Deposit Insurance Fund

Federal Deposit Insurance Corporation

62

IV. Financial Statements and Notes

Deposit Insurance Fund
 F e d e r a l D e p o s i t I n s u r a n c e C o r p o r a t i o n

 Deposit Insurance Fund Balance Sheet at December 31 

 D o l l a r s i n T h o u s a n d s 

 2006 2005

 Assets

 Cash and cash equivalents $ 2,953,995 $ 3,209,444

Cash and other assets: Restricted for SAIF-member exit fees (Note 8) 

 (Includes cash and cash equivalents of $20.9 million at December 31, 2005) 0 341,656

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

 Held-to-maturity securities 37,184,214 34,253,237

 Available-for-sale securities 8,958,566 9,987,223

 Interest receivable on investments and other assets, net 747,715 737,566

 Receivables from resolutions, net (Note 4) 538,991 533,474

 Property and equipment, net (Note 5) 376,790 378,064

 Total Assets $ 50,760,271 $ 49,440,664

 Liabilities 

 Accounts payable and other liabilities $ 154,283 $ 296,540

Postretirement benefit liability (Note 11) 129,906 0

 Contingent liabilities for: (Note 6)

 Anticipated failure of insured institutions 110,775 5,366

 Litigation losses 200,000 200,500

 SAIF-member exit fees and investment proceeds held in escrow (Note 8) 0 341,656

 Total Liabilities 594,964 844,062

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

 Fund Balance

 Accumulated net income 49,929,226 48,190,062

 Unrealized gain on available-for-sale securities, net (Note 3) 233,822 406,540

 Unrealized postretirement benefit gain (Note 11) 2,259 0

 Total Fund Balance 50,165,307 48,596,602

 Total Liabilities and Fund Balance $ 50,760,271 $ 49,440,664

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

63

Deposit Insurance Fund (combined BIF and SAIF for 2005 – Note 2)
Deposit Insurance Fund

 Federal Deposit Insurance Corporation

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

 D o l l a r s i n T h o u s a n d s 

2006 2005

Revenue

 Interest on U.S. Treasury obligations $ 2,240,723 $ 2,341,505

 Exit fees earned (Note 8) 345,295 0

 Assessments (Note 7) 31,945 60,884

Other revenue 25,565 18,073

Total Revenue 2,643,528 2,420,462

Expenses and Losses

 Operating expenses (Note 9) 950,618 965,652

 Provision for insurance losses (Note 10) (52,097) (160,170)

Insurance and other expenses 5,843 3,821

 Total Expenses and Losses 904,364 809,303

 Net Income 1,739,164 1,611,159

 Unrealized loss on available-for-sale securities, net (172,718) (521,350)

 Unrealized postretirement benefit gain 2,259 0

 Comprehensive Income 1,568,705 1,089,809

 Fund Balance - Beginning 48,596,602 47,506,793

 Fund Balance - Ending $ 50,165,307 $ 48,596,602

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

64

(combined BIF and SAIF for 2005 – Note 2)
 Federal Deposit Insurance Corporation

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

 D o l l a r s i n T h o u s a n d s 

2006 2005

Operating Activities

 Net Income: $ 1,739,164 $ 1,611,159

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

 Amortization of U.S. Treasury obligations 599,274 834,118

 Treasury inflation-protected securities (TIPS) inflation adjustment (109,394) (345,023)

 Depreciation on property and equipment 52,919 56,006

Provision for insurance losses (52,097) (160,170)

Terminations/adjustments of work-in-process accounts 433 178

Exit fees earned (345,295) 0

 Change in Operating Assets and Liabilities:

 Decrease/(Increase) in unamortized premium 

 and discount of U.S. Treasury obligations (restricted) 1,359 (6,565)

 (Increase) /Decrease in interest receivable and other assets (14,635) 5,590

 Decrease in receivables from resolutions 147,258 348,173

(Decrease)/Increase in accounts payable and other liabilities (166,822) 27,145

 Increase in postretirement benefit liability 129,906 0

 (Decrease) in contingent liabilities for litigation losses 0 (182)

 Increase in exit fees and investment proceeds held in escrow 3,639 28,556

 Net Cash Provided by Operating Activities 1,985,709 2,398,985

 Investing Activities

 Provided by:

 Maturity of U.S. Treasury obligations, held-to-maturity 5,955,000 8,220,000

 Maturity of U.S. Treasury obligations, available-for-sale 845,000 1,830,000 

 Used by:

 Purchase of property and equipment (11,721) (47,197)

 Purchase of U.S. Treasury obligations, held-to-maturity (9,050,372) (11,693,984)

 Net Cash Used by Investing Activities (2,262,093) (1,691,181)

 Net (Decrease)/Increase in Cash and Cash Equivalents (276,384) 707,804

 Cash and Cash Equivalents - Beginning 3,230,379 2,522,575

Unrestricted Cash and Cash Equivalents - Ending 2,953,995 3,209,444

 Restricted Cash and Cash Equivalents - Ending 0 20,935

Cash and Cash Equivalents - Ending $ 2,953,995 $ 3,230,379

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

65

Deposit Insurance Fund (combined BIF and SAIF for 2005 – Note 2)
Deposit Insurance Fund

Notes to the 

Financial Statements 

December 31, 2006 

and 2005

11. Legislation and Operations of the Deposit Insurance Fund

Overview

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

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

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

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

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

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

(insured depository institutions), 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 fund. 

An active institution’s primary federal supervisor is generally determined by the 

institution’s charter type. Commercial and savings banks are supervised by the 

FDIC, the Office of the Comptroller of the Currency, or the Federal Reserve 

Board, while thrifts are supervised by the Office of Thrift Supervision. 

The Deposit Insurance Fund (DIF) was established on March 31, 2006 as a result 

of the merger of the Bank Insurance Fund (BIF) and the Savings Association 

Insurance Fund (SAIF) pursuant to the recently enacted deposit insurance reform 

legislation. The FDIC is the administrator of the DIF and the FSLIC Resolution 

Fund (FRF). These funds are maintained separately to carry out their respective 

mandates. 

The DIF is an insurance fund responsible for protecting insured bank and thrift 

depositors from loss due to institution failures. 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 

and the Resolution Trust Corporation. 

Recent Legislation

The Federal Deposit Insurance Reform Act of 2005 (Reform Act [Title II, Subtitle B 

of Public Law 109-171, 120 Stat. 9]) was enacted on February 8, 2006. Companion 

legislation, the Federal Deposit Insurance Reform Conforming Amendments Act 

of 2005 (Public Law 109-173, 119 Stat. 3601), was enacted on February 15, 2006. 

In addition to merging the BIF and the SAIF, the legislation: 1) requires the 

deposit of funds into the DIF for SAIF-member exit fees that had been restricted 

and held in escrow; 2) provides FDIC with greater discretion to charge insurance

assessments and to impose more sensitive risk-based pricing; 3) annually permits

the designated reserve ratio to vary between 1.15 and 1.50 percent of estimated

insured deposits, thereby eliminating the statutorily fixed designated reserve 

ratio of 1.25 percent; 4) generally requires the declaration and payment of 

dividends from the DIF if the reserve ratio of the DIF equals or exceeds 

1.35 percent of estimated insured deposits at the end of a calendar year; 

5) grants a one-time assessment credit for each eligible insured depository 

Financial Statements and Notes

66
institution or its successor based on an institution’s proportionate share of the 

aggregate assessment base of all eligible institutions at December 31, 1996; and 

6) immediately increases coverage for certain retirement accounts to $250,000 

and allows the FDIC to increase all deposit insurance coverage, under certain 

circumstances, to reflect inflation every five years beginning January 1, 2011. 

See Note 7 for a more detailed discussion of these reforms.

Operations of the DIF

The primary purpose of the DIF is to: 1) insure the deposits and protect the 

depositors of DIF-insured institutions and 2) resolve DIF-insured failed institutions

upon appointment of FDIC as receiver in a manner that will result in the least 

possible cost to the DIF. 

