74 FDIC 2009 Annual Report

IV. Financial Statements and Notes

Deposit Insurance Fund Balance Sheet at December 31

Dollars in Thousands

2009 2008

Assets

Cash and cash equivalents $ 54,092,423 $ 1,011,430 

Cash and cash equivalents—restricted—systemic risk (Note 16) 6,430,589 2,377,387 

Investment in U.S. Treasury obligations, net (Note 3) 5,486,799 27,859,080 

Assessments receivable, net (Note 9) 280,510 1,018,486 

Receivables and other assets—systemic risk (Note 16) 3,298,819 1,138,132 

Trust preferred securities (Note 5) 1,961,824 0 

Interest receivable on investments and other assets, net 220,588 405,453 

Receivables from resolutions, net (Note 4) 38,408,622 15,765,465 

Property and equipment, net (Note 6) 388,817 368,761 

Total Assets $ 110,568,991 $ 49,944,194 

Liabilities 

Accounts payable and other liabilities $ 273,338 $ 132,597 

Unearned revenue—prepaid assessments (Note 9) 42,727,101 0 

Liabilities due to resolutions (Note 7) 34,711,726 4,724,462 

Deferred revenue—systemic risk (Note 16) 7,847,447 2,077,880 

Postretirement benefit liability (Note 13) 144,952 114,124 

Contingent liabilities for:

Anticipated failure of insured institutions (Note 8) 44,014,258 23,981,204 

Systemic risk (Note 16) 1,411,966 1,437,638 

Litigation losses (Note 8) 300,000 200,000 

Total Liabilities 131,430,788 32,667,905 

Commitments and off-balance-sheet exposure (Note 14)

Fund Balance

Accumulated Net (Loss) Income (21,001,312) 15,001,272 

Unrealized Gain on U.S. Treasury investments, net (Note 3) 142,127 2,250,052 

Unrealized postretirement benefit (Loss) Gain (Note 13) (2,612) 24,965 

Total Fund Balance (20,861,797) 17,276,289 

Total Liabilities and Fund Balance $ 110,568,991 $ 49,944,194

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

Deposit Insurance Fund (DIF)
IV. Financial Statements and Notes 75

Deposit Insurance Fund Statement of Income and Fund Balance 

for the Years Ended December 31

Dollars in Thousands

2009 2008

Revenue

Interest on U.S. Treasury obligations $ 704,464 $ 2,072,317

Assessments (Note 9) 17,717,374 2,964,518

Systemic risk revenue (Note 16) 1,721,626 1,463,537

Realized gain on sale of securities (Note 3) 1,389,285 774,935

Other revenue (Note 10) 3,173,611 31,017

Total Revenue 24,706,360 7,306,324

Expenses and Losses

Operating expenses (Note 11) 1,271,099 1,033,490

Systemic risk expenses (Note 16) 1,721,626 1,463,537

Provision for insurance losses (Note 12) 57,711,772 41,838,835

Insurance and other expenses 4,447 3,693

Total Expenses and Losses 60,708,944 44,339,555

Net Loss (36,002,584) (37,033,231)

Unrealized (Loss) Gain on U.S. Treasury investments, net (Note 3) (2,107,925) 1,891,144

Unrealized postretirement benefit (Loss) Gain (Note 13) (27,577) 5,340

Comprehensive Loss (38,138,086) (35,136,747)

Fund Balance—Beginning 17,276,289 52,413,036

Fund Balance—Ending $ (20,861,797) $ 17,276,289

The accompanying notes are an integral part of these financial statements.
76 FDIC 2009 Annual Report

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

Dollars in Thousands

2009 2008

Operating Activities

Net Loss $ (36,002,584) $ (37,033,231)

Adjustments to reconcile net loss to net cash provided by (used by)

operating activities:

Amortization of U.S. Treasury obligations 210,905 457,289

Treasury inflation-protected securities inflation adjustment 10,837 (271,623)

Gain on sale of U.S. Treasury obligations (1,389,285) (774,935)

Depreciation on property and equipment 70,488 55,434

Loss on retirement of property and equipment 924 447

Provision for insurance losses 57,711,772 41,838,835

Unrealized (Loss) Gain on postretirement benefits (27,577) 5,340

Guarantee termination fee from Citigroup (1,961,824) 0

Systemic risk expenses 0 (2,352)

Change in Operating Assets and Liabilities:

Decrease (Increase) in assessments receivable, net 737,976 (773,905)

Decrease in interest receivable and other assets 192,750 402,225

(Increase) in receivables from resolutions (60,229,760) (32,955,471)

(Increase) in receivable—systemic risk (2,160,688) (21,285)

Increase (Decrease) in accounts payable and other liabilities 140,740 (18,838)

Increase (Decrease) in postretirement benefit liability 30,828 (2,034)

(Decrease) in contingent liabilities—systemic risk (25,672) 0

Increase in liabilities due to resolutions 29,987,265 4,724,462

Increase in unearned revenue—prepaid assessments 42,727,101 0

Increase in deferred revenue—systemic risk 5,769,567 2,377,387

Net Cash Provided by (Used by) Operating Activities 35,793,763 (21,992,255)
IV. Financial Statements and Notes 77

Deposit Insurance Fund Statement of Cash Flows (continued)

Dollars in Thousands

2009 2008

Investing Activities

Provided by:

Maturity of U.S. Treasury obligations, held-to-maturity 0 3,304,350

Maturity of U.S. Treasury obligations, available-for-sale 6,382,027 3,930,226

Sale of U.S. Treasury obligations 15,049,873 13,974,732

Used by:

Purchase of property and equipment (91,468) (72,783)

Net Cash Provided by Investing Activities 21,340,432 21,136,525

Net Increase (Decrease) in Cash and Cash Equivalents 57,134,195 (855,730)

Cash and Cash Equivalents—Beginning 3,388,817 4,244,547

Unrestricted Cash and Cash Equivalents—Ending 54,092,423 1,011,430

Restricted Cash and Cash Equivalents—Ending 6,430,589 2,377,387

Cash and Cash Equivalents—Ending $ 60,523,012 $ 3,388,817

The accompanying notes are an integral part of these financial statements.
78 FDIC 2009 Annual Report

Notes to the Financial Statem

Deposit Insurance

December 31, 2009 and 20

1. Legislation and Operations of 

the Deposit Insurance Fund

Overview

The Federal Deposit Insurance Corporati

(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 associ

ations (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 (DIF). 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 savings associations (known as “thrifts”) are supervised by the

Office of Thrift Supervision.

The FDIC is the administrator of the DIF. The

DIF is responsible for protecting insured bank

and thrift depositors from loss due to institution failures. The FDIC is required by 12 U.S.C.

1823(c) to resolve troubled institutions in a manner that will result in the least possible cost to

the deposit insurance fund unless a systemic risk

determination is made that compliance with the

least-cost test would have serious adverse effects

on economic conditions or financial stability and

any action or assistance taken under the systemic

risk determination would avoid or mitigate such

adverse effects. A systemic risk determination

can only be invoked by the Secretary of the U.S.

Treasury, in consultation with the President,

and upon the written recommendation of twothirds of both the FDIC Board of Directors and

the Board of Governors of the Federal Reserve

System. The systemic risk provision requires the

FDIC to recover any related losses to the DIF

through one or more special assessments from

all insured depository institutions and, with the

concurrence of the U.S. Treasury (Treasury),

depository institution holding companies (see

Note 16).

The FDIC is also the administrator of the

FSLIC Resolution Fund (FRF). 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. The DIF and the

FRF are maintained separately to carry out their

respective mandates.

Recent Legislation

Helping Families Save Their Homes Act of 

2009 (Public Law 111-22) was enacted on May

20, 2009. This legislation provides for: 1) extending the FDIC’s deposit insurance coverage from

$100,000 to $250,000 until 2013, 2) extending

FDIC’s authority to borrow from the Treasury

in amounts necessary to carry out the increased

insurance coverage, notwithstanding the amount

limitations contained in Sections 14(a) and 15(c)
IV. Financial Statements and Notes 79

of the FDI Act, 3) repealing the prohibition

against the FDIC taking the increased insurance

coverage into account for purposes of setting

assessments, 4) extending the generally applicable time limit from 5 years to 8 years for an FDIC

Restoration Plan to rebuild the reserve ratio of

the DIF, 5) permanently increasing the FDIC’s

authority to borrow from the Treasury from $30

billion to $100 billion and, if necessary, up to

$500 billion through 2010, and 6) allowing FDIC

to charge systemic risk special assessments by

rulemaking on both insured depository institutions and, with Treasury concurrence, depository institution holding companies.

The Emergency Economic Stabilization Act 

of 2008 (EESA), legislation to help stabilize

the financial markets, was enacted on October

3, 2008. The legislation requires that Treasury

consult with the FDIC and other federal agencies

in the establishment of the troubled asset relief

program (known as TARP).

Operations of the DIF

The primary purpose of the DIF isto: 1) insure

the deposits and protect the depositors of DIFinsured 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 (unless a systemic risk

determination is made).

The DIF is primarily funded from deposit

insurance assessments and interest earned on

investments in U.S. Treasury obligations. Additional funding sources, if necessary, are borrowings from the Treasury, Federal Financing Bank

(FFB), Federal Home Loan Banks, and insured

depository institutions. The FDIC has borrowing authority of $100 billion from the Treasury,

and if necessary, up to $500 billion through 2010.

Additionally, FDIC has a Note Purchase Agreement with the FFB not to exceed $100 billion to

enhance DIF’s ability to fund deposit insurance

obligations.

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 Treasury. The MOL for the DIF was

$118.2 billion and $69.0 billion as of December

31, 2009 and 2008, respectively. In connection

with the temporary increase in the basic deposit insurance coverage limit from $100,000 to

$250,000, the FDIC may borrow from the Treasury to carry out the increase in the maximum

deposit insurance amount without regard to the

MOL or the $100 billion limit.

Operations of Resolution Entities

The FDIC is responsible for managing and

disposing of the assets of failed institutions in an

orderly and efficient manner. The assets held by

receiverships, pass-through conservatorships and

bridge institutions (collectively, resolution entities), and the claims against them, are accounted

for separately from DIF assets and liabilities to

ensure that proceeds from these entities are distributed in accordance with applicable laws and

regulations. Accordingly, income and expenses

attributable to resolution entities are accounted for

as transactions of those entities. All are billed by

the FDIC for services provided on their behalf.
80 FDIC 2009 Annual Report

2. Summary of Significant 

Accounting Policies

General

These financial statements pertain to the

financial position, results of operations, and cash

flows of the DIF and are presented in accordance with U.S. generally accepted accounting

principles (GAAP). As permitted by the Federal

Accounting Standards Advisory Board’s Statement of Federal Financial Accounting Standards 34, The Hierarchy of Generally Accepted 

Accounting Principles, Including the Application 

of Standards Issued by the Financial Accounting 

Standards Board, the FDIC prepares financial

statements in conformity with standards promulgated by the Financial Accounting Standards

Board (FASB). These statements do not include

reporting for assets and liabilities of resolution

entities because these entities are legally separate and distinct, and the DIF does not have any

ownership interests in them. Periodic and final

accountability reports of resolution entities are

furnished to courts, supervisory authorities, and

others upon request.

