1

III. Financial

Statements

and Notes

Bank Insurance 

Fund

December 31, 2003

and 2002
43

BIF

Bank Insurance Fund

Federal Deposit Insurance Corporation

Bank Insurance Fund Balance Sheets at December 31 

Dollars in Thousands 

2003 2002

Assets

Cash and cash equivalents $ 2,544,281 $ 4,606,896

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

Held-to-maturity securities 16,293,073 16,709,665

Available-for-sale securities 14,209,773 10,823,593

Interest receivable on investments and other assets, net 550,999 483,674

Receivables from bank resolutions, net (Note 4) 511,089 505,395

Property and equipment, net (Note 5) 287,380 303,084

Total Assets $ 34,396,595 $ 33,432,307

Liabilities 

Accounts payable and other liabilities $ 231,441 $ 148,573

Contingent liabilities for: (Note 6)

Anticipated failure of insured institutions 178,266 1,008,097

Litigation losses and other 204,693 225,297

Total Liabilities 614,400 1,381,967

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

Fund Balance

Accumulated net income 32,979,898 31,238,171

Unrealized gain on available-for-sale securities, net (Note 3) 802,297 812,169

Total Fund Balance 33,782,195 32,050,340

Total Liabilities and Fund Balance $ 34,396,595 $ 33,432,307

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

Federal Deposit Insurance Corporation

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

Dollars in Thousands 

2003 2002

Revenue

Interest on U.S. Treasury obligations $ 1,530,014 $ 1,692,381

Assessments (Note 7) 80,159 84,030

Other revenue 15,831 19,474

Total Revenue 1,626,004 1,795,885

Expenses and Losses

Operating expenses (Note 8) 805,496 821,136

Provision for insurance losses (Note 9) (928,468) (86,970)

Insurance and other expenses 7,249 16,451

Total Expenses and Losses (115,723) 750,617

Net Income 1,741,727 1,045,268

Unrealized (loss) /gain on available-for-sale securities, net (9,872) 566,247

Comprehensive Income 1,731,855 1,611,515

Fund Balance - Beginning 32,050,340 30,438,825

Fund Balance - Ending $ 33,782,195 $ 32,050,340

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

BIF

45

Federal Deposit Insurance Corporation

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

Dollars in Thousands 

2003 2002

Operating Activities

Provided by:

Interest on U.S. Treasury obligations $ 1,794,002 $ 1,858,852

Recoveries from bank resolutions 1,034,311 1,116,406

Assessments 80,496 81,971

Miscellaneous receipts 112,263 22,607

Used by:

Operating expenses (753,617) (742,270)

Disbursements for bank resolutions (935,602) (2,168,187)

Miscellaneous disbursements (31,861) (38,311)

Net Cash Provided by Operating Activities (Note 13) 1,299,992 131,068

Investing Activities

Provided by:

Maturity of U.S. Treasury obligations, held-to-maturity 3,890,000 3,625,000

Maturity of U.S. Treasury obligations, available-for-sale 1,690,000 1,150,000

Used by:

Purchase of property and equipment (42,669) (49,647)

Purchase of U.S. Treasury obligations, held-to-maturity (3,659,868) 0

Purchase of U.S. Treasury obligations, available-for-sale (5,240,070) (1,686,138)

Net Cash (Used by) Provided by Investing Activities (3,362,607) 3,039,215

Net (Decrease)/Increase in Cash and Cash Equivalents (2,062,615) 3,170,283

Cash and Cash Equivalents - Beginning 4,606,896 1,436,613

Cash and Cash Equivalents - Ending $ 2,544,281 $ 4,606,896

The accompanying notes are an integral part of these financial statements.
11. 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 established in the FDI Act, as

amended. 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 SAIFmember 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, 2003

and 2002
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 and $56.7 billion

as of December 31, 2003 and 2002, respectively.

Receivership Operations

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

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

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

assets and liabilities to ensure that receivership 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. 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 are again

considering deposit insurance reform legislation. If Congress enacts deposit 

insurance reform legislation that contains the above recommendations, the new

law would have a significant impact on the BIF and 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 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. 
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.

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 2002 financial statements to conform 

to the presentation used in 2003.
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 

▼

3

50

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

As of December 31, 2003 and 2002, the book value of investments in

U.S. Treasury obligations, net, was $30.5 billion and $27.5 billion, respectively. 

As of December 31, 2003, the BIF held $6.4 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 $6.8 billion of callable U.S. Treasury bonds at December 31, 2003. 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 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.