The DIF is primarily funded from: 1) interest earned on investments in 

U.S. Treasury obligations and 2) deposit insurance assessments. Additional 

funding sources, if necessary, are borrowings from the U.S. Treasury, Federal 

Financing Bank, Federal Home Loan Banks, and insured depository institutions. 

The FDIC has borrowing authority from the U.S. Treasury up to $30 billion for 

insurance purposes on behalf of the DIF. On December 15, 2006, the FDIC 

entered into a Note Purchase Agreement with the Federal Financing Bank 

in an amount not exceeding $40 billion. The Note Purchase Agreement, 

if needed, will enhance DIF’s ability to fund large deposit insurance obligations 

and deal with large institution resolutions.

A statutory formula, known as the Maximum Obligation Limitation (MOL), limits 

the amount of obligations the DIF can incur to the sum of its cash, 90 percent of 

the fair market value of other assets, and the amount authorized to be borrowed 

from the U.S. Treasury. The MOL for the DIF was $79.7 billion and $78.2 billion 

as of December 31, 2006 and 2005, 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 DIF 

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.

67
Deposit Insurance Fund

22. Summary of Signifi cant Accounting Policies

General

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

and cash flows of the DIF 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 and thrifts 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.

Merger of the Funds

The merger of the BIF and SAIF into the newly established DIF was accounted 

for by combining the carrying value of each Fund’s assets and liabilities. Since 

this merger results in a new reporting entity, financial results of the newly 

formed DIF were retrospectively applied as though they had been combined at 

the beginning of the reporting year as well as for full prior year periods reported 

for comparative purposes. 

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 

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

DIF funds are required to be invested in obligations of the United States or 

in obligations guaranteed as to principal and interest by the United States; the 

Secretary of the U.S. Treasury must approve all such investments in excess 

of $100,000. The Secretary has granted approval to invest DIF funds only in 

U.S. Treasury obligations that are purchased or sold exclusively through the 

Bureau of the Public Debt’s Government Account Series (GAS) program.

DIF’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 

68
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 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 method. 

Capital Assets and Depreciation

The FDIC buildings are depreciated on a straight-line basis over a 35 to 50 year 

estimated life. Leasehold improvements are capitalized and depreciated over 

the lesser of the remaining life of the lease or the estimated useful life of the 

improvements, if determined to be material. Capital assets depreciated on a 

straight-line basis over a five-year estimated 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

In September 2006, the Financial Accounting Standards Board issued Statement 

of Financial Accounting Standards (SFAS) No. 158, Employers’ Accounting 

for Defined Benefit Pension and Other Postretirement Plans - an amendment 

of FASB Statements No. 87, 88, 106, and 132(R). For FDIC’s postretirement 

benefits other than pensions, this pronouncement amends the recognition 

and disclosure requirements of SFAS No. 106 and SFAS No. 132(R). 

The pronouncement requires recognition of: 1) the funded status of the plan as 

an asset or liability, 2) the cumulative actuarial gains/losses and prior service costs/

credits as accumulated comprehensive income, and 3) the changes in the actuarial

gains/losses and prior service costs/credits for the period as other comprehensive 

income. The FDIC adopted SFAS No. 158 for the 2006 calendar year financial 

statements. As a result, the FDIC recognized the underfunded status (difference 

between the accumulated postretirement benefit obligation and the plan assets 

at fair value) as a liability and the cumulative actuarial gains/losses and prior 

service costs/credits are shown as accumulated other comprehensive income 

on the Balance Sheet. In addition, the changes in the actuarial gains/losses and 

prior service costs/credits for the period are recognized as other comprehensive 

income on the Statement of Income and Fund Balance. Prior to this change, the 

net postretirement benefit obligation (comprised of both the underfunded status 

and unrecognized actuarial gains/losses and prior service costs/credits) was 

recognized as a liability on the Balance Sheet. 

Retrospective application is not permitted or required by the Statement. See 

Note 11 for specifics regarding postretirement benefits other than pensions.

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.

69
Deposit Insurance Fund

3

 U.S. Treasury Obligations at December 31, 2006 

 D o l l a r s i n T h o u s a n d s 

 Net Unrealized Unrealized

 Yield at Face Carrying Holding Holding Market

 Maturity●

 Purchase Value Amount Gains Losses Value

Held-to-Maturity

 U . S. Treasury notes and bonds

 Within 1 year 4.58% $ 6,401,000 $ 6,448,905 $ 3,389 $ (20,704) $ 6,431,590

 After 1 year thru 5 years 4.47% 15,500,000 16,276,424 91,703 (196,635) 16,171,492

 After 5 years thru 10 years 4.68% 9,025,000 9,690,085 36,025 (42,270) 9,683,840

 After 10 years 5.01% 2,445,000 3,247,814 57,589 (3,227) 3,302,176

 U. S. Treasury inflation-protected securities

 After 1 year thru 5 years 3.83% 926,751 926,844 21,185 0 948,029

 After 5 years thru 10 years 2.41% 568,345 594,142 0 (778) 593,364

 Total $ 34,866,096 $ 37,184,214 $ 209,891 $ (263,614) $ 37,130,491 

▼

Available-for-Sale

 U . S. Treasury notes and bonds

 Within 1 year 3.85% $ 1,225,000 $ 1 ,269,835 $ 0 $ (9,208) $ 1,260,627

 U. S. Treasury inflation-protected securities

 After 1 year thru 5 years 3.80% 7,443,478 7,454,909 243,030 0 7,697,939

 Total $ 8,668,478 $ 8,724,744 $ 243,030 $ (9,208) $ 8,958,566

 Total Investment in U.S. Treasury Obligations, Net

 Total $ 43,534,574 $ 45,908,958 $ 452,921 $ (272,822) $ 46,089,057

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

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

Economic Indicators in early 2006.

All unrealized losses occurred 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 unrealized losses are considered temporary. However, of the $273 million reported as total unrealized losses, $237 million is recognized as unrealized losses occurring 

over a period of 12 months or longer with a market value of $13.3 billion applied to the affected securities.

●

▼

■

■

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

As of December 31, 2006 and 2005, the book value of investments in U.S. 

Treasury obligations, net, was $46.1 billion and $44.2 billion, respectively. As 

of December 31, 2006, the DIF held $9.2 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 DIF 

held $6.1 billion of callable U.S. Treasury bonds at December 31, 2006. 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. 

70
 U.S. Treasury Obligations at December 31, 2005 

 D o l l a r s i n T h o u s a n d s 

 Net Unrealized Unrealized

 Yield at Face Carrying Holding Holding Market

 Maturity●

 Purchase Value Amount Gains Losses Value

Held-to-Maturity

 U . S. Treasury notes and bonds

 Within 1 year 5.19% $ 5,920,000 $ 5,942,398 $ 29,554 $ (18,187) $ 5,953,765

 After 1 year thru 5 years 4.47% 18,680,000 19,872,850 219,864 (187,672) 19,905,042

 After 5 years thru 10 years 4.53% 5,350,000 5,674,953 62,578 (13,184) 5,724,347

 After 10 years 4.72% 1,420,000 1,848,524 31,668 0 1,880,192

 U. S. Treasury inflation-protected securities

 After 1 year thru 5 years 3.83% 914,596 914,512 40,784 0 955,296

 Total $ 32,284,596 $ 34,253,237 $ 384,448 $ (219,043) $ 34,418,642 

▼

Available-for-Sale

 U . S. Treasury notes and bonds

 Within 1 year 3.71% $ 845,000 $ 898,720 $ 696 $ (6,870) $ 892,546

 After 1 year thru 5 years 3.86% 1,225,000 1,324,055 4,967 (16,448) 1,312,574

 U. S. Treasury inflation-protected securities

 After 1 year thru 5 years 3.97% 5,119,864 5,122,414 280,679 0 5,403,093

 After 5 years thru 10 years 3.39% 2,225,975 2,235,494 143,516 0 2,379,010

 Total $ 9,415,839 $ 9,580,683 $ 429,858 $ (23,318) $ 9,987,223

 Total Investment in U.S. Treasury Obligations, Net

 Total $ 41,700,435 $ 43,833,920 $ 814,306 $ (242,361) $ 44,405,865

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

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

Economic Indicators in early 2005.