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 the assessments receivable and associ

ated revenue; the allowance for loss on receivables from resolutions (including loss-share

agreements); the estimated losses for: anticipated

failures, litigation, and representations and warranties; guarantee obligations for: the Temporary

Liquidity Guarantee Program and debt of limited liability companies; valuation of trust preferred securities; and the postretirement benefit

obligation.

Cash Equivalents

Cash equivalents are short-term, highly liquid

investments consisting primarily of U.S. Treasury Overnight Certificates. The majority of

cash equivalents held by the DIF at December

31, 2009, resulted from the collection of $45.7

billion in prepaid assessments on December 30,

2009 for all quarterly assessment periodsthrough

December 31, 2012 (see Note 9).

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 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 classified as available-for-sale. Securities designated as available-for-sale are shown

at fair value. Unrealized gains and losses are

reported as other comprehensive income. Realized gains and losses are included in the Statement of Income and Fund Balance as components

of Net Income. Income on securities is calculated
IV. Financial Statements and Notes 81

and recorded on a daily basis using the effective

interest method.

Revenue Recognition for Assessments

Assessment revenue is recognized for the

quarterly period of insurance coverage based

on an estimate. The estimate is derived from

an institution’s risk-based assessment rate and

assessment base for the prior quarter adjusted for

the current quarter’s available assessment credits, any changes in supervisory examination and

debt issuer ratings for larger institutions, and a

modest deposit insurance growth factor. At the

subsequent quarter-end, the estimated revenue

amounts are adjusted when actual assessments

for the covered period are determined for each

institution. (See Note 9 for additional information on assessments.)

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 useful 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

useful 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

Certain reclassifications have been made in

the 2008 financial statements to conform to the

presentation used in 2009.

Disclosure about Recent Accounting 

Pronouncements

•	 FASB Accounting Standards Codification

(ASC) 105, Generally Accepted Accounting Principles (formerly SFAS No. 168, The 

FASB Accounting Standards Codification 

and the Hierarchy of Generally Accepted 

Accounting Principles—a replacement of 

FASB Statement No. 162, issued in June

2009), became effective for financial statements covering periods ending after September 15, 2009. On July 1, 2009, the FASB ASC

was launched and became the sole source

of authoritative accounting principles applicable to the FDIC.

	 All existing standards that were used to

create the Codification have become superseded. As a result, references to generally

accepted accounting principles in these

Notes will consist of the numbers used in the

Codification and, if appropriate, the former

pronouncement number. The Codification’s

purpose was not to create new accounting or

reporting guidance, but to organize and simplify authoritative GAAP literature. Consequently, there will be no change to the DIF’s

financial statements due to the implementation of this Codification.

•	 	Statement of Financial Accounting Standards

(SFAS) No. 167, Amendments to FASB Interpretation No. 46(R), was issued by the FASB

in June 2009, and subsequently codifi
82 FDIC 2009 Annual Report

upon issuance of Accounting Standards

Update No. 2009-17, Consolidations (ASC 

810) - Improvements to Financial Reporting 

by Enterprises Involved with Variable Interest Entities. SFAS 167, effective for reporting

periods beginning after November 15, 2009,

modifies the former quantitative approach

for determining the primary beneficiary of a

variable interest entity (VIE) to a qualitative

assessment. An enterprise must determine

qualitatively whether it has (1) the power

to direct the activities of the VIE that most

significantly impact the entity’s economic

performance and (2) the obligation to absorb

losses of the VIE or the right to receive benefits from the VIE that could potentially be

significant to the VIE. If an enterprise has

both of these characteristics, the enterprise

is considered the primary beneficiary and

must consolidate the VIE. Management is

currently reviewing the possible impact, if

any, of SFAS 167 (now codified in ASC 810)

on DIF’s accounting and financial reporting

requirements for 2010.

•	 SFAS No. 166, Accounting for Transfers of 

Financial Assets—an amendment of FASB 

Statement No. 140, was issued by the FASB

in June 2009. Subsequently, the FASB issued

Accounting Standards Update No. 2009-16,

Transfers and Servicing (ASC 860) - Accounting for Transfers of Financial Assets, to 

formally incorporate the provisions of SFAS

No. 166 into the Codification. SFAS 166

removes the concept of a qualifying specialpurpose entity from GAAP, changes the

requirements for derecognizing financial

assets, and requires additional disclosures

about a transferor’s continuing involvement

in transferred financial assets. The FASB’s

objective is to improve the information that a

reporting entity provides in its financial statements about a transfer of financial assets; the

effects of a transfer on its financial position,

financial performance, and cash flows; and a

transferor’s continuing involvement, if any, in

transferred financial assets.

	 The provisions of SFAS 166 (now codified

in ASC 860) become effective for the DIF for

all transfers of financial assets occurring on

or after January 1, 2010.

•	 SFAS No. 165, Subsequent Events, was

issued in May 2009 and subsequently codified in FASB ASC 855, Subsequent Events.

ASC 855 represents the inclusion of guidance

on subsequent events in the accounting literature. Historically, management had relied

on auditing literature for guidance on assessing and disclosing subsequent events. ASC

855 now requires the disclosure of the date

through which an entity has evaluated subsequent events and the basis for that date—that

is, whether that date represents the date the

financial statements were issued or were

available to be issued. These new provisions,

effective for the DIF as of December 31,

2009, do not have a significant impact on the

financial statements.

•	 FASB Staff Position (FSP) FAS 115-2 and

FAS 124-2, Recognition and Presentation of 

Other-Than-Temporary Impairments, was

issued in April 2009 and subsequently codified in FASB ASC 320, Investments-Debt 

and Equity Securities. It modifies the other-
IV. Financial Statements and Notes 83

than-temporary impairment (OTTI) guidance

for debt securities. An OTTI is considered to

have occurred if 1) an entity has the intent to

sell an impaired security, 2) it is more likely

than not that it will be required to sell the

security before its anticipated recovery, or 3)

an entity does not expect to recover the entire

amortized cost basis when there is no intent

or likely requirement to sell the security.

	 In addition, the FSP requires that an OTTI

loss should be recognized in earnings or

other comprehensive income. If the entity

has the intent to sell the security or it is more

likely than not that it will be required to sell

the security, the entire impairment (amortized cost basis over fair value) will be recognized in earnings. However, if an entity’s

management asserts that it does not have the

intent to sell a debt security and it is more

likely than not that it will not have to sell

the security before recovery of its cost basis,

then an entity must separate the impairment

loss into two components: 1) the amount

related to credit loss, which is recorded

in earnings, and 2) the remainder of the

impairment loss, which is recorded in other

comprehensive income. The provisions of

the FSP, now codified in ASC 320, became

effective for the DIF as of June 30, 2009.

•	 Other recent accounting pronouncements

have been deemed to be not applicable

or material to the financial statements as

presented.

3. Investment in U.S. Treasury

Obligations, Net

As of December 31, 2009 and 2008, investments in U.S. Treasury obligations, net, were

$5.5 billion and $27.9 billion, respectively. As of

December 31, 2009 and 2008, the DIF held $2.1

billion and $2.7 billion, respectively, of Treas

ury inflation-protected securities (TIPS). These

securities are indexed to increases or decreases

in the Consumer Price Index for All Urban Consumers (CPI-U).

For the year ended December 31, 2009, available-for-sale securities were sold for total proceeds of $15.2 billion. The gross realized gains

on these sales totaled $1.4 billion. To determine

gross realized gains, the cost of securities sold is

based on specific identification. Net unrealized

holding losses on available-for-sale securities of

$2.1 billion are included in other comprehensive

loss.
84 FDIC 2009 Annual Report

Total Investment in U.S. Treasury Obligations, Net at December 31, 2009

Dollars in Thousands

Maturity 

Yield at

Purchase (a)

Face

Value

Net

Carrying

Amount

Unrealized

Holding

Gains

Unrealized

Holding

Losses

Fair

Value

U.S. Treasury notes and bonds

Within 1 year 5.04% $ 3,058,000 $ 3,062,038 $ 48,602 $ 0 $ 3,110,640

After 1 year through 5 years 4.15% 300,000 302,755 11,648 0 314,403

U.S. Treasury inflation-protected securities

After 1 year through 5 years 3.14% 1,968,744 1,979,879 81,877 0 2,061,756

Total $ 5,326,744 $ 5,344,672 $ 142,127 $ 0 $ 5,486,799

(a) 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 1.1 percent, based on figures issued by the Congressional Budget Office and Blue Chip Economic Indicators in 

early 2009. 

Total Investment in U.S. Treasury Obligations, Net at December 31, 2008

Dollars in Thousands

Maturity (a) 

Yield at

Purchase (b)

Face

Value

Net

Carrying

Amount

Unrealized

Holding

Gains

Unrealized

Holding

Losses (c)

Fair

Value

U.S. Treasury notes and bonds

Within 1 year 4.25% $ 6,192,000 $ 6,350,921 $ 130,365 $ 0 $ 6,481,286

After 1 year through 5 years 4.72% 9,503,000 9,451,649 1,030,931 0 10,482,580

After 5 years through 10 years 4.79% 6,130,000 7,090,289 1,142,753 0 8,233,042

U.S. Treasury inflation-protected securities

Within 1 year 3.82% 726,550 726,561 0 (5,627) 720,934

After 1 year through 5 years 3.14% 1,973,057 1,989,608 0 (48,370) 1,941,238

Total $ 24,524,607 $ 25,609,028 $ 2,304,049 $ (53,997) $ 27,859,080

(a) 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. 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.

(b) 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 2008.

(c) The unrealized losses on the U.S. Treasury inflation-protected securities (TIPS) is attributable to the two-month delay in adjusting TIPS’ principal for changes in the November

and December Consumer Price Index for all Urban Consumers. As the losses occurred over a period less than a year and the December 31, 2008, unrealized losses converted to

unrealized gains by February 28, 2009, the FDIC does not consider these securities to be other than temporarily impaired at December 31, 2008.
IV. Financial Statements and Notes 85

4. Receivables From Resolutions, 

Net

Receivables From Resolutions, Net 

at December 31

Dollars in Thousands

2009 2008

Receivables from 

closed banks $ 98,647,508 $ 27,389,467

Receivables from 

operating banks 0 9,406,278

Allowance for losses (60,238,886) (21,030,280)

Total $ 38,408,622 $ 15,765,465

The receivables from resolutions include payments made by the DIF to cover obligations to

insured depositors (subrogated claims), advances

to resolution entities for working capital, and

administrative expenses paid on behalf of resolution entities. Any related allowance for lossrepresents the difference between the funds advanced

and/or obligations incurred and the expected

repayment. Estimated future payments on losses

incurred on assets sold to an acquiring institution under a loss-sharing agreement are factored

into the computation of the expected repayment.

Assets held by DIF resolution entities are the

main source of repayment of the DIF’s receivables from resolutions.

As of December 31, 2009, there were 179 active

receiverships which includes 140 established in

2009. As of December 31, 2009 and 2008, DIF

resolution entities held assets with a book value

of $49.3 billion and $45.8 billion, respectively

(including cash, investments, and miscellaneous

receivables of $7.7 billion and $5.1 billion, respectively). Ninety-nine percent of the current asset

book value of $49.3 billion is held by resolution

entities established in 2008 and 2009.

