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United States Government Accountability Office:
GAO:
Report to Congressional Committees:
March 2011:
Financial Audit:
Federal Deposit Insurance Corporation Funds' 2010 and 2009 Financial
Statements:
GAO-11-412:
GAO Highlights:
Highlights of GAO-11-412, a report to congressional committees.
Why GAO Did This Study:
Created in 1933 to insure bank deposits and promote sound banking
practices, the Federal Deposit Insurance Corporation (FDIC) plays an
important role in maintaining public confidence in the nation’s
financial system. FDIC administers the Deposit Insurance Fund (DIF),
which protects bank and savings deposits, and the Federal Savings and
Loan Insurance Corporation (FSLIC) Resolution Fund (FRF), which was
created to close out the business of the former FSLIC.
Section 17 of the Federal Deposit Insurance Act, as amended, requires
GAO to annually audit the financial statements of the DIF and the FRF.
GAO is responsible for obtaining reasonable assurance about whether FDIC
’s financial statements for the DIF and the FRF are presented fairly
in all material respects, in conformity with U.S. generally accepted
accounting principles, and whether FDIC maintained effective internal
control over financial reporting, and for testing FDIC’s compliance
with selected laws and regulations.
What GAO Found:
In GAO’s opinion, FDIC fairly presented, in all material respects, the
2010 and 2009 financial statements for the two funds it administers—
DIF and FRF. Also, in GAO’s opinion, FDIC had effective internal
control over financial reporting. Further, GAO did not find any
reportable instances of noncompliance with provisions of the laws and
regulations it tested.
The slowly recovering economy continued to challenge the soundness of
many DIF-insured institutions. In 2010, 157 banks with combined assets
of approximately $93 billion failed, costing the DIF an estimated $24
billion. FDIC identified additional risk that could result in up to
$25 billion in further estimated losses to the DIF should potentially
vulnerable insured institutions fail. FDIC continues to evaluate the
risks to affected institutions and the effect of such risks on the
DIF. Actual losses, if any, will largely depend on future economic
conditions and could differ materially from FDIC’s estimates. From
January 1 through March 14, 2011, 25 institutions failed.
As of December 31, 2010, the DIF had a negative fund balance of $7.4
billion, and it had a negative 0.12 percent ratio of reserves to
estimated insured deposits. In contrast, at December 31, 2009, the DIF
had a negative fund balance of $20.9 billion, and its ratio of
reserves to estimated insured deposits was a negative 0.39 percent.
The improvement in 2010 was primarily attributable to lower losses
from 2010 bank failures than projected at December 31, 2009, and lower
estimates of losses from anticipated failures at December 31, 2010.
During 2010, FDIC continued the use of loss-share agreements with
acquirers of failed institutions as a mean of both conserving the
initial cash outlay and as a longer-term means of attempting to
further minimize losses to the DIF. In addition to the DIF’s existing
resources, which include advanced assessments FDIC charged the
industry in 2009, FDIC can borrow up to $100 billion each from the
U.S. Treasury and the Federal Financing Bank, subject to statutory
limits.
The Dodd-Frank Act, enacted in July 2010, contains significant
provisions related to assessments and capitalization of the DIF. Such
provisions include redefining the assessment base; increasing the
statutory minimum designated reserve ratio from 1.15 percent to not
less than 1.35 percent; increasing the standard deposit insurance
coverage from $100,000 to $250,000 and extending unlimited deposit
insurance coverage for noninterest-bearing transaction accounts to the
end of 2012; and authorizing FDIC to undertake enforcement actions
against depository institution holding companies if their conduct or
threatened conduct poses a risk of loss to the DIF.
During 2010, FDIC took corrective actions that effectively resolved a
material weakness in its internal control related to estimating losses
on loss-share agreements and a significant deficiency in internal
control related to security over its information systems, both of
which GAO reported in its audit of the FDIC funds’ 2009 financial
statements. Nonetheless, GAO identified areas in which FDIC’s internal
controls could be further improved and will be reporting separately to
FDIC management on these matters.
What GAO Recommends:
GAO is not making recommendations in this report, but will be
reporting separately on matters identified during its audit, along
with recommendations for strengthening the corporation’s internal
controls. In commenting on a draft of this report, FDIC discussed its
efforts to resolve the previously reported material weakness and
significant deficiency, and emphasized its dedication to sound
financial management.
View GAO-11-412 or key components. For more information, contact
Steven J. Sebastian at (202) 512-3406 or sebastians@gao.gov.
[End of section]
Contents:
Transmittal Letter:
Auditor's Report:
Opinion on the DIF's Financial Statements:
Opinion on the FRF's Financial Statements:
Opinion on Internal Control:
Compliance with Laws and Regulations:
Objectives, Scope, and Methodology:
FDIC Comments and Our Evaluation:
Deposit Insurance Fund's Financial Statements: Balance Sheet:
Statement of Income and Fund Balance:
Statement of Cash Flows:
Notes to the Financial Statements:
FSLIC Resolution Fund's Financial Statements:
Balance Sheet:
Statement of Income and Accumulated Deficit:
Statement of Cash Flows:
Notes to the Financial Statements:
Appendix:
Appendix I: Comments from the Federal Deposit Insurance Corporation:
Abbreviations:
CFO: Chief Financial Officer:
DIF: Deposit Insurance Fund:
FDIC: Federal Deposit Insurance Corporation:
FMFIA: Federal Managers' Financial Integrity Act:
FRF: FSLIC Resolution Fund:
FSLIC: Federal Savings and Loan Insurance Corporation:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
March 18, 2011:
The Honorable Tim Johnson:
Chairman:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Spencer Bachus:
Chairman:
The Honorable Barney Frank:
Ranking Member:
Committee on Financial Services:
House of Representatives:
This report presents the results of our audits of the financial
statements of the Deposit Insurance Fund (DIF) and the FSLIC
Resolution Fund (FRF) as of and for the years ending December 31,
2010, and 2009. These financial statements are the responsibility of
the Federal Deposit Insurance Corporation (FDIC), the administrator of
the two funds.
This report contains our (1) unqualified opinions on the DIF's and the
FRF's financial statements; (2) opinion that FDIC's internal control
over financial reporting was effective as of December 31, 2010; and
(3) conclusion that we found no reportable compliance issues during
2010 with provisions of laws and regulations we tested. This report
also discusses actions FDIC took during 2010 to resolve a material
weakness in its internal control related to its process for estimating
losses on loss-share agreements and to resolve a significant
deficiency in its internal control related to security over its
information systems, both of which we reported in our audit of the
FDIC funds' 2009 financial statements.
This report also discusses the significant challenges faced by FDIC-
insured financial institutions and the related impact on the DIF. As
of December 31, 2010, the DIF had a negative fund balance of $7.4
billion and its ratio of reserves to estimated insured deposits was a
negative 0.12 percent. In response to the Dodd-Frank Wall Street
Reform and Consumer Protection Act, FDIC has adopted a restoration
plan intended to enable the DIF to meet the statutory minimum
designated reserve ratio of not less than 1.35 percent of estimated
insured deposits or the comparable percentage of the new assessment
base. The act requires that FDIC take such steps as may be necessary
to achieve this minimum designated reserve ratio by September 30, 2020.
We are sending copies of this report to the Chairman of the Board of
Directors of FDIC, the Chairman of the FDIC Audit Committee, the
Chairman of the Board of Governors of the Federal Reserve System, the
Comptroller of the Currency, the Director of the Office of Thrift
Supervision, the Secretary of the Treasury, the Director of the Office
of Management and Budget, and other interested parties. This report
also is available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov].
If you have any questions concerning this report, please contact me at
(202) 512-3406 or sebastians@gao.gov. Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this report.
Signed by:
Steven J. Sebastian:
Director:
Financial Management and Assurance:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
To the Board of Directors:
The Federal Deposit Insurance Corporation:
In accordance with section 17 of the Federal Deposit Insurance Act, as
amended, we are responsible for conducting audits of the financial
statements of the funds administered by the Federal Deposit Insurance
Corporation (FDIC). In our audits of the Deposit Insurance Fund's
(DIF) and the FSLIC Resolution Fund's (FRF) financial statements
[Footnote 1] for 2010 and 2009, we found:
* the financial statements as of and for the years ended December 31,
2010, and 2009, are presented fairly, in all material respects, in
conformity with U.S. generally accepted accounting principles;
* FDIC's internal control over financial reporting was effective as of
December 31, 2010; and:
* no reportable noncompliance with provisions of laws and regulations
we tested.
The following sections discuss in more detail (1) these conclusions;
(2) our audit objectives, scope, and methodology; and (3) agency
comments and our evaluation.
Opinion on the DIF's Financial Statements:
The financial statements, including the accompanying notes, present
fairly, in all material respects, in conformity with U.S. generally
accepted accounting principles, the DIF's assets, liabilities, and
fund balance as of December 31, 2010, and 2009, and its income and
fund balance and its cash flows for the years then ended.
As discussed in note 8 to the DIF's financial statements, FDIC-insured
financial institutions continued to face significant challenges in
2010. The slowly recovering economy and credit environment continued
to challenge the soundness of many DIF-insured institutions. In 2010,
157 banks with combined assets of approximately $93 billion failed,
costing the DIF an estimated $24 billion--this cost was generally
recognized in the DIF's 2009 financial statements. Regulatory and
market data suggest that the banking industry will continue to
experience elevated levels of stress over the coming year. In addition
to the losses reflected on the DIF's financial statements, FDIC has
identified additional risk as of year-end 2010 that could result in
further estimated losses to the DIF of up to approximately $25 billion
should other potentially vulnerable insured institutions ultimately
fail. FDIC continues to evaluate the ongoing risks to affected
institutions in light of current economic and financial conditions,
and the effect of such risks on the DIF. Actual losses, if any, will
largely depend on future economic and market conditions and could
differ materially from FDIC's estimates. As discussed in note 17 to
the DIF's financial statements, through March 14, 2011, 25
institutions failed during 2011.
As of December 31, 2010, the DIF had a negative fund balance of $7.4
billion and its ratio of reserves to estimated insured deposits was a
negative 0.12 percent. In contrast, at December 31, 2009, the DIF had
a negative fund balance of $20.9 billion and its ratio of reserves to
estimated insured deposits was a negative 0.39 percent. The
improvement in 2010 was primarily attributable to lower losses from
2010 bank failures than projected at December 31, 2009, and lower
estimates of losses from anticipated failures at December 31, 2010.
During 2010, FDIC continued its efforts to maintain the DIF's ability
to resolve problem institutions. As discussed in notes 4 and 7 of
DIF's financial statements, FDIC continued the use of purchase and
assumption resolution transactions containing loss-share agreements
with acquirers of failed institutions as a means of both conserving
the initial cash outlay required by the DIF in resolving a troubled
institution and as a longer-term means of attempting to further
minimize the ultimate losses to the DIF. Under such agreements, which
typically cover a 5-to 10-year period, an acquiring institution
assumes all of the deposits and purchases most, if not all, of the
assets of a failed institution. FDIC, in turn, agrees to cover a large
percentage of any losses on assets covered under the agreements up to
a stated threshold. During 2010, 130 of the 157 institutions that
failed and were resolved by FDIC were handled through the use of loss-
share agreements with acquirers of these institutions.
The DIF has a variety of resources available to carry out its
insurance responsibilities. At December 31, 2010, the DIF had $12.4
billion in investments in U.S. Treasury obligations in addition to $27
billion in cash and cash equivalents, which provide a ready source of
funds for its insurance activities. These funds were primarily
obtained through FDIC's charging the industry approximately 3 years of
advanced assessments at the end of 2009. In addition, as discussed in
note 1 to DIF's financial statements, FDIC can borrow up to $100
billion from the U.S. Treasury and it also has a note agreement with
the Federal Financing Bank enabling it to borrow up to $100 billion.
However, the total amount that FDIC can borrow from these sources for
the DIF would be subject to the DIF's statutory maximum obligation
limitation, which equaled $106.3 billion as of December 31, 2010.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act)[Footnote 2] contains significant provisions related to
assessments and capitalization of the DIF. One of these provisions
requires FDIC to define the assessment base as average consolidated
total assets minus average tangible equity. This contrasts with the
previous assessment base consisting of domestic deposits. This change
will broaden the assessment base and is intended to better measure the
risk that a bank poses to the DIF. The act also sets the statutory
minimum designated reserve ratio of not less than 1.35 percent of
estimated insured deposits, or the comparable percentage of the new
assessment base, and requires that FDIC take such steps as may be
necessary to achieve this reserve ratio by September 30, 2020. This
change, intended to strengthen the DIF, increases the minimum
designated reserve ratio from 1.15 percent, but as noted above,
extends the target date for the DIF to achieve this minimum designated
reserve ratio from December 31, 2016. FDIC adopted a new restoration
plan on October 19, 2010 in response to the above requirements. In
addition, the act provides for a permanent increase in the standard
deposit insurance coverage amount from $100,000 to $250,000
(retroactive to January 1, 2008) and unlimited deposit insurance
coverage for noninterest-bearing transaction accounts for 2 years to
the end of 2012. The act also authorizes FDIC to undertake enforcement
actions against depository institution holding companies if their
conduct or threatened conduct poses a risk of loss to the DIF.