All unrealized losses occurred 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 unrealized losses are considered temporary. However, of the $242 million reported as total unrealized losses, $116 million is recognized as unrealized losses occurring 

●

▼

■

■

As of December 31, 2006 and 2005, the unamortized premium, net of the 

unamortized discount, was $2.4 billion and $2.1 billion, respectively.

71
Deposit Insurance Fund

44. Receivables From Resolutions, Net

The receivables from resolutions include payments made by the DIF 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 DIF 

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

closed banks and thrifts. As of December 31, 2006, there were 25 active 

receiverships, with no failures in the current year. 

As of December 31, 2006 and 2005, DIF receiverships held assets with 

a book value of $655 million and $745 million, respectively (including cash, 

investments, and miscellaneous receivables of $348 million and $370 million 

at December 31, 2006 and 2005, 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. Assets in the judgmental sample, which represents 97 percent of 

the asset book value for all active DIF receiverships, 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 DIF’s actual recoveries 

to vary from the level currently estimated. 

As of December 31, 2006, the DIF allowance for loss was $4.1 billion. The 

allowance for loss is equivalent to 88 percent of the gross receivable. Of 

the remaining 12 percent of the gross receivable, the amount of credit risk 

is limited since 89.1 percent of the receivable will be repaid from receivership 

cash, investments, and a promissory note fully secured by a letter of credit.

72
6

55. Property and Equipment, Net

The depreciation expense was $53 million and $56 million for December 31, 2006 

and 2005, respectively.

6. Contingent Liabilities for:

Anticipated Failure of Insured Institutions

The DIF records a contingent liability and a loss provision for DIF-insured 

institutions that are likely to fail 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, 2006 and 2005, 

the contingent liabilities for anticipated failure of insured institutions were 

$110.8 million and $5.4 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 DIF should potentially vulnerable insured 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 DIF could 

incur additional estimated losses up to approximately $0.6 billion.

 Property and Equipment, Net at December 31 

 D o l l a r s i n T h o u s a n d s 

 2006 2005

 Land $ 37,352 $ 37,352 

 Buildings (includes construction-in-process) 284,871 272,861 

 Application software (includes work-in-process) 259,744 241,424 

 Furniture, fixtures, and equipment 161,127 140,728 

 Accumulated depreciation (323,274) (273,789)

 Retirements (43,030) (40,512)

 Total $ 376,790 $ 378,064 

73
Deposit Insurance Fund

7

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 DIF 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 $0.6 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 and thrift 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 

$8.1 billion as of December 31, 2006. There were no contingent liabilities from 

any of the outstanding claims asserted in connection with representations and 

warranties at December 31, 2006 and 2005, respectively.

In addition, future losses could be incurred until the contracts offering the 

representations and warranties, and guarantees have expired, some as late 

as 2032. Consequently, the FDIC believes it is possible that additional losses 

may be incurred by the DIF 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 DIF 

from outstanding contracts with unasserted representation and warranty 

claims.

7. Assessments

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) 

required the FDIC to establish a risk-based assessment system, charging 

higher rates to those insured depository institutions that posed greater risks 

to the DIF. To arrive at a risk-based assessment for a particular institution, the 

FDIC placed each institution in one of nine risk categories based on capital ratios 

and supervisory examination data. Based on FDIC's evaluation of the institutions 

under the risk-based premium system and due to limitations imposed by the 

74
Deposit Insurance Funds Act of 1996 (DIFA) and the continued health of the 

banking and thrift industries, most institutions were not charged an assessment 

for a number of years. In addition, the FDIC was required by statute 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 

warranted). Of the institutions assessed, the assessment rate averaged approximately 5 cents and 10 cents per $100 of assessable deposits for 2006 and 2005, 

respectively. During 2006 and 2005, $32 million and $61 million were recognized 

as assessment income from institutions, respectively. 

The assessment process will significantly change as of January 1, 2007. 

The Reform Act (enacted in February 2006) and the implementing regulations 

(published in November 2006):

• provide the FDIC with greater discretion to charge insurance assessments,

 eliminate the cap on assessments for the best-rated institutions, and provide

 that no insured institution may be barred from the lowest risk category solely

 because of its size. By regulation, the FDIC has placed each institution into 

 one of four risk categories for risk-based assessment purposes, so that all 

 insured depository institutions will be required to pay assessments;

• establish a range for the DRR from 1.15 to 1.50 percent of estimated 

 insured deposits and eliminate the fixed DRR of 1.25 percent. The FDIC 

 is required to annually publish the DRR and has, by regulation, set the 

 DRR at 1.25 percent for 2007;

• grant a one-time assessment credit of approximately $4.7 billion to certain

 eligible insured depository institutions (or their successors) based on the

 assessment base of the institution as of December 31, 1996, as compared 

 to the combined aggregate assessment base of all eligible institutions; and 

• require the FDIC to annually determine if a dividend should be paid, based

 on the statutory requirements generally to declare dividends if: 1) the reserve

 ratio of the DIF exceeds 1.50 percent of estimated insured deposits, for the

 full amount in excess of the amount required to maintain the reserve ratio

 at 1.50 percent, or 2) if the reserve ratio equals or exceeds 1.35 percent of

 estimated insured deposits but is no greater than 1.50 percent, for one-half

 of the amount in excess of the amount required to maintain the reserve 

 ratio at 1.35 percent. 

Assessments continue to be levied on institutions for payments of the interest

on obligations issued by the Financing Corporation (FICO). The FICO was 

established as a mixed-ownership government corporation to function solely 

as a financing vehicle for the FSLIC. The annual FICO interest obligation of 

approximately $790 million is paid on a pro rata basis using the same rate 

for banks and thrifts. The FICO assessment has no financial impact on the DIF 

and is separate from deposit insurance assessments. The FDIC, as administrator 

of the DIF, acts solely as a collection agent for the FICO. During 2006 and 2005, 

$788 million and $780 million, respectively, were collected and remitted to the 

FICO.

75
Deposit Insurance Fund

88. Exit Fees Earned

From the early to mid-1990s, the SAIF collected entrance and exit fees for 

conversion transactions when an insured depository institution converted from 

the BIF to the SAIF (resulting in an entrance fee) or from the SAIF to the BIF 

(resulting in an exit fee). Regulations approved by the FDIC’s Board of Directors 

(Board) and published in the Federal Register on March 21, 1990, directed that: 

1) exit fees paid to the SAIF be held in escrow, and 2) the Board and the 

Secretary of the Treasury will determine when it is no longer necessary to 

escrow such funds for the payment of interest on obligations previously issued 

by the FICO. These escrowed exit fees were invested in U.S. Treasury securities 

pending determination of ownership. The interest earned was also held in 

escrow and as a result of the above, the SAIF did not recognize exit fees or 

any interest earned as revenue. 

The recent deposit insurance legislation removed the restriction on SAIFmember exit fees held in escrow and the funds were deposited into the general

(unrestricted) fund of the DIF. The exit fees plus earned interest, a total of 

$345 million, are recognized as revenue at their carrying value on the Income 

Statement for 2006 and are classified on the Balance Sheet as a combination 

of Cash and cash equivalents, Investments in U.S. Treasury obligations, net, 

and Interest receivable on investments. At December 31, 2005, the exit fees 

and earned interest are shown on the Balance Sheet line items of Cash and 

other assets: Restricted for SAIF-member exit fees (an asset) and SAIF-member 

exit fees and investment proceeds held in escrow (a liability). 