Estimated cash recoveries from the management and disposition of assets that are used to

determine the allowance for losses were based on

asset recovery rates from several sources including: actual or pending institution-specific asset

disposition data; failed institution-specific asset

valuation data; aggregate asset valuation data on

several recently failed or troubled institutions; and

empirical asset recovery data based on failures as

far back as 1990. Methodologies for determining

the asset recovery rates incorporate estimating

future cash recoveries, net of applicable liquidation cost estimates, and discounting based on market-based risk factors applicable to a given asset’s

type and quality. The resulting estimated cash

recoveries are then used to derive the allowance

for loss on the receivables from these resolutions.

For failed institutions resolved using a whole

bank purchase and assumption transaction with

an accompanying loss-share agreement, the projected future loss-share payments andmonitoring

costs on the covered assets sold to the acquiring

institution under the agreement are considered in

determining the allowance for loss on the receivables from these resolutions. The loss-share cost

projections are based on the intrinsic value of the

covered assets. The intrinsic value is determined

using economic models that consider the quality and type of covered assets, current and future

market conditions, risk factors and estimated

asset holding periods.

Estimated asset recoveries are regularly

evaluated during the year, but remain subject

to uncertainties because of potential changes

in economic and market conditions. Continuing

economic uncertainties could cause the DIF’s
86 FDIC 2009 Annual Report

actual recoveries to vary significantly from current estimates.

Whole Bank Purchase and Assumption 

Transactions with Loss-sharing Agreements

The FDIC resolved 90 of the 140 failures in

2009 using a Whole Bank Purchase and Assumption resolution transaction with an accompanying

Loss-Share Agreement on assets purchased by

the acquirer. The acquiring institution assumes

all of the deposits and purchases essentially all

of the assets of a failed institution. The majority

of the commercial and residential assets are purchased under a loss-share agreement, where the

FDIC agreesto share in future losses experienced

by the acquirer on those assets covered under the

agreement. Loss-share agreements are used by

the FDIC to keep assets in the private sector and

minimize disruptions to loan customers.

Losses on the covered assets will be shared

between the acquirer and the FDIC in its capacity as receiver of the failed institution when losses

occur through the sale, foreclosure, loan modification, orthe write-down ofloansin accordance with

the terms of the loss-share agreement. The agreement typically covers a 5 to 10 year period with the

receiver covering 80 percent of the losses incurred

by the acquirer up to a stated threshold amount

(which varies by agreement) and the acquiring

bank covering 20 percent. Any losses above the

stated threshold amount will be reimbursed by the

receiver at 95 percent of the losses booked by the

acquirer. The estimated liability for loss-sharing is

accounted for by the receiver and is considered in

the determination of the DIF’s allowance for loss

against the corporate receivable from the resolution. As loss-share claims are asserted and proven,

DIF receiverships will satisfy these loss-share

payments using available liquidation funds and/or

amounts due from the DIF for funding the deposits

assumed by the acquirer (see Note 7).

Through December 31, 2009, 93 DIF receiverships are estimated to pay approximately $22.2

billion over the length of these loss-share agreements on approximately $126.4 billion in total

covered assets at the inception date of these

agreements. To date, 37 receiverships have made

loss-share payments totaling $892.2 million.

Financial instruments that potentially subject the DIF to concentrations of credit risk are

receivables from resolutions. The repayment of

DIF’s receivables from resolutions is primarily

influenced by recoveries on assets held by DIF

receiverships and payments on the covered assets

under loss-sharing agreements. The majority of

the $165.5 billion in remaining assets in liquidation ($41.4 billion) and current loss-share covered

assets($124.1 billion) are concentrated in commercial loans ($71.7 billion), residential loans ($70.3

billion), and securities ($14.7 billion). Most of the

assets in these asset types originated from failed

institutions located in California ($55.6 billion),

Florida ($15.7 billion), Alabama ($15.6 billion),

Texas ($11.3 billion), and Illinois ($7.3 billion).

5. Trust Preferred Securities

On January 15, 2009, subject to a systemic

risk determination, the Treasury, the FDIC and

the Federal Reserve Bank of New York executed

terms of a guarantee agreement with Citigroup to

provide protection against the possibility of unusually large losses on an asset pool of approximately

$301.0 billion of loans and securities backed by

residential and commercial real estate and other

such assetsthat would remain on the balance sheet
IV. Financial Statements and Notes 87

of Citigroup. The term of the loss-share guarantee

was 10 years for residential assets and 5 years for

non-residential assets. The FDIC exposure from

this guarantee was capped at $10 billion.

In consideration for its portion of the lossshare guarantee at inception, the FDIC received

3,025 shares of Citigroup’s designated cumulative perpetual preferred stock (Series G) with a

liquidation preference at the time of $1,000,000

per share for a total of $3.025 billion paying dividends at a rate of 8 percent annually. On July

30, 2009, all shares of preferred stock initially

received were exchanged for 3,025,000 of Citigroup Capital XXXIII trust preferred securities

(TruPs) with a liquidation amount of $1,000 per

security. The principal amount is due in 2039.

The equivalent exchange of $3.025 billion pays

a quarterly distribution at a rate of 8 percent

annually. The Treasury initially received $4.034

billion in preferred stock for its loss-share protection and received an equivalent, aggregate

amount of $4.034 billion in trust preferred securities at the time of the exchange for TruPs.

On December 23, 2009, Citigroup terminated

the loss-sharing agreement citing improvements

in its financial condition and in financial market stability. The FDIC incurred no loss from

the guarantee prior to termination of the agreement. In connection with the early termination

of the guarantee program, the Treasury and the

FDIC agreed that Citigroup would reduce the

combined $7.1 billion liquidation amount of the

TruPs by $1.8 billion. Pursuant to an agreement

between the Treasury and the FDIC, TruPs held

by the Treasury were reduced by $1.8 billion and

the FDIC initially retained all TruPs holdings of

$3.025 billion. The FDIC will transfer an aggregate liquidation amount of $800 million in TruPs

to the Treasury, plus any related interest, less any

payments made or required to be made by the

FDIC for guaranteed debt instruments issued by

Citigroup or any of its affiliates under the Temporary Liquidity Guarantee Program (TLGP; see

Note 16). This transfer will occur within 5 days

of the date on which no Citigroup debt remains

outstanding under the TLGP. The fair value of

the TruPs and related interest are recorded as

systemic risk assets described in Note 16.

The remaining $2.225 billion (par value) of

TruPs held by the FDIC are classified as available-for-sale debt securities in accordance with

FASB ASC Topic 320, Investments—Debt and 

Equity Securities. Upon termination of the guarantee agreement, the DIF recognized revenue of

$1.962 billion for the fair value of the TruPs. (See

Note 10, Other Revenue and Note 15, Disclosures 

About the Fair Value of Financial Instruments).

6. Property and Equipment, Net

Property and Equipment, Net 

at December 31

Dollars in Thousands

2009 2008

Land $ 37,352 $ 37,352

Buildings (including leasehold improvements) 295,265 281,401

Application software 

(including work-in-process) 179,479 173,872

Furniture, fixtures, and

equipment 117,430 84,574

Accumulated depreciation (240,709) (208,438)

Total $ 388,817 $ 368,761

The depreciation expense was $70 million

and $55 million for 2009 and 2008, respectively.
88 FDIC 2009 Annual Report

7. Liabilities Due to Resolutions

As of December 31, 2009, the DIF recorded

liabilities totaling $34.7 billion to resolution

entities representing the agreed-upon value of

assets transferred from the receiverships, at the

time of failure, to the acquirers/bridge institutions for use in funding the deposits assumed

by the acquirers/bridge institutions. Ninetyseven percent of these liabilities are due to failures resolved under a whole bank purchase and

assumption transaction, most with an accompanying loss-share agreement. The DIF satisfies

these liabilities either by directly sending cash

to the receiverships to fund loss-share and other

expenses or by offsetting receivables from resolutions when a receivership declares a dividend.

Inherent in these liabilities are $470 million in

unreimbursed deposit claims subrogated by the

DIF on behalf of the Temporary Liquidity Guarantee Program (see Note 16).

In addition, there were $150 million in unpaid

brokered deposit claims related to multiple

receiverships. The DIF pays these liabilities

when the claims are approved.

8. 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, absent some favorable event such as

obtaining additional capital or merging, when the

liability is 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.

During the year, the conditions of the banking industry continued to deteriorate. The difficult economic and credit environment continued

to challenge the soundness of many DIF-insured

institutions.The ongoingweaknessin housing and

commercial real estate markets led to asset quality problems and volatility in financial markets,

which hurt the banking industry performance and

weakened many institutions with significant portfolios of residential and commercial mortgages.

The impact of the economic deterioration in the

banking industry caused a significant increase in

the contingent loss reserve. As of December 31,

2009 and 2008, the contingent liabilitiesfor anticipated failure of insured institutions were $44.0

billion and $24.0 billion, respectively.

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

services industry that could result in an additional loss to the DIF should potentially vulnerable

insured institutions ultimately fail. 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 $24 billion.

The actual losses, if any, will largely depend

on future economic and market conditions and

could differ materially from this estimate.

During 2009, 140 banks with combined assets

of $171.2 billion failed. It is uncertain how long

and how deep the current downturn will be.

Supervisory and market data suggest that the

banking industry will continue to experience

elevated levels of stress over the coming year.

The FDIC continues to evaluate the ongoing

risks to affected institutions in light of the existing economic and financial conditions, and the

extent to which such risks will continue to put

stress on the resources of the insurance fund.
IV. Financial Statements and Notes 89

Litigation Losses

The DIF records an estimated loss for unresolved legal cases to the extent that those losses

are considered probable and reasonably estimable. The FDIC recorded probable litigation losses

of $300 million and $200 million for the DIF as

of December 31, 2009 and 2008, respectively,

and has determined that there are no reasonably

possible losses from unresolved cases.

Other Contingencies

Representations and Warranties

In an effort to maximize the return from the

sale of assets from bank and thrift resolutions,

FDIC as receiver offered representations and

warranties, and guarantees on certain loan and

servicing rightssales. Although these representations and warranties were offered by the receiver, DIF guaranteed the obligations under these

agreements. In general, the guarantees, representations, and warranties relate to the completeness

and accuracy of loan documentation, the quality

of the underwriting standards used, the accuracy

of the delinquency status, and the conformity

of the loans with characteristics of the pool in

which they were sold at the time of sale.

As a result of loans and servicing rights sold

in connection with the asset disposition of IndyMac Federal Bank, the unpaid principal balance

for loans subject to representations and warranties increased by $184 billion to $195 billion as

of December 31, 2009. Since the receiverships

are the primary guarantors and they have sufficient funds to pay asserted claims, the DIF did

not record contingent liabilities from any of the

outstanding claims asserted in connection with

representations and warranties at December 31,

2009 and 2008.

In addition, until the contracts offering the

representations and warranties and guarantees

have expired, future losses could be incurred,

some as late as 2032. Consequently, the FDIC

believes it is possible that 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.