The DIF continues to face some exposure as a result of actions taken
pursuant to the systemic risk determination made in 2008 by the
Department of the Treasury, in consultation with the President and
upon recommendation of the Boards of FDIC and the Federal Reserve. As
discussed in note 16 to the DIF's financial statements, FDIC
established the Temporary Liquidity Guarantee Program (TLGP). The TLGP
consists of the (1) Debt Guarantee Program, under which FDIC
guaranteed newly issued senior unsecured debt up to prescribed limits
issued by insured institutions and certain holding companies, and (2)
Transaction Account Guarantee Program (TAGP), under which, through
December 31, 2010, FDIC provided unlimited coverage for noninterest-
bearing transaction accounts held by participating insured
institutions. FDIC charged fees to participants that are to be used to
cover any losses under both guarantee programs. The unlimited deposit
insurance coverage for noninterest-bearing transaction accounts under
the Dodd-Frank Act essentially replaces the TAGP, except that FDIC
will not charge a separate assessment fee for insuring the transaction
accounts. As discussed in note 16, as of December 31, 2010, the amount
of debt guaranteed by FDIC under the Debt Guarantee Program was $267
billion.
Opinion on the FRF's Financial Statements:
The financial statements, including the accompanying notes, present
fairly, in all material respects, in conformity with U.S. generally
accepted accounting principles, FRF's assets, liabilities, and
resolution equity as of December 31, 2010, and 2009, and its income
and accumulated deficit and its cash flows for the years then ended.
Opinion on Internal Control:
FDIC maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2010, which provided
reasonable assurance that misstatements, losses, or noncompliance
material in relation to the financial statements would be prevented or
detected and corrected on a timely basis. Our opinion is based on
criteria established under 31 U.S.C. 3512 (c), (d), commonly known as
the Federal Managers' Financial Integrity Act of 1982 (FMFIA).
Resolution of Prior Year Material Weakness:
In our 2009 audit report[Footnote 3] we reported a material
weakness[Footnote 4] in FDIC's controls over its process for deriving
and reporting estimates of losses to the DIF from resolution
transactions involving loss-share agreements[Footnote 5] because
existing controls were not fully effective in preventing or detecting
and correcting errors in developing and reporting loss-share loss
amounts in FDIC's draft 2009 financial statements of the DIF. As
described in our audit report, we identified weaknesses in FDIC's
controls over (1) the development of initial loss-share loss
estimates, including verifying the accuracy of the calculations; (2)
managerial review and oversight of the initial loss-share estimation
process and its underlying assumptions; and (3) reporting of the loss-
share loss estimates as part of the allowance for losses against the
Receivables from resolutions, net on the DIF's balance sheet. We
subsequently provided further details of the control deficiencies
related to this material weakness as well as recommendations for
corrective actions in a separate report to FDIC management.[Footnote
6] To correct these control deficiencies, we recommended that FDIC
officials (1) establish mechanisms for monitoring implementation of
newly issued policies and procedures over the process for calculating
initial loss-share loss estimates; (2) develop specific procedures for
documenting assumptions underlying initial loss-share loss estimates,
including periodic managerial review and approval of assumptions and
changes over time; and (3) establish and document detailed procedures
for ensuring the completeness and accuracy of the overall allowance
for loss calculations, including loss-share related losses.
In response to the material weakness in internal control, FDIC
developed and implemented a corrective action plan that included
additional controls to address the control deficiencies we identified.
Specifically, FDIC:
* implemented a new review process and documentation procedures over
the development of initial loss-share loss amounts;
* established additional monitoring and review of loss-share estimates
with the creation of the Closed Bank Financial Risk Committee
dedicated to oversight of the loss-share agreement process, including
approval of underlying assumptions in loss-share related calculations
and ongoing periodic reviews of initial and updated loss-share loss
estimates; and:
* enhanced controls over both the inclusion of loss-share related
losses in the allowance for loss determination and the overall process
for calculating the allowance for loss related to the Receivables from
resolutions, net line item on the DIF's balance sheet.
During our audit, we found that FDIC's actions significantly reduced
the risk that a material misstatement would not be detected and timely
corrected, and concluded that remaining control deficiencies in FDIC's
process of deriving and reporting estimates of losses involving loss-
share agreements do not individually or collectively constitute a
material weakness or significant deficiency.[Footnote 7]
Although FDIC made significant improvements to its controls over its
process for estimating losses related to loss-share agreements, it
continues to face risk because of ongoing financial institution
failures and the highly manual process FDIC employs in its loss-share
estimation process. Although improved, FDIC's current loss-share
estimation process is complex, is not fully documented, and involves
multiple manual data entries. As a result, the process relies heavily
on effective reviews and oversight for ensuring data accuracy. The
determination of the overall allowance for losses associated with
receivables from resolution activity equally depends upon a highly
complex series of integrated spreadsheets that draw information from
multiple, often manually input, data sources, and thus also relies
heavily on effective supervisory review and oversight for ensuring
data accuracy. Because of the nature of this process, FDIC will need
to continue to provide effective review and oversight controls to
accurately report estimated loss-share losses and the overall
allowance for loss related to resolution activity on the DIF's
financial statements.
Resolution of Prior Year Significant Deficiency:
In our 2009 audit report, we reported a significant deficiency
concerning the effectiveness of FDIC's security over its information
systems, which reduced FDIC's ability to ensure that authorized users
had only the access needed to perform their assigned duties, and that
its systems were sufficiently protected from unauthorized access. The
audit report highlighted the control issues that constituted the
significant deficiency. Specifically, FDIC did not (1) adequately
control access to its computer systems; (2) enforce its policies and
procedures governing the assignment, use, and monitoring of mainframe
user identifications (IDs); (3) appropriately configure certain key
systems, potentially allowing the systems to be manipulated by
internal users without detection; (4) have policies and procedures in
place to prevent users from having inappropriate or incompatible
access to multiple applications; and (5) effectively test and verify
that all system interfaces were properly configured for major changes
to some important accounting and system administrative applications.
Subsequently, we provided more details on these issues and reported
additional underlying control weaknesses, along with recommendations
for corrective actions, to FDIC management.[Footnote 8]
During 2010, FDIC made substantial progress in correcting many of the
underlying control issues that constituted the significant deficiency.
Specifically, FDIC did the following:
* Corrected weaknesses in controls over access to computer systems and
a business application that had not effectively limited individuals'
access to only those functions and data necessary to perform their
assigned duties. For example, FDIC strengthened network configurations
such that users are now prevented from obtaining unauthorized access
to network controls and control information. Additionally, FDIC
addressed weaknesses that had resulted in granting users inappropriate
and excessive access privileges to a business application supporting
resolution and receivership activities.
* Corrected weaknesses in enforcing revised policies and procedures
governing the assignment, use, and monitoring of mainframe user IDs
intended to support technical assistance to business processes. FDIC
also greatly reduced the incidence of the use of access privileges
that provide a limited number of system administrators full access to
all data and programs on the mainframe.
* Corrected the configuration of certain key systems, significantly
reducing the potential for the misuse of powerful mainframe programs.
* Made progress in resolving deficiencies in controls designed to
prevent users from having inappropriate or incompatible access to
multiple applications.
* Corrected deficiencies in the interfaces of two applications that
increased the risk of errors in data as it is transferred from one
system to another.
As a result of the improvements we noted in FDIC's information system
controls, we concluded that the remaining unresolved prior year issues
and new issues identified in our 2010 audit do not individually or
collectively constitute a material weakness or significant deficiency.
In order to sustain the progress FDIC has made in improving its
information system controls, it will be important for FDIC to continue
to place a high level of emphasis on this area, especially with
respect to continuous and periodic monitoring activities.
During our 2010 audit, we identified other deficiencies in FDIC's
system of internal control that we do not consider to be material
weaknesses or significant deficiencies but merit FDIC management's
attention and correction. We have communicated these matters to FDIC
management and as appropriate, will be reporting them in writing to
FDIC separately, along with recommendations for corrective actions.
Compliance with Laws and Regulations:
Our tests for compliance with selected provisions of laws and
regulations disclosed no instances of noncompliance that would be
reportable under U.S. generally accepted government auditing
standards. However, the objective of our audits was not to provide an
opinion on overall compliance with laws and regulations. Accordingly,
we do not express such an opinion.
Objectives, Scope, and Methodology:
FDIC management is responsible for (1) preparing the annual financial
statements in conformity with U.S. generally accepted accounting
principles; (2) establishing and maintaining effective internal
control over financial reporting and evaluating its effectiveness; and
(3) complying with applicable laws and regulations. Management
evaluated the effectiveness of FDIC's internal control over financial
reporting as of December 31, 2010, based on criteria established under
FMFIA. FDIC management provided an assertion concerning the
effectiveness of its internal control over financial reporting (see
appendix I).
We are responsible for planning and performing the audit to obtain
reasonable assurance and provide our opinion about whether (1) the
financial statements are presented fairly, in all material respects,
in conformity with U.S. generally accepted accounting principles, and
(2) FDIC management maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2010. We
are also responsible for testing compliance with selected provisions
of laws and regulations that have a direct and material effect on the
financial statements.
In order to fulfill these responsibilities, we:
* examined, on a test basis, evidence supporting the amounts and
disclosures in the financial statements;
* assessed the accounting principles used and significant estimates
made by FDIC management;
* evaluated the overall presentation of the financial statements;
* obtained an understanding of FDIC and its operations, including its
internal control over financial reporting;
* considered FDIC's process for evaluating and reporting on internal
control over financial reporting based on criteria established under
FMFIA;
* assessed the risk that a material misstatement exists in the
financial statements and the risk that a material weakness exists in
internal control over financial reporting;
* tested relevant internal control over financial reporting;
* evaluated the design and operating effectiveness of internal control
over financial reporting based on the assessed risk;
* tested compliance with certain laws and regulations, including
selected provisions of the Federal Deposit Insurance Act, as amended;
and:
* performed such other procedures as we considered necessary in the
circumstances.
An entity's internal control over financial reporting is a process
affected by those charged with governance, management, and other
personnel, the objectives of which are to provide reasonable assurance
that (1) transactions are properly recorded, processed, and summarized
to permit the preparation of financial statements in conformity with
U.S. generally accepted accounting principles, and assets are
safeguarded against loss from unauthorized acquisition, use, or
disposition, and (2) transactions are executed in accordance with laws
and regulations that could have a direct and material effect on the
financial statements.
We did not evaluate all internal controls relevant to operating
objectives as broadly defined by FMFIA, such as controls relevant to
preparing statistical reports and ensuring efficient operations. We
limited our internal control testing to controls over financial
reporting. Because of inherent limitations in internal control,
internal control may not prevent or detect and correct misstatements
due to error or fraud, losses, or noncompliance. We also caution that
projecting any evaluation of effectiveness to future periods is
subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with policies
and procedures may deteriorate.
We did not test compliance with all laws and regulations applicable to
FDIC. We limited our tests of compliance to those laws and regulations
that have a direct and material effect on the financial statements for
the year ended December 31, 2010. We caution that noncompliance may
occur and not be detected by these tests and that such testing may not
be sufficient for other purposes.
We performed our audit in accordance with U.S. generally accepted
government auditing standards. We believe our audit provides a
reasonable basis for our opinions and other conclusions.
FDIC Comments and Our Evaluation:
In commenting on a draft of this report, FDIC's Chief Financial
Officer (CFO) noted that he was pleased that FDIC had received
unqualified opinions on the DIF's and FRF's 2010 and 2009 financial
statements. He noted that over the past year, FDIC had worked
diligently to resolve the material weakness and significant deficiency
that we had reported in our 2009 audit. In particular, he cited
significant steps taken to strengthen controls over the loss-share
estimation process and over information systems security. The CFO
stated that FDIC would continue to make improvements in these areas in
the coming year, and stressed that FDIC's dedication to sound
financial management remains a top priority.
The complete text of FDIC's comments and its Management Report
containing its assertion on the effectiveness of its internal control
over financial reporting are reprinted in appendix I.
Signed by:
Steven J. Sebastian:
Director:
Financial Management and Assurance:
March 14, 2011:
[End of section]
Deposit Insurance Fund's Financial Statements:
Balance Sheet:
Deposit Insurance Fund:
Federal Deposit Insurance Corporation:
Deposit Insurance Fund Balance Sheet at December 31:
Dollars in Thousands:
Assets:
Cash and cash equivalents - unrestricted:
2010: $27,076,606;
2009: $54,092,423.
Cash and cash equivalents - restricted - systemic risk (Note 16):
(Includes cash/cash equivalents of $5,030,369 at December 31, 2010 and
$6,430,589 at December 31, 2009):
2010: $6,646,968;
2009: $6,420,589.
Investment in U.S. Treasury obligations, net: (Note 3):
2010: $12,3711,268;
2009: $5,486,799.
