1

IV. Financial

Statements

and Notes

Bank Insurance 

Fund

December 31, 2004

and 2003
43

BIF

Bank Insurance Fund

Federal Deposit Insurance Corporation

Bank Insurance Fund Balance Sheet at December 31 

Dollars in Thousands 

2004 2003

Assets

Cash and cash equivalents $ 1,822,005 $ 2,544,281

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

Held-to-maturity securities 22,637,330 16,293,073

Available-for-sale securities 9,470,605 14,209,773

Interest receivable on investments and other assets, net 601,498 550,999

Receivables from bank resolutions, net (Note 4) 375,303 511,089

Property and equipment, net (Note 5) 357,106 287,380

Total Assets $ 35,263,847 $ 34,396,595

Liabilities 

Accounts payable and other liabilities $ 268,680 $ 231,441

Contingent liabilities for: (Note 6)

Anticipated failure of insured institutions 8,261 178,266

Litigation losses and other 200,301 204,693

Total Liabilities 477,242 614,400

Commitments and off-balance-sheet exposure (Note 11)

Fund Balance

Accumulated net income 34,096,676 32,979,898

Unrealized gain on available-for-sale securities, net (Note 3) 689,929 802,297

Total Fund Balance 34,786,605 33,782,195

Total Liabilities and Fund Balance $ 35,263,847 $ 34,396,595

The accompanying notes are an integral part of these financial statements.
44

Federal Deposit Insurance Corporation

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

Dollars in Thousands 

2004 2003

Revenue

Interest on U.S. Treasury obligations $ 1,552,576 $ 1,530,014

Assessments (Note 7) 95,268 80,159

Other revenue 27,553 15,831

Total Revenue 1,675,397 1,626,004

Expenses and Losses

Operating expenses (Note 8) 822,381 805,496

Provision for insurance losses (Note 9) (269,368) (931,164)

Insurance and other expenses 5,606 9,945

Total Expenses and Losses 558,619 (115,723)

Net Income 1,116,778 1,741,727

Unrealized loss on available-for-sale securities, net (112,368) (9,872)

Comprehensive Income 1,004,410 1,731,855

Fund Balance - Beginning 33,782,195 32,050,340

Fund Balance - Ending $ 34,786,605 $ 33,782,195

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

BIF

45

Federal Deposit Insurance Corporation

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

Dollars in Thousands 

2004 2003

Operating Activities

Net Income: $ 1,116,778 $ 1,741,727

Adjustments to reconcile net income to net cash provided by operating activities:

Amortization of U.S.Treasury obligations 737,439 455,628

Treasury inflation-indexed securities (TIIS) inflation adjustment (181,650) (115,150)

Depreciation on property and equipment 54,424 54,947

Provision for losses (269,368) (931,164)

Terminations/adjustments of work-in-process accounts 817 92

Change in Operating Assets and Liabilities:

(Increase) in interest receivable and other assets (36,433) (69,826)

Decrease in receivables from bank resolutions 218,693 102,663

Increase in accounts payable and other liabilities 15,819 85,577

(Decrease) in contingent liabilities for litigation losses and other (1,047) (25,367)

Net Cash Provided by Operating Activities 1,655,472 1,299,127

Investing Activities

Provided by:

Maturity of U.S. Treasury obligations, held-to-maturity 3,365,000 3,890,000

Maturity of U.S. Treasury obligations, available-for-sale 5,810,000 1,690,000

Used by:

Purchase of property and equipment (104,502) (41,804)

Purchase of U.S. Treasury obligations, held-to-maturity (10,026,597) (3,659,868)

Purchase of U.S. Treasury obligations, available-for-sale (1,421,649) (5,240,070)

Net Cash Used by Investing Activities (2,377,748) (3,361,742)

Net Decrease in Cash and Cash Equivalents (722,276) (2,062,615)