●

▼

■

■
51

BIF

Bank Insurance Fund

U.S. Treasury Obligations at December 31, 2002 

Dollars in Thousands 

Net Unrealized

Yield at Face Carrying Holding Market

Maturity●Purchase Value Amount Gains Value

Held-to-Maturity

Within 1 year 5.98% $ 2,690,000 $ 2,737,188 $ 63,325 $ 2,800,513

After 1 year thru 5 years 6.24% 10,265,000 10,401,894 1,169,295 11,571,189

After 5 years thru 10 years 5.39% 2,895,000 2,961,035 370,281 3,331,316

Treasury Inflation-Indexed

After 5 years thru 10 years 3.82% 607,987 609,548 68,169 677,717

Total $ 16,457,987 $ 16,709,665 $ 1,671,070 $ 18,380,735

Available-for-Sale

Within 1 year 5.31% $ 1,390,000 $ 1,389,723 $ 27,614 $ 1,417,337

After 1 year thru 5 years 4.91% 3,355,000 3,595,734 235,538 3,831,272

Treasury Inflation-Indexed

After 5 years thru 10 years 3.78% 5,010,245 5,025,967 549,017 5,574,984

Total $ 9,755,245 $ 10,011,424 $ 812,169 $ 10,823,593

Total Investment in U.S. Treasury Obligations, Net

Total $ 26,213,232 $ 26,721,089 $ 2,483,239 $ 29,204,328

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 2002.

▼

●

▼

As of December 31, 2003 and 2002, the unamortized premium, net of the

unamortized discount, was $902 million and $508 million, respectively.
Receivables From Bank Resolutions, Net at December 31 

Dollars in Thousands 

2003 2002

Receivables from closed banks $ 4,914,901 $ 6,055,613

Allowance for losses (4,403,812) (5,550,218) 

Total $ 511,089 $ 505,395 

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, 2003, there were 31 active receiverships, including 

three failures in the current year, with assets at failure of $1.1 billion and BIF

outlays of $889 million. 

As of December 31, 2003 and 2002, BIF receiverships held assets with 

a book value of $756 million and $1.1 billion, respectively (including cash, 

investments, and miscellaneous receivables of $436 million and $479 million 

at December 31, 2003 and 2002, 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, 2003, an allowance for loss of $4.4 billion, or 90% of the

gross receivable, was recorded. Of the remaining 10% of the gross receivable,

the amount of credit risk is limited since over three-fourths 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 $55 million and $47 million for 2003 and 2002,

respectively.

6. Contingent Liabilities for:

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 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 

historical loss rates to groups of institutions with certain shared characteristics.

In addition, institution-specific analysis is performed on those banks where 

failure is imminent absent institution management resolution of existing 

problems. As of December 31, 2003 and 2002, the contingent liabilities for

anticipated failure of insured institutions were $178 million and $1.0 billion,

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 is evidenced by the level of problem bank assets and the presence of various

high-risk banking business models that are particularly vulnerable to adverse 

economic and market conditions. Due to the uncertainty surrounding future 

economic and market conditions, there are other banks 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 $2.2 billion.

53

Property and Equipment, Net at December 31 

Dollars in Thousands 

2003 2002 

Land $ 37,352 $ 37,352 

Buildings (includes construction-in-process) 180,187 171,362

Application software (includes work-in-process) 177,111 155,196

Furniture, fixtures, and equipment 97,682 98,497 

Accumulated depreciation (204,952) (159,323)

Total $ 287,380 $ 303,084
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 $111.3 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 $7.4 billion 

as of December 31, 2003. The contingent liability from all outstanding claims

asserted in connection with representations and warranties was zero and 

$11.6 million at December 31, 2003 and 2002, 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 20 cents and 22 cents per $100 of assessable deposits for 2003

and 2002, respectively. During 2003 and 2002, $80 million and $84 million were

collected from BIF-member institutions, respectively. On November 4, 2003, 
8

Bank Insurance Fund

BIF

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

2004. 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, 2003, the BIF reserve ratio was 1.31 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 and the SAIF, acts solely as a collection agent for the FICO. During

2003 and 2002, $627 million and $621 million, respectively, were collected

from BIF-member institutions and remitted to the FICO.

8. Operating Expenses

Operating expenses were $805 million for 2003, compared to $821 million for

2002. The decrease of $16 million is primarily attributable to lower salary/benefit

expenses resulting from the workforce reduction programs in 2002. 

During 2002, the FDIC offered voluntary employee buyout incentives to a majority

of its employees and conducted a reduction-in-force (RIF) in 2002 and 2003 

in an effort to reduce identified staffing excesses and skill imbalances. As 

a result, approximately 750 employees left by December 31, 2003. Termination

benefits included compensation of fifty percent of employee’s current base

salary and locality adjustment for voluntary departures. The total cost of this buyout was $33.1 million for 2002, with BIF’s pro rata share totaling $28.9 million,

which is included in the “Salaries and benefits” category in the chart below, as

well as the “Separation Incentive Payment” line item in Note 10. Through 2003,

BIF paid $20.8 million of this compensation benefit and the remaining unpaid

amount is recorded as a liability in the “Accounts payable and other liabilities”

line item.

