of work-in-process accounts
In Operating Assets and Liabilities:
in interest receivable and other assets
in receivables from bank resolutions
in accounts payable and other liabilities
in contingent liabilities for litigation losses and other
Cash Provided by Operating Activities
of U.S. Treasury obligations, held-to-maturity
of U.S. Treasury obligations, available-for-sale
of property and equipment
of U.S. Treasury obligations, held-to-maturity
of U.S. Treasury obligations, available-for-sale
Cash Used by Provided by Investing Activities
Net Decrease in Cash
and Cash Equivalents
Cash and Cash Equivalents
Cash and Cash Equivalents
The accompanying notes are an integral
part of these financial statements.
1. Legislation and Operations of the Bank Insurance Fund
The Federal Deposit Insurance Corporation (FDIC) is the independent deposit
insurance agency created by Congress in 1933 to maintain stability and
public confidence in the nation's banking system. Provisions that
govern the operations of the FDIC are generally found in the Federal
Deposit Insurance (FDI) Act, as amended, (12 U.S.C. 1811, et seq). In
carrying out the purposes of the FDI Act, as amended, the FDIC insures
the deposits of banks and savings associations, and in cooperation with
other federal and state agencies promotes the safety and soundness of
insured depository institutions by identifying, monitoring and addressing
risks to the deposit insurance funds. The FDIC is the administrator of
the Bank Insurance Fund (BIF), the Savings Association Insurance Fund
(SAIF), and the FSLIC Resolution Fund (FRF), which 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. These insurance funds must be maintained
at not less than 1.25 percent of estimated insured deposits or a higher
percentage as circumstances warrant. 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 Resolution Trust Corporation.
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. 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. In addition, SAIF-member
thrifts can convert to a bank charter and retain their SAIF membership.
These institutions are referred to as Sasser financial institutions.
Likewise, BIF-member banks can convert to a thrift charter and retain
their BIF membership.
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 BIF-insured
failed institutions upon appointment of FDIC as receiver in a manner
that will result in the least possible cost to the BIF. In addition,
the FDIC, acting on behalf of the BIF, examines state-chartered banks
that are not members of the Federal Reserve System.
The BIF is primarily funded from: 1) interest earned on investments
in U.S. Treasury obligations and 2) deposit insurance assessments. Additional
funding sources are U.S. Treasury and Federal Financing Bank (FFB) borrowings,
if necessary. The FDIC has borrowing authority from the U.S. Treasury
up to $30 billion for insurance purposes on behalf of the BIF and the
A statutory formula, known as the Maximum Obligation Limitation (MOL),
limits the amount of obligations the BIF can incur to the sum of its
cash, 90 percent of the fair market value of other assets, and the amount
authorized to be borrowed from the U.S. Treasury. The MOL for the BIF
was $57.2 billion and $57.0 billion as of December 31, 2005 and 2004,
The FDIC is responsible for managing and disposing of the assets of
failed institutions in an orderly and efficient manner. The assets
held by receivership entities, and the claims against them, are accounted
for separately from BIF assets and liabilities to ensure that receivership
proceeds are distributed in accordance with applicable laws and regulations.
Accordingly, income and expenses attributable to receiverships are
accounted for as transactions of those receiverships. Receiverships
are billed by the FDIC for services provided on their behalf.
Recent Legislative Initiatives
During 2005, Congress considered deposit insurance reform legislation
which, if enacted, would materially change future financial statements.
The legislation was contained in the conference report to reconciliation
legislation, S. 1932, adopted by the Senate in December and at the
close of the year was awaiting action by the House. A companion technical
corrections bill, H.R. 4636, was passed by both the House and the
Senate and is cleared for action by the President. The legislation:
1) merges the BIF and the SAIF into a new fund, the Deposit Insurance
Fund (DIF); 2) annually permits the designated reserve ratio to vary
between 1.15 and 1.50 of estimated insured deposits, thereby eliminating
the fixed designated reserve ratio of 1.25; 3) requires the declaration
of dividends from the DIF for the full amount of the reserve ratio
in excess of 1.50 percent or, if less than 1.50 percent, one-half
of the amount between 1.35 and 1.50 percent; 4) grants a one-time
assessment credit for each eligible institution or its successor
based on an institution's proportionate share of the aggregate
assessment base at December 31, 1996; and 5) immediately increases
coverage for certain retirement accounts to $250,000 and indexes
all deposit insurance coverage every five years beginning January
2. Summary of Significant Accounting Policies
These financial statements pertain to the financial position, results
of operations, and cash flows of the BIF and are presented in conformity
with U.S. generally accepted accounting principles (GAAP). These statements
do not include reporting for assets and liabilities of closed banks for
which the FDIC acts as receiver. Periodic and final accountability reports
of the FDIC's activities as receiver are furnished to courts, supervisory
authorities, and others as required.