Cash and Cash Equivalents - Beginning 2,544,281 4,606,896

Cash and Cash Equivalents - Ending $ 1,822,005 $ 2,544,281 

The accompanying notes are an integral part of these financial statements.
11. Legislation and Operations of the Bank Insurance Fund

Overview

The Federal Deposit Insurance Corporation (FDIC) is the independent deposit

insurance agency created by Congress in 1933 to maintain stability and public

confidence in the nation’s banking system. Provisions that govern the operations

of the FDIC are generally found in the Federal Deposit Insurance (FDI) Act, as

amended, (12 U.S.C. 1811, et seq). In carrying out the purposes of the FDI Act,

as amended, the FDIC insures the deposits of banks and savings associations,

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. 

Bank Insurance 

Fund

Notes to the 

Financial 

Statements 

December 31, 2004

and 2003
Bank Insurance Fund

47

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 SAIF. 

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% 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 $57.0 billion 

as of December 31, 2004 and 2003.

Receivership Operations

The FDIC is responsible for managing and disposing of the assets of failed 

institutions in an orderly and efficient manner. The assets held by receivership

entities, and the claims against them, are accounted for separately from BIF

assets and liabilities to ensure that receivership proceeds are distributed in

accordance with applicable laws and regulations. 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

In April 2001, FDIC issued recommendations for deposit insurance reform. The

FDIC recommendations included merging BIF and SAIF and improving FDIC’s

ability to manage the merged fund by permitting the FDIC Board of Directors 

to price insurance premiums properly to reflect risk, to set the reserve ratio in a

range around 1.25 percent, establish a system for providing credits, rebates and

surcharges, and to eliminate the SAIF exit fee reserve. FDIC also recommended

that Congress consider indexing deposit insurance coverage for inflation. During

the 107th Congress (2001-2002), hearings were held in the House and Senate

and legislation was introduced containing major elements of FDIC’s deposit

insurance reform proposals. The legislation was not enacted prior to congressional adjournment. During the 108th Congress (2003 - 2004), the House and

Senate again considered deposit insurance reform legislation; however, Congress

adjourned without enacting that legislation. Legislation similar to the deposit

insurance reform proposals of the 107th and 108th Congress may be introduced

in the 109th Congress, which begins in January 2005. If Congress enacts deposit

insurance reform legislation that contains the above recommendations, the new

law would have a significant impact on the BIF and the SAIF. FDIC management,

however, cannot predict which provisions, if any, will ultimately be enacted.

BIF
2

48

2. Summary of Significant Accounting Policies

General

These financial statements pertain to the financial position, results of operations,

and cash flows of the BIF and are presented in 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

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 heldto-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.

Interest on both types of securities is calculated on a daily basis and recorded

monthly using the effective interest method. 
Bank Insurance Fund

BIF

49

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.

Related Parties

The nature of related parties and a description of related party transactions are

discussed in Note 1 and disclosed throughout the financial statements and 

footnotes.

Reclassifications

Reclassifications have been made in the 2003 financial statements to conform 

to the presentation used in 2004.

In 2004, the BIF changed the format of its Statement of Cash Flows from the

direct method to the indirect method for purposes of reporting cash flows from

operating activities. Accordingly, the Statement of Cash Flows for 2003 contains

certain reclassifications to conform to the BIF’s current financial statement format.

For 2003 and 2004, the reconciliation of net income to net cash provided by

operating activities is included in the Statement of Cash Flows. Consequently,

information pertaining to gross amounts of receipts and payments, not required

for presentation of the indirect method, is available within other footnotes to

these financial statements.
U.S. Treasury Obligations at December 31, 2004 

Dollars in Thousands 

Net Unrealized Unrealized

Yield at Face Carrying Holding Holding Market

Maturity●

Purchase Value Amount Gains Losses Value

Held-to-Maturity

Within 1 year 3.93% $ 6,290,000 $ 6,486,753 $ 50,757 $ (11,129) $ 6,526,381

After 1 year thru 5 years 4.94% 10,575,000 11,135,043 399,365 (10,104) 11,524,304