Assessments receivable, net (Note 9):
2010: $217,893;
2009: $280,510.
Receivables and other assets - systemic risk (Note 16):
2010: $2,269,422;
2009: $3,298,819.
Trust preferred securities (Note 5):
2010: $2,297,818;
2009: $1,961,824.
Interest receivable on investments and other assets, net:
2010: $259,683;
2009: $220,588.
Receivables from resolutions, net (Note 4):
2010: $29,532,545;
2009: $38,408,622.
Property and equipment, net (Note 5):
2010: $416,065;
2009: $388,817.
Total Assets:
2010: $81,088,268;
2009: $110,568,991.
Liabilities:
Accounts payable and other liabilities:
2010: $514,287;
2009: $273,338.
Unearned revenue - prepaid assessments (Note 9):
2010: $30,057,033;
2009: $42,727,101.
Liabilities due to resolutions (Note 7):
2010: $30,511,877;
2009: $34,711,726.
Deferred revenue - systemic risk (Note 16):
2010: $9,054,541;
2009: $7,847,447.
Postretirement benefit liability (Note 13):
2010: $165,874;
2009: $144,952.
Contingent liabilities for: Anticipated failure of insured
institutions: (Note 8):
2010: $17,687,569;
2009: $44,014,258.
Contingent liabilities for: Systemic risk (Note 16):
2010: $149,327;
2009: $1,411,966.
Contingent liabilities for: Litigation losses: (Note 8):
2010: $300,000;
2009: $300,000.
Total Liabilities:
2010: $88,440,508;
2009: $131,430,788.
Commitments and off-balance-sheet exposure (Note 14):
Fund Balance:
Accumulated net income:
2010: ($7,696,428);
2009: ($21,001,312).
Unrealized gain on available-for-sale securities, net (Note 3):
2010: $26,698;
2009: $142,127.
Unrealized postretirement benefit (Loss) Gain (Note 13):
2010: 9$18,503);
2009: ($2,612).
Unrealized Gain on trust preferred securities (Note 5):
2010: $335,993;
2009: $0.
Total Fund Balance:
2009: ($20,861,797);
2010: ($7,352,240).
Total Liabilities and Fund Balance:
2010: $81,088,268;
2009: $110,568,991.
The accompanying notes are an integral part of these financial
statements.
[End of statement]
Statement of Income and Fund Balance:
Deposit Insurance Fund:
Federal Deposit Insurance Corporation:
Deposit Insurance Fund Statement of Income and Fund Balance for the
Years Ended December 31:
Dollars in Thousands:
Revenue:
Interest on U.S. Treasury obligations:
2010: $204,871;
2009: $704,464.
Assessments (Note 9):
2010: $13,610,436;
2009: $17,717,374.
Systemic risk revenue (Note 16):
2010: ($672,818);
2009: $1,721,626.
Realized gain on sale of securities (Note 3):
2010: $0;
2009: $1,389,285.
Other revenue (Note 10):
2010: $237,425;
2009: $3,173,611.
Total Revenue:
2010: $13,379,914;
2009: $4,706,360.
Expenses and Losses:
Operating expenses (Note 11):
2010: $1,592,641;
2009: $1,271,099.
Systemic risk expenses (Note 16):
2010: ($672,818);
2009: $1,721,626.
Provision for insurance losses (Note 12):
2010: ($847,843);
2009: $57,711,772.
Insurance and other expenses:
2010: $3,050;
2009: $4,447.
Total Expenses and Losses:
2010: $75,030;
2009: $60,708,944.
Net Loss:
2010: $13,304,884;
2009: ($36,002,584).
Unrealized (Loss) Gain on available-for-sale securities, net (Note 3):
2010: ($115,429);
2009: ($2,107,925).
Unrealized postretirement benefit (Loss) Gain (Note 13):
2010: ($15,891);
2009: ($27,557).
Unrealized Gain on trust preferred securities (Note 5):
2010: $335,993;
2009: $0.
Comprehensive Income (Loss):
2010: $13,509,557;
2009: ($38,138,086).
Fund Balance - Beginning:
2010: ($20,861,797);
2009: $17,276,289.
Fund Balance - Ending:
2010: ($7,352,240);
2009: ($20,861,797).
The accompanying notes are an integral part of these financial
statements.
[End of statement]
Statement of Cash Flows:
Deposit Insurance Fund:
Federal Deposit Insurance Corporation:
Deposit Insurance Fund Statement of Cash Flows for the Years Ended
December 31:
Dollars in Thousands:
Operating Activities:
Net Income (Loss):
2010: $13,304,884;
2009: ($36,002,584).
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of U.S. Treasury obligations:
2010: ($5,149);
2009: $210,905.
Treasury inflation-protected securities (TIPS) inflation adjustment:
2009: $10,837;
2010: ($23,051).
Gain on sale of U.S. Treasury obligations:
2010: $0;
2009: ($1,389,285).
Depreciation on property and equipment:
2010: $68,790;
2009: $70,488.
Loss on retirement of property and equipment:
2010: $620;
2009: $924.
Provision for insurance losses:
2010: ($847,843);
2009: $57,711,772.
Unrealized Loss on postretirement benefits:
2010: ($15,891);
2009: ($27,577).
Guarantee termination fee from Citigroup:
2010: $0;
2009: ($1,961,824).
Change In Operating Assets and Liabilities:
Decrease in assessments receivable, net:
2010: $62,617;
2009: $737,976.
(Increase) Decrease in interest receivable and other assets:
2010: ($34,194);
2009: $192,750.
(Increase) in receivables from resolutions:
2010: ($16,607,671);
2009: ($60,229,760).
Decrease (Increase) in receivable - systemic risk:
2010: $1,029,397);
2009: ($2,160,688).
Increase in accounts payable and other liabilities:
2010: $240,949;
2009: $140,740.
Increase in postretirement benefit liability:
2010: $20,922;
2009: $30,828.
Decrease in contingency liabilities - systemic risk:
2010: ($1,262,639);
2009: ($25,672).
(Decrease) Increase in liabilities due to resolutions:
2010: ($4,199,849);
2009: $29,978,265).
[Decrease) Increase in unearned revenue - prepaid assessments:
2010: ($12,670,068);
2009: $42,727,101.
Increase in deferred revenue - systemic risk:
2010: $1,203,936;
2009: $5,769,567.
Net Cash (Used by) Provided by Operating Activities:
2010: ($19,734,240);
2009: $35,793,763.
Investing Activities:
Provided by: Maturity of U.S. Treasury obligations:
2010: $21,558,000;
2009: $6,382,027.
Provided by: Sale of U.S. Treasury obligations:
2010: $0;
2009: $15,049,873.
Used by: Purchase of property and equipment:
2010: ($96,659);
2009: ($91,468).
Used by: Purchase U.S. Treasury obligations:
2010: ($30,143,138);
2009: $0.
Net Cash (used by) Provided by Investing Activities:
2010: ($8,681,797);
2009: $21,340,432.
Net (Decrease) Increase in Cash and Cash Equivalents:
2010: ($28,416,037);
2009: $57,134,195.
Cash and Cash Equivalents - Beginning:
2010: $60,523,012;
2009: $3,388,817.
Unrestricted Cash and Cash Equivalents - Ending:
2010: $27,076,606;
2009: $54,092,423.
Restricted Cash and Cash Equivalents - Ending:
2010: $5,030,369;
2009: $6,430,589.
Cash and Cash Equivalents - Ending:
2010: $32,106,975;
2009: $60,523,012.
The accompanying notes are an integral part of these financial
statements.
[End of statement]
Notes to the Financial Statements:
Notes to the Financial Statements: Deposit Insurance Fund:
December 31, 2010 and 2009:
1. Legislation and Operations of the Deposit Insurance Fund:
Overview:
The Federal Deposit Insurance Corporation (FDIC) is the independent
deposit insurance agency created by Congress in 1933 to maintain
stability and public confidence in the nation’s banking system.
Provisions that govern the operations of the FDIC are generally found
in the Federal Deposit Insurance (FDI) Act, as amended (12 U.S.C.
1811, et seq.) In carrying out the purposes of the FDI Act, as
amended, the FDIC insures the deposits of banks and savings
associations (insured depository institutions), and in cooperation
with other federal and state agencies promotes the safety and
soundness of insured depository institutions by identifying,
monitoring and addressing risks to the Deposit Insurance Fund (DIF).
An active institution’s primary federal supervisor is generally
determined by the institution’s charter type. Commercial and savings
banks are supervised by either 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 (OTS). (See “Recent Legislation” below for certain
OTS functional responsibilities to be transferred to the FDIC in the
future).
The FDIC is the administrator of the DIF and 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 DIF 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
under this statutory provision can only be invoked by the Secretary of
the Treasury, in consultation with the President, and upon the written
recommendation of two-thirds of both the FDIC Board of Directors and
the Board of Governors of the Federal Reserve System. Until passage of
recent legislation (see “Recent Legislation” below), a systemic risk
determination could permit open bank assistance. As explained below,
such open bank assistance is no longer available. 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 Secretary of the
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 former
Resolution Trust Corporation. The DIF and the FRF are maintained
separately to fund their respective mandates of the FDIC.
Pursuant to the enactment of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act) on July 21, 2010 (see “Recent
Legislation” below), the FDIC is the manager of the Orderly
Liquidation Fund (OLF). Established as a separate fund in the U.S.
Treasury (Treasury), the OLF is inactive and unfunded until the FDIC
is appointed as receiver for a covered financial company (a failing
financial company, such as a bank holding company or nonbank financial
company for which a systemic risk determination has been made as set
forth in section 203 of the Dodd-Frank Act). At the commencement of an
orderly liquidation of a covered financial company, the FDIC may
borrow funds required by the receivership from the Treasury, up to the
Maximum Obligation Limitation for each covered financial company and
in accordance with an Orderly Liquidation and Repayment Plan.
Borrowings will be deposited in the OLF and repaid to the Treasury
with the proceeds of asset sales. If such proceeds are insufficient,
any remaining shortfall must be recovered from assessments imposed on
financial companies as specified in the Dodd-Frank Act.
Recent Legislation:
The Dodd-Frank Act (Public Law 111-203) provides comprehensive reform
of the supervision and regulation of the financial services industry.
Under this legislation, the FDIC’s new responsibilities include: 1)
broad authority to liquidate failing systemic financial firms in an
orderly manner as manager of the newly created OLF; 2) issuing
regulations, jointly with the Federal Reserve Board (FRB), requiring
that nonbank financial companies supervised by the FRB and bank
holding companies with assets equal to or exceeding $50 billion
provide the FRB, the FDIC, and the Financial Stability Oversight
Council (FSOC) a plan for their rapid and orderly resolution in the
event of material financial distress or failure; 3) serving as a
voting member of the FSOC; 4) back-up examination authority for
nonbank financial companies supervised by the FRB and bank holding
companies with at least $50 billion in assets; 5) back-up enforcement
actions against depository institution holding companies if their
conduct or threatened conduct poses a risk of loss to the DIF; and 6)
federal oversight of state-chartered thrifts upon the transfer of such
authority from OTS (between 12 and 18 months after enactment of the
Dodd-Frank Act, currently set for July 21, 2011).
The Dodd-Frank Act limits the systemic risk determination authority
under 12 U.S.C. 1823(c) to DIF-insured depository institutions for
which the FDIC has been appointed receiver and requires that any
action taken or assistance provided under this authority must be for
the purpose of winding up the insured depository institution in
receivership. Under Title XI of the Act, the FDIC is granted new
authority to establish a widely available program to guarantee
obligations of solvent insured depository institutions or solvent
depository institution holding companies (including affiliates) upon
systemic determination of a liquidity event during times of severe
economic distress. This program would not be DIF-funded; it would be
funded by fees and assessments paid by all participants in the
program. If fees are insufficient to cover losses or expenses, the
FDIC must impose a special assessment on participants as necessary to
cover the insufficiency. Any excess funds at the end of the liquidity
event program would be deposited in the General Fund of the Treasury.
The new law also makes changes related to the FDIC’s deposit insurance
mandate. These changes include a permanent increase in the standard
deposit insurance amount to $250,000 (retroactive to January 1, 2008)
and unlimited deposit insurance coverage for non-interest bearing
transaction accounts for two years, from December 31, 2010 to the end
of 2012. Additionally, the legislation changes the assessment base
(from a deposits-based formula to one based on assets) and establishes
new reserve ratio requirements (see Note 9).
Operations of the DIF:
The primary purposes of the DIF are to: 1) insure the deposits and
protect the depositors of DIF-insured institutions and 2) resolve
failed DIF-insured institutions upon appointment of the 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. Other
available funding sources, if necessary, are borrowings from the
Treasury, the Federal Financing Bank (FFB), Federal Home Loan Banks,
and insured depository institutions. The FDIC has borrowing authority
of $100 billion from the Treasury and a Note Purchase Agreement with
the FFB not to exceed $100 billion to enhance the 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 $106.3 billion and $118.2 billion as of December 31, 2010 and
2009, respectively.