Use of Estimates
Management makes estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from these estimates. Where it is reasonably
possible that changes in estimates will cause a material change in
the financial statements in the near term, the nature and extent
of such changes in estimates have been disclosed. The more significant
estimates include allowance for loss on receivables from bank resolutions,
the estimated losses for anticipated failures and litigation, and
the postretirement benefit obligation.
Cash equivalents are short-term, highly liquid investments with original
maturities of three months or less. Cash equivalents consist primarily
of Special U.S. Treasury Certificates.
Investment in U.S. Treasury Obligations
BIF funds are required to be invested in obligations of the United
States or in obligations guaranteed as to principal and interest
by the United States; the Secretary of the U.S. Treasury must approve
all such investments in excess of $100,000. The Secretary has granted
approval to invest BIF funds only in U.S. Treasury obligations that
are purchased or sold exclusively through the Bureau of the Public
Debt's Government Account Series (GAS) program.
BIF's investments in
U.S. Treasury obligations are either classified as held-to-maturity
or available-for-sale. Securities designated as held-to-maturity
are shown at amortized cost. Amortized cost is the face value of securities
plus the unamortized premium or less the unamortized discount. Amortizations
are computed on a daily basis from the date of acquisition to the date
of maturity, except for callable U.S. Treasury securities, which are
amortized to the first anticipated call date. Securities designated as
available-for-sale are shown at market value, which approximates fair
value. Unrealized gains and losses are included in Comprehensive Income.
Realized gains and losses are included in the Statement of Income and
Fund Balance as components of Net Income. Income on both types of securities
is calculated and recorded on a daily basis using the effective interest
Cost Allocations Among Funds
Operating expenses not directly charged to the BIF, the SAIF, and the
FRF are allocated to all funds using workload-based allocation percentages.
These percentages are developed during the annual corporate planning
process and through supplemental functional analyses.
Capital Assets and Depreciation
The FDIC has designated the BIF as administrator of property and equipment
used in its operations. Consequently, the BIF includes the cost of
these assets in its financial statements and provides the necessary
funding for them. The BIF charges the other funds usage fees representing
an allocated share of its annual depreciation expense. These usage
fees are recorded as cost recoveries, which reduce operating expenses.
The FDIC buildings are depreciated on a straight-line basis over a 35
to 50 year estimated life. Leasehold improvements are capitalized and
depreciated over the lesser of the remaining life of the lease or the
estimated useful life of the improvements, if determined to be material.
Capital assets depreciated on a straight-line basis over a five-year
estimated life include mainframe equipment; furniture, fixtures, and
general equipment; and internal-use software. Personal computer equipment
is depreciated on a straight-line basis over a three-year estimated life.
Disclosure about Recent Accounting Pronouncements
Recent accounting pronouncements have been adopted or deemed to be
not applicable to the financial statements as presented.
The nature of related parties and a description of related party transactions are discussed in Note 1 and disclosed throughout the financial statements and footnotes.
Reclassifications have been made in the 2004 financial statements to
conform to the presentation used in 2005. These reclassifications include
the reallocation of amounts from "Provision for insurance losses" to "Insurance
and other expenses" for assets acquired from assisted banks and
terminated receiverships. The reclassifications had no impact on the
prior year's net income or fund balance.
3. Investment in U.S. Treasury Obligations, Net As
of December 31, 2005 and 2004, the book value of investments in U.S. Treasury
obligations, net, was $32.3 billion and $32.1 billion, respectively. As
of December 31, 2005, the BIF held $6.5 billion of Treasury inflation-protected
securities (TIPS). These securities are indexed to increases or decreases
in the Consumer Price Index for All Urban Consumers (CPI-U). Additionally,
the BIF held $5.4 billion of callable U.S. Treasury bonds at December 31,
2005. Callable U.S. Treasury bonds may be called five years prior to the
respective bonds' stated maturity on their semi-annual coupon payment dates
upon 120 days notice.
4. Receivables From Bank Resolutions, Net
The receivables from bank resolutions include payments
made by the BIF to cover obligations to insured depositors, advances
for working capital, and administrative expenses paid on behalf of receiverships.
Any related allowance for loss represents the difference between the
funds advanced and/or obligations incurred and the expected repayment.
Assets held by BIF receiverships are the main source of repayment of
the BIF's receivables from closed banks. As of December 31, 2005,
there were 24 active receiverships, with no failures in the current year.