After 5 years thru 10 years 4.76% 4,360,000 4,374,344 197,842 (1,336) 4,570,850

Treasury Inflation-Indexed

After 1 year thru 5 years 3.82% 640,107 641,190 76,255 0 717,445

Total $ 21,865,107 $ 22,637,330 $ 724,219 $ (22,569) $ 23,338,980 

▼

3

50

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

As of December 31, 2004 and 2003, the book value of investments in 

U.S.Treasury obligations, net, was $32.1 billion and $30.5 billion, respectively.

As of December 31, 2004, the BIF held $6.6 billion of Treasury inflation-indexed

securities (TIIS). These securities are indexed to increases or decreases in the

Consumer Price Index for All Urban Consumers (CPI-U). Additionally, the BIF

held $6.6 billion of callable U.S. Treasury bonds at December 31, 2004. 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. 

Available-for-Sale

Within 1 year 3.65% $ 1,560,000 $ 1,598,564 $ 10,129 $ (3,051) $ 1,605,642

After 1 year thru 5 years 3.72% 1,685,000 1,893,380 31,116 (11,945) 1,912,551

Treasury Inflation-Indexed

After 1 year thru 5 years 3.81% 2,270,854 2,268,756 236,566 0 2,505,322

After 5 years thru 10 years 3.75% 3,004,072 3,019,976 427,114 0 3,447,090

Total $ 8,519,926 $ 8,780,676 $ 704,925 $ (14,996) $ 9,470,605

Total Investment in U.S. Treasury Obligations, Net

Total $ 30,385,033 $ 31,418,006 $ 1,429,144 $ (37,565) $ 32,809,585

For purposes of this table, all callable securities are assumed to mature on their first call dates. Their yields at purchase are reported as their yield to first call date.

For TIIS, the yields in the above table are stated at their real yields at purchase, not their effective yields. Effective yields on TIIS include a long-term annual inflation

assumption as measured by the CPI-U. The long-term CPI-U consensus forecast is 2.2%, based on figures issued by the Congressional Budget Office and Blue Chip

Economic Indicators in early 2004.

All unrealized losses occurred during the last 12 months as a result of changes in market interest rates. FDIC has the ability and intent to hold the related securities until

maturity. As a result, all losses are considered temporary.

●

▼

■

■
51

BIF

Bank Insurance Fund

As of December 31, 2004 and 2003, the unamortized premium, net of the

unamortized discount, was $1 billion and $902 million, respectively.

U.S. Treasury Obligations at December 31, 2003 

Dollars in Thousands 

Net Unrealized Unrealized

Yield at Face Carrying Holding Holding Market

Maturity●

Purchase Value Amount Gains Losses Value

Held-to-Maturity

Within 1 year 5.05% $ 3,365,000 $ 3,449,985 $ 65,110 $ (275) $ 3,514,820

After 1 year thru 5 years 5.66% 9,985,000 10,244,862 830,414 0 11,075,276

After 5 years thru 10 years 5.42% 1,910,000 1,976,450 191,954 0 2,168,404

Treasury Inflation-Indexed

After 5 years thru 10 years 3.82% 620,450 621,776 78,947 0 700,723

Total $ 15,880,450 $ 16,293,073 $ 1,166,425 $ (275) $ 17,459,223 

▼

Available-for-Sale

Within 1 year 2.31% $ 5,810,000 $ 6,050,064 $ 32,642 $ (230) $ 6,082,476

After 1 year thru 5 years 4.68% 1,995,000 2,229,143 114,071 0 2,343,214

Treasury Inflation-Indexed

After 1 year thru 5 years 3.88% 1,225,321 1,215,319 139,813 0 1,355,132

After 5 years thru 10 years 3.75% 3,887,611 3,912,950 516,001 0 4,428,951

Total $ 12,917,932 $ 13,407,476 $ 802,527 $ (230) $ 14,209,773

Total Investment in U.S. Treasury Obligations, Net

Total $ 28,798,382 $ 29,700,549 $ 1,968,952 $ (505) $ 31,668,996

For purposes of this table, all callable securities are assumed to mature on their first call dates. Their yields at purchase are reported as their yield to first call date.