76
10

9

 Provision for Insurance Losses for the Years Ended December 31

 D o l l a r s i n T h o u s a n d s 

 2006 2005

 Valuation Adjustments:

 Closed banks and thrifts $ (152,776) $ (159,421)

 Other assets (4,230) 3,762

 Total Valuation Adjustments (157,006) (155,659)

 Contingent Liabilities Adjustments:

 Anticipated failure of insured institutions 105,409 (4,852)

 Litigation losses (500) 200

 Other contingencies 0 141

 Total Contingent Liabilities Adjustments 104,909 (4,511)

 Total $ (52,097) $ (160,170)

 Operating Expenses for the Years Ended December 31

 D o l l a r s i n T h o u s a n d s 

 2006 2005

 Salaries and benefits $ 619,452 $ 645,418

 Outside services 124,045 113,416

 Travel 49,408 45,732

 Buildings and leased space 65,929 71,480

 Software/Hardware maintenance 27,139 33,366

 Depreciation of property and equipment 52,919 55,989

 Other 22,124 21,959

 Services billed to receiverships (10,398) (21,708)

 Total $ 950,618 $ 965,652

77

9. Operating Expenses

Operating expenses were $951 million for 2006, compared to $966 million for 

2005. The chart below lists the major components of operating expenses.

10. Provision for Insurance Losses

Provision for insurance losses was a negative $52 million for 2006 and a negative 

$160 million for 2005. The following chart lists the major components of the 

provision for insurance losses.
Deposit Insurance Fund

11. Employee Benefi ts

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 DIF contributes a portion of pension 

benefits for eligible employees, it does not account for the assets of either 

retirement system. The DIF also does not have actuarial data for accumulated 

plan benefits or the unfunded liability relative to eligible employees. These 

amounts are reported on and accounted for by the U.S. Office of Personnel 

Management.

Eligible FDIC employees also may participate in a FDIC-sponsored tax-deferred 

401(k) savings plan with matching contributions up to five percent. Under 

the Federal Thrift Savings Plan (TSP), FDIC provides FERS employees with 

an automatic contribution of 1 percent of pay and an additional matching 

contribution up to 4 percent of pay. CSRS employees also can contribute 

to the TSP. However, CSRS employees do not receive agency matching 

contributions.

Prior to 2006, the FDIC reduced its workforce with a voluntary buyout program, 

and to a lesser extent, reduction-in-force actions resulting in separation or 

severance payments. The 2006 and 2005 related costs for these reductions 

are included in the “Operating expenses” line item in the Income Statement.

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

 D o l l a r s i n T h o u s a n d s 

 2006 2005

 Civil Service Retirement System $ 6,808 $ 7,632

 Federal Employees Retirement System (Basic Benefit) 38,915 38,458

 FDIC Savings Plan 20,681 20,886

 Federal Thrift Savings Plan 15,328 15,228

 Separation Incentive Payment 0 22,371

 Severance Pay 39 2,733

 Total $ 81,771 $ 107,308 

78

11
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.

At December 31, 2006, the DIF’s accumulated postretirement benefit obligation, 

representing the underfunded status of the plan, was $129.9 million, which 

is recognized in the “Postretirement benefit liability” line item on the Balance 

Sheet. The cumulative actuarial gains/losses (changes in assumptions and plan 

experience) and prior service costs/credits (changes to plan provisions that 

increase or decrease benefits) was $2.3 million at December 31, 2006, which is 

reported as accumulated other comprehensive income in the “Unrealized postretirement benefit gain” line item on the Balance Sheet. At December 31, 2005, 

the net postretirement benefit liability (the underfunded status adjusted for 

any unrecognized actuarial gains/losses and prior service costs/credits) of 

$126.7 million is recognized in the “Accounts payable and other liabilities” 

line item.

The DIF’s expense for postretirement benefits in 2006 and 2005 was $9.0 million 

and $10.3 million, respectively, which is included in the current and prior year’s 

operating expenses on the Statement of Income and Fund Balance. The changes 

in the actuarial gains/losses and prior service costs/credits for 2006 of $2.3 million 

are reported as other comprehensive income in the “Unrealized postretirement 

benefit gain” line item. Key actuarial assumptions used in the accounting for the 

plan include the discount rate of 4.75 percent, the rate of compensation increase 

of 4.00 percent, and the dental coverage trend rate of 6.70 percent. See Note 2 

regarding the recent issuance of a relevant FASB accounting pronouncement.

79
Deposit Insurance Fund

12. Commitments and Off-Balance-Sheet Exposure

Commitments:

Leased Space

The FDIC’s lease commitments total $62.9 million for future years. The lease 

agreements contain escalation clauses resulting in adjustments, usually on an 

annual basis. The DIF recognized leased space expense of $30 million and 

$39 million for the periods ended December 31, 2006 and 2005, respectively.

Off-Balance-Sheet Exposure:

Deposit Insurance

As of September 30, 2006, the estimated insured deposits for DIF were 

$4.1 trillion. This estimate is derived primarily from quarterly financial data 

submitted by insured depository institutions to the FDIC. This estimate 

represents the accounting loss that would be realized if all insured depository 

institutions were to fail and the acquired assets provided no recoveries.

80

12

 Leased Space Commitments

 D o l l a r s i n T h o u s a n d s 

 2007 2008 2009 2010 2011 2012/Thereafter

 $ 21,491 $ 15,723 $ 13,552 $ 6,334 $ 3,727 $ 2,026
81

13 13. Disclosures About the Fair Value of Financial Instruments

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

at fair 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 resolutions primarily include the DIF’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 DIF’s allowance for loss against the net receivables from resolutions. Therefore, 

the corporate subrogated claim indirectly includes the effect of discounting and 

should not be viewed as being stated in terms of nominal cash flows.

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

of 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 DIF 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 resolutions.
FSLIC Resolution Fund

82

Federal Deposit Insurance Corporation

FSLIC Resolution Fund
 F e d e r a l D e p o s i t I n s u r a n c e C o r p o r a t i o n

 FSLIC Resolution Fund Balance Sheet at December 31

 D o l l a r s i n T h o u s a n d s 

2006 2005

 Assets

 Cash and cash equivalents $ 3,616,466 $ 3,602,703

 Receivables from thrift resolutions and other assets, net (Note 3) 36,730 38,746

 Receivables from U.S. Treasury for goodwill judgments (Note 4) 251,827 0

 Total Assets $ 3,905,023 $ 3,641,449 

 Liabilities 

 Accounts payable and other liabilities $ 5,497 $ 7,799

 Contingent liabilities for litigation losses and other (Note 4) 279,327 257,503

 Total Liabilities 284,824 265,302

 Resolution Equity (Note 5)

 Contributed capital 127,453,996 127,007,441

 Accumulated deficit (123,833,797) (123,631,294)

 Total Resolution Equity 3,620,199 3,376,147

 Total Liabilities and Resolution Equity $ 3,905,023 $ 3,641,449

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

83
FSLIC Resolution Fund

 F e d e r a l D e p o s i t I n s u r a n c e C o r p o r a t i o n

 FSLIC Resolution Fund Statement of Income and Accumulated Deficit for the Years Ended December 31

 D o l l a r s i n T h o u s a n d s 

2006 2005

Revenue

 Interest on U.S. Treasury obligations $ 151,648 $ 98,260

 Other revenue 17,650 24,176

Total Revenue 169,298 122,436

 Expenses and Losses

 Operating expenses 12,002 24,626

 Provision for losses (19,257) (16,112)

 Goodwill/Guarini litigation expenses (Note 4) 411,056 975,598

 Recovery of tax benefits (34,783) (45,946)

Other expenses 2,783 10,333

 Total Expenses and Losses 371,801 948,499

 Net (Loss) (202,503) (826,063)

Accumulated Deficit - Beginning (123,631,294) (122,805,231)

Accumulated Deficit - Ending $ (123,833,797) $ (123,631,294)

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

84
 F e d e r a l D e p o s i t I n s u r a n c e C o r p o r a t i o n

 FSLIC Resolution Fund Statement of Cash Flows for the Years Ended December 31

 D o l l a r s i n T h o u s a n d s 

2006 2005

 Operating Activities

 Net (Loss) $ (202,503) $ (826,063)

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

 Provision for losses (19,257) (16,112)

 Change in Assets and Liabilities:

 Decrease in receivables from thrift resolutions and other assets 21,273 59,630

 (Decrease)/Increase in accounts payable and other liabilities (2,302) 2,196

 Increase in contingent liabilities for litigation losses and other 21,824 257,104

 Net Cash (Used by) Operating Activities (180,965) (523,245)

 Financing Activities 

 Provided by:

U.S.Treasury payments for goodwill litigation 194,728 624,564

 Net Cash Provided by Financing Activities 194,728 624,564

 Net Increase in Cash and Cash Equivalents 13,763 101,319

 Cash and Cash Equivalents - Beginning 3,602,703 3,501,384

 Cash and Cash Equivalents - Ending $ 3,616,466 $ 3,602,703

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

85
FSLIC Resolution Fund

Notes to the 

Financial Statements 

December 31, 2006 

and 2005

11. Legislative History and Operations/Dissolution 

 of the FSLIC Resolution Fund

Legislative History

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. In addition, FDIC is charged with responsibility 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 (RTC). 