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. Resolution
entities 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 DIF and are presented in
conformity 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 associated revenue;
the allowance for loss on receivables from resolutions (including loss-
share agreements); liabilities due to resolutions; the estimated
losses for anticipated failures, litigation, and representations and
warranties; guarantee obligations for the Temporary Liquidity
Guarantee Program and structured transactions; the 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.
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 and has granted the FDIC 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.
The 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 and recorded on a daily basis using
the effective interest or straight-line method depending on the
maturity of the security.
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.
Disclosure about Recent Relevant Accounting Pronouncements:
* Accounting Standards Update (ASU) No. 2009-17, Improvements to
Financial Reporting by Enterprises Involved with Variable Interest
Entities, modified Accounting Standards Codification (ASC) Topic 810,
Consolidation, to incorporate the provisions of former Statement of
Financial Accounting Standards (SFAS) No. 167, Amendments to FASB
Interpretation No. 46(R), effective for reporting periods beginning
after November 15, 2009. The provisions of ASC 810 require that an
enterprise make qualitative assessments of its relationship with a
variable interest entity (VIE) based on the enterprise’s 1) power to
direct the activities that most significantly impact the economic
performance of the VIE and 2) 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 the relationship causes the variable
interest holder to have both of these characteristics, the enterprise
is considered the primary beneficiary and must consolidate the VIE.
During 2010, selected FDIC receiverships engaged in structured
transactions, some of which resulted in the issuance of note
obligations that were guaranteed by the FDIC in its corporate capacity
(see Note 8). In accordance with the provisions of ASC 810, an
analysis of each structured transaction was performed to determine
whether the terms of the legal agreements extended rights that would
cause the FDIC in its corporate capacity to be characterized as the
primary beneficiary. The conclusion of these analyses was that the
FDIC in its corporate capacity did not have the power to direct the
significant activities of any entity with which it was involved at
December 31, 2010 and therefore, there is no current consolidation
requirement for the DIF 2010 financial statements. In making that
determination, consideration was given to which, if any, activities
were significant to each VIE. Often, the right to service collateral,
to liquidate collateral or to unilaterally dissolve the LLC or trust
was determined to be the most significant activity. In other cases, it
was determined that there were no significant ongoing activities and
that the design of the entity was the best indicator of which party
was the primary beneficiary. The results of each analysis identified a
party other than the FDIC in its corporate capacity as the primary
beneficiary. In the future, the FDIC in its corporate capacity may
become the primary beneficiary upon the activation of provisional
contract rights that extend to the corporation if payments are made on
guarantee claims. Ongoing analyses will be required in order to
monitor implications for ASC 810 provisions.
* ASU No. 2009-16, Accounting for Transfers of Financial Assets
modified ASC Topic 860, Transfers and Servicing, to incorporate the
provisions of former SFAS No. 166, Accounting for Transfers of
Financial Assets, an amendment of FASB Statement No. 140, effective
for reporting periods beginning after November 15, 2009. The
provisions of ASC 860 remove the concept of a qualifying special
purpose entity, change the requirements for derecognizing financial
assets and require additional disclosures about a transferor’s
continuing involvement with transferred assets. The DIF has not
engaged in any transfers of financial assets or financial liabilities;
thus, there is no current impact to these financial statements for
2010.
* ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic
820) – Improving Disclosures about Fair Value Measurements, requires
enhanced disclosures for significant transfers into and out of Level 1
(measured using quoted prices in active markets) and Level 2 (measured
using other observable inputs) of the fair value measurement
hierarchy. These disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009. The required
disclosures are included in Note 15. Separate disclosure of the gross
purchases, sales, issuances, and settlements activity for Level 3
(measured using unobservable inputs) fair value measurements will
become effective for fiscal years beginning after December 15, 2010.
Currently, the additional disclosures are not expected to impact the
DIF.
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, 2010 and 2009, investments in U.S. Treasury
obligations, net, were $12.4 billion and $5.5 billion, respectively.
As of December 31, 2010 and 2009, the DIF held $2.0 billion and $2.1
billion, respectively, of Treasury Inflation-Protected Securities
(TIPS). These securities are indexed to increases or decreases in the
Consumer Price Index for All Urban Consumers (CPI-U).
Total Investment in U.S. Treasury Obligations, Net at December 31,
2010:
Dollars in Thousands:
Maturity: U.S. Treasury notes and bonds: Within 1 year;
Yield at Purchase[A]: 0.73%;
Face Value: $3,000,000;
Net carrying amount: $3,052,503;
Unrealized Holding Gains: $42,048;
Unrealized Holding Losses: ($31); Fair Value: $3,054,520.
Maturity: U.S. Treasury Inflation-Protected Securities:
Within 1 year; Yield at Purchase[A]: 3,47%;
Face Value: $1,375,955;
Net carrying amount: $1,357,967;
Unrealized Holding Gains: $1,391;
Unrealized Holding Losses: $0;
Fair Value: $1,377,558.
Maturity: U.S. Treasury Inflation-Protected Securities: After 1 year
through 5 years;
Yield at Purchase[A]: 2.41%;
Face Value: $615,840;
Net carrying amount: $621,412;
Unrealized Holding Gains: $22,381;
Unrealized Holding Losses: $0;
Fair Value: $643,793.
U.S. Treasury Bills: Within 1 year;
Yield at Purchase[A]: 0.19%;
Face Value: $7,300,000;
Net carrying amount: $7,294,688;
Unrealized Holding Gains: $909;
Unrealized Holding Losses: $0;
Fair Value: $7,295,697.
Maturity: Total;
Face Value: $12,291,795;
Net carrying amount: $12,344,570;
Unrealized Holding Gains: $26,729;
Unrealized Holding Losses: ($31);
Fair Value: $12,371,268.
(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 1.8 percent,
based on figures issued by the Congressional Budget Office and Blue
Chip Economic Indicators in early 2010.
[End of table]
Total Investment in U.S. Treasury Obligations, Net at December 31,
2009:
Dollars in Thousands:
Maturity: U.S. Treasury notes and bonds: Within 1 year;
Yield at Purchase[A]: 5.04%;
Face Value: $3,058,000;
Net carrying amount: $3,062,038;
Unrealized Holding Gains: $48,602;
Unrealized Holding Losses: $0;
Fair Value: $3,110,640.
Maturity: U.S. Treasury notes and bonds: After 1 year through 5 years;
Yield at Purchase[A]: 4.15%;
Face Value: $300,000;
Net carrying amount: $302,755;
Unrealized Holding Gains: $11,648;
Unrealized Holding Losses: $0;
Fair Value: $314,403
Maturity: U.S. Treasury inflation-protected securities After 1 year
through 5 years;
Yield at Purchase[A]: 3.14%;
Face Value: $1,968,744;
Net carrying amount: $1,979,879;
Unrealized Holding Gains: $81,877;
Unrealized Holding Losses: $0;
Fair Value: $2,061,756.
Maturity: Total;
Face Value: $5,326,744
Net carrying amount: $5,344,672
Unrealized Holding Gains: $142,127;
Unrealized Holding Losses: $0;
Fair Value: $5,436,799.
[A] for TIPS, the yields in the above table are stated at their real
yields at purchase, net 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 Economy Indicators in early 2009.
[End of table]
4. Receivables From Resolutions, Net:
Table: Receivables From Resolutions, Net at December 31:
Dollars in Thousands:
Receivables from closed banks:
2010: $115,896,763;
2009: $98,647,508.
Allowance for losses:
2010: ($86,364,218);
2009: ($60,238,886).
Total:
2010: $29,532,545;
2009: $38,408,622.
[End of table]
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 loss represents 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-share agreement are factored into the computation of the
expected repayment. Assets held by DIF resolution entities (including
structured transaction-related assets; see Note 8) are the main source
of repayment of the DIF’s receivables from resolutions.
As of December 31, 2010, there were 336 active receiverships which
include 157 established in 2010. As of December 31, 2010 and 2009, DIF
resolution entities held assets with a book value of $49.9 billion and
$49.3 billion, respectively (including cash, investments, and
miscellaneous receivables of $22.9 billion and $7.7 billion,
respectively). Ninety-nine percent of the current asset book value of
$49.9 billion are held by resolution entities established since 2008.
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, sampled
asset valuation data, 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, recoveries, and monitoring 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 covered assets’ intrinsic value which is determined
using financial models that consider the quality and type of covered
assets, current and future market conditions, risk factors and
estimated asset holding periods. For year-end 2010 financial
reporting, the loss-share cost estimates were updated for the majority
(62% or 137) of the 222 active loss-share agreements; the remaining 85
were already based on recent loss estimates. The updated loss
projections for the larger loss-share agreements were primarily based
on new third-party valuations estimating the cumulative loss of loss-
share covered assets. For the smaller loss-share agreements, the loss
projections were based on a financial model that applies recent
aggregate asset valuation recovery rates against current loss-share
covered asset balances.
Note that 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 actual recoveries to vary
significantly from current estimates.
Whole Bank Purchase and Assumption Transactions with Loss-Share
Agreements:
Since the beginning of 2008, the FDIC resolved 223 failures using a
Whole Bank Purchase and Assumption resolution transaction with an
accompanying loss-share agreement on assets purchased by the financial
institution acquirer. The acquirer typically assumes all of the
deposits and purchases essentially all of the assets of a failed
institution. The majority of the commercial and residential loan
assets are purchased under a loss-share agreement, where the FDIC
agrees to share in future losses and recoveries 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 are 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, or write-down
of loans in accordance with the terms of the loss-share agreement. The
majority of the agreements cover a five- 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. Typically, any losses above the
stated threshold amount will be reimbursed by the receiver at 95
percent of the losses booked by the acquirer. (For agreements executed
after March 26, 2010, the threshold was eliminated and generally 80%
of all losses are covered by the receiver.) As mentioned above, the
estimated loss-share liability is accounted for by the receiver and is
included in the calculation 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 by drawing on
amounts due from the DIF for funding the deposits assumed by the
acquirer (see Note 7).
Through December 31, 2010, DIF receiverships are estimated to pay
approximately $38.8 billion over the duration of these loss-share
agreements on approximately $193.0 billion in total covered assets at
the inception date of these agreements. To date, 158 receiverships
have made loss-share payments totaling $8.3 billion.
Concentration of Credit Risk:
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 $184.4 billion in remaining assets in liquidation
($27.0 billion) and current loss-share covered assets ($157.4 billion)
are concentrated in commercial loans ($104.4 billion), residential
loans ($56.3 billion), and structured transaction-related assets as
described in Note 8 ($12.8 billion). Most of the assets in these asset
types originated from failed institutions located in California ($53.4
billion), Florida ($20.8 billion), Illinois ($15.7 billion), Puerto
Rico ($15.3 billion), and Alabama ($14.6 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 loss
protection on a pool of approximately $301.0 billion of assets that
remained on the balance sheet of Citigroup.
In consideration for its portion of the loss-share guarantee at
inception, the FDIC received $3.025 billion of Citigroup’s preferred
stock (Series G). On July 30, 2009, all shares of preferred stock
initially received were exchanged for 3,025,000 Citigroup Capital
XXXIII trust preferred securities (TruPs) with a liquidation amount of
$1,000 per security and a distribution rate of 8 percent per annum
payable quarterly. The principal amount is due in 2039. 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-share 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 of its 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 five days of the date on
which no Citigroup debt remains outstanding under the TLGP. The fair
value of these TruPs and related interest are recorded as systemic
risk assets as described in Note 16.
The remaining $2.225 billion (liquidation amount) of TruPs held by the
FDIC is 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 in 2009 of $1.962 billion for the fair value of the TruPs (see
Note 10). At December 31, 2010, the fair value of the TruPs was $2.298
billion (see Note 15). An unrealized holding gain of $336 million in
2010 is included in other comprehensive income.
6. Property and Equipment, Net:
Table: Property and Equipment, Net at December 31:
Dollars in Thousands:
Land:
2010: $37,352;
2009: $37,352.
Buildings (including leasehold improvements):
2010: $312,173;
2009: $295,265.
Application software (includes work-in-process):
2010: $122,736;
2009: $179,479.
Furniture, Fixtures, and equipment:
2010: $144,661;
2009: $117,430.
Accumulated depreciation:
2010: ($200,857);
2009: ($240,709).
Total:
2010: $416,065;
2009: $388,817.
The depreciation expense was $69 million and $70 million for 2010 and
2009, respectively.
[End of table]
7. Liabilities Due to Resolutions:
As of December 31, 2010 and 2009, the DIF recorded liabilities
totaling $30.4 billion and $34.5 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. Eighty-nine 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.
In addition, there was $80 million and $150 million in unpaid deposit
claims related to multiple receiverships as of December 31, 2010 and
2009, respectively. 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.
The banking industry continued to face significant problems in 2010.
The slowly recovering economic and credit environment challenged the
soundness of many DIF-insured institutions.