For TIIS, the yields in the above table are stated at their real yields at purchase, not their effective yields. Effective yields on TIIS include a long-term annual inflation

assumption as measured by the CPI-U. The long-term CPI-U consensus forecast is 2.4%, based on figures issued by the Office of Management and Budget and the

Congressional Budget Office in early 2003.

All unrealized losses occurred during the last 12 months as a result of changes in market interest rates. FDIC has the ability and intent to hold the related securities until

maturity within the coming year. As a result, all losses are considered temporary and will be eliminated upon redemption of the securities.

●

▼

■

■
Receivables From Bank Resolutions, Net at December 31 

Dollars in Thousands 

2004 2003

Receivables from closed banks $ 4,621,702 $ 4,914,901

Allowance for losses (4,246,399) (4,403,812) 

Total $ 375,303 $ 511,089 

4

52

4. Receivables From Bank Resolutions, Net

The receivables from bank resolutions include payments made by the BIF to

cover obligations to insured depositors, advances to receiverships for working

capital, and administrative expenses paid on behalf of receiverships. Any 

related allowance for loss represents the difference between the funds advanced

and /or obligations incurred and the expected repayment. Assets held by BIF

receiverships are the main source of repayment of the BIF’s receivables from

closed banks. As of December 31, 2004, there were 31 active receiverships,

including 3 failures in the current year, with assets at failure of $151 million 

and BIF outlays of $133 million. 

As of December 31, 2004 and 2003, BIF receiverships held assets with 

a book value of $504 million and $756 million, respectively (including cash,

investments, and miscellaneous receivables of $269 million and $436 million 

at December 31, 2004 and 2003, 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. 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 nonsampled 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. 

As of December 31, 2004, an allowance for loss of $4.2 billion, or 92% of the

gross receivable, was recorded. Of the remaining 8% of the gross receivable,

the amount of credit risk is limited since almost two-thirds of the receivable 

will be repaid from receivership cash and investments.
5

6

Bank Insurance Fund

BIF

5. Property and Equipment, Net

The depreciation expense was $54 million and $55 million for 2004 and 2003,

respectively.

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, 2004 and 2003, the 

contingent liabilities for anticipated failure of insured institutions were $8 million

and $178 million, respectively. 

In addition to these recorded contingent liabilities, the FDIC has identified 

additional risk in the financial services industry that could result in a material 

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.

53

Property and Equipment, Net at December 31 

Dollars in Thousands 

2004 2003 

Land $ 37,352 $ 37,352 

Buildings (includes construction-in-process) 221,494 180,187

Application software (includes work-in-process) 223,149 177,111

Furniture, fixtures, and equipment 133,556 97,682 

Accumulated depreciation (258,445) (204,952)

Total $ 357,106 $ 287,380
7

54

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

market conditions. The FDIC’s Board of Directors has the statutory authority to

consider the contingent liability from anticipated failures of insured institutions

when setting assessment rates.

Litigation Losses

The BIF records an estimated loss for unresolved legal cases to the extent that

those losses are considered probable and reasonably estimable. In addition to

the amount recorded as probable, the FDIC has determined that losses from

unresolved legal cases totaling $51.5 million are reasonably possible.

Other Contingencies

Representations and Warranties

As part of the FDIC’s efforts to maximize the return from the sale of assets 

from bank resolutions, representations and warranties, and guarantees are

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

$3.8 billion as of December 31, 2004. There were no contingent liabilities from

any of the outstanding claims asserted in connection with representations and

warranties at December 31, 2004 and 2003, 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.