As of December 31, 2005 and 2004, BIF receiverships held
assets with a book value of $356 million and $504 million, respectively
investments, and miscellaneous receivables of $251 million and $269 million
at December 31, 2005 and 2004, respectively). The estimated cash recoveries
from the management and disposition of these assets that are used to derive
the allowance for losses are based on a sampling of receivership assets
in liquidation. The sampled assets are generally valued by estimating future
cash recoveries, net of applicable liquidation cost estimates, and then
discounting these net cash recoveries using current market-based risk factors
based on a given asset's type and quality. Resultant recovery estimates
are extrapolated to the non-sampled assets in order to derive the allowance
for loss on the receivable. These estimated recoveries are regularly evaluated,
but remain subject to uncertainties because of potential changes in economic
and market conditions. Such uncertainties could cause the BIF's actual
recoveries to vary from the level currently estimated.
5. Property and Equipment, Net
6. Contingent Liabilities for:
Anticipated Failure of Insured Institutions
The BIF records a contingent liability and a loss provision for BIF-insured
institutions (including Oakar and Sasser financial institutions) that
are likely to fail within one year of the reporting date, absent some
favorable event such as obtaining additional capital or merging, when
the liability becomes probable and reasonably estimable.
The contingent liability is derived by applying expected failure rates and
loss rates to institutions based on supervisory ratings, balance sheet characteristics,
and projected capital levels. In addition, institution-specific analysis
is performed on those institutions where failure is imminent absent institution
management resolution of existing problems, or where additional information
is available that may affect the estimate of losses. As of December 31, 2005
and 2004, the contingent liabilities for anticipated failure of insured institutions
were $2 million and $8 million, respectively.
In addition to these recorded contingent liabilities, the FDIC has identified
additional risk in the financial services industry that could result in an
additional loss to the BIF should potentially vulnerable financial institutions
ultimately fail. This risk results from the presence of various high-risk
banking business activities that are particularly vulnerable to adverse economic
and market conditions. Due to the uncertainty surrounding such conditions
in the future, there are institutions other than those with losses included
in the contingent liability for which the risk of failure is less certain,
but still considered reasonably possible. As a result of these risks, the
FDIC believes that it is reasonably possible that the BIF could incur additional
estimated losses up to approximately $0.3 billion.
The accuracy of these estimates
will largely depend on future economic and market conditions. The FDIC's
Board of Directors has the statutory authority to consider the contingent
liability from anticipated failures
of insured institutions when setting assessment rates.
There remains uncertainty about the effect of the 2005 hurricane season
on the deposit insurance fund balances. The economic dislocations as well
as the potential adverse effects on collateral values and the repayment capacity
of borrowers resulting from the hurricanes may stress the balance sheets
of a few, small institutions that are located in the areas of greatest devastation.
The FDIC continues to evaluate the risks to affected institutions in light
of economic conditions, the amount of insurance proceeds that will protect
institution collateral, and the level of government disaster relief. At this
point, however, the FDIC cannot estimate the impact of such risks on the
The BIF records an estimated loss for unresolved legal cases to
the extent that those losses are considered probable and reasonably
In addition to the amount recorded as probable, the FDIC has determined
that losses from unresolved legal cases totaling $1.2 million are reasonably
Representations and Warranties
of the FDIC's
efforts to maximize the return from the sale of assets from bank
resolutions, representations and warranties,
and guarantees were offered on certain loan sales. In general, the
guarantees, representations, and warranties on loans sold relate to
the completeness and accuracy of loan documentation, the quality of
the underwriting standards used, the accuracy of the delinquency status
when sold, and the conformity of the loans with characteristics of
the pool in which they were sold. The total amount of loans sold subject
to unexpired representations and warranties, and guarantees was $3.4
billion as of December 31, 2005. There were no contingent liabilities
from any of the outstanding claims asserted in connection with representations
and warranties at December 31, 2005 and 2004, respectively.
In addition, future losses on representations and warranties, and guarantees
could be incurred over the remaining life of the loans sold, which is generally
20 years or more. Consequently, the FDIC believes it is possible that additional
losses may be incurred by the BIF from the universe of outstanding contracts
with unasserted representation and warranty claims. However, because of the
uncertainties surrounding the timing of when claims may be asserted, the
FDIC is unable to reasonably estimate a range of loss to the BIF from outstanding
contracts with unasserted representation and warranty claims.
In compliance with provisions
of the FDI Act, as amended, 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 based on capital ratios and supervisory examination
data. Due to the continuing health of the banking industry, the majority
of the financial institutions are not assessed. Of those assessed, the
assessment rate averaged approximately 11 cents and 22 cents per $100 of
assessable deposits for 2005 and 2004, respectively. During 2005 and 2004,
$53 million and $95 million were recognized as assessment income from BIF-member
institutions, respectively. On November 8, 2005, 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 2006. The Board
reviews assessment rates semiannually to ensure that funds are available
to satisfy the BIF's obligations. If necessary, the Board may impose
more frequent rate adjustments or emergency special assessments.