55
9

56

9. Provision for Insurance Losses

Provision for insurance losses was a negative $928 million for 2003 and a negative

$87 million for 2002. The following chart lists the major components of the 

provision for insurance losses.

Operating Expenses for the Years Ended December 31

Dollars in Thousands 

2003 2002

Salaries and benefits $ 555,683 $ 599,930

Outside services 81,851 77,935

Travel 41,773 37,880

Buildings and leased space 61,582 60,613

Equipment (not capitalized) 15,111 14,923

Depreciation of property and equipment 54,947 47,042

Other 20,689 20,560

Services billed to receiverships (26,140) (37,747)

Total $ 805,496 $ 821,136

Provision for Insurance Losses for the Years Ended December 31

Dollars in Thousands 

2003 2002

Valuation Adjustments:

Closed banks $ (108,309) $ 616,844

Open bank assistance and other assets 2,534 6,006

Total Valuation Adjustments (105,775) 622,850

Contingent Liabilities Adjustments:

Anticipated failure of insured institutions (829,831) (902,903)

Litigation losses 345 180,458

Other contingencies 6,793 12,625

Total Contingent Liabilities Adjustments (822,693) (709,820)

Total $ (928,468) $ (86,970)
10

Bank Insurance Fund

BIF

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.

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.

Prior to 2003, the BIF funded its liability for postretirement benefits other than

pensions directly to a separate entity, which was established to restrict the funds

and to provide for the accounting and administration of these benefits. As of

January 1, 2003, the FDIC changed its funding policy for these benefits and

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

and reporting for the obligation. The change does not impact any benefit 

entitlements to employees and retirees or the accrual of this liability pursuant 

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

Dollars in Thousands 

2003 2002

Civil Service Retirement System $ 7,740 $ 13,365

Federal Employees Retirement System (Basic Benefit) 29,477 30,366

FDIC Savings Plan 17,397 18,956

Federal Thrift Savings Plan 12,066 12,235

Separation Incentive Payment (see note 8) 91 29,085

Total $ 66,771 $ 104,007
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to the provisions of SFAS No. 106. The BIF received $89 million, of the total

$103 million, as its proportionate share of the plan assets and recognized 

a liability of $90 million, of the total $104 million, in the “Accounts payable 

and other liabilities” line item on its Balance Sheets. 

The net cumulative effect of this accounting change for the periods prior 

to 2003 was $787 thousand which is included in the “Insurance and other

expenses” line item on BIF’s Statements of Income and Fund Balance. In addition

to the cumulative effect, the BIF’s expense for such benefits in 2003 was 

$11 million, which is included in the current year operating expenses. In the

absence of the accounting change, BIF would have recognized an expense 

of $6 million.

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

in the “Accounts payable and other liabilities” line item in the Balance Sheet

was $98 million. At December 31, 2002, the BIF’s net postretirement benefit

asset recognized in the “Interest receivable on investments and other assets,

net” line item in the Balance Sheet was $130 thousand. 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.

11. Commitments and Off-Balance-Sheet Exposure

Commitments:

Leased Space

The BIF’s allocated share of the FDIC’s lease commitments totals $124 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 $38 million and $37 million

for the years ended December 31, 2003 and 2002, respectively.

Leased Space Commitments

Dollars in Thousands 

2004 2005 2006 2007 2008 2009/Thereafter

$ 37,345 $ 32,666 $ 22,484 $ 13,652 $ 8,887 $ 9,052
Bank Insurance Fund

BIF

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. One deal terminated

in 2003 with a cumulative gain to the BIF of $6 million. Although the remaining

term of the limited guaranty for the last deal is 23 years, this deal will be evaluated

for possible termination in 2004. As of December 31, 2003 and 2002, the maximum

off-balance-sheet exposure was $81 million and $202 million, respectively.

Deposit Insurance

As of September 30, 2003, deposits insured by the BIF totaled approximately

$2.5 trillion. This would be the accounting loss if all depository institutions

were to fail and the acquired assets provided no recoveries.

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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.
13

BIF

13. Supplementary Information Relating to the Statements

of Cash Flows

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

Dollars in Thousands 

2003 2002

Net Income $ 1,741,727 $ 1,045,268

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

Income Statement Items:

Amortization of U.S. Treasury obligations 455,628 217,742 

TIIS inflation adjustment (115,150) (110,679)

Depreciation on property and equipment 54,947 47,484

Retirement of property and equipment 852 2,149

Change in Assets and Liabilities:

(Increase) Decrease in interest receivable on investments and other assets (67,460) 63,688

(Increase) in receivables from bank resolutions (5,694) (426,239)

Increase in accounts payable and other liabilities 85,577 14,218

(Decrease) in contingent liabilities for anticipated failure of insured institutions (829,831) (902,903)

(Decrease) Increase in contingent liabilities for litigation losses and other (20,604) 180,340

Net Cash Provided by Operating Activities $ 1,299,992 $ 131,068

Bank Insurance Fund

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