7. Assessments

In compliance with provisions of the FDI Act, as amended, the FDIC uses a riskbased 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. The majority of the financial

institutions are not assessed. Of those assessed, the assessment rate averaged

approximately 22 cents and 20 cents per $100 of assessable deposits for 2004

and 2003, respectively. During 2004 and 2003, $95 million and $80 million were

recognized as assessment income from BIF-member institutions, respectively.
8

Bank Insurance Fund

BIF

On November 15, 2004, 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 2005. 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, 2004, the BIF reserve ratio was 1.32 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 assessments. The FDIC, as administrator of the BIF, acts solely 

as a collection agent for the FICO. During 2004 and 2003, $631 million and

$627 million, respectively, were collected from BIF-member institutions and

remitted to the FICO.

8. Operating Expenses

Operating expenses were $822 million for 2004, compared to $805 million for

2003. The chart below lists the major components of operating expenses.

55

Operating Expenses for the Years Ended December 31

Dollars in Thousands 

2004 2003

Salaries and benefits $ 575,100 $ 555,683

Outside services 84,947 81,851

Travel 36,089 41,773

Buildings and leased space 60,693 61,582

Equipment (not capitalized) 11,595 15,111

Depreciation of property and equipment 54,424 54,947

Other 20,102 20,689

Services billed to receiverships (20,569) (26,140)

Total $ 822,381 $ 805,496
10

9

56

9. Provision for Insurance Losses

Provision for insurance losses was a negative $269 million for 2004 and a negative

$931 million for 2003. 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.

In October 2004, the FDIC announced a voluntary employee buyout program to 

a majority of its employees in an effort to further reduce identified staffing

excesses. The offer period for the buyout program is from November 1, 2004 

to May 2, 2005. Termination benefits include compensation of fifty percent of

the current salary for voluntary departures. The reasonably estimated total cost

associated with employees expected to accept the buyout offer is $23.7 million,

with BIF’s pro rata share totaling $20.6 million. During 2004, 129 employees 

left the FDIC. The total cost of this buyout was $6.9 million for 2004, with BIF’s

pro rata share totaling $6 million, which is included in the “Operating expenses”

and the “Accounts payable and other liabilities”line items.

Provision for Insurance Losses for the Years Ended December 31

Dollars in Thousands 

2004 2003

Valuation Adjustments:

Closed banks $ (82,758) $ (108,309)

Open bank assistance and other assets (13,260) (162)

Total Valuation Adjustments (96,018) (108,471)

Contingent Liabilities Adjustments:

Anticipated failure of insured institutions (170,005) (829,831)

Litigation losses (3,998) 345

Other contingencies 653 6,793

Total Contingent Liabilities Adjustments (173,350) (822,693)

Total $ (269,368) $ (931,164)
Bank Insurance Fund

BIF

In the event the FDIC does not meet its staffing reduction goal through the 

voluntary employee buyout program, the FDIC plans to conduct a reductionin-force (RIF). Because of uncertainties regarding the number of employees 

that will be subject to the RIF, the FDIC is unable to reasonably estimate the

related costs.

Postretirement Benefits Other Than Pensions

The FDIC provides certain life and dental insurance coverage for its eligible

retirees, the retirees’ beneficiaries, and covered dependents. Retirees eligible 

for life insurance coverage are those who have qualified due to: 1) immediate

enrollment upon appointment or five years of participation in the plan and 

2) eligibility for an immediate annuity. The life insurance program provides 

basic coverage at no cost to retirees and allows converting optional coverages 

to direct-pay plans. Dental coverage is provided to all retirees eligible for an

immediate annuity.

As of January 1, 2003, the FDIC ceased funding for postretirement benefits and

eliminated the separate entity in order to simplify the investment, accounting,

and reporting for the obligation. The separate entity had been established to

restrict the funds and to provide for the accounting and administration of these

benefits. As a result, the BIF received $89 million as its proportionate share 

of the plan assets and recognized a liability of $90 million in the “Accounts

payable and other liabilities” line item on its Balance Sheet. 