Purchase and Assumption Indemnification

In connection with Purchase and Assumption agreements for resolutions, the FDIC in

its receivership capacity generally indemnifies the purchaser of a failed institution’s assets

and liabilities in the event a third party asserts

a claim against the purchaser unrelated to the

explicit assets purchased or liabilities assumed

at the time of failure. The FDIC in its Corporate

capacity is a secondary guarantor if and when a

receiver is unable to pay. These indemnifications

generally extend for a term of six years after the

date of institution failure. The FDIC is unable

to estimate the maximum potential liability for

these types of guarantees as the agreements do

not specify a maximum amount and any payments are dependent upon the outcome of future

contingent events, the nature and likelihood of

which cannot be determined at this time. During 2009 and 2008, the FDIC in its Corporate

capacity has not made any indemnification payments under such agreements and no amount
90 FDIC 2009 Annual Report

assets, net” and “Accounts payable and other liabilities” line items, respectively. Guarantee fees

are recognized as revenue on a straight-line basis

over the term of the notes.

The source of payment for the LLC-issued

debt is the collections from the LLC assets. If

cash flow collections from the LLC assets are

insufficient to cover the payments on the notes

in accordance with priority of payments, then the

FDIC as guarantor is required to make a guarantee payment for any shortfall. The estimated

loss of the guarantees to the DIF is based on the

discounted present value of the expected guarantee payments by the FDIC, reimbursements to

the FDIC for guarantee payments, and guarantee fee collections. Under both a base case and a

more stressful modeling scenario, the cash flows

from the LLC assets provide sufficient coverage

to fully pay the debts by their maturity dates.

Therefore, the estimated loss to the DIF from

these guarantees is zero.

As of December 31, 2009, the maximum estimated guarantee exposure equals the total outstanding debt of $2.1 billion.

9. Assessments

The FDI Act, as amended, requires a riskbased assessment system. The Act allows the

FDIC discretion in defining risk and, by regulation, the FDIC has established several assessment risk categories based upon supervisory and

capital evaluations. On March 4, 2009, the Board

issued a final rule on Assessments to: 1) make

it fairer and more sensitive to risk, 2) improve

the way the risk-based assessment system differentiates risk among insured institutions,

and 3) increase deposit insurance assessment

has been accrued in the accompanying financial

statements with respect to these indemnification

guarantees.

FDIC Guaranteed Debt of Limited Liability 

Companies

During 2009, the FDIC in its corporate capacity offered guarantees on loans issued by newlyformed limited liability companies (LLCs) that

were created to dispose of certain residential

mortgage loans, construction loans, and other

assets of two receiverships. The receiverships

transferred a portfolio of assets with an unpaid

principal balance of $5.8 billion to the LLCs. Private investors purchased a 40–50 percent ownership interest in the LLCs for $615 million in

cash and the LLCs issued notes of $2.1 billion to

the receiverships to partially fund the purchase

of the assets. The receiverships hold the remaining 50–60 percent equity interest in the LLCs.

In exchange for the guarantees, the DIF expects

to receive estimated fees totaling $71.4 million,

which equals one percent per annum over the

estimated life of the notes.

The term of the guarantees extends until the

earliest of 1) payment in full of the notes or 2) two

years following the maturity date of the notes (12

years). In the event of note payment default by

an LLC, the FDIC in its corporate capacity can

take one or more of the following remedies: 1)

accelerate the payment of the unpaid principal

amount of the notes; 2) sell the assets held as collateral; and 3) foreclose on the equity interests of

the debtor.

The DIF has recorded a receivable for the

estimated guarantee fees of $71.4 million and an

offsetting deferred revenue liability, included in

the “Interest receivable on investments and other
IV. Financial Statements and Notes 91

•	 On May 22, 2009, the FDIC adopted a final

rule imposing a 5 basis point special assessment on each insured depository institution’s

total assets minus Tier 1 capital as reported

in its report of condition as of June 30, 2009.

The special assessment of $5.5 billion was

collected on September 30, 2009, at the

same time the regular quarterly risk-based

assessment for the second quarter 2009 was

collected.

•	 On November 17, 2009, the FDIC issued a

Final Rule, Prepaid Assessments, to address

the DIF’s liquidity needs to pay for projected

near-term failures and to ensure that the

deposit insurance system remains industryfunded. Pursuant to the Rule, on December

30, 2009, a majority of insured depository

institutions prepaid estimated quarterly

risk-based assessments of $45.7 billion for

the period October 2009 through December

2012. The prepaid amount was based on

maintaining assessment rates at their current

levels through the end of 2010 and adopting a

uniform 3 basis point increase in assessment

rates effective January 1, 2011. An institution’s quarterly risk-based deposit insurance assessments thereafter will be offset

by the amount prepaid until that amount is

exhausted or until June 30, 2013, when any

amount remaining would be returned to the

institution.

	 Prepaid assessments were mandatory

for all institutions, but the FDIC exercised

its discretion as supervisor and insurer to

exempt an institution from the prepayment

requirement if the FDIC determined that

the prepayment would adversely affect the

safety and soundness of the institution. In

rates to raise assessment revenue to help meet

the requirements of the Restoration Plan. The

assessment rate averaged approximately 23.32

cents and 4.18 cents per $100 of the assessment

base, as defined in part 327.5(b) of FDIC Rules

and Regulations, for 2009 and 2008, respectively. (The assessment rate would have been 16.19

cents if the special assessment imposed on June

30, 2009 was excluded from the 2009 assessment

income.)

In compliance with provisions of the FDI Act,

as amended, and implementing regulations, the

FDIC is required to:

•	 annually establish and publish a designated

reserve ratio (DRR) within the statutory

range from 1.15 to 1.50 percent of estimated

insured deposits. As of December 31, 2009,

the DIF reserve ratio was (0.39) percent of

estimated insured deposits and the FDIC has

set the DRR at 1.25 percent for 2010;

•	 adopt a DIF restoration plan to return the

reserve ratio to 1.15 percent generally within

eight years, if the reserve ratio falls below

1.15 percent or is expected to fall below 1.15

percent within six months (see paragraph

titled, Amended Restoration Plan);

•	 annually determine if a dividend should be

paid, based on the statutory requirement generally to declare dividends for one-half of the

amount between 1.35 and 1.50 percent and

all amounts exceeding 1.50 percent.

Assessment Revenue

During 2009, the FDIC implemented actions

to supplement DIF’s revenue through a special

assessment and liquidity through prepaid assessments from insured depository institutions:
92 FDIC 2009 Annual Report

addition, institutions were allowed to request

exemption from payment under certain

circumstances.

Forthose institutionsthat prepaid assessments,

the DIF recognized revenue of $3.0 billion for the

fourth quarter insurance period. The remaining

prepaid amount of $42.7 billion is included in the

“Unearned revenue—prepaid assessments” line

item on the Balance Sheet. For those institutions

that did not prepay assessments, the “Assessments Receivable, net” line item of $281 million represents the estimated gross premiums

due from insured depository institutions for the

fourth quarter of the year. The actual deposit

insurance assessment for the fourth quarter was

billed and collected at the end of the first quarter of 2010. During 2009 and 2008, $17.7 billion

and $3.0 billion, respectively, were recognized as

assessment revenue from institutions.

The FDI Act, as amended, granted 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. Of

the credits granted, $2.7 million remained as of

December 31, 2009.

Amended Restoration Plan

A Federal Register notice for Amendment of 

FDIC Restoration Plan was issued on October

2, 2009, amending DIF’s Restoration Plan which

was originally adopted on October 7, 2008 and

subsequently amended on February 27, 2009.

The Amended Restoration Plan addresses the

need to return the DIF to its mandated minimum

reserve ratio of 1.15 percent of estimated insured

deposits. The Restoration Plan provided for the

following: 1) the period of the Plan was extended

to eight years; 2) current assessment rates will be

maintained through December 31, 2010, with a

uniform increase in risk-based assessment rates

of 3 basis points effective January 1, 2011; and 3)

at least semi-annually hereafter, the FDIC will

update its loss and income projections for the

Fund and, if necessary, will increase assessment

rates prior to the end of the eight-year period, to

return the reserve ratio to 1.15 percent.

Assessments Related to FICO

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 former 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 2009 and 2008, approximately $784 million and $791 million, respectively, was collected

and remitted to the FICO.
IV. Financial Statements and Notes 93

10. Other Revenue

Other Revenue 

for the Years Ended December 31

Dollars in Thousands

2009 2008

Guarantee termination

fees $ 2,053,825 $ 0

Debt guarantee 

surcharges 871,746 0

Dividends and interest on 

Citigroup trust preferred 

securities 231,227 0

Other 16,813 31,017

Total $ 3,173,611 $ 31,017

Guarantee Termination Fees

Bank of America

In January 2009, the FDIC, Treasury, and the

Federal Reserve Bank of New York (federal parties) signed a Summary of Terms (Term Sheet)

with Bank of America to guarantee or lend

against a pool of up to $118.0 billion of financial

instruments consisting of securities backed by

residential and commercial real estate loans and

corporate debt and related derivatives. In May

2009, prior to completing definitive documentation, Bank of America notified the federal parties of its desire to terminate negotiations with

respect to the guarantee contemplated in the Term

Sheet. All parties agreed that Bank of America

received value for entering into the Term Sheet

and that the federal parties should be compensated for out-of-pocket expenses and a fee equal to

the amount Bank of America would have paid for

the guarantee from the date of the signing of the

Term Sheet through the termination date. Under

the terms of the settlement, the federal parties

received a total of $425 million. Of this amount,

the FDIC received and recognized revenue of

$92 million for the DIF. No losses were borne by

the FDIC prior to the settlement.

Citigroup

In connection with the termination of the lossshare agreement with Citigroup, the DIF recognized revenue of $1.962 billion for the fair value of

the trust preferred securities received as consideration for the guarantee as agreed to in the termination and recorded $231 million in dividends and

interest from Citigroup (see Note 5).

Surcharges on FDIC-Guaranteed Debt

On June 3, 2009, the FDIC published a final

rule in the Federal Register amending the Temporary Liquidity Guarantee Program (TLGP) to

provide a limited extension of the Debt Guarantee Program (DGP) for insured depository institutions and other participating entities (see Note

16). The amendment also imposed surcharges

on FDIC-guaranteed debt issued after March 31,

2009, with a maturity of one year or more. The

DGP extensions, coupled with the surcharges,

were designed to facilitate an orderly transition period for all participants to return to the

non-guaranteed debt market and to reduce the

potential for market disruptions at the end of the

program. Unlike other TLGP fees, which are

reserved for projected TLGP losses, the amount

of surcharges collected were deposited into the

DIF. During 2009, the DIF collected surcharges

in the amount of $872 million.
94 FDIC 2009 Annual Report

11. Operating Expenses

Operating expenses were $1.3 billion for 2009,

compared to $1 billion for 2008. The chart below

lists the major components of operating expenses.

Operating Expenses 

for the Years Ended December 31

Dollars in Thousands

2009 2008

Salaries and benefits $ 901,836 $ 702,040

Outside services 244,479 159,170

Travel 97,744 67,592

Buildings and leased 

space 65,286 53,630

Software/Hardware 

maintenance 40,678 29,312

Depreciation of property and equipment 70,488 55,434

Other 37,563 32,198

Services reimbursed 

by TLGP (3,613) (2,352)

Services billed to resolution entities (183,362) (63,534)

Total $ 1,271,099 $ 1,033,490

12. Provision for Insurance Losses

Provision for insurance losses was $57.7 billion for 2009 and $41.8 billion for 2008. The following chart lists the major components of the

provision for insurance losses.