The U.S. Congress created the FSLIC through the enactment of the National 

Housing Act of 1934. The Financial Institutions Reform, Recovery, and 

Enforcement Act of 1989 (FIRREA) abolished the insolvent FSLIC, created the 

FSLIC Resolution Fund (FRF), and transferred the assets and liabilities of the 

FSLIC to the FRF-except those assets and liabilities transferred to the RTCeffective on August 9, 1989. Further, the FIRREA established the Resolution 

Funding Corporation (REFCORP) to provide part of the initial funds used by 

the RTC for thrift resolutions.

The RTC Completion Act of 1993 (RTC Completion Act) terminated the RTC 

as of December 31, 1995. All remaining assets and liabilities of the RTC were 

transferred to the FRF on January 1, 1996. Today, the FRF consists of two 

distinct pools of assets and liabilities: one composed of the assets and liabilities 

of the FSLIC transferred to the FRF upon the dissolution of the FSLIC (FRFFSLIC), and the other composed of the RTC assets and liabilities (FRF-RTC). 

The assets of one pool are not available to satisfy obligations of the other.

Pursuant to the Federal Deposit Insurance Reform Act of 2005, the Bank 

Insurance Fund and the Savings Association Insurance Fund were merged into 

a new fund, the Deposit Insurance Fund (DIF). The FDIC is the administrator 

of the FRF and the DIF. These funds are maintained separately to carry out their 

respective mandates.

Financial Statements and Notes

86
Operations/Dissolution of the FRF

The FRF will continue operations until all of its assets are sold or otherwise 

liquidated and all of its liabilities are satisfied. Any funds remaining in the 

FRF-FSLIC will be paid to the U.S. Treasury. Any remaining funds of the 

FRF-RTC will be distributed to the REFCORP to pay the interest on the 

REFCORP bonds. In addition, the FRF-FSLIC has available until expended 

$602.2 million in appropriations to facilitate, if required, efforts to wind up 

the resolution activity of the FRF-FSLIC. 

The FDIC has conducted an extensive review and cataloging of FRF’s remaining

assets and liabilities and is continuing to explore approaches for concluding 

FRF’s activities. An executive-level Steering Committee was established in 2003 

to facilitate the FRF dissolution. Some of the issues and items that remain 

open in FRF are: 1) criminal restitution orders (generally have from 5 to 10 years 

remaining to enforce); 2) collections of settlements and judgments obtained 

against officers and directors and other professionals responsible for causing 

or contributing to thrift losses (generally have from 6 months to 12 years 

remaining to enforce); 3) numerous assistance agreements entered into by the 

former FSLIC (FRF could continue to receive tax-sharing benefits through year 

2008); 4) goodwill and Guarini litigation (no final date for resolution has been 

established; see Note 4); and 5) environmentally impaired owned real estate 

assets. The FDIC is considering whether enabling legislation or other measures 

may be needed to accelerate liquidation of the remaining FRF assets and 

liabilities. The FRF could realize substantial recoveries from the tax-sharing 

benefits, criminal restitution orders and professional liability claims ranging 

from $165 million to $271.4 million; however, any associated recoveries are 

not reflected in FRF’s financial statements given the significant uncertainties 

surrounding the ultimate outcome.

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 FRF 

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.

87
FSLIC Resolution Fund

2. Summary of Signifi cant Accounting Policies

General

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

and cash flows of the FRF 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 thrift institutions 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 losses on receivables 

from thrift resolutions and the estimated losses for litigation.

Provision for Losses 

The provision for losses represents the change in the valuation of the recievables 

from thrift resolutions and other assets.

Fair Value of Financial Instruments 

Cash equivalents, which consist of Special U.S. Treasury Certificates, are shortterm, highly liquid investments with original maturities of three months or less 

and are shown at fair value. The carrying amount of short-term receivables and 

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

to their short maturities.

The net receivable from thrift resolutions is influenced by the underlying valuation 

of receivership assets. This corporate receivable is unique and the estimate 

presented is not necessarily indicative of the amount that could be realized 

in a sale to the private sector. Such a sale would require indeterminate, but 

substantial, discounts for an interested party to profit from these assets because 

of credit and other risks. Consequently, it is not practicable to estimate its fair 

market value.

Other assets primarily consist of credit enhancement reserves, which are valued 

by performing projected cash flow analyses using market-based assumptions 

(see Note 3).

2

88
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 2005 financial statements to conform 

to the presentation used in 2006. 

3. Receivables From Thrift Resolutions and Other Assets, Net

Receivables From Thrift Resolutions

The receivables from thrift resolutions include payments made by the FRF 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 the FDIC in its 

receivership capacity for the former FSLIC and SAIF-insured institutions are a 

significant source of repayment of the FRF’s receivables from thrift resolutions. 

As of December 31, 2006, 20 of the 850 FRF receiverships remain active primarily 

due to unresolved litigation, including goodwill matters. 

As of December 31, 2006 and 2005, FRF receiverships held assets with 

a book value of $33 million and $139 million, respectively (including cash, 

investments, and miscellaneous receivables of $26 million and $113 million 

at December 31, 2006 and 2005, 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. Assets in the judgmental sample, which represents 96 percent of 

the asset book value for all active FRF receiverships, 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 FRF’s actual recoveries 

to vary from the level currently estimated. 

3

89
FSLIC Resolution Fund

Other Assets 

Other assets primarily include credit enhancement reserves valued at $20.2 million 

and $16.7 million as of December 31, 2006 and 2005, respectively. The credit 

enhancement reserves resulted from swap transactions where the former RTC 

received mortgage-backed securities in exchange for single-family mortgage 

loans. The RTC supplied credit enhancement reserves for the mortgage loans in 

the form of cash collateral to cover future credit losses over the remaining life 

of the loans. These reserves may cover future credit losses through 2020.

Gross receivables from thrift resolutions subject the FRF to credit risk. An 

allowance for loss of $11.3 billion, or 99.9 percent of the gross receivable, 

was recorded as of December 31, 2006. Of the remaining 0.1 percent of the 

gross receivable, 65 percent is expected to be repaid from receivership cash 

and investments. 

 Receivables From Thrift Resolutions and Other Assets, Net at December 31

 D o l l a r s i n T h o u s a n d s 

 2006 2005

 Receivables from closed thrifts $ 11,308,460 $ 16,080,789

 Allowance for losses (11,299,448) (16,065,703)

 Receivables from Thrift Resolutions, Net 9,012 15,086

 Other assets 27,718 23,660

 Total $ 36,730 $ 38,746

90
44. Contingent Liabilities for:

Litigation Losses

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

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

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

unresolved legal cases totaling $3 million are reasonably possible.

Additional Contingency 

Goodwill Litigation

In United States v. Winstar Corp., 518 U.S. 839 (1996), the Supreme Court 

held that when it became impossible following the enactment of FIRREA 

in 1989 for the federal government to perform certain agreements to count 

goodwill toward regulatory capital, the plaintiffs were entitled to recover 

damages from the United States. Approximately 26 remaining cases are 

pending against the United States based on alleged breaches of these 

agreements.

