

67,539

Less: Benefit obligation

75,275

67,539

Under Funded Status of the Plan

$

3,989

$

0

Accrued benefit liability recognized in the Statements of Financial Position

$

3,989

$

0

Expenses and Cash Flows for the Period Ended December 31

Net periodic benefit cost

$

2,468

$

(1,942)

Employer contributions

1,111

6,299

Benefits paid

1,111

6,299

Weighted-Average Assumptions at December 31

Discount rate

4.50%

4.50%

Expected return on plan assets

4.50%

4.50%

Rate of compensation increase

3.00%

4.00%

(a) Invested in U.S. Treasury obligations.


Total dental coverage trend rates were assumed to be 7% per year, inclusive of general inflation. Dental costs were assumed to be subject to an annual cap of $2,000.

 

12. Commitments and Off-Balance-Sheet Exposureline

Commitments

Leases
The BIF’s allocated share of the FDIC’s lease commitments totals $150.9 million for future years. The lease agreements contain escalation clauses resulting in adjustments, usually on an annual basis. The allocation to the BIF of the FDIC’s future lease commitments is based upon current relationships of the workloads among the BIF, the SAIF, and the FRF. Changes in the relative workloads could cause the amounts allocated to the BIF in the future to vary from the amounts shown below. The BIF recognized leased space expense of $41.5 million and $47.7 million for the years ended December 31, 1999 and 1998, respectively.

 

Lease Commitments
Dollars in Thousands

2000

2001

2002

2003

2004

2005

$39,487

$34,718

$33,322

$23,043

$13,261

$7,085


Off-Balance-Sheet Exposure

Asset Securitization Guarantees
As discussed in Note 7, the BIF provided certain limited guarantees to facilitate securitization transactions. The table below gives the maximum off-balance-sheet exposure the BIF has under these guarantees.

 

Asset Securitization Guarantees at December 31

Dollars in Thousands

1999

1998

Maximum exposure under the limited guarantees

$

448,881

$

481,313

Less: Guarantee claims paid (inception-to-date)

(32,716)

(27,253)

Less: Amount of exposure recognized as a contingent liability (see Note 7)

(2,477)

(7,141)

Maximum Off-Balance-Sheet Exposure Under the Limited Guarantees

$

413,688

$

446,919

Deposit Insurance
As of December 31, 1999, deposits insured by the BIF totaled approximately $2.2 trillion. This would be the accounting loss if all depository institutions were to fail and the acquired assets provided no recoveries.

Asset Putbacks
Upon resolution of a failed bank, the assets are placed into receivership and may be sold to an acquirer under an agreement that certain assets may be resold, or "putback," to the receivership. The values and time limits for these assets to be putback are defined within each agreement. It is possible that the BIF could be called upon to fund the purchase of any or all of the "unexpired putbacks" at any time prior to expiration. The FDIC’s estimate of the volume of assets subject to repurchase under existing agreements is $4.5 million. The actual amount subject to repurchase should be significantly lower because the estimate does not reflect subsequent collections on or sales of assets kept by the acquirer. It also does not reflect any decrease due to acts by the acquirers which might disqualify assets from repurchase eligibility. Repurchase eligibility is determined by the FDIC when the acquirer initiates the asset putback procedures. The FDIC projects that a total of $132 thousand in book value of assets will be putback.

 

13. Concentration of Credit Riskline
As of December 31, 1999, the BIF had $15.8 billion in gross receivables from bank resolutions and $105.1 million in gross assets acquired from assisted banks and terminated receiverships. An allowance for loss of $15.0 billion and $84.4 million, respectively, has been recorded against these assets. The liquidating entities’ ability to make repayments to the BIF is largely influenced by the economy of the area in which they are located. The BIF’s estimated maximum exposure to possible accounting loss for these assets is shown in the table below.

 

Concentration of Credit Risk at December 31, 1999
Dollars in Millions

Southeast

Southwest

Northeast

Midwest

Central

West

Total

Receivables from bank resolutions, net

$160

$106

$391

$5

$0

$81

$743

Assets acquired from assisted banks and terminated receiverships, net

0

20

0

0

0

1

21

Total

$160

$126

$391

$5

$0

$82

$764

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

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

Although the value of the corporate subrogated claim is influenced by valuation of receivership assets (see Note 4), such receivership valuation is not equivalent to the valuation of the corporate claim. Since the corporate claim is unique, not intended for sale to the private sector, and has no established market, it is not practicable to estimate its fair market value.