Provision for Insurance Losses 

for the Years Ended December 31

Dollars in Thousands

2009 2008

Valuation Adjustments

Closed banks 

and thrifts $ 37,586,603 $ 17,974,530

Other assets (7,885) 7,377

Total Valuation 

Adjustments 37,578,718 17,981,907

Contingent Liabilities 

Adjustments:

Anticipated failure of 

insured institutions 20,033,054 23,856,928

Litigation 100,000 0

Total Contingent 

Liabilities Adjustments 20,133,054 23,856,928

Total $ 57,711,772 $ 41,838,835

13. Employee Benefits

Pension Benefits and Savings Plans

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 (OPM).
IV. Financial Statements and Notes 95

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), the 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.

Pension Benefits and 

Savings Plans Expenses 

for the Years Ended December 31

Dollars in Thousands

2009 2008

Civil Service Retire- ment System $ 6,401 $ 6,204

Federal Employees 

Retirement System 

(Basic Benefit) 56,451 44,073

FDIC Savings Plan 25,449 21,786

Federal Thrift Savings 

Plan 20,503 16,659

Total $ 108,804 $ 88,722

Postretirement Benefits Other Than 

Pensions

The DIF has no postretirement health insurance liability, since all eligible retirees are covered by the Federal Employees Health Benefit

(FEHB) program. FEHB is administered and

accounted for by the OPM. In addition, OPM

pays the employer share of the retiree’s health

insurance premiums.

The FDIC provides certain life and dental

insurance coverage for its eligible retirees, the

retirees’ beneficiaries, and covered dependents.

Retirees eligible for life and dental 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. For the dental coverage,

retirees are responsible for a portion of the dental

premium.

The FDIC has elected not to fund the postretirement life and dental benefit liabilities. As a

result, the DIF recognized the underfunded status (difference between the accumulated postretirement benefit obligation and the plan assets at

fair value) as a liability. Since there are no plan

assets, the plan’s benefit liability is equal to the

accumulated postretirement benefit obligation.

At December 31, 2009 and 2008, the liability was

$145.0 million and $114.1 million, respectively,

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) were ($2.6) million and $25.0 million at December 31, 2009 and

2008, respectively. These amounts are reported

as accumulated other comprehensive income

in the “Unrealized postretirement benefit (loss)

gain” line item on the Balance Sheet.

The DIF’s expenses for postretirement benefits for 2009 and 2008 were $7.7 million each

year, which are 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 2009 and 2008 of ($27.6) million and
96 FDIC 2009 Annual Report

$5.3 million, respectively, are reported as other

comprehensive income in the “Unrealized postretirement benefit (loss) gain” line item. Key

actuarial assumptions used in the accounting for

the plan include the discount rate of 5.25 percent,

the rate of compensation increase of 4.10 percent,

and the dental coverage trend rate of 7.0 percent.

The discount rate of 5.25 percent is based upon

rates of return on high-quality fixed income

investments whose cash flows match the timing

and amount of expected benefit payments.

14. Commitments and 

Off-Balance-Sheet Exposure

Commitments:

Leased Space

The FDIC’s lease commitments total $158

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 $29 million and

$21 million for the years ended December 31,

2009 and 2008, respectively.

Leased Space Commitments

Dollars in Thousands

2010 2011 2012 2013 2014

2015/

Thereafter

$ 37,630 $ 37,553 $ 30,982 $ 21,182 $ 17,995 $ 13,041

Off-Balance-Sheet Exposure:

Deposit Insurance

As of December 31, 2009, the estimated

insured deposits for DIF were $5.4 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.
IV. Financial Statements and Notes 97

15. Disclosures About the Fair Value of Financial Instruments

Financial assets recognized and measured at fair value on a recurring basis at each reporting date

include cash equivalents (Note 2), the investment in U.S. Treasury obligations (Note 3) and trust preferred securities (Note 5). The following tables present the DIF’s financial assets measured at fair value

as of December 31, 2009 and 2008.

Assets Measured at Fair Value at December 31, 2009

Dollars in Thousands

Fair Value Measurement Using

Quoted Prices in 

Active Markets for 

Identical Assets

(Level 1)

Significant Other 

Observable 

Inputs

(Level 2)

Significant 

Unobservable 

Inputs

(Level 3)

Total Assets 

at Fair Value

Assets

Cash and cash equivalents 

(Special U.S. Treasuries)1 $ 54,092,423 $ 54,092,423

Investment in U.S. Treasury 

Obligations (Available-for-Sale)2 5,486,799 5,486,799

Trust preferred securities 

(Available-for-Sale) $ 1,961,824 1,961,824

Trust preferred securities held for 

UST (Note 16) 705,375 705,375

Total Assets $ 59,579,222 $ 0 $ 2,667,199 $ 62,246,421

1

 Cash equivalents are Special U.S. Treasury Certificates with overnight maturities valued at prevailing interest rates established by the 

U.S. Bureau of Public Debt.

2

 The investment in U.S. Treasury obligations is measured based on prevailing market yields for federal government entities.

Assets Measured at Fair Value at December 31, 2008

Dollars in Thousands

Fair Value Measurement Using

Quoted Prices in 

Active Markets for 

Identical Assets

(Level 1)

Significant Other 

Observable 

Inputs

(Level 2)

Significant 

Unobservable 

Inputs

(Level 3)

Total Assets 

at Fair Value

Assets

Cash and cash equivalents 

(Special U.S. Treasuries)1 $ 1,011,430 $ 0 $ 0 $ 1,011,430

Investment in U.S. Treasury 

Obligations (Available-for-Sale)2 27,859,080 0 0 27,859,080

Total Assets $ 28,870,510 $ 0 $ 0 $ 28,870,510

1

 Cash equivalents are Special U.S. Treasury Certificates with overnight maturities valued at prevailing interest rates established by the 

U.S. Bureau of Public Debt.

2

 The investment in U.S. Treasury obligations is measured based on prevailing market yields for federal government entities.
98 FDIC 2009 Annual Report

In exchange for prior loss-share guarantee

coverage provided to Citigroup as described in

Note 5, the FDIC and the Treasury received trust

preferred securities. The fair value of the trust

preferred securities was derived from a proprietary valuation model developed by the Treasury

to estimate the value of financial instruments

obtained as consideration for actions taken to

stabilize the financial system under the Troubled

Asset Relief Program pursuant to the Emergency

Economic Stabilization Act of 2008. The model

establishes the fair value of the TruPs based on

the discounted present value of expected cash

flows. Key inputs include assumptions about

default probabilities, dividend deferral probabilities and call options. The FDIC independently

performed benchmark procedures to ensure the

reasonableness of the model outputs.

Some of the DIF’s financial assets and liabilities are not recognized at fair value but are recorded at amounts that approximate fair value due to

their short maturities and/or comparability with

current interest rates. Such items include interest

receivable on investments, assessment receivables, other short-term receivables, accounts payable and other liabilities.

The net receivables from resolutions primarily

include the DIF’s subrogated claim arising from

obligations to insured depositors. The resolution

entity 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 resolution

entity assets (see Note 4), such 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 a

fair 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 resolution entity payments to the

DIF on the subrogated claim does not necessarily correspond with the timing of collections on

resolution entity assets. Therefore, the effect of

discounting used by resolution entities should

not necessarily be viewed as producing an estimate of fair value for the net receivables from

resolutions.

There is no readily available marketfor guarantees associated with systemic risk (see Note 16).

16. Systemic Risk Transactions

Pursuant to systemic risk determinations,

the FDIC established the Temporary Liquidity

Guarantee Program (TLGP) for insured depository institutions, designated affiliates and certain

holding companies during 2008, and provided

loss-share guarantee assistance to Citigroup

on a pool of covered assets in 2009, which was

subsequently terminated as described in Note 5.

The FDIC received consideration in exchange for

guarantees issued under the TLGP and guarantee assistance provided to Citigroup.
IV. Financial Statements and Notes 99

At inception of the guarantees, the DIF recognized a liability for the non-contingent fair value

of the obligation the FDIC has undertaken to

stand ready to perform over the term of the guarantees. As required by FASB ASC 460, Guarantees, this non-contingent liability was measured

at the amount of consideration received in

exchange for issuing the guarantee. As systemic

risk expenses are incurred (including contingent

liabilities and valuation allowances), the DIF will

reduce deferred revenue and recognize an offsetting amount as systemic risk revenue. Revenue

recognition will also occur during the term of the

guarantee if a supportable and documented analysis has determined that the consideration and

any related interest/dividend income received

exceeds the projected systemic risk losses. Any

deferred revenue not absorbed by losses during

the guarantee period will be recognized as revenue to the DIF.

Temporary Liquidity Guarantee Program

The FDIC established the TLGP on October

14, 2008 in an effort to counter the system-wide

crisis in the nation’s financial sector. The TLGP

consists of two components: (1) the Debt Guarantee Program (DGP), and (2) the Transaction

Account Guarantee Program (TAG). On November 26, 2008, a final rule for the program was

published in the Federal Register and codified in

part 370 of title 12 of the Code of Federal Regulations (12 CFR Part 370).

Debt Guarantee Program

The Debt Guarantee Program initially permitted participating entities to issue FDIC-guaranteed senior unsecured debt between October

14, 2008 and June 30, 2009, with the FDIC’s

guarantee for such debt to expire on the earlier

of the maturity of the debt (or the conversion

date, for mandatory convertible debt issued on

or after February 27, 2009) or June 30, 2012. To

reduce market disruption at the conclusion of the

DGP and to facilitate the orderly phase-out of the

program, the FDIC issued a final rule on June 3,

2009, that extended the period during which participating entities could issue FDIC-guaranteed

debt, through October 31, 2009. Concurrently,

the FDIC extended the expiration of the guarantee period from June 30, 2012 to December 31,

2012. Upon the expiration of the extended DGP,

the final rule grants existing participating entities access to a limited six-month emergency

FDIC guarantee facility expiring on April 30,

2010. The FDIC’s guarantee for all debt expires

on the earliest of the mandatory convertible

debt, the stated date of maturity, or December

31, 2012.

Fees for participation in the DGP are reserved

for possible TLGP losses. Since inception, the

FDIC has recorded $8.3 billion of guarantee fees

and fees of $1.2 billion from participating entities that elected to issue senior unsecured nonguaranteed debt. During 2009, the total amount

collected under the DGP was $7.1 billion, comprised of $6.1 billion for guaranteed debt and

$1.0 billion for non-guaranteed debt. The fees

are included in the “Cash and cash equivalents—

restricted—systemic risk” line item and recognized as “Deferred revenue-systemic risk” on

the Balance Sheet.

Additionally, as described in Note 5, the FDIC

holds $800 million (par value) of Citigroup trust

preferred securities (and any related interest) as

security in the event payments are required to be

made by the FDIC for guaranteed debt instru-
100 FDIC 2009 Annual Report

ments issued by Citigroup or any of its affiliates

under the TLGP. At December 31, 2009, the fair

value of these securities totaled $705.4 million,

and was determined using the valuation methodology described in Note 15 for other trust preferred securities held by the DIF. Because these

TruPs are held on behalf of the Treasury, the

decline in value has no impact on the fund balance of the DIF.