On July 22, 1998, the Department of Justice’s (DOJ’s) Office of Legal Counsel 

(OLC) concluded that the FRF is legally available to satisfy all judgments and 

settlements in the goodwill litigation involving supervisory action or assistance 

agreements. OLC determined that nonperformance of these agreements was 

a contingent liability that was transferred to the FRF on August 9, 1989, upon 

the dissolution of the FSLIC. On July 23, 1998, the U.S. Treasury determined, 

based on OLC’s opinion, that the FRF is the appropriate source of funds for 

payments of any such judgments and settlements. The FDIC General Counsel 

concluded that, as liabilities transferred on August 9, 1989, these contingent 

liabilities for future nonperformance of prior agreements with respect to 

supervisory goodwill were transferred to the FRF-FSLIC, which is that portion 

of the FRF encompassing the obligations of the former FSLIC. The FRF-RTC, 

which encompasses the obligations of the former RTC and was created upon 

the termination of the RTC on December 31, 1995, is not available to pay any 

settlements or judgments arising out of the goodwill litigation. 

The goodwill lawsuits are against the United States and as such are defended 

by the DOJ. On November 15, 2006, the DOJ again informed the FDIC that it 

is “unable at this time to provide a reasonable estimate of the likely aggregate 

contingent liability resulting from the Winstar-related cases.” This uncertainty 

arises, in part, from the existence of significant unresolved issues pending 

at the appellate or trial court level, as well as the unique circumstances of 

each case. 

91
FSLIC Resolution Fund

The FDIC believes that it is probable that additional amounts, possibly substantial, 

may be paid from the FRF-FSLIC as a result of judgments and settlements in 

the goodwill litigation. Based on the representations from the DOJ, the FDIC 

is unable to estimate a range of loss to the FRF-FSLIC from the goodwill litigation. 

However, the FRF can draw from an appropriation provided by Section 110 

of the Department of Justice Appropriations Act, 2000 (Public Law 106-113, 

Appendix A, Title I, 113 Stat. 1501A-3, 1501A-20) such sums as may be 

necessary for the payment of judgments and compromise settlements in the 

goodwill litigation. This appropriation is to remain available until expended. 

Because an appropriation is available to pay such judgments and settlements, 

any liability for the goodwill litigation should have a corresponding receivable 

from the U.S. Treasury and therefore have no net impact on the financial 

condition of the FRF-FSLIC. 

The FRF paid $194.7 million as a result of judgments and settlements in four 

goodwill cases for the year ended December 31, 2006, compared to $624.6 

million for seven goodwill cases for the year ended December 31, 2005. As 

described above, the FRF received appropriations from the U.S. Treasury to 

fund these payments. At December 31, 2006, the FRF accrued a $251.8 million 

contingent liability and offsetting receivable from the U.S. Treasury for judgments 

in two additional cases that were fully adjudicated as of year end. These funds 

were paid in January 2007.

In addition, the FRF-FSLIC pays the goodwill litigation expenses incurred by 

DOJ based on a Memorandum of Understanding (MOU) dated October 2, 1998, 

between the FDIC and DOJ. Under the terms of the MOU, the FRF-FSLIC paid 

$17.5 million and $18.3 million to DOJ for fiscal years (FY) 2007 and 2006, 

respectively. DOJ returns any unused fiscal year funding to the FRF unless 

special circumstances warrant these funds be carried over and applied against 

current fiscal year charges. At September 30, 2006, DOJ had an additional 

$3.4 million in unused fiscal year 2006 funds that were applied against 

FY 2007 charges of $20.9 million.

Guarini Litigation

Paralleling the goodwill cases are similar cases alleging that the government 

breached agreements regarding tax benefits associated with certain FSLICassisted acquisitions. These agreements allegedly contained the promise of 

tax deductions for losses incurred on the sale of certain thrift assets purchased 

by plaintiffs from the FSLIC, even though the FSLIC provided the plaintiffs with 

tax-exempt reimbursement. A provision in the Omnibus Budget Reconciliation 

Act of 1993 (popularly referred to as the “Guarini legislation”) eliminated the 

tax deductions for these losses.

Eight Guarini cases were originally filed seeking damages relating to the 

government’s elimination of certain tax deductions. Seven of those eight cases 

have now concluded. One case settled in 2002 for $20,000, and a second case 

concluded in 2004 with no damage award. Judgments were paid in four cases 

in 2005 and 2006 for a total of $152.6 million. In a seventh case settled in 2006 

for $99 million, the settlement agreement further obligates the FRF-FSLIC as a 

92
guarantor for all tax liabilities in the event the settlement amount is determined 

by tax authorities to be taxable. The maximum potential exposure under this 

guarantee through 2009 is approximately $81 million. After reviewing relevant 

case law in relation to the nature of the settlement, the FDIC believes that it is 

very unlikely the settlement will be subject to taxation. Therefore, the FRF is not 

expected to fund any payment under this guarantee and no liability has been 

recorded. The eighth Guarini case is currently before the U.S.Court of Federal 

Claims for consideration of one remaining issue. 

The FDIC has established a contingent liability of approximately $27.5 million for 

the remaining Guarini litigation loss exposure. 

Representations and Warranties

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

thrift resolutions, representations and warranties, and guarantees were offered 

on certain loan sales. The majority of loans subject to these agreements have 

been paid off, refinanced, or the period for filing claims has expired. The FDIC’s 

estimate of maximum potential exposure to the FRF is $30 million based on an 

assessment of remaining portfolio balances still covered by representations and 

warranties. No claims in connection with representations and warranties have 

been asserted since 1998 on the remaining open agreements. Because of the 

age of the remaining portfolio and lack of claim activity, the FDIC does not expect 

new claims to be asserted in the future. Consequently, the financial statements 

at December 31, 2006 and 2005 do not include a liability for these agreements.

93
FSLIC Resolution Fund

5. Resolution Equity

As stated in the Legislative History section of Note 1, the FRF is comprised of 

two distinct pools: the FRF-FSLIC and the FRF-RTC. The FRF-FSLIC consists 

of the assets and liabilities of the former FSLIC. The FRF-RTC consists of the 

assets and liabilities of the former RTC. Pursuant to legal restrictions, the two 

pools are maintained separately and the assets of one pool are not available 

to satisfy obligations of the other.

The following table shows the contributed capital, accumulated deficit, and 

resulting resolution equity for each pool.

Contributed Capital

The FRF-FSLIC and the former RTC received $43.5 billion and $60.1 billion 

from the U.S. Treasury, respectively, to fund losses from thrift resolutions 

prior to July 1, 1995. Additionally, the FRF-FSLIC issued $670 million in capital 

certificates to the Financing Corporation (a mixed-ownership government 

corporation established to function solely as a financing vehicle for the FSLIC) 

and the RTC issued $31.3 billion of these instruments to the REFCORP. FIRREA 

prohibited the payment of dividends on any of these capital certificates. Through 

December 31, 2006, the FRF-RTC has returned $4.556 billion to the U.S. Treasury 

and made payments of $4.572 billion to the REFCORP. These actions serve to 

reduce contributed capital.

During 2006, the FRF-FSLIC recieved $194.7 million for U.S. Treasury payments for 

goodwill litigation and established a receivable for $251.8 million (see Note 4).

Accumulated Deficit

The accumulated deficit represents the cumulative excess of expenses over 

revenue for activity related to the FRF-FSLIC and the FRF-RTC. Approximately 

$29.8 billion and $87.9 billion were brought forward from the former FSLIC and 

the former RTC on August 9, 1989, and January 1, 1996, respectively. The FRFFSLIC accumulated deficit has increased by $12.4 billion, whereas the FRF-RTC 

accumulated deficit has decreased by $6.3 billion, since their dissolution dates.

 Resolution Equity at December 31, 2006

 D o l l a r s i n T h o u s a n d s 

 FRF

 FRF-FSLIC FRF-RTC Consolidated

Contributed capital - beginning $ 44,808,104 $ 82,199,337 $ 127,007,441

 Add: U.S. Treasury payments for goodwill litigation 446,555 0 446,555

 Contributed capital - ending 45,254,659 82,199,337 127,453,996

Accumulated deficit (42,212,338) (81,621,459) (123,833,797)

 Total $ 3,042,321 $ 577,878 $ 3,620,199

94

5
66. Employee Benefi ts

Pension 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 FRF contributes a portion of pension 

benefits for eligible employees, it does not account for the assets of either 

retirement system. The FRF 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. The FRF’s pension-related expenses were $850 thousand and 

$2.9 million for 2006 and 2005, respectively. 