The ongoing weakness in housing and commercial real estate markets led
to continuing asset quality problems, which hurt banking industry
performance and weakened many institutions with significant portfolios
of residential and commercial mortgages. Despite the challenging
conditions evident in certain business lines and markets, the losses
to the DIF from failures that occurred in 2010 fell short of the
amount reserved at the end of 2009, as the aggregate number and size
of institution failures in 2010 were less than anticipated. The
removal from the reserve of banks that did fail in 2010, as well as
projected favorable trends in bank supervisory downgrade and failure
rates and the smaller size of institutions that remain troubled, all
contribute to a decline by $26.3 billion to $17.7 billion in the
contingent liability for anticipated failures of insured institutions
at the end of 2010.
In addition to these recorded contingent liabilities, the FDIC has
identified risk in the financial services industry that could result
in additional losses 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 of up to approximately $24.5 billion. The
actual losses, if any, will largely depend on future economic and
market conditions and could differ materially from this estimate.
During 2010, 157 banks with combined assets of $93.2 billion failed.
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.
Litigation Losses:
The DIF records an estimated loss for unresolved legal cases to the
extent that those losses are considered probable and reasonably
estimable. Probable litigation losses of $300 million were recorded
for both December 31, 2010 and 2009, and the FDIC has determined that
there are no reasonably possible losses from unresolved cases.
Other Contingencies:
IndyMac Federal Bank Representation and Indemnification Contingent
Liability On March 19, 2009, the FDIC as receiver of IndyMac Federal
Bank (IMFB) and certain subsidiaries (collectively, sellers) sold
substantially all of the assets of IMFB and the respective
subsidiaries, including mortgage loans and mortgage loan servicing
rights, to OneWest Bank and its affiliates. To maximize sale returns,
the sellers made certain customary representations regarding the
assets and have certain obligations to indemnify the acquirers for
losses incurred as a result of breaches of such representations,
losses incurred as a result of the failure to obtain contractual
counterparty consents to the sale, and third party claims arising from
pre-sale acts and omissions of the sellers or the failed bank.
Although the representations and indemnifications were made by or are
obligations of the sellers, the FDIC, in its corporate capacity,
guaranteed the receivership’s indemnification obligations under the
sale agreements. The representations relate generally to ownership of
and right to sell the assets; compliance with applicable law in the
origination of the loans; accuracy of the servicing records; validity
of loan documents; and servicing of the loans serviced for others.
Until the period for asserting claims under these arrangements have
expired and all indemnification claims quantified and paid, losses
could continue to be incurred by the receivership and, in turn, the
DIF either directly, as a result of the FDIC corporate guaranty of the
receivership’s indemnification obligations, or indirectly, as a result
of a reduction in the receivership’s assets available to pay the DIF’s
claims as subrogee for insured accountholders. The acquirers’ rights
to assert actual and potential breaches extend out to March 19, 2019
for the Fannie Mae and Ginnie Mae reverse mortgage servicing
portfolios (unpaid principal balance of $21.7 billion at December 31,
2010 and 2009), March 19, 2014 for the Fannie Mae, Freddie Mac and
Ginnie Mae mortgage servicing portfolios (unpaid principal balance of
$45.3 billion at December 31, 2010 compared to $62.1 billion at December
31, 2009), and March 19, 2011 for the remaining (private) mortgage
servicing portfolio and whole loans (unpaid principal balance of $74.2
billion at December 31, 2010 compared to $104.4 billion at December
31, 2009).
As of December 31, 2010, the IndyMac receivership has paid $2.8
million in approved claims and has accrued an additional $2.6 million
liability for claims asserted but unpaid. The FDIC believes it is
likely that additional losses will be incurred, however quantifying
the contingent liability associated with the representations and the
indemnification obligations is subject to a number of uncertainties,
including 1) borrower prepayment speeds, 2) the occurrence of borrower
defaults and resulting foreclosures and losses, 3) the assertion by
third party investors of claims with respect to loans serviced for
them, 4) the existence and timing of discovery of breaches and the
assertion of claims for indemnification for losses by the acquirer, 5)
the compliance by the acquirer with certain loss mitigation and other
conditions to indemnification, 6) third party sources of loss recovery
(such as title companies and insurers), 7) the ability of the acquirer
to refute claims from investors without incurring reimbursable losses,
and 8) the cost to cure breaches and respond to third party claims.
Because of these and other uncertainties that surround the liability
associated with indemnifications and the quantification of possible
losses, the FDIC has determined that while additional losses are
probable, the amount is not estimable.
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 receivership 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 2010 and 2009, the
FDIC in its corporate capacity made no indemnification payments under
such agreements and no amount has been accrued in the accompanying
financial statements with respect to these indemnification guarantees.
FDIC Guaranteed Debt of Structured Transactions:
During 2009 and 2010, the FDIC as receiver used three types of
structured transactions to dispose of certain performing and non-
performing residential mortgage loans, commercial loans, construction
loans, and mortgage backed securities held by the receiverships. The
three types of structured transactions are: 1) limited liability
companies (LLCs), 2) securitizations, and 3) structured sale
guaranteed notes (SSGNs).
LLCs:
Under the LLC structure, the FDIC, as receiver, contributes a pool of
assets to a newly-formed LLC and offers for sale, through a
competitive bid process, some of the equity in the LLC. The day-to-day
management of the LLC is transferred to the highest bidder along with
the purchased equity interest. The FDIC, in its corporate capacity,
guarantees notes issued by the LLCs. In exchange for the guarantee,
the DIF receives a guarantee fee in either a lump-sum, up-front
payment based on the estimated duration of the note or a monthly
payment based on a fixed percentage multiplied by the outstanding note
balance. The terms of these guarantees generally stipulate that all
cash flows received from the entity’s collateral be used in the
following order to: 1) pay operational expenses of the entity, 2) pay
FDIC its contractual guarantee fee, 3) pay down the guaranteed notes
(or, if applicable, fund the related defeasance account for payoff of
the notes at maturity), and 4) pay the equity investors. If the FDIC
is required to perform under these guarantees, it acquires an interest
in the cash flows of the LLC equal to the amount of guarantee payments
made plus accrued interest thereon. As mentioned above, this interest
is senior to all equity interests and thus will be reimbursed, in
full, prior to equity holders receiving a return on investment. Once
all expenses have been paid, the guaranteed notes have been satisfied,
and FDIC has been reimbursed for any guarantee payments, the equity
holders receive any remaining cash flows.
Private investors purchased a 40 or 50 percent ownership interest in
the LLC structures for $1.6 billion in cash and the LLCs issued notes
of $4.4 billion to the receiverships to partially fund the purchase of
the assets. The receiverships hold the remaining 50 or 60 percent
equity interest in the LLCs and, in most cases, the guaranteed notes.
The FDIC in its corporate capacity guarantees the timely payment of
principal and interest for the notes. The terms of the note guarantees
extend until the earliest of 1) payment in full of the notes or 2) two
years following the maturity date of the notes. The note with the
longest term matures in 2020. In the event of note payment default by
a 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; or 3)
foreclose on the equity interests of the debtor.
Securitizations and SSGNs:
Securitizations and SSGNs (collectively, “Trusts”) are transactions in
which certain assets or securities from failed institutions are pooled
into a trust structure. The Trusts issued senior notes, subordinate
notes, and owner trust certificates collateralized by the mortgage-
backed securities or loans that are transferred to the Trusts.
Private investors purchased the senior notes issued by the Trusts for
$4.6 billion in cash. The receiverships hold 100 percent of the
subordinate notes and owner trust certificates (“OTCs”). The FDIC in
its corporate capacity guarantees the timely payment of principal and
interest for the senior notes. The terms of these guarantees generally
stipulate that all cash flows received from the entity’s collateral be
used in the following order to: 1) pay operational expenses of the
entity, 2) pay FDIC its contractual guarantee fee, 3) pay interest on
the guaranteed notes, 4) pay down the guaranteed notes, and 5) pay the
holders of the subordinate notes and owner trust certificates. If the
FDIC is required to perform under its guarantees, it acquires an
interest in the cash flows of the trust equal to the amount of
guarantee payments made plus accrued interest thereon. As mentioned
above, this interest is senior to all interests of subordinate note
holders and OTC holders and thus will be reimbursed, in full, prior to
these holders receiving a return on any remaining investment. Once all
expenses have been paid, the guaranteed notes have been satisfied, and
FDIC has been reimbursed for any guarantee payments, the subordinate
note holders and OTC holders receive the remaining cash flows.
All Structured Transactions:
Through December 31, 2010, the receiverships have transferred a
portfolio of loans with an unpaid principal balance of $16.4 billion
and mortgage-backed securities with a book value of $6.8 billion to
the LLCs and Trusts which have issued notes guaranteed by the FDIC. To
date, the DIF has collected guarantee fees totaling $128 million and
recorded a receivable for additional guarantee fees of $170 million,
included in the “Interest receivable on investments and other assets,
net” line item. All guarantee fees are recorded as deferred revenue,
included in the “Accounts payable and other liabilities” line item,
and recognized as revenue primarily on a straight-line basis over the
term of the notes. At December 31, 2010, the amount of deferred
revenue recognized on the balance sheet was $249 million. The DIF
records no other structured transaction related assets or liabilities
on its balance sheet.
The estimated loss on 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/Trust 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. To date,
FDIC in its corporate capacity has not provided, and does not intend
to provide, any form of financial or other support to a Trust or LLC
that it was not previously contractually required to provide.
As of December 31, 2010, the maximum exposure to loss is $8.3 billion,
the sum of all outstanding debt issued by LLCs and Trusts that is
guaranteed by the FDIC in its corporate capacity. The $8.3 billion is
comprised of $4.2 billion issued by LLCs, $3.8 billion issued by
SSGNs, and $.3 billion issued by the securitization. Some transactions
have established defeasance accounts to pay off the notes at maturity.
A total of $756 million has been deposited into these accounts.
9. Assessments:
The Dodd-Frank Act, enacted on July 21, 2010, provides for significant
DIF assessment and capitalization reforms. As a result, the FDIC
issued proposed regulations and adopted a new Restoration Plan. The
following presents the required DIF reforms and the related FDIC actions
taken to:
* define the assessment base generally as average consolidated total
assets minus average tangible equity (the new assessment base).
To amend its regulations, the FDIC issued a proposed rulemaking to
redefine the assessment base used for calculating deposit insurance
assessments from adjusted domestic deposits to average consolidated
total assets minus average tangible equity (measured as Tier 1
capital).
* annually establish and publish a designated reserve ratio (DRR) at
the statutory minimum percentage of not less than 1.35 percent of
estimated insured deposits or the comparable percentage of the new
assessment base. In addition, the FDIC must annually determine if a
dividend should be paid, based on the statutory requirement generally
to declare dividends if the DIF reserve ratio exceeds 1.50 percent of
estimated insured deposits. The Board of Directors is given sole
discretion to suspend or limit dividends and must prescribe relevant
regulations.
In order to implement these requirements, the FDIC proposed a
comprehensive long-range plan for deposit insurance fund management
with the intent of maintaining a positive fund balance and moderate,
steady assessment rates. The proposed rulemaking would set the DRR at
2 percent as a long-term minimum goal and adopt a lower assessment
rate schedule when the reserve ratio reaches 1.15. To increase the
probability that the fund reserve ratio will reach a level sufficient
to withstand a future crisis, the proposed rulemaking would suspend
dividends permanently when the fund reserve ratio exceeds 1.5 percent
and, in lieu of dividends, adopt lower assessment rate schedules when
the reserve ratio reaches 2 percent and 2.5 percent so that average
rates would decline about 25 percent and 50 percent, respectively. In
December 2010, the FDIC issued a final rule related to the DRR portion
of the proposed rulemaking, setting the DRR at 2 percent effective on
January 1, 2011.
* return the reserve ratio to 1.35 percent of estimated insured
deposits by September 30, 2020.
To comply with this mandate, the FDIC adopted a new Restoration Plan
that provides for the following: 1) the period of the Restoration Plan
is extended from the end of 2016 to September 30, 2020; 2) the FDIC
will maintain the current schedule of assessment rates, foregoing the
uniform 3 basis point increase previously scheduled to take effect on
January 1, 2011; 3) institutions may continue to use assessment
credits without additional restriction during the term of the
Restoration Plan; 4) the FDIC will pursue rulemaking in 2011 regarding
the method that will be used to offset the effect on small
institutions (less than $10 billion in assets) of the statutory
requirement that the fund reserve ratio increase from 1.15 percent to
1.35 percent by September 30, 2020; and 5) at least semiannually, the
FDIC will update its loss and income projections for the fund and, if
needed, will increase or decrease rates, following notice-and-comment
rulemaking, if required.
In addition, the FDIC issued a proposed rulemaking to revise the
assessment system applicable to large insured depository institutions
(IDIs) to better capture risk at the time an IDI assumes the risk, to
better differentiate IDIs during periods of good economic and banking
conditions based on how they would fare during periods of stress or
economic downturns, and to better take into account the losses that
the FDIC may incur if such an IDI fails. Specifically, proposed changes
include eliminating risk categories and the use of long-term debt
issuer ratings for large IDIs and combining CAMELS ratings and forward-
looking financial measures into two scorecards: one for most large
IDIs and another for large IDIs that are structurally and
operationally complex or that pose unique challenges and risks in case
of failure (highly complex IDIs).