The FDIC believes that a sale to the private sector of the corporate claim would require indeterminate, but substantial discounts for an interested party to profit from these assets because of credit and other risks. In addition, the timing of receivership payments to the BIF on the subrogated claim does not necessarily correspond with the timing of collections on receivership assets. Therefore, the effect of discounting used by receiverships should not necessarily be viewed as producing an estimate of market value for the net receivables from bank resolutions.

The majority of the net assets acquired from assisted banks and terminated receiverships (except real estate) is comprised of various types of financial instruments, including investments, loans and accounts receivables. Like receivership assets, assets acquired from assisted banks and terminated receiverships are valued using discount rates that include consideration of market risk. However, assets acquired from assisted banks and terminated receiverships do not involve the unique aspects of the corporate subrogated claim, and therefore the discounting can be viewed as producing a reasonable estimate of fair market value.

 

 

15. Supplementary Information Relating to the Statements of Cash Flowsline

Reconciliation of Net Income to Net Cash Provided by Operating Activities for the Years Ended December 31

Dollars in Thousands

1999

1998

Net Income

$

(106,445)

$

1,308,723

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities

Income Statement Items:

Provision for insurance losses

1,168,749

(37,699)

Amortization of U.S. Treasury obligations

164,880

133,705

TIIS inflation adjustment

(26,930)

0

Gain on sale of investments

0

(224)

Gain on conversion of benefit plan

0

(200,532)

Depreciation on property and equipment

12,288

3,745

Retirement of capitalized equipment

4,476

0

Change in Assets and Liabilities:

Decrease (Increase) in interest receivable on investments and other assets

188,322

(7,033)

(Increase) Decrease in receivables from bank resolutions

(311,671)

417,444

Decrease in assets acquired from assisted banks and terminated receiverships

17,599

31,129

(Decrease) in accounts payable and other liabilities

(45,219)

(26,416)

(Decrease) in contingent liabilities for anticipated failure of insured institutions

(574,000)

(8,000)

(Decrease) in contingent liabilities for assistance agreements

(13,007)

(8,505)

(Decrease) in contingent liabilities for litigation losses

(14,595)

0

(Decrease) in contingent liabilities for asset securitization guarantees

(4,748)

(7,531)

Net Cash Provided by Operating Activities

$

459,699

$

1,598,806

16. Year 2000 Issuesline
State of Readiness

The FDIC, as administrator for the BIF, conducted a corporate-wide effort to ensure that all FDIC information systems were Year 2000 compliant. This meant that systems must accurately process date and time data in calculations, comparisons, and sequences after December 31, 1999, and be able to correctly deal with leap-year calculations in 2000. An oversight committee comprised of FDIC division management directed the Year 2000 effort.

The FDIC’s Division of Information Resources Management (DIRM) led the Year 2000 effort, under the direction of the oversight committee. The internal Year 2000 team used a structured approach and rigorous program management as described in the U.S. General Accounting Office’s (GAO) Year 2000 Computing Crisis: An Assessment Guide. This methodology consisted of five phases under the overall umbrellas of Program and Project Management. The FDIC completed all of the recommended GAO phases: Awareness, Assessment, Renovation, Validation, and Implementation.

As a precautionary measure, the FDIC developed a Year 2000 Rollover Weekend Strategy to monitor the information systems during the transition into the year 2000. Contingency plans were in place for mission-critical application failures and for other systems. No major problems were anticipated due to the extensive planning and validation that occurred (see Note 17).

 

Year 2000 Estimated Costs

Year 2000 compliance expenses for the BIF are estimated at $45.4 million and $34.7 million at December 31, 1999 and 1998, respectively. These expenses are reflected in the "Operating expenses" line of the BIF’s Statements of Income and Fund Balance.

 

 

17. Subsequent Eventsline
Year 2000 Effect on Internal Systems

On January 1, 2000, all FDIC systems were operating normally as a result of a corporate-wide effort to ensure that all FDIC information systems were Year 2000 compliant prior to December 31, 1999. No internal system failures have occurred and none are anticipated (see Note 16).

 

Year 2000 Effect on Anticipated Failures

As of May 5, 2000, no banks had failed due to Year 2000 related problems and none are anticipated. Refer to "Contingent Liabilities for: Year 2000 Anticipated Failures" (see Note 7).