Postretirement Benefits Other Than Pensions

The FRF no longer records a liability for the postretirement benefits of life and 

dental insurance as a result of FDIC’s change in funding policy for these benefits 

and elimination of the separate entity formerly used to account for such estimated

future costs. In implementing this change, management decided not to allocate 

either the plan assets or the revised net accumulated postretirement benefit 

obligation (a long-term liability) to the FRF due to the expected dissolution of the 

FRF. However, the FRF does continue to pay its proportionate share of the yearly 

claim expenses associated with these benefits.

95
To the Board of Directors

The Federal Deposit Insurance Corporation

We have audited the balance sheets as of December 31, 2006, and 

2005, for the two funds administered by the Federal Deposit Insurance 

Corporation (FDIC), the related statements of income and fund balance 

(accumulated deficit), and the statements of cash flows for the years then 

ended. In our audits of the Deposit Insurance Fund (DIF) and the FSLIC 

Resolution Fund (FRF), we found

• the financial statements of each fund are presented fairly, in all material 

 respects, in conformity with U.S. generally accepted accounting 

 principles;

• FDIC had effective internal control over financial reporting and 

 compliance with laws and regulations for each fund; and

• no reportable noncompliance with laws and regulations we tested.

The following sections discuss our conclusions in more detail. They also 

present information on the scope of our audits and our evaluation of 

FDIC management’s comments on a draft of this report.

The financial statements, including the accompanying notes, present 

fairly, in all material respects, in conformity with U.S. generally accepted 

accounting principles, DIF’s financial position as of December 31, 2006, 

and 2005, and the results of its operations and its cash flows for the years 

then ended.

As discussed in note 1 to DIF’s financial statements, on February 8, 2006, 

the President signed into law the Federal Deposit Insurance Reform Act 

of 2005 (the Act). Among its provisions, the Act called for the merger of 

the Bank Insurance Fund (BIF) and Savings Association Insurance Fund 

(SAIF) into a single deposit insurance fund. In accordance with the Act, 

on March 31, 2006, FDIC established the DIF with the merger of the 

BIF and SAIF. As further discussed in note 2 to DIF’s financial statements, 

the merger resulted in a new reporting entity. The financial results of 

the newly formed DIF were retrospectively applied as though they had 

been combined at the beginning of the reporting year as well as for prior 

periods presented for comparative purposes.

Opinion on DIF's

Financial Statements

96
The financial statements, including the accompanying notes, present 

fairly, in all material respects, in conformity with U.S. generally accepted 

accounting principles, FRF’s financial position as of December 31, 2006, 

and 2005, and the results of its operations and its cash flows for the years 

then ended.

FDIC management maintained, in all material respects, effective internal 

control over financial reporting (including safeguarding assets) and 

compliance as of December 31, 2006, that provided reasonable assurance

that misstatements, losses, or noncompliance material in relation to 

FDIC’s financial statements for each fund would be prevented or detected

on a timely basis. Our opinion is based on criteria established under 

31 U.S.C. 3512 (c), (d) [commonly known as the Federal Managers’ 

Financial Integrity Act (FMFIA)].

In our prior year audit,1

 we reported on weaknesses we identified in 

FDIC’s information system controls, which we considered to be a reportable condition.2

 Specifically, FDIC had implemented a new financial 

system May 2005 and, in doing so, did not ensure that controls were 

adequate to accommodate its new systems environment.

97

Opinion on FRF's

Financial Statements

Opinion on Internal

Control

1 GAO, Financial Audit: Federal Deposit Insurance Corporation Funds’ 2005 

and 2004 Financial Statements, GAO-06-146 (Washington, D.C.: Mar. 2, 2006).

2 Reportable conditions involve matters coming to the auditor’s attention that, 

in the auditor’s judgment, should be communicated because they represent 

significant deficiencies in the design or operation of internal control and could 

adversely affect FDIC’s ability to meet the control objectives described in this 

report. In May 2006, the American Institute of Certified Public Accountants 

(AICPA) issued Statement on Auditing Standard (SAS) 112, which became 

effective for audits of financial statements for periods ending on or after 

December 15, 2006. SAS 112 established standards and provides guidance 

on the auditor’s responsibilities for identifying, evaluating, and communicating 

matters related to an entity’s internal control over financial reporting identified 

in an audit of financial statements. Under the new SAS, the auditor is required 

to communicate control deficiencies that are significant deficiencies or material 

weaknesses in internal controls. A significant deficiency is a control deficiency, 

or combination of deficiencies, that adversely affects the entity’s ability to initiate,

authorize, record, process, or report financial data reliably in accordance with 

generally accepted accounting principles such that there is more than a remote 

likelihood that a misstatement of the entity’s financial statements that is more 

than inconsequential will not be prevented or detected. As a result of SAS 112, 

the term reportable condition is no longer used.
During 2006, FDIC corrected many of these weaknesses and implemented 

mitigating or compensating controls to provide protection for the corporation’s financial and sensitive information in the new systems environment. 

These improvements enabled us to conclude that the remaining issues 

related to information systems controls do not constitute a significant 

deficiency. However, continued management commitment to an effective 

information security program will be essential to ensure that the corporation’s financial and sensitive information will be adequately protected. 

In light of the evolving nature of information security, and with new 

exposures and threats continuing to develop, the corporation’s information 

security program will need to dynamically adapt to address changing 

information security challenges. As FDIC continues to enhance its new 

financial system, which is based on an integrated financial management 

software package, the corporation’s reliance on controls implemented in 

the single, integrated financial system will increase. The continued effectiveness of FDIC’s controls will be dependent on sound implementation 

of the integrated financial management software and its operations.

We did identify control deficiencies during our 2006 audits that we do 

not consider to be significant deficiencies. We will be reporting separately 

to FDIC management on these matters.

Our tests for compliance with selected provisions of laws and regulations 

disclosed no instances of noncompliance that would be reportable under 

U.S. generally accepted government auditing standards. However, the 

objective of our audits was not to provide an opinion on overall compliance 

with laws and regulations. Accordingly, we do not express such an 

opinion.

FDIC management is responsible for (1) preparing the annual financial 

statements in conformity with U.S. generally accepted accounting principles; (2) establishing, maintaining, and assessing internal control to 

provide reasonable assurance that the broad control objectives of FMFIA 

are met; and (3) complying with applicable laws and regulations.

We are responsible for obtaining reasonable assurance about whether 

(1) the financial statements are presented fairly, in all material respects, 

in conformity with U.S. generally accepted accounting principles; and 

(2) management maintained effective internal control, the objectives of 

which are the following:

• financial reporting—transactions are properly recorded, processed, 

 and summarized to permit the preparation of financial statements in 

 conformity with U.S. generally accepted accounting principles; and 

 assets are safeguarded against loss from unauthorized acquisition, use,

 or disposition; and

Compliance with Laws 

and Regulations

Objectives, Scope, and 

Methodology

98
99

• compliance with laws and regulations—transactions are executed in 

 accordance with laws and regulations that could have a direct and 

 material effect on the financial statements.

We are also responsible for testing compliance with selected provisions 

of laws and regulations that could have a direct and material effect on the 

financial statements.

In order to fulfill these responsibilities, we

• examined, on a test basis, evidence supporting the amounts and 

 disclosures in the financial statements;

• assessed the accounting principles used and significant estimates made 

 by management;

• evaluated the overall presentation of the financial statements;

• obtained an understanding of internal control related to financial 

 reporting (including safeguarding assets) and compliance with laws 

 and regulations;

• tested relevant internal controls over financial reporting and compliance, 

 and evaluated the design and operating effectiveness of internal control;

• considered FDIC’s process for evaluating and reporting on internal 

 control based on criteria established by FMFIA; and

• tested compliance with certain laws and regulations, including 

 selected provisions of the Federal Deposit Insurance Act, as amended, 

 the Federal Deposit Insurance Reform Act of 2005, and the Chief 

 Financial Officers Act of 1990.

We did not evaluate all internal controls relevant to operating objectives 

as broadly defined by FMFIA, such as those controls relevant to preparing 

statistical reports and ensuring efficient operations. We limited our internal

control testing to controls over financial reporting and compliance. 