Assessment Revenue:
The assessment rate averaged approximately 17.72 cents per $100 and
23.32 cents per $100 of the assessment base, as defined in part
327.5(b) of FDIC Rules and Regulations, for 2010 and 2009,
respectively. During 2010 and 2009, $13.6 billion and $17.7 billion
were recognized as assessment revenue from institutions. For those
institutions that did not prepay assessments as described below, the
“Assessments receivable, net” line item of $218 million represents the
estimated premiums due from IDIs for the fourth quarter of 2010. The
actual deposit insurance assessments for the fourth quarter will be
billed and collected at the end of the first quarter of 2011.
During 2009, the FDIC implemented actions to supplement DIF’s revenue
through a special assessment and its liquidity through prepaid
assessments from IDIs:
* On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis
point special assessment on each IDI’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.
* On November 12, 2009, the FDIC adopted a final rule to address the
DIF’s liquidity needs to pay for projected near-term failures and to
ensure that the deposit insurance system remained industry-funded.
Pursuant to the final rule, on December 30, 2009, a majority of IDIs
prepaid estimated quarterly risk-based assessments of $45.7 billion for
the period October 2009 through December 2012. An institution’s
quarterly risk-based deposit insurance assessment thereafter is 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.
At December 31, 2010, the remaining prepaid amount of $30.1 billion is
included in the “Unearned revenue – prepaid assessments” line item on
the Balance Sheet.
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.
Reserve Ratio:
As of December 31, 2010, the DIF reserve ratio was -0.12 percent of
estimated insured deposits.
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 2010 and
2009, approximately $796 million and $784 million, respectively, was
collected and remitted to the FICO.
10. Other Revenue:
Table: Other Revenue for the Years Ended December 31:
Dollars in Thousands:
Guarantee termination fees:
2010: $0;
2009: $2,053,825.
Dividends and interest on Citigroup trust preferred securities:
2010: $177,675;
2009: $231,227.
Debt guarantee surcharges:
2010: $0;
2009: $871,746.
Other:
2010: $15,193;
2009: $13,348.
Total:
2010: $237,425;
2009: $3,173,611.
[End of table]
Guarantee Termination Fees and Dividends and Interest on TruPs
Bank of America:
In January 2009, the FDIC, the 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 owned by Bank of America. In
May 2009, prior to completing definitive documentation, Bank of
America announced its intention to terminate negotiations with respect
to the loss-share guarantee arrangement contemplated in the Term
Sheet. Bank of America paid a termination fee of $425 million to
compensate the federal parties for the guarantee from the date of the
signing of the Term Sheet through the termination date. Of this
amount, the FDIC received and recognized revenue of $92 million for
the DIF in 2009. No losses were borne by the FDIC prior to the
termination.
Citigroup:
In connection with the termination of a loss-share agreement with
Citigroup on December 23, 2009 (see Note 5), the DIF recognized
revenue of $1.962 billion for the fair value of the trust preferred
securities received as consideration for the guarantee. The DIF
recognized $178 million and $231 million of dividends and interest on
the securities for 2010 and 2009, respectively.
Guarantee Fees for Structured Transactions:
The FDIC in its corporate capacity participated in structured
transactions as guarantor of the principal and interest due on certain
notes issued by related limited liability companies and Trusts (see
Note 8). The transactions were formed to maximize recoveries on assets
purchased by these entities from receiverships. In exchange for the
guarantees, the DIF receives guarantee fees that are recognized as
revenue over the term of each guarantee on a straight line basis. The
DIF recognized revenue in the amount of $45 million and $3 million
during 2010 and 2009, respectively.
Surcharges on FDIC-Guaranteed Debt:
The DIF collected a surcharge on all debt issued under the Temporary
Liquidity Guarantee Program (TLGP) after March 31, 2009 in an effort
to provide an incentive for all participants to return to the non-
guaranteed debt market. Unlike other TLGP fees (see Note 16), which are
reserved for projected TLGP losses, the surcharges collected were
deposited into the DIF.
During 2009, the DIF collected surcharges in the amount of $872
million. No surcharges were collected in 2010.
11. Operating Expenses:
Operating expenses were $1.6 billion for 2010, compared to $1.3
billion for 2009. The chart below lists the major components of
operating expenses.
Table: Operating Expenses for the Years Ended December 31:
Dollars in Thousands:
Salaries and benefits:
2010: $1,184,523;
2009: $901,836.
Outside services:
2010: $360,880;
2009: $244,479.
Travel:
2010: $111,110;
2009: $97,744.
Buildings and leased space:
2010: $85,137;
2009: $65,286.
Software/Hardware maintenance:
2010: $50,575;
2009: $40,678.
Depreciation of property and equipment:
2010: $68,790;
2009: $70,488.
Other:
2010: $35,384;
2009: $37,563.
Services reimbursed by TLGP:
2010: ($242);
2009: ($3,613).
Services billed to resolution entities:
2010: ($303,516);
2009: ($183,362).
Total:
2010: $1,592,641;
2009: $1,271,099.
[End of table]
12. Provision for Insurance Losses:
Provision for insurance losses was a negative $848 million for 2010,
compared to a positive $57.7 billion for 2009. The 2010 negative
provision is primarily due to lower-than-anticipated loss estimates at
time of failure for banks that have failed and leveling off of
estimated losses to the DIF from banks expected to fail. The following
chart lists the major components of the provision for insurance losses.
Table: Provision for Insurance Losses for the Years Ended December 31:
Dollars in Thousands:
Valuation Adjustments:
Closed banks and thrifts:
2010: $25,483,252;
2009: $37,586,603.
Other assets:
2010: ($4,406);
2009: ($7,885).
Total Valuation Adjustments:
2010: $25,478,846;
2009: $37,578,718.
Contingent Liabilities Adjustments:
Anticipated failure of insured institutions:
2010: ($26,326,689);
2009: $20,033,054.
Litigation:
2010: $0;
2009: $100,000.
Total Contingent Liabilities Adjustments:
2010: ($26,326,689);
2009: $20,133,054.
Total:
2009: $41,838,835;
2010: ($847,843).
[End of table]
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).
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, they do not
receive agency matching contributions.
Table: Pension Benefits and Savings Plans Expenses for the Years Ended
December 31:
Dollars in Thousands:
Civil Service Retirement System:
2010: $6,387;
2009: $6,401.
Federal Employees Retirement System (Basic Benefit):
2010: $78,666;
2009: $56,451.
FDIC Savings Plan:
2010: $30,825;
2009: $25,449.
Federal Thrift Savings Plan:
2010: $28,679;
2009: $20,503.
Total:
2010: $14,557;
2009: $108,804.
[End of table]
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 coverage 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, 2010
and 2009, the liability was $166 million and $145 million,
respectively, which is recognized in the “Postretirement benefit
liability” line item on the Balance Sheet. The cumulative actuarial
losses (changes in assumptions and plan experience) and prior service
costs (changes to plan provisions that increase benefits) were $19
million and $3 million at December 31, 2010 and 2009, respectively.
These amounts are reported as accumulated other comprehensive income
in the “Unrealized postretirement benefit loss” line item on the
Balance Sheet.
The DIF’s expenses for postretirement benefits for 2010 and 2009 were
$9 million and $8 million, respectively, 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 losses and prior service
costs for 2010 and 2009 of $16 million and $28 million, respectively,
are reported as other comprehensive income in the “Unrealized
postretirement benefit loss” line item. Key actuarial assumptions used
in the accounting for the plan include the discount rate of 5.0
percent, the rate of compensation increase of 4.1 percent, and the
dental coverage trend rate of 7.0 percent. The discount rate of 5.0
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 $204 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
$45 million and $29 million for the years ended December 31, 2010 and
2009, respectively.
Table: Leased Space Commitments:
Dollars in Thousands:
2011: $54,086;
2012: $48,047;
2013: $37,005;
2014: $28,035;
2015: $19,731;
2016/Thereafter: $17,229.
[End of table]
Off-Balance-Sheet Exposure:
Deposit Insurance:
As of December 31, 2010, the estimated insured deposits for DIF were
$6.2 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. The amount of $6.2 trillion
includes noninterest-bearing transaction accounts that received
coverage under the Dodd-Frank Act beginning on December 31, 2010 to
the end of 2012.
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, 2010 and 2009.
Table: Assets Measured at Fair Value at December 31, 2010:
Dollars in Thousands:
Fair Value Measurements Using:
Assets: Cash and cash equivalents (Special U.S. Treasuries)[1]:
Quoted Prices in Active Markets for Identical Assets (Level 1):
$27,076,606;
Significant Other Observable Inputs (Level 2): $0;
Significant Unobservable Inputs (Level 3): $0;
Total Assets at Fair Value: $27,076,606.
Available for Sale Debt Securities:
Investment in U.S. Treasury Obligations[2]:
Quoted Prices in Active Markets for Identical Assets (Level 1):
$12,371,268;
Significant Other Observable Inputs (Level 2): $0;
Significant Unobservable Inputs (Level 3): $0;
Total Assets at Fair Value: $12,371,268.
Trust preferred securities:
Quoted Prices in Active Markets for Identical Assets (Level 1): $0;
Significant Other Observable Inputs (Level 2): $2,297,818;
Significant Unobservable Inputs (Level 3): $0;
Total Assets at Fair Value: $2,297,818.
Trust preferred securities held for UST (Note 16):
Quoted Prices in Active Markets for Identical Assets (Level 1): $0;
Significant Other Observable Inputs (Level 2): $826,182;
Significant Unobservable Inputs (Level 3): $0;
Total Assets at Fair Value: $826,182.
Total Assets:
Quoted Prices in Active Markets for Identical Assets (Level 1):
$39,447,874;
Significant Other Observable Inputs (Level 2): $3,124,000;
Significant Unobservable Inputs (Level 3): $0;
Total Assets at Fair Value: $42,571,874.
[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.
[End of table]
In exchange for prior loss-share guarantee coverage provided to
Citigroup as described in Note 5, the FDIC and the Treasury received
TruPs. At December 31, 2010, the fair value of the securities in the
amount of $3.124 billion was classified as a Level 2 measurement based
on an FDIC developed model using observable market data for traded
Citigroup securities to determine the expected present value of future
cash flows. Key inputs include market yields on U.S. Dollar interest
rate swaps and discount rates for default, call and liquidity risks
that are derived from traded Citigroup securities and modeled pricing
relationships.
Table: Assets Measured at Fair Value at December 31, 2009:
Dollars in Thousands:
Fair Value Measurements Using:
Assets:
Cash and cash equivalents (Special U.S. Treasuries)[1]:
Quoted Prices in Active Markets for Identical Assets (Level 1):
$54,092,423;
Significant Other Observable Inputs (Level 2): $0;
Significant Unobservable Inputs (Level 3): $0;
Total Assets at Fair Value: $54,092,421.
Available for Sale Debt Securities:
Investment in U.S. Treasury Obligations[2]:
Quoted Prices in Active Markets for Identical Assets (Level 1):
$5,486,799;
Significant Other Observable Inputs (Level 2): $0;
Significant Unobservable Inputs (Level 3): $0;
Total Assets at Fair Value: $5,486,799.
Trust preferred securities:
Quoted Prices in Active Markets for Identical Assets (Level 1): $0;
Significant Other Observable Inputs (Level 2): $0;
Significant Unobservable Inputs (Level 3): $1,961,824;
Total Assets at Fair Value: $1,961,824.
Trust preferred securities held for UST (Note 16):
Quoted Prices in Active Markets for Identical Assets (Level 1): $0;
Significant Other Observable Inputs (Level 2): $0;
Significant Unobservable Inputs (Level 3): $705,375;
Total Assets at Fair Value: $705,375.
Total Assets:
Quoted Prices in Active Markets for Identical Assets (Level 1):
$59,579,222;
Significant Other Observable Inputs (Level 2): $0;
Significant Unobservable Inputs (Level 3): $2,667,199;
Total Assets at Fair Value: $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.
[End of table]
At December 31, 2009 the fair value of the TruPs in the amount of
$2.667 billion was classified as a Level 3 measurement and 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. The change in fair value classification from
Level 3 to Level 2 between 2009 and 2010 was due to a greater reliance
on observable inputs. The table below reconciles the beginning and
ending Level 3 balances for 2010.
Table: Fair Value Measurements Using Unobservable Inputs (Level 3) -
Trust Preferred Securities at December 31, 2010:
Dollars in Thousands:
Beginning balance:
2010: $2,667,199;
2009: $0.
Total gains or losses:
2010: $0;
2009: $0.
Transfers in and/or out of Level 3:
2010: ($2,667,199);
2009: $2,667,199.
Total:
2010: $0;
2009: $2,667,199.
(a) The Corporation's policy is to recognize Level 3 transfers as of
the beginning of the reporting period.