The FDIC’s payment obligation under the

DGP will be triggered by a payment default. In

the event of default, the FDIC will continue to

make scheduled principal and interest payments

under the terms of the debt instrument through

its maturity, or in the case of mandatory convertible debt, through the mandatory conversion date. The debtholder or representative must

assign to the FDIC the right to receive any and

all distributions on the guaranteed debt from any

insolvency proceeding, including the proceeds

of any receivership or bankruptcy estate, to the

extent of payments made under the guarantee.

Since inception of the program, $618 billion

in total guaranteed debt has been issued. To

date, one debt issuer has defaulted on guaranteed debt of $2.0 million. Eighty-four financial

entities (54 insured depository institutions and

30 affiliates and holding companies) had $309

billion in guaranteed debt outstanding at yearend 2009. At December 31, 2009, the contingent

liability for this guarantee was $87.9 million and

is included in the “Contingent liability for Systemic Risk” line item. The FDIC believes that it

is reasonably possible that additional estimated

losses of approximately $2.5 billion could occur

under the DGP.

Transaction Account Guarantee Program

The Transaction Account Guarantee Program

provides unlimited coverage for non-interest bearing transaction accounts held by insured depository

institutions on all deposit amounts exceeding the

fully insured limit (generally $250,000). In August

2009, the FDIC extended the expiration date of the

TAG program from December 31, 2009 to June 30,

2010. During 2009, the FDIC collected TAG fees of

$639.2 million which are earmarked for TLGP possible losses and payments.

Upon the failure of a participating insured depository institution, payment of guaranteed claims of

depositors with non-interest bearing transaction

accounts are funded with TLGP restricted cash. The

FDIC will be subrogated to these claims of depositors against the failed entity, and dividend payments

by the receivership are deposited back into TLGP

restricted accounts.

At December 31, 2009, the “Receivables and

other assets—systemic risk” line item includes

$187.5 million of estimated TAG fees due from

insured depository institutions. Thisreceivable was

collected at the end of the first quarter of 2010.

The contingent liability resulting from the

anticipated failure of insured institutions participating in the TAG was $1.3 billion at December

31, 2009. For the 2009 failures, estimated losses

of $1.7 billion were recorded for the non-interest

bearing transaction accounts. The provision for

anticipated failures and the loss recorded at resolution are both recorded as “Systemic risk expenses” with a corresponding amount of guarantee

fees recognized as “Systemic risk revenue.” The

FDIC believes that it is reasonably possible that

additional estimated losses of approximately $721

million could occur under the TAG.
IV. Financial Statements and Notes 101

As of December 31, 2009, the maximum estimated exposure under the TAG is $834 billion. 

However, 525 institutions elected to exit the TAG 

program after December 31, 2009. The reported 

TAG deposits associated with these institutions 

at December 31, 2009, totaled $568 billion. Consequently, the maximum exposure under the 

TAG as of January 1, 2010, is estimated to be 

$266 billion.

Systemic Risk Activity at December 31, 2009

Dollars in Thousands

Cash and cash 

equivalents—

restricted—

systemic risk 

Receivables 

and other 

assets—

systemic risk

Deferred 

revenue—

systemic risk

Contingent 

liability—

systemic risk

Revenue/

Expenses—

systemic risk

Balance at 01-01-09 $ 2,377,387 $ 1,138,132 $ (2,077,880) $ (1,437,638)

Guaranteed and non-guaranteed debt fees collected 7,066,423 (1,026,870) (6,039,553)

TAG fees collected 639,176 (89,977) (549,199)

Receivable for TAG fees 187,541 (187,541)

Receivable for TAG accounts at failed institutions 4,124,849

TruPs and accrued interest held for UST 801,422 (801,422)

Market value adjustment on TruPs held for UST (94,624) 94,624 

Estimated losses for TAG accounts at failed institutions (1,741,653) 1,741,653 $ 1,741,653

Provision for TLGP losses in future failures (25,672) 25,672 (25,672)

Default of guaranteed debt issued by a failed bank (16) 16 2,033

Overnight investment interest collected 6,085 (6,085)

TLGP operating expenses 3,612 3,612 

Reimbursement to DIF for TLGP operating expenses 

incurred

(3,658,466)

Totals $ 6,430,589 $ 3,298,820(a) $ (7,847,447) $ (1,411,966) $ 1,721,626 

(a) Total may not equal the line item due to rounding
102 FDIC 2009 Annual Report

17. Subsequent Events

Subsequent events have been evaluated

through June 14, 2010, the date the financial

statements are available to be issued.

FDIC Guaranteed Debt of Limited 

Liability Companies

During 2010, the FDIC in its corporate capacity offered guarantees on $997.4 million in

purchase money notes issued by newly-formed

limited liability companies (LLCs). The terms

of the guarantees expire no later than the final

note maturing in 2020. The LLCs were created

to dispose of $4.6 billion of performing and

non-performing commercial and residential real

estate loans as well as related assets purchased

from multiple receiverships (multibank structured transactions). Private investors purchased

40-50 percent ownership interests in the LLCs,

with the receiverships holding the remaining

50-60 percent equity interest. In exchange for the

guarantees, the DIF expects to receive estimated

fees totaling $29.0 million. Based upon modeling scenarios, the cash flows from the assets of

each LLC provide sufficient coverage to defease

the debts by their maturity dates. Therefore, the

estimated loss to the DIF from these guarantees

is zero.

During 2010, FDIC-guaranteed notesissued by

three LLCs to receiverships during 2009 and 2010

were sold to private investors. The timely payment of principal due on the notes will continue to

be fully guaranteed by the FDIC (see Note 8).

FDIC Guaranteed Debt of Notes

On March 12, 2010, the FDIC issued $1.8 billion of notes backed by approximately $3.6 billion of residential mortgage-backed securities

(RMBS) from seven failed bank receiverships.

The underlying securities were sold to a statutory trust, which subsequently issued two series of

senior notes. The notes mature in 2038 and 2048

and are backed by the RMBS. Investors included banks, investment funds, insurance funds,

and pension funds. The $1.8 billion in proceeds

will go to the seven failed bank receiverships

and eventually be used to pay creditors, including the DIF. This will maximize recoveries for

the receiverships and recover substantial funds

for the DIF. The FDIC, in its corporate capacity, will fully and unconditionally guarantee the

timely payment of principal and interest due and

payable on the senior notes. In exchange for the

guarantees, the DIF expects to receive monthly

payments based on the outstanding principal balance of the senior notes.

Amendment of the TLGP to Extend the 

Transaction Account Guarantee Program 

(TAG)

An Interim Rule with request for comments, 

issued on April 19, 2010, amends the TLGP to

extend the expiration date for the TAG from June

30, 2010 to December 31, 2010, and grants the

FDIC discretion to extend the program to December 31, 2011, without additional rulemaking, if

economic conditions warrant such an extension.

Assessment rates for institutions participating

in the TAG remain unchanged under the interim rule. Additionally, the interim rule would:

1) require TAG assessment reporting based on

average daily account balances; 2) reduce the

maximum interest rate for qualifying negotiable

order of withdrawal (NOW) accounts guaranteed pursuant to the TAG to 0.25 percent from
IV. Financial Statements and Notes 103

0.50 percent; 3) provide an irrevocable, one-time

opportunity for institutions currently participating in the TAG to opt-out of the program, effective on July 1, 2010; and 4) establish conforming

disclosure requirements for institutions that optout of and those that continue to participate in

the extended program.

Proposed Revision of the Deposit 

Insurance Assessment System

On April 13, 2010, the FDIC Board of Directors approved for issuance a Notice of Proposed

Rulemaking on Assessments (NPR) to revise the

assessmentsystem applicable to large banks. The

NPR would eliminate risk categories and the use

of long-term debt issuer ratings, and replace the

financial ratios currently used with a scorecard

consisting of well-defined financial measures

that are more forward looking and better suited

for large institutions. Additionally, the proposal

would alter the assessment rates applicable to all

insured depository institutions to ensure that the

revenue collected under the proposed assessment

system would approximately equal that under the

existing assessment system.

2010 Failures Through June 14, 2010

Through June 14, 2010, 82 insured institutions failed with total losses to the DIF estimated

to be $16.8 billion.
104 FDIC 2009 Annual Report

FSLIC Resolution Fund (FRF)

FSLIC Resolution Fund Balance Sheet at December 31

Dollars in Thousands

2009 2008

Assets

Cash and cash equivalents (Note 2) $ 3,470,125 $ 3,467,227

Receivables from thrift resolutions and other assets, net (Note 3) 32,338 34,952

Receivables from U.S. Treasury for goodwill judgments (Note 4) 405,412 142,305

Total Assets $ 3,907,875 $ 3,644,484

Liabilities 

Accounts payable and other liabilities $ 2,972 $ 8,066

Contingent liabilities for litigation losses and other (Note 4) 405,412 142,305

Total Liabilities 408,384 150,371

Resolution Equity (Note 5)

Contributed capital 127,847,696 127,442,179

Accumulated deficit (124,348,205) (123,948,066)

Total Resolution Equity 3,499,491 3,494,113 

Total Liabilities and Resolution Equity $ 3,907,875 $ 3,644,484

The accompanying notes are an integral part of these financial statements.
IV. Financial Statements and Notes 105

FSLIC Resolution Fund Statement of Income and Accumulated Deficit 

for the Years Ended December 31

Dollars in Thousands

2009 2008

Revenue

Interest on U.S. Treasury obligations $ 3,167 $ 56,128

Other revenue 5,276 7,040

Total Revenue 8,443 63,168

Expenses and Losses

Operating expenses 4,905 3,188

Provision for losses 2,051 (891)

Goodwill/Guarini litigation expenses (Note 4) 408,997 254,247

Recovery of tax benefits (10,279) (26,846)

Other expenses 2,908 11,623

Total Expenses and Losses 408,582 241,321

Net Loss (400,139) (178,153)

Accumulated Deficit—Beginning (123,948,066) (123,769,913)

Accumulated Deficit—Ending $ (124,348,205) $ (123,948,066)

The accompanying notes are an integral part of these financial statements.
106 FDIC 2009 Annual Report

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

Dollars in Thousands

2009 2008

Operating Activities

Net Loss $ (400,139) $ (178,153)

Adjustments to reconcile net loss to net cash used by operating 

activities:

Provision for losses 2,051 (891)

Change In Operating Assets and Liabilities:

Decrease in receivables from thrift resolutions and other assets 563 751

(Decrease)/Increase in accounts payable and other liabilities (5,094) 3,791

Increase in contingent liabilities for litigation losses and other 263,107 106,954

Net Cash Used by Operating Activities (139,512) (67,548)

Financing Activities

Provided by:

U.S. Treasury payments for goodwill litigation (Note 4) 142,410 142,642

Used by:

Payments to Resolution Funding Corporation (Note 5) 0 (225,000)

Net Cash Provided/(Used) by Financing Activities 142,410 (82,358)

Net Increase/(Decrease) in Cash and Cash Equivalents 2,898 (149,906)

Cash and Cash Equivalents—Beginning 3,467,227 3,617,133

Cash and Cash Equivalents—Ending $ 3,470,125 $ 3,467,227 

The accompanying notes are an integral part of these financial statements.
IV. Financial Statements and Notes 107

Notes to the Financial Statem

FSLIC Resolut

December 31, 2009 and 20

1. 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 fund 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 FRFexcept those assets and liabilities transferred to

the RTC-effective 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

(FRF-FSLIC), 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.