Because of inherent limitations in internal control, misstatements due 

to error or fraud, losses, or noncompliance may nevertheless occur 

and not be detected. We also caution that projecting our evaluation to 

future periods is subject to the risk that controls may become inadequate 

because of changes in conditions or that the degree of compliance with 

controls may deteriorate.

We did not test compliance with all laws and regulations applicable to 

FDIC. We limited our tests of compliance to those laws and regulations 

that could have a direct and material effect on the financial statements for 

the year ended December 31, 2006. We caution that noncompliance may 

occur and not be detected by these tests and that such testing may not be 

sufficient for other purposes.
100

FDIC Comments and 

Our Evaluation

We performed our work in accordance with U.S. generally accepted 

government auditing standards.

In commenting on a draft of this report, FDIC’s Chief Financial Officer 

(CFO) was pleased to receive unqualified opinions on the DIF and FRF 

financial statements and to note that there were no material weaknesses 

identified during the 2006 audits. FDIC’s CFO appreciated that we 

recognized the improvements that FDIC made over the past year to its 

information systems environment. Also, the CFO stated that FDIC’s 

sustained commitment to enhancing information systems controls 

adequately addressed the concerns that we highlighted in the prior year 

report and enabled us to conclude that the remaining issues related to 

such controls do not constitute a significant deficiency. Finally, the CFO 

stated that FDIC’s goal is to maintain an effective information security 

program going forward, and has pledged to work diligently to resolve 

control issues that we identified during the 2006 audits, as well as any 

that may arise in the future.

The complete text of FDIC’s comments is reprinted in appendix I.

David M. Walker

Comptroller General

of the United States

January 31, 2007
Federal Deposit Insurance Corporation

550 17th Street, NW Washington, DC 20429 Deputy to the Chairman and Chief Financial Officer

101

Appendix I

February 8, 2007

Mr. David M. Walker

Comptroller General of the United States

U.S. Government Accountability Office

441 G Street, NW

Washington, DC 20548

Re: FDIC Management Response on the GAO 2006 Financial Statements Audit Report

Dear Mr. Walker:

Thank you for the opportunity to comment on the U.S. Government Accountability Office’s 

(GAO) draft audit report titled, Financial Audit: Federal Deposit Insurance Corporation 

Funds’ 2006 and 2005 Financial Statements, GAO-07-371. The report presents GAO’s 

opinions on the calendar year 2006 and 2005 financial statements of the Deposit Insurance Fund 

(DIF) and the Federal Savings and Loan Insurance Corporation Resolution Fund (FRF). The 

report also presents GAO’s opinion on the effectiveness of FDIC’s internal controls as of

December 31, 2006, and GAO’s evaluation of FDIC’s compliance with selected laws and 

regulations. 

We are pleased to accept GAO’s unqualified opinions on the DIF and the FRF financial statements and to note that there were no material weaknesses identified during the 2006 audits. The 

GAO reported that the funds’ financial statements were presented fairly, in all material respects, 

in conformity with U.S. generally accepted accounting principles; FDIC had effective internal 

control over financial reporting and compliance with laws and regulations for each fund; and 

there were no instances of noncompliance with laws and regulations that were tested.

In addition, we appreciate that GAO recognized the improvements that FDIC made over the 

past year to its information systems environment. We believe that our sustained commitment 

to enhancing information systems controls adequately addressed the concerns that GAO highlighted in the prior year report, thus enabling GAO to conclude that the remaining issues related 

to such controls do not constitute a significant deficiency. Our goal is to maintain an effective 

information security program going forward. Accordingly, we will work diligently to resolve 

any control issues that GAO identified during its 2006 audits, as well as any that may arise in 

the future. 

We look forward to continuing our cooperative working relationship with the GAO in the coming year. Our collaborative efforts and open communication at all levels of our organizations 

should ensure continued success. If you have any questions or concerns, please do not hesitate 

to contact me. 

Sincerely,

Steven O. App

Deputy to the Chairman and

Chief Financial Officer 
Overview of the Industry

The 8,743 FDIC-insured commercial 

banks and savings institutions that 

filed financial results for the first 

three quarters of 2006 reported 

year-to-date net income of $112.4 

billion (excludes 12 U.S. branches of 

foreign banks). This was $10.6 billion 

(10.4 percent) more than the industry 

reported for the first three quarters 

of 2005, and represented the largest 

three-quarter earnings total ever 

reported by the industry. The improvement in earnings reflected strong 

growth in loans and other interestbearing investments, very good 

asset quality, and higher noninterest 

income at larger institutions. More 

than half of all insured institutions– 

56.8 percent – reported earnings 

increases for the first three quarters

of 2006, but the percentage of 

institutions that were unprofitable 

increased to 6.9 percent, from 

5.8 percent in the first three quarters 

of 2005.

Profitability, as measured by return 

on assets (ROA), remained very high 

by historic standards. For the first 

three quarters of 2006, the industry 

ROA was 1.33 percent, the same as 

in the first three quarters of 2005, 

and the third-highest ever registered 

for a nine-month period. Earnings 

growth was led by increased noninterest income. Total noninterest 

income grew by $17.6 billion 

(10.5 percent) compared to the 

same period in 2005. Income from 

trading was $3.9 billion (34.6 percent) 

higher than a year earlier, securitization 

income was $2.5 billion (14.1 percent) 

higher, and income from investment 

banking increased by $1.6 billion 

(20.8 percent). Net interest income 

was $16.0 billion higher than in the 

same period of 2005, but this represented only a 6.7 percent increase, 

while interest-earning assets grew 

by 9.7 percent. The relatively sluggish growth in net interest income 

reflected narrower net interest 

margins caused by rising short-term 

interest rates and a flattening yield 

curve. Improvements in asset quality 

also provided a boost to earnings in 

2006. Provisions for loan and lease 

losses were $1.8 billion (8.1 percent) 

lower than in 2005, as net charge-offs 

declined by $3.6 billion (16.0 percent).

Lower gains on sales of securities 

and other assets (down $2.5 billion, or 

58.3 percent), and higher noninterest 

expenses (up $18.0 billion, or 7.6 percent) limited the improvement in 

earnings.

Asset growth at insured institutions 

remained very robust in 2006. For 

the 12 months ended September 

30, 2006, total assets of FDIC-insured 

institutions grew by $1.1 trillion 

(9.9 percent). Loans and leases 

accounted for more than half of 

the growth in assets (56.2 percent), 

while growth in securities accounted 

for almost one-tenth of the increase 

in total assets (9.6 percent). Loans 

to commercial borrowers accounted 

for two-thirds of the growth in total 

loans, with loans to commercial and 

industrial (C&I) borrowers, real estate 

construction and development loans, 

and loans secured by nonfarm nonresidential properties registering the 

biggest increases. Residential mortgage loans had the largest increase 

of any single loan category, growing 

by $158 billion (7.8 percent). 

Deposit growth was also strong in 

2006, but it did not keep pace with 

the rapid growth in assets. Total 

deposits increased by $609.5 billion 

(8.7 percent) between September 

30, 2005, and September 30, 2006, 

but this growth represented only 

57.7 percent of insured institutions’ 

funding needs. Nondeposit liabilities 

increased by $315 billion (12.0 percent) during this period, and equity 

capital grew by $132.5 billion 

(12.1 percent). Merger-related 

goodwill accounted for almost onethird ($43.1 billion, or 32.6 percent) 

of the total increase in equity capital. 

More than 99 percent of all insured 

institutions met or exceeded the 

highest regulatory capital requirements as of September 30.

102
Asset quality indicators remained 

very positive in 2006. At mid-year, 

the percentage of loans and leases 

that were noncurrent (90 days or 

more past due or in nonaccrual status)

reached the lowest level in the 23 

years that all insured institutions 

have reported noncurrent loan data. 

The industry’s net charge-off rate 

was also at a historical low level in 

2006. At the end of the third quarter, 

the number of institutions on the 

FDIC’s “Problem List” stood at 47, 

the lowest level in the 36 years for 

which data are available.

103