(b) The transfer from Level 3 to Level 2 was due to adoption of
observable market data for these securities.
[End of table]
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 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 market for 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.
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). The program is
codified in part 370 of title 12 of the Code of Federal Regulations
(12 CFR Part 370).
Debt Guarantee Program:
The DGP permitted participating entities to issue FDIC-guaranteed
senior unsecured debt through October 31, 2009. The FDIC’s guarantee
for all such debt expires on the earliest of the conversion date for
mandatory convertible debt, the stated date of maturity, or December 31,
2012.
All fees for participation in the DGP are reserved for possible TLGP
losses. Through the end of the debt issuance period, the DIF collected
$8.3 billion of guarantee fees and fees of $1.2 billion from
participating entities that elected to issue senior unsecured non-
guaranteed debt. The fees are included in the “Cash and investments –
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
(liquidation amount) of Citigroup TruPs (and any related interest) as
security in the event payments are required to be made by the DIF for
guaranteed debt instruments issued by Citigroup or any of its affiliates
under the TLGP. At December 31, 2010, the fair value of these
securities totaled $826 million, and was determined using the
valuation methodology described in Note 15 for other Citigroup TruPs
held by the DIF. There is an offsetting liability in “Deferred
Revenue- Systemic Risk”, representing amounts to be transferred to the
Treasury or, if necessary, paid for guaranteed debt instruments issued
by Citigroup or its affiliates under the TLGP. Consequently, there is no
impact on the fund balance to the DIF.
The FDIC’s payment obligation under the DGP is 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. Through December 31, 2010, the FDIC has paid $8
million in claims for principal and interest arising from guaranteed
debt default by three debt issuers. Sixty-six financial entities (39
insured depository institutions and 27 affiliates and holding
companies) had $267.1 billion in guaranteed debt outstanding at year
end. This reported outstanding debt at year end is derived from data
submitted by debtholders. At December 31, 2010, the contingent
liability for this guarantee of $149 million 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 $545 million could occur under the DGP. Given the
magnitude of outstanding debt and the uncertainty surrounding future
possible losses, the FDIC believes it is appropriate to continue its
current practice of deferring income recognition for the remaining
$9.1 billion of “Deferred Revenue-Systemic Risk.”
Transaction Account Guarantee Program:
The Transaction Account Guarantee Program, implemented under the TLGP,
provided unlimited coverage through December 31, 2010 for non-interest
bearing transaction accounts held by insured depository institutions
on all deposit amounts exceeding the fully insured limit of $250,000.
During 2010 and 2009, the FDIC collected TAG fees of $481 million and
$639 million, respectively, which are earmarked for TLGP possible
losses and payments. At December 31, 2010, the “Receivables and other
assets – systemic risk” line item includes $50 million of estimated
TAG fees due from insured depository institutions on March 31, 2011.
Upon the failure of a participating insured depository institution,
payment of guaranteed claims of depositors with non-interest bearing
transaction accounts were funded with TLGP restricted cash. The FDIC
is subrogated to these claims of depositors against the failed entity,
and dividend payments by the receivership are deposited back into TLGP
restricted accounts.
Since inception of the TAG, covered claims were estimated to be $8.8
billion with estimated losses of $2.3 billion as of December 31, 2010.
Table: Systemic Risk Activity at December 31, 2010:
Dollars in Thousands:
Balance at 01-01-10:
Cash and cash equivalents - restricted - systemic risk: $6,430,589;
Receivables and other assets - systemic risk: $3,298,819;
Deferred revenue - systemic risk: ($7,847,447);
Contingent liability - systemic risk: ($1,411,966);
Revenue/Expenses - systemic risk: $0.
TAG fees collected:
Cash and cash equivalents - restricted - systemic risk: $7,066,423;
Receivables and other assets - systemic risk: ($187,541);
Deferred revenue - systemic risk: ($293,240);
Contingent liability - systemic risk: $0;
Revenue/Expenses - systemic risk: $0.
Receivable for TAG fees:
Cash and cash equivalents - restricted - systemic risk: $0;
Receivables and other assets - systemic risk: $50,235;
Deferred revenue - systemic risk: ($50,235);
Contingent liability - systemic risk: $0;
Revenue/Expenses - systemic risk: $0.
Receivable for TAG accounts at failed institutions:
Cash and cash equivalents - restricted - systemic risk: $0;
Receivables and other assets - systemic risk: ($493,128);
Deferred revenue - systemic risk: $0;
Contingent liability - systemic risk: $0;
Revenue/Expenses - systemic risk: $0.
Dividends and overnight interest on TruPs held for UST:
Cash and cash equivalents - restricted - systemic risk: $0;
Receivables and other assets - systemic risk: $63,856;
Deferred revenue - systemic risk: ($63,856)
Contingent liability - systemic risk: $0;
Revenue/Expenses - systemic risk: $0.
Market value adjustment on TruPs held for UST:
Cash and cash equivalents - restricted - systemic risk: $0;
Receivables and other assets - systemic risk: $120,807;
Deferred revenue - systemic risk: ($120,807);
Contingent liability - systemic risk: $0;
Revenue/Expenses - systemic risk: $0.
Estimated losses for TAG accounts at failed institutions:
Cash and cash equivalents - restricted - systemic risk: $0;
Receivables and other assets - systemic risk: ($583,626);
Deferred revenue - systemic risk: $583,626;
Contingent liability - systemic risk: $0;
Revenue/Expenses - systemic risk: $583,626.
Provisions for TLGP losses in future failures:
Cash and cash equivalents - restricted - systemic risk: $0;
Receivables and other assets - systemic risk: $0;
Deferred revenue - systemic risk: ($1,262,639);
Contingent liability - systemic risk: $1,262,639;
Revenue/Expenses - systemic risk: ($1,262,639).
Guaranteed debt obligations paid:
Cash and cash equivalents - restricted - systemic risk: ($7,970);
Receivables and other assets - systemic risk: $0;
Deferred revenue - systemic risk: $7,970;
Contingent liability - systemic risk: $0;
Revenue/Expenses - systemic risk: $5,953.
U.S. investment interest collected:
Cash and cash equivalents - restricted - systemic risk: $12,063;
Receivables and other assets - systemic risk: $0;
Deferred revenue - systemic risk: ($12,063);
Contingent liability - systemic risk: $0;
Revenue/Expenses - systemic risk: $0.
Investment receivable on U.S. Treasury obligations:
Cash and cash equivalents - restricted - systemic risk: $720;
Receivables and other assets - systemic risk: $0;
Deferred revenue - systemic risk: ($720);
Contingent liability - systemic risk: $0;
Revenue/Expenses - systemic risk: $0.
Amortization of U.S. Treasury obligations:
Cash and cash equivalents - restricted - systemic risk: $2,191;
Receivables and other assets - systemic risk: $0;
Deferred revenue - systemic risk: ($2,191);
Contingent liability - systemic risk: $0;
Revenue/Expenses - systemic risk: $0.
Unrealized gain on U.S. Treasury obligations:
Cash and cash equivalents - restricted - systemic risk: $247;
Receivables and other assets - systemic risk: $0;
Deferred revenue - systemic risk: ($247);
Contingent liability - systemic risk: $0;
Revenue/Expenses - systemic risk: $0.
TLGP operating expenses:
Cash and cash equivalents - restricted - systemic risk: $0;
Receivables and other assets - systemic risk: $0;
Deferred revenue - systemic risk: 489;
Contingent liability - systemic risk: $0;
Revenue/Expenses - systemic risk: $242.
Reimbursement to DIP for TAG claims and TLGP operating expenses
incurred:
Cash and cash equivalents - restricted - systemic risk: ($264,834);
Receivables and other assets - systemic risk: $0;
Deferred revenue - systemic risk: $0;
Contingent liability - systemic risk: $0;
Revenue/Expenses - systemic risk: $0.
Totals:
Cash and cash equivalents - restricted - systemic risk: $6,646,968;
Receivables and other assets - systemic risk: $2,269,422;
Deferred revenue - systemic risk: ($9,054,541);
Contingent liability - systemic risk: ($149,327;
Revenue/Expenses - systemic risk: ($627,818).
(1) As of December 31, 2010, the fair value of investments in U.S.
Treasury obligations held by TLGP was $1.6 billion. An unrealized gain
of $247 thousand is reported in the "Deferred revenue - systemic risk"
line item.
[End of table]
17. Subsequent Events:
Subsequent events have been evaluated through March 14, 2011, the date
the financial statements are available to be issued.
2011 Failures through March 14, 2011:
Through March 14, 2011, 25 insured institutions failed in 2011 with
total losses to the DIF estimated to be $1.8 billion.
Assessments:
On February 7, 2011, the FDIC adopted a Final Rule, Assessments, Large
Bank Pricing, which becomes effective on April 1, 2011. The Rule
amends 12 CFR 327 to implement revisions to the FDI Act made by the
Dodd-Frank Act to: 1) redefine the assessment base used for calculating
deposit insurance assessments; 2) change the assessment rate
adjustments; 3) lower the initial base rate schedule and the total
base rate schedule for all insured depository institutions to collect
approximately the same revenue for the DIF under the new assessment
base as would have been collected under the former assessment base; 4)
provide progressively lower assessment rate schedules when the reserve
ratio of the DIF reaches certain enumerated levels and suspend
dividends indefinitely; and 5) change the risk-based assessment system
for large insured depository institutions (generally, those
institutions with at least $10 billion in total assets). During the
last quarter of 2010, FDIC issued three Notices of Proposed Rulings
(NPRs) in order to propose revisions to the FDI Act, as amended (see
Note 9). This Final Rule encompasses all of the proposals contained in
the NPRs, except the proposal setting the Designated Reserve Ratio
(DRR), which was covered in the DRR Final Rule issued in December 2010.
[End of section]
FSLIC Resolution Fund's Financial Statements:
Balance Sheet: FSLIC Resolution Fund:
Federal Deposit Insurance Corporation:
FSLIC Resolution Fund Balance Sheet at December 31:
Dollars in Thousands:
Assets:
Cash and cash equivalents:
2010: $3,547,907;
2009: $3,470,125.
Receivables from thrift resolutions and other assets, net (Note 3):
2010: $23,408;
2009: $32,338.
Receivables from U.S. Treasury for goodwill litigation (Note 4):
2010: $323,495;
2009: $405,412.
Total Assets:
2010: $3,894,810;
2009: $3,907,875.
Liabilities:
Accounts payable and other liabilities:
2010: $2,990;
2009: $2,972.
Contingent liabilities for goodwill litigation (Note 4):
2010: $323,495;
2009: $405,412.
Total Liabilities:
2010: $326,485;
2009: $408,384.
Resolution Equity (Note 5):
Contributed capital:
2010: $127,792,696;
2009: $127,847,696.
Accumulated deficit:
2010: ($124,224,371);
2009: ($124,301,205).
Total Resolution Equity:
2010: $3,568,325;
2009: $3,499,491.
Total Liabilities and Resolution Equity:
2010: $3,894,810;
2009: $3,907,875.
The accompanying notes are an integral part of these financial
statements.
[End of balance sheet]
[End of section]
Statement of Income and Accumulated Deficit:
Statement of Income and Accumulated Deficit:
FSLIC Resolution Fund:
Federal Deposit Insurance Corporation:
FSLIC Resolution Fund Statement of Income and Accumulated Deficit for
the Years Ended December 31 (Dollars in Thousands):
Revenue:
Interest on U.S. Treasury obligations:
2010: $3,876;
2009: $3,167.
Other revenue:
2010: $9,393;
2009: $5,276.
Total Revenue:
2010: $13,269;
2009: $8,443.
Expenses and Losses:
Operating expenses:
2010: $3,832;
2009: $4,905.
Provision for losses:
2010: ($945);
2009: $2,051.
Goodwill litigation expenses (Note 4):
2010: ($53,266);
2009: $408,997.
Recovery of tax benefits:
2010: ($63,256);
2009: {$10,279).
Other expenses:
2010: $3,070;
2009: $2,908.
Total Expenses and Losses:
2010: ($110,565);
2009: $408,582.
Net (Loss)/Income:
2010: $123,834);
2009: ($400,139).
Accumulated Deficit - Beginning:
2010: ($124,348,205);
2009: {$123,948,066).
Accumulated Deficit - Ending:
2010: ($124,224,371);
2009: ($124,348,205).
The accompanying notes are an integral part of these financial
statements.
[End of Statement of Income and Accumulated Deficit]
Statement of Cash Flows:
FSLIC Resolution Fund:
Federal Deposit Insurance Corporation:
FSLIC Resolution Fund Statement of Cash Flows for the Years Ended
December 31:
Dollars in Thousands:
Operating Activities:
Net Income (Loss):
2010: (123,834;
2009: ($400,139).
Adjustments to reconcile net (loss)/income to net cash used by
operating activities: Provision for losses:
2010: ($945);
2009: $2,051.
Change in Operating Assets and Liabilities:
Decrease in receivables from thrift resolutions and other assets:
2010: $9,875;
2009: $563.