The FDIC is the administrator of the FRF and

the Deposit Insurance Fund. These funds are

maintained separately to carry out their respective mandates.

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. Some of the issues and items that

remain open in FRF are: 1) criminal restituti
108 FDIC 2009 Annual Report

orders (generally have from 3 to 8 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 up to 10 years remaining to enforce);

3) numerous assistance agreements entered into

by the former FSLIC (FRF could continue to

receive tax benefits sharing through year 2013);

4) goodwill litigation (no final date for resolution

has been established; see Note 4); and 5) affordable housing program monitoring (requirements

can exceed 25 years). The FRF could potentially

realize substantial recoveries from the tax benefits sharing of up to approximately $231 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.

2. Summary of Significant 

Accounting Policies

General

These financial statements pertain to the

financial position, results of operations, and cash

flows of the FRF and are presented in accordance with U.S. generally accepted accounting

principles (GAAP). As permitted by the Federal

Accounting Standards Advisory Board’s Statement of Federal Financial Accounting Standards 34, The Hierarchy of Generally Accepted 

Accounting Principles, Including the Application 

of Standards Issued by the Financial Accounting 

Standards Board, the FDIC prepares financial

statements in conformity with standards promulgated by the Financial Accounting Standards

Board (FASB). These statements do not include

reporting for assets and liabilities of resolution

entities because these entities are legally separate and distinct, and the FRF does not have any

ownership interests in them. Periodic and final

accountability reports of resolution entities are

furnished to courts, supervisory authorities, and

others upon request.

Use of Estimates

Management makes estimates and assumptionsthat affect the amountsreported 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 estimatesinclude allowance

for losses on receivables from thrift resolutions

and the estimated losses for litigation.
IV. Financial Statements and Notes 109

Cash Equivalents

Cash equivalents are short-term, highly liquid

investments consisting primarily of U.S. Treasury Overnight Certificates.

Provision for Losses

The provision for losses represents the change

in the valuation of the receivables from thrift

resolutions and other assets.

Disclosure about Recent Accounting 

Pronouncements

•	 Financial Accounting Standards Board

(FASB) Accounting Standards Codification

(ASC) 105, Generally Accepted Accounting Principles (formerly SFAS No. 168, The 

FASB Accounting Standards Codification 

and the Hierarchy of Generally Accepted 

Accounting Principles—a replacement of 

FASB Statement No. 162, issued in June

2009) became effective for financial statements covering periods ending after September 15, 2009. The FDIC follows accounting

standards set by the FASB. On July 1, 2009,

the FASB ASC was launched and became the

sole source of authoritative accounting principles applicable to the FDIC.

	 All existing standards that were used to

create the Codification have become superseded. As a result, references to generally

accepted accounting principles in these

Notes will consist of the numbers used in the

Codification and, if applicable, the former

pronouncement number. The Codification’s

purpose was not to create new accounting

or reporting guidance, but to organize and

simplify authoritative GAAP literature. Consequently, there will be no change to FRF’s

financial statements due to the implementation of this Statement.

•	 SFAS No. 167, Amendments to FASB Interpretation No. 46(R), was issued by the FASB

in June 2009, and subsequently codified

upon issuance of Accounting Standards

Update No. 2009-17, Consolidations (ASC

810)—Improvements to Financial Reporting 

by Enterprises Involved with Variable Interest Entities. SFAS 167, effective for reporting

periods beginning after November 15, 2009,

modifies the former quantitative approach

for determining the primary beneficiary of a

variable interest entity (VIE) to a qualitative

assessment. An enterprise must determine

qualitatively whether it has (1) the power

to direct the activities of the VIE that most

significantly impact the entity’s economic

performance and (2) the obligation to absorb

losses of the VIE or the right to receive benefits from the VIE that could potentially be

significant to the VIE. If an enterprise has

both of these characteristics, the enterprise

is considered the primary beneficiary and

must consolidate the VIE. Management is

currently reviewing the possible impact, if

any, of SFAS 167 (now codified in ASC 810)

on FRF’s accounting and financial reporting

requirements for 2010.

•	 SFAS No. 166, Accounting for Transfers of 

Financial Assets—an amendment of FASB 

Statement No. 140, was issued by the FASB

in June 2009. Subsequently, the FASB issued

Accounting Standards Update No. 2009-16,

Transfers and Servicing (ASC 860)—Accounting for Transfers of Financial Assets, to 
110 FDIC 2009 Annual Report

formally incorporate the provisions of SFAS

No. 166 into the Codification. SFAS 166

removes the concept of a qualifying specialpurpose entity from GAAP, changes the

requirements for derecognizing financial

assets, and requires additional disclosures

about a transferor’s continuing involvement

in transferred financial assets. The FASB’s

objective is to improve the information that a

reporting entity provides in its financial statements about a transfer of financial assets; the

effects of a transfer on its financial position,

financial performance, and cash flows; and a

transferor’s continuing involvement, if any, in

transferred financial assets.

	 The provisions of SFAS 166 (now codified

in ASC 860) become effective for the FRF

for all transfers of financial assets occurring

on or after January 1, 2010.

•	 SFAS No. 165, Subsequent Events, was

issued in May 2009 and subsequently codified in FASB ASC 855, Subsequent Events.

ASC 855 represents the inclusion of guidance

on subsequent events in the accounting literature. Historically, management had relied

on auditing literature for guidance on assessing and disclosing subsequent events. ASC

855 now requires the disclosure of the date

through which an entity has evaluated subsequent events and the basis for that date—that

is, whether that date represents the date the

financial statements were issued or were 

available to be issued. These new provisions,

effective for the FRF as of December 31,

2009, do not have a significant impact on the

financial statements.

Other recent accounting pronouncements

have been 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.

3. Receivables From Thrift 

Resolutions and Other Assets, 

Net

Receivables From Thrift Resolutions

The receivablesfrom thrift resolutionsinclude

payments made by the FRF to cover obligations

to insured depositors, advances to receiverships

for working capital, and administrative expenses

paid on behalf ofreceiverships.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

RTC are a significant source of repayment of the

FRF’s receivables from thrift resolutions. As of

December 31, 2009, 8 of the 850 FRF receiverships remain active primarily due to unresolved

litigation, including goodwill matters.

The FRF receiverships held assets with a

book value of $20 million as of December 31,

2009 and 2008, (which primarily consist of cash,

investments, and miscellaneous receivables).

The estimated cash recoveries from the management and disposition of these assets are used to

derive the allowance for losses. The FRF receivership assets are valued by discounting projected

cash flows, net of liquidation costs using current
IV. Financial Statements and Notes 111

market-based risk factors applicable to a given

asset’s type and quality. These estimated asset

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 current estimates.

Other Assets

Other assets primarily include credit enhancement reserves valued at $21.3 million and $21.2

million as of December 31, 2009 and 2008,

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.

Receivables From Thrift Resolutions 

and Other Assets, Net at December 31

Dollars in Thousands

2009 2008

Receivables from 

closed thrifts $ 5,744,509 $ 5,725,450

Allowance for losses (5,736,737) (5,717,740)

Receivables from Thrift 

Resolutions, Net 7,772 7,710

Other assets 24,566 27,242

Total $ 32,338 $ 34,952

4. 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.

As of December 31, 2009 and 2008, respectively,

$405.4 million and $142.3 million were recorded

as probable losses. Additionally, at December 31,

2009, the FDIC has determined that there are no

losses from unresolved legal cases considered to

be reasonably possible.

In December 2008, FDIC concluded a 131⁄2

year old legal case (FDIC v. Hurwitz) arising from

the December 30, 1988 failure of United Savings

Association of Texas. In August 2005, the District Court ordered sanctions against the FDIC in

the amount of $72 million. However, in August

2008, the Fifth Circuit Court of Appeals reversed

$57 million of the sanctions, but remanded the

remaining $15 million to the District Court to

determine what portion should be paid. Subsequently, in November 2008, an agreement was

reached between the parties, whereby the FDIC

would pay $10 million to settle the case. On

December 17, 2008, the settlement agreement

was fully executed and the settlement funds were

paid. The $10 million payment is recognized in

the “Other expenses” line item.

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
112 FDIC 2009 Annual Report

pending at the appellate or trial court level, as

well as the unique circumstances of each case.

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 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. 1501A3, 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

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 $142.4 million as a result of

judgments and settlementsin four goodwill cases

for the year ended December 31, 2009, compared

to $142.6 million for four goodwill cases for the

year ended December 31, 2008. As described

above, the FRF received appropriations from the

U.S. Treasury to fund these payments. Based on

recent court decisions, the FRF accrued a $405.4

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

cases. During 2009, four of the six cases were

fully adjudicated but not paid as of year end.

In addition, the FRF-FSLIC pays the goodwill

litigation expenses incurred by DOJ based on a

Memorandum of Understanding (MOU) dated

toward regulatory capital, the plaintiffs were

entitled to recover damages from the United

States. Approximately eight 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 FRFRTC, 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

January 26, 2010, 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
IV. Financial Statements and Notes 113

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

$13.2 million. 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, 2009 and 2008, do not include a liability for

these agreements.

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.

October 2, 1998, between the FDIC and DOJ.

Under the terms of the MOU, the FRF-FSLIC

paid $3.5 million and $4.3 million to DOJ for

fiscal years (FY) 2010 and 2009, respectively.

As in prior years, DOJ carried over and applied

all unused funds toward current FY charges.

At December 31, 2009, DOJ had an additional

$3.3 million in unused FY 2009 funds that were

applied against FY 2010 charges of $6.8 million.

Guarini Litigation

Paralleling the goodwill cases are similar

cases alleging that the government breached

agreements regarding tax benefits associated

with certain FSLIC-assisted 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.

All eight of the original Guarini cases have

been settled. However, a case settled in 2006

further obligates the FRF-FSLIC as a 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 is approximately $81 million. However,

the FDIC believesthat it is very unlikely the settlement will be subject to taxation. More definitive

information may be available during 2010, after

the IRS completes its Large Case Program audit

on the institution’s 2006 returns. The FRF is not

expected to fund any payment under this guarantee and no liability has been recorded.
114 FDIC 2009 Annual Report

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.TheFRF-FSLIC

accumulated deficit has increased

by $13.0 billion, whereas the FRFRTC accumulated deficit has decreased by $6.3

billion, since their dissolution dates.

6. Employee Benefits

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 $42 thousand and $169 thousand

for 2009 and 2008, respectively.

Resolution Equity at December 31, 2009

Dollars in Thousands

FRF-FSLIC FRF-RTC

FRF 

Consolidated

Contributed capital—beginning $ 45,692,842 $ 81,749,337 $ 127,442,179

Add: U.S. Treasury payments/

receivable for goodwill litigation 405,517 0 405,517

Less: REFCORP payments 0 0 0

Contributed capital—ending 46,098,359 81,749,337 127,847,696

Accumulated deficit (42,764,230) (81,583,975) (124,348,205)

Total $ 3,334,129 $ 165,362 $ 3,499,491

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 mixedownership 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, 2009, the FRF-RTC

has returned $4.556 billion to the U.S. Treasury

and made payments of $5.022 billion to the REFCORP. These actions serve to reduce contributed

capital.

FRF-FSLIC received $142.4 million in U.S.