The FDIC is required to maintain the insurance funds at a designated reserve
ratio (DRR) of not less than 1.25 percent of estimated insured deposits (or
a higher percentage as circumstances warrant). If the reserve ratio falls
below the DRR, the FDIC is required to set semiannual assessment rates that
are sufficient to increase the reserve ratio to the DRR not later than one
year after such rates are set, or in accordance with a recapitalization schedule
of fifteen years or less. As of September 30, 2005, the BIF reserve ratio
was 1.25 percent of estimated insured deposits.
Assessments are also levied on institutions for payments of the interest
on obligations issued by the Financing Corporation (FICO). The FICO was established
as a mixed-ownership government corporation to function solely as a financing
vehicle for the FSLIC. The annual FICO interest obligation of approximately
$790 million is paid on a pro rata basis using the same rate for banks and
thrifts. The FICO assessment has no financial impact on the BIF and is separate
from the regular deposit insurance assessments. The FDIC, as administrator
of the BIF, acts solely as a collection agent for the FICO. During 2005 and
2004, $620 million and $631 million, respectively, were collected from BIF-member
institutions and remitted to the FICO.
8. Operating Expenses
Operating expenses were $846 million for 2005, compared to $821 million
for 2004. The chart below lists the major components of operating expenses.
9. Provision for Insurance Losses
Provision for insurance losses was a negative $138 million for 2005
and a negative $281 million for 2004. The following chart lists the
major components of the
provision for insurance losses.
10. Employee Benefits
Pension Benefits, Savings Plans and Postemployment Benefits
Eligible FDIC employees (permanent and term employees with appointments
exceeding one year) are covered by the federal government retirement
plans, either the Civil Service Retirement System (CSRS) or the Federal
Employees Retirement System (FERS). Although the BIF contributes a
portion of pension benefits for eligible employees, it does not account
for the assets of either retirement system. The BIF also does not have
actuarial data for accumulated plan benefits or the unfunded liability
relative to eligible employees. These amounts are reported on and accounted
for by the U.S. Office of Personnel Management.
Eligible FDIC employees also may participate in a FDIC-sponsored tax-deferred
401(k) savings plan with matching contributions up to five percent. The
BIF pays its share of the employer's portion of all related costs.
The FDIC offered
a voluntary employee buyout program to a majority of its employees
and conducted a reduction-in-force (RIF) during
2005 in an effort to further reduce identified staffing excesses. Consequently,
578 employees left or will leave the FDIC as a result of the buyout program
and an additional 62 employees left due to the RIF. Termination benefits
included compensation of fifty percent of the current salary for voluntary
departures and severance pay for employees that left due to the RIF.
The total cost of the buyout program and the RIF to the FDIC was $32.6
million, with BIF's share totaling $28 million, which is included
in the "Operating expenses" line item for 2005 and 2004.
Postretirement Benefits Other Than Pensions
provides certain life and dental insurance coverage for its eligible
retirees, the retirees' beneficiaries,
and covered dependents. Retirees eligible for life insurance coverage
are those who have qualified due
to: 1) immediate enrollment upon appointment or five years of participation
in the plan and 2) eligibility for an immediate annuity. The life insurance
program provides basic coverage at no cost to retirees and allows converting
optional coverages to direct-pay plans. Dental coverage is provided to
all retirees eligible for an immediate annuity.
At December 31,
2005 and 2004, the BIF's net postretirement benefit
liability recognized in the "Accounts payable and other liabilities" line
item in the Balance Sheet was $110 million and $104 million, respectively.
In addition, the BIF's expense for these benefits in 2005 and 2004
was $9.0 million and $9.3 million, respectively, which is included in
the current and prior year's operating expenses. Key actuarial
assumptions used in the accounting for the plan include the discount
rate, the rate of compensation increase, and the dental coverage trend
11. Commitments and Off-Balance-Sheet Exposure
The BIF's allocated share
of the FDIC's lease commitments totals $78.6
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 and the SAIF. 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 $34 million and $36 million
for the years ended December 31, 2005 and 2004, respectively.
As of September 30, 2005, deposits insured by the BIF totaled approximately
$2.8 trillion. This would be the accounting loss if all depository institutions
were to fail and the acquired assets provided no recoveries.
12. Disclosures About the Fair Value of Financial Instruments
Cash equivalents are short-term, highly liquid investments and are shown
at current value. The fair market value of the investment in U.S. Treasury
obligations is disclosed in Note 3 and is based on current market prices.
The carrying amount of interest receivable on investments, short-term receivables,
and accounts payable and other liabilities approximates their fair market
value, due to their short maturities and/or comparability with current
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.