At December 31, 2004 and 2003, the BIF’s net postretirement benefit liability

recognized in the “Accounts payable and other liabilities” line item in the

Balance Sheet was $104 million and $98 million, respectively. In addition, 

the BIF’s expense for these benefits in 2004 and 2003 was $9.3 million and 

$11 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 rate.

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Pension Benefits, Savings Plans Expenses and Postemployment Benefits for the Years Ended December 31

Dollars in Thousands 

2004 2003

Civil Service Retirement System $ 7,958 $ 7,740

Federal Employees Retirement System (Basic Benefit) 33,638 29,477

FDIC Savings Plan 19,604 17,397

Federal Thrift Savings Plan 13,715 12,066

Separation Incentive Payment 6,082 91

Total $ 80,997 $ 66,771
11

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11. Commitments and Off-Balance-Sheet Exposure

Commitments:

Leased Space

The BIF’s allocated share of the FDIC’s lease commitments totals $105 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 $36 million and $38 million

for the years ended December 31, 2004 and 2003, respectively.

Off-Balance-Sheet Exposure:

Asset Securitization Guarantees

As part of the FDIC’s efforts to maximize the return from the sale or disposition

of assets from bank resolutions, the FDIC has securitized some receivership

assets. To facilitate the securitizations, the BIF provided limited guarantees to

cover certain losses on the securitized assets up to a specified maximum. In

exchange for backing the limited guarantees, the BIF received assets from the

receiverships in an amount equal to the expected exposure under the guarantees.

Currently, there is one limited guarantee deal remaining with a term of approximately 20 years. This deal will be evaluated for possible termination in 2005. 

As of December 31, 2004 and 2003, the maximum off-balance-sheet exposure

was $37 million and $81 million, respectively.

Deposit Insurance

As of September 30, 2004, deposits insured by the BIF totaled approximately

$2.6 trillion. This would be the accounting loss if all depository institutions were

to fail and the acquired assets provided no recoveries.

Leased Space Commitments

Dollars in Thousands 

2005 2006 2007 2008 2009 2010/Thereafter

$ 36,121 $ 25,948 $ 16,814 $ 11,487 $ 10,081 $ 4,424
12

Bank Insurance Fund

BIF

12. Disclosures About the Fair Value of Financial Instruments

Cash equivalents are short-term, highly liquid investments and are shown at 

current value. The fair market value of the investment in U.S. Treasury obligations

is disclosed in Note 3 and is based on current market prices. The carrying amount

of interest receivable on investments, short-term receivables, and accounts

payable and other liabilities approximates their fair market value, due to their

short maturities and/or comparability with current interest rates.

The net receivables from bank resolutions primarily include the BIF’s subrogated

claim arising from payments to insured depositors. The receivership assets 

that will ultimately be used to pay the corporate subrogated claim are valued

using discount rates that include consideration of market risk. These discounts

ultimately affect the BIF’s allowance for loss against the net receivables from

bank resolutions. Therefore, the corporate subrogated claim indirectly includes

the effect of discounting and should not be viewed as being stated in terms 

of nominal cash flows.

Although the value of the corporate subrogated claim is influenced by valuation

of receivership assets (see Note 4), such receivership valuation is not equivalent

to the valuation of the corporate claim. Since the corporate claim is unique, not

intended for sale to the private sector, and has no established market, it is not

practicable to estimate its fair market value.

The FDIC believes that a sale to the private sector of the corporate claim would

require indeterminate, but substantial, discounts for an interested party to 

profit from these assets because of credit and other risks. In addition, the 

timing of receivership payments to the BIF on the subrogated claim does 

not necessarily correspond with the timing of collections on receivership

assets. Therefore, the effect of discounting used by receiverships should 

not necessarily be viewed as producing an estimate of market value for 

the net receivables from bank resolutions.

59