Treasury payments for goodwill litigation in

2009. Furthermore, $405.4 million and $142.3

million were accrued for as receivables at yearend 2009 and 2008, respectively. The effect of

this activity was an increase in contributed capital of $405.5 million in 2009.
IV. Financial Statements and Notes 115

7. Disclosures About the Fair Value of Financial Instruments

The financial asset recognized and measured at fair value on a recurring basis at each reporting date 

is cash equivalents. The following tables present the FRF’s financial asset measured at fair value as of 

December 31, 2009 and 2008.

Postretirement Benefits Other Than Pensions

The FRF no longer records a liability for the 

postretirement benefits of life and dental insurance (a long-term liability), due to the expected 

dissolution of the FRF. The liability is recorded 

by the DIF. However, the FRF does continue to 

pay its proportionate share of the yearly claim 

expenses associated with these benefits. 

Assets Measured at Fair Value at December 31, 2009

Dollars in Thousands

Fair Value Measurement Using

Quoted Prices in 

Active Markets 

for Identical 

Assets 

(Level 1)

Significant 

Other 

Observable 

Inputs 

(Level 2)

Significant 

Unobservable 

Inputs 

(Level 3)

Total Assets 

at Fair Value

Assets

Cash equivalents 

(Special U.S. Treasuries)1 $ 3,470,125 $ 0 $ 0 $ 3,470,125

1

 Cash equivalents are Special U.S. Treasury Certificates with overnight maturities valued at prevailing interest rates established by the U.S. 

Bureau of Public Debt.

Assets Measured at Fair Value at December 31, 2008

Dollars in Thousands

Fair Value Measurement Using

Quoted Prices in 

Active Markets 

for Identical 

Assets 

(Level 1)

Significant 

Other 

Observable 

Inputs 

(Level 2)

Significant 

Unobservable 

Inputs 

(Level 3)

Total Assets 

at Fair Value

Assets

Cash equivalents 

(Special U.S. Treasuries)1 $ 3,467,227 $ 0 $ 0 $ 3,467,227

1

 Cash equivalents are Special U.S. Treasury Certificates with overnight maturities valued at prevailing interest rates established by the U.S. 

Bureau of Public Debt.
116 FDIC 2009 Annual Report

Some of the FRF’s financial assets and liabilities are not recognized at fair value but are 

recorded at amounts that approximate fair value 

due to their short maturities and/or comparability with current interest rates. Such items include 

other short-term receivables and accounts payable and other liabilities.

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 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).
117

Government Accountability Office’s Audit Opinion
118 FDIC 2009 Annual Report
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120 FDIC 2009 Annual Report
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122 FDIC 2009 Annual Report
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124 FDIC 2009 Annual Report
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126 FDIC 2009 Annual Report
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128 FDIC 2009 Annual Report
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130 FDIC 2009 Annual Report
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132 FDIC 2009 Annual Report
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134 FDIC 2009 Annual Report

Management’s Response

Appendix I
135
136 FDIC 2009 Annual Report

Management’s Report on Internal Control over Financial Reporting

The Federal Deposit Insurance Corporation’s (FDIC’s) internal control over financial reporting is a

process effected by those charged with governance, management, and other personnel, designed to

provide reasonable assurance regarding the preparation of reliable financial statements in accordance

with U.S. generally accepted accounting principles (GAAP), and compliance with applicable laws

and regulations. The objective of the FDIC’s internal control over financial reporting is to reasonably

assure that (1) transactions are properly recorded, processed and summarized to permit the preparation of financial statements in accordance with GAAP, and assets are safeguarded against loss from

unauthorized acquisition, use, or disposition; and (2) transactions are executed in accordance with the

laws and regulations that could have a direct and material effect on the financial statements.

Management is responsible for establishing and maintaining effective internal control over financial reporting. Management assessed the effectiveness of the FDIC’s internal control over financial

reporting as of December 31, 2009, through its enterprise risk management program that seeks to

comply with the spirit of the following standards, among others: Federal Managers’ Financial Integrity Act (FMFIA); Chief Financial Officers Act (CFO Act); Government Performance and Results

Act (GPRA); Federal Information Security Management Act (FISMA); and OMB Circular A-123. In

addition, other standards that the FDIC considers are the framework set forth by the Committee of

Sponsoring Organizations of the Treadway Commission’s Internal Control-Integrated Framework

and the U.S. Government Accountability Office’s (GAO’s) Standards for Internal Control in the Federal Government.

Based on our evaluation, FDIC management concluded that as of December 31, 2009, the Corporation

generally maintained effective internal controls, with the exception of a material weakness related

to its process for estimating losses on loss-sharing arrangements. Therefore, the Corporation did not

maintain, in all material respects, effective internal control over financial reporting.

Federal Deposit Insurance Corporation

June 14, 2010
137

Overview of the Industry

Total net income for the 8,012 FDIC-insured

commercial banks and savings institutions that

reported financial results as of December 31,

2009, was $12.5 billion for the year, up from $4.5

billion in 2008, but well below the $100 billion

that insured institutions earned in 2007. The

average return on assets (ROA), a basic yardstick

of earnings performance, was 0.09 percent, compared to 0.03 percent in 2008. These are the two

lowest annual ROAs for the industry in the past

22 years. Most of the year-over-year improvement in industry profitability occurred at the

largest institutions. Almost two out of every

three insured institutions (63.2 percent) reported

a lower ROA in 2009 than in 2008, and 29.5 percent of all institutions reported a net loss for the

year. This is the highest percentage of unprofitable institutions in the 26 years for which data

are available.

Historically high expenses for credit-quality

problems were the principal cause of earnings

weakness. Insured institutions set aside $247.7

billion in loan-loss provisions during 2009, compared to $177 billion a year earlier. Total loss

provisions in 2009 represented 38 percent of

the industry’s net operating revenue (net interest income plus total noninterest income) for the

year, the largest proportion in any year since the

creation of the FDIC.

Despite the burden of increased loan loss

expenses and the weakness of the U.S. economy,

the industry was considerably resilient in generating revenue during the year. Net operating

revenue totaled $656.3 billion, an increase of

$90.9 billion (16.1 percent) over 2008. Net interest income was $38.1 billion (10.7 percent) higher than a year earlier, while noninterest income

increased by $52.8 billion (25.4 percent).

The improvement in net interest income was

attributable to higher net interest margins(NIMs),

as the industry’s total interest-earning assets

declined by $477.2 billion (4.1 percent) in 2009.

The average NIM rose to 3.47 percent in 2009, up

from 3.16 percent a year earlier. This is the highest annual NIM for the industry since 2005 and

the first time in seven years that it has increased.

Much of the year-over-year improvement in NIMs

occurred at larger institutions, which benefitted

from a sharp decline in average funding costs.

More than half of all institutions (53.8 percent)

reported lower NIMs compared to 2008.

Growth in noninterest income was led by

increased trading revenue, which totaled $24.8

billion, compared to trading losses of $1.8 billion

a year earlier. Servicing fees also posted strong

growth, rising to $30.8 billion in 2009 from

$13.6 billion in 2008. Income from securitization activities was a notable area of noninterest

income weakness in 2009. Securitization income

totaled only $4.8 billion, down from $15.3 billion

the previous year.

Higher asset values contributed to a $14 billion reduction in realized losses on securities

and other assets in 2009. In 2008, insured institutions reported $15.4 billion in realized losses;

in 2009, realized losses totaled only $1.4 billion.

Improvement in asset values was also evident in a

$12.6 billion (38.6 percent) decline in charges for

goodwill impairment and other intangible asset

expenses. These charges, which reached $32.7

billion in 2008, fell to $20.1 billion in 2009.

Despite lower goodwill impairment costs,

total noninterest expenses increased by $16.2

billion (4.4 percent) in 2009. Deposit insurance
138 FDIC 2009 Annual Report

premiums paid by insured institutions totaled

$17.8 billion, an increase of $14.8 billion over

2008. Expenses for salaries and employee benefits were $11.4 billion (7.5 percent) higher than

in 2008.

As was the case in 2008, failures significantly affected earnings reported for the full year

because losses incurred by failed institutions

were not included in the year-to-date income

reported by surviving institutions as of December 31. During 2009, 119 failed institutions filed

financial reportsfor one or more quarters prior to

their failure. Together, these institutions reported

more than $8.2 billion in net losses that are not

included in full-year earnings for the industry.

Similarly, for institutions that change ownership

or are merged into other institutions, purchase

accounting rules stipulate that the income and

expenses that have been booked by acquired

institutions are to be reset to zero as of the date

of acquisition. Previously accrued income and

expenses become adjustments to assets, equity

capital, and reserves, and are not included in the

subsequent reporting of year-to-date income and

expense. If the 2009 losses reported by failed

institutions had been included, the industry’s net

income for the year would have been less than

$5 billion.

The industry’s troubled loans continued to

increase in 2009. At the end of December, the

amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual

status) was $391.3 billion, compared to $233.6

billion at the end of 2008. Noncurrent loans and

leases represented 5.37 percent of all loans and

leases, the highest percentage in the 26 years that

insured institutions have reported noncurrent

loan data. Residential mortgage loans accounted for more than half (51.2 percent) of the total

increase in noncurrent loans in 2009, rising by

$80.7 billion. Noncurrent real estate construction and development (C&D) loans rose by $20.3

billion, noncurrent loans to commercial and

industrial (C&I) borrowers increased by $16.7

billion, and noncurrent real estate loans secured

by nonfarm nonresidential properties increased

by $24.3 billion.

Net charge-offs of loans and leases totaled

$186.8 billion in 2009, compared to $100.4 billion

in 2008. The full-year net charge-off rate of 2.49

percent was the highest annual rate since 1934.

Net charge-offs of credit card loans totaled $37.5

billion for the year, net charge-offs of residential mortgage loans were $33.9 billion, C&I loan

charge-offs totaled $31.8 billion, and net chargeoffs of real estate C&D loans were $27.3 billion.

Total assets of insured institutions registered

a historic decline in 2009, as weak loan demand,

tighter loan underwriting standards, increased

loan charge-offs, and deleveraging by institutions seeking to boost their regulatory capital ratios all contributed to a contraction in the

industry’s balance sheet. Assets fell by $731.7

billion (5.3 percent) during the year, the largest

annual percentage decline since the inception of

the FDIC. The reduction in assets was led by a

$640.9 billion (8.3 percent) decline in net loans

and leases. C&I loan balances declined by $273.2

billion (18.3 percent), residential mortgage loans

fell by $128.5 billion (6.3 percent), and real estate

C&D loans declined by $139.4 billion (23.6 percent). Real estate loans secured by nonfarm non

residential properties (up $25.2 billion, or 2.4

percent) was the only major loan category that

had meaningful growth in 2009.
139

In contrast to the reduction in industry assets,

deposit balances increased by $191.1 billion (2.1

percent) during the year. Nondeposit liabilitiesfell

by $1 trillion (31.3 percent). At year-end, deposits

funded 70.4 percent of total industry assets, the

highest proportion since March 31, 1996.

The number of insured institutions on the

FDIC’s “Problem List” rose from 252 institutions with assets of $159 billion to 702 institutions with assets of $402.8 billion in 2009. This

is the largest number and asset total of “problem”

institutions since the middle of 1993. At yearend, more than 95 percent of all insured institutions, representing more than 98 percent of total

industry assets, met or exceeded the regulatory

threshold defining “well-capitalized” for purposes of prompt corrective action.