Increase (Decrease) in accounts payable and other liabilities:
2010: $18;
2009: ($5,094).
(Decrease) Increase in contingent liabilities for goodwill litigation:
2010: ($81,917);
2009: $263,107.
Net Cash Used by Operating Activities:
2010: $50,865;
2009: ($139,512).
Financing Activities:
Provided by: U.S. Treasury payments for goodwill litigation (Note 4):
2010: $26,917;
2009: $142,410.
Net Cash Provided by Financing Activities:
2010: $26,917;
2009: $142,410.
Net Increase in Cash and Cash Equivalents:
2010: $77,782;
2009: $2,898.
Cash and Cash Equivalents - Beginning:
2010: $3,470,125;
2009: $3,467,227.
Cash and Cash Equivalents - Ending:
2010: $3,547,907;
2009: $3,470,125.
The accompanying notes are an integral part of these financial
statements.
[End of Statement of Cash Flows]
Notes to the Financial Statements:
FSLIC Resolution Fund:
December 31, 2010 and 2009:
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 former
Resolution Trust Corporation (RTC).
The U.S. Congress created the FSLIC through the enactment of the
National Housing Act of 1934. The Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA) abolished the insolvent
FSLIC, created the FSLIC Resolution Fund (FRF), and transferred the
assets and liabilities of the FSLIC to the FRF--except those assets
and liabilities transferred to the 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 (FRFRTC). 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 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 restitution orders (generally have
from 3 to 13 years remaining to enforce); 2) collections of settlements
and judgments obtained against officers and directors and other
professionals responsible for causing or contributing to thrift losses
(generally have from one to 10 years remaining to enforce, unless the
judgments are renewed, which will result in significantly longer
periods for collection for some judgments); 3) numerous assistance
agreements entered into by the former FSLIC (FRF could continue to
receive tax benefits sharing through the year 2012); 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 recoveries
from tax benefits sharing of up to approximately $52 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
receivership 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 receivership 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 allowance for losses on receivables from thrift
resolutions and the estimated losses for litigation.
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 Relevant Accounting Pronouncements:
* ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic
820) – Improving Disclosures about Fair Value Measurements, requires
enhanced disclosures for significant transfers into and out of Level 1
(measured using quoted prices in active markets) and Level 2 (measured
using other observable inputs) of the fair value measurement
hierarchy. These disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, but did not
impact the FRF in 2010. Separate disclosure of the gross purchases,
sales, issuances, and settlements activity for Level 3 (measured using
unobservable inputs) fair value measurements will become effective for
fiscal years beginning after December 15, 2010. Currently, the
additional disclosures are not expected to impact the FRF.
Other recent accounting pronouncements have been deemed to be not
applicable or material 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 receivables from thrift resolutions include payments made by the
FRF to cover obligations to insured depositors, advances to
receiverships for working capital, and administrative expenses paid on
behalf of receiverships. Any related allowance for loss represents the
difference between the funds advanced and/or obligations incurred and
the expected repayment. Assets held by the FDIC in its receivership
capacity for the former RTC are a significant source of repayment of
the FRF’s receivables from thrift resolutions. As of December 31,
2010, eight of the 850 FRF receiverships remain active. Half of these
receiverships are expected to complete their liquidation efforts
during 2011. The remaining four receiverships will remain active until
their goodwill litigation or liability-related impediments are
resolved.
The FRF receiverships held assets with a book value of $18 million and
$20 million as of December 31, 2010 and 2009, respectively (which
primarily consist of cash, investments, and miscellaneous
receivables). At December 31, 2010, $13 million of the $18 million in
assets in the FRF receiverships was cash held for non-FRF, third party
creditors.
Other Assets:
Other assets primarily include credit enhancement reserves valued at
$17 million and $21 million as of December 31, 2010 and 2009,
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 cash reserves, which may cover future credit losses
through 2020, are valued by estimating credit losses on the underlying
loan portfolio and then discounting cash flow projections using market-
based rates.
Table: Receivables From Thrift Resolutions and Other Assets, Net at
December 31:
Dollars in Thousands:
Receivables from closed thrifts:
2010: $5,763,949;
2009: $5,744,509.
Allowance for losses:
2010: ($5,762,186);
2009: ($5,736,737).
Receivables from Thrift Resolutions, Net:
2010: $1,763;
2009: $7,772.
Other assets:
2010: $21,645;
2009: $24,566.
Total:
2010: $23,408;
2009: $32,338.
[End of table]
4. Contingent Liabilities for:
Goodwill Litigation:
In United States v. Winstar Corp., 518 U.S. 839 (1996), the Supreme
Court held that when it became impossible following the enactment of
FIRREA in 1989 for the federal government to perform certain
agreements to count goodwill toward regulatory capital, the plaintiffs
were entitled to recover damages from the United States. Six remaining
cases are pending against the United States based on alleged breaches
of these agreements.
On July 22, 1998, the Department of Justice’s (DOJ's) Office of Legal
Counsel (OLC) concluded that the FRF is legally available to satisfy
all judgments and settlements in the goodwill litigation involving
supervisory action or assistance agreements. OLC determined that
nonperformance of these agreements was a contingent liability that was
transferred to the FRF on August 9, 1989, upon the dissolution of the
FSLIC. On July 23, 1998, the U.S. Treasury determined, based on OLC’s
opinion, that the FRF is the appropriate source of funds for payments
of any such judgments and settlements. The FDIC General Counsel
concluded that, as liabilities transferred on August 9, 1989, these
contingent liabilities for future nonperformance of prior agreements
with respect to supervisory goodwill were transferred to the FRF-
FSLIC, which is that portion of the FRF encompassing the obligations
of the former FSLIC. The FRF-RTC, which encompasses the obligations of
the former RTC and was created upon the termination of the RTC on
December 31, 1995, is not available to pay any settlements or
judgments arising out of the goodwill litigation.
The FRF can draw from an appropriation provided by Section 110 of the
Department of Justice Appropriations Act, 2000 (Public Law 106-113,
Appendix A, Title I, 113 Stat. 1501A-3, 1501A-20) such sums as may be
necessary for the payment of judgments and compromise settlements in
the goodwill litigation. This appropriation is to remain available
until expended. Because an appropriation is available to pay such
judgments and settlements, any estimated 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.
For the year ended December 31, 2010, the FRF paid $27 million as a
result of judgments and settlements in four goodwill cases compared to
$142 million for four goodwill cases for the year ended December 31,
2009. Of the four goodwill cases paid during 2010, only one was active
at December 31, 2009 due to ongoing litigation. The FRF received
appropriations from the U.S. Treasury to fund these payments.
The contingent liability and offsetting receivable from the U.S.
Treasury as of December 31, 2010 was $323 million for one case
compared with $405 million for six cases as of December 31, 2009. No
new cases were accrued during 2010. The one case comprising the
contingent liability and offsetting receivable at December 31, 2010
was accrued prior to 2010 following an appellate decision for a
specific monetary amount. This case is currently before the lower
court pending on remand following appeal and is still considered
active.
Based on representations from the DOJ, the entity that defends these
lawsuits against the United States, the FDIC is unable to estimate a
range of loss to the FRF-FSLIC for the remaining five goodwill cases
considered active as of December 31, 2010. Three of these cases were
not accrued because court decisions are still pending. In the other
two cases the appellate courts decided to award nothing, but the cases
are still active due to continued legal proceedings.
Six goodwill cases were active as of December 31, 2010 compared with
eight active cases as of December 31, 2009. Of the cases considered
active at year end 2009, one was fully adjudicated with no award and
one was settled and paid during 2010. In addition, the FRF-FSLIC pays
the goodwill litigation expenses incurred by the DOJ based on a
Memorandum of Understanding (MOU) dated October 2, 1998, between the
FDIC and the DOJ. Under the terms of the MOU, the FRF-FSLIC paid $2
million and $4 million to the DOJ for fiscal years (FY) 2011 and 2010,
respectively. As in prior years, the DOJ carried over and applied all
unused funds toward current FY charges. At December 31, 2010, the DOJ
had an additional $3 million in unused FY 2010 funds that were applied
against FY 2011 charges of $5 million.
Guarini Litigation:
Paralleling the goodwill cases were 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 believes that it is very unlikely the settlement will be
subject to taxation. More definitive information may be available
during 2011, after the Internal Revenue Service (IRS) completes its
Large Case Program audit on the affected Corporation’s 2006 returns;
this audit is currently underway. The FRF is not expected to fund any
payment under this guarantee and no liability has been recorded.
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 zero. 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, 2010 and 2009, 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.
Table: Resolution Equity at December 31, 2010:
Dollars in Thousands:
Contributed capital - beginning:
FRF-FSLIC: $46,098,359;
FRF-RTC: $81,749,337;
FRF Consolidated: $127,847,696.
Contributed capital - ending:
FRF-FSLIC: $46,043,359;
FRF-RTC: $81,749,337;
FRF Consolidated: $127,792,696.
Accumulated deficit:
FRF-FSLIC: ($42,643,726);
FRF-RTC: ($81,580,645);
FRF Consolidated: ($124,224,371).
Total:
FRF-FSLIC: $3,339,633;
FRF-RTC: $168,692;
FRF Consolidated: $3,568,325.
[End of table]
Contributed Capital:
The FRF-FSLIC and the former RTC received $43.5 billion and $60.1
billion from the U.S. Treasury, respectively, to fund losses from
thrift resolutions prior to July 1, 1995. Additionally, the FRF-FSLIC
issued $670 million in capital certificates to the Financing
Corporation (a mixed-ownership government corporation established to
function solely as a financing vehicle for the FSLIC) and the RTC
issued $31.3 billion of these instruments to the REFCORP. FIRREA
prohibited the payment of dividends on any of these capital
certificates.
Through December 31, 2010, the FRF-RTC has returned $4.6 billion to
the U.S. Treasury and made payments of $5.0 billion to the REFCORP.
These actions serve to reduce contributed capital. The most recent
payment to the REFCORP was in January of 2008 for $225 million.
FRF-FSLIC received $27 million in U.S. Treasury payments for goodwill
litigation in 2010. Furthermore, $323 million and $405 million were
accrued for as receivables at December 31, 2010 and 2009, respectively.
Accumulated Deficit:
The accumulated deficit represents the cumulative excess of expenses
and losses over revenue for activity related to the FRF-FSLIC and the
FRF-RTC. Approximately $29.8 billion and $87.9 billion were brought
forward from the former FSLIC and the former RTC on August 9, 1989,
and January 1, 1996, respectively. The FRF-FSLIC accumulated deficit
has increased by $12.8 billion, whereas the FRF-RTC accumulated
deficit has decreased by $6.3 billion, since their dissolution dates.
6. Disclosures About the Fair Value of Financial Instruments:
The financial assets recognized and measured at fair value on a
recurring basis at each reporting date are cash equivalents and credit
enhancement reserves. The following table presents the FRF’s financial
assets measured at fair value as of December 31, 2010 and 2009.
Table: Assets Measured at Fair Value at December 31, 2010:
Dollars in Thousands:
Assets:
Fair Value Measurements Using:
Cash and cash equivalents (Special U.S. Treasuries)[1]:
Quoted Prices in Active Markets for Identical Assets (Level 1):
$3,547,907;
Significant Other Observable Inputs (Level 2): $0;
Significant Unobservable Inputs (Level 3): $0;
Total Assets at Fair Value: $3,547,907.
Credit enhancement reserves[2]:
Quoted Prices in Active Markets for Identical Assets (Level 1):
$0;
Significant Other Observable Inputs (Level 2): $17,378;
Significant Unobservable Inputs (Level 3): $0;
Total Assets at Fair Value: $17,378.
Total Assets:
Quoted Prices in Active Markets for Identical Assets (Level 1):
$3,547,907;
Significant Other Observable Inputs (Level 2): $17,378;
Significant Unobservable Inputs (Level 3): $0;
Total Assets at Fair Value: $3,565,285.
[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] Credit enhancement reserves are valued by performing projected
cash flow analyses using market-based assumptions (see Note 3).
Assets Measured at Fair Value at December 31, 2009:
Dollars in Thousands:
Fair Value Measurements Using:
Cash and cash equivalents (Special U.S. Treasuries)[1]:
Quoted Prices in Active Markets for Identical Assets (Level 1):
$3,467,227;
Significant Other Observable Inputs (Level 2): $0;
Significant Unobservable Inputs (Level 3): $0;
Total Assets at Fair Value: $3,467,227.
Credit enhancement reserves[2]:
Quoted Prices in Active Markets for Identical Assets (Level 1):
$0;
Significant Other Observable Inputs (Level 2): $21,278;
Significant Unobservable Inputs (Level 3): $0;
Total Assets at Fair Value: $21,278.
Total Assets:
Quoted Prices in Active Markets for Identical Assets (Level 1):
$3,470,125;
Significant Other Observable Inputs (Level 2): $21,278;
Significant Unobservable Inputs (Level 3): $0;
Total Assets at Fair Value: $3,491,403.
[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] Credit enhancement reserves are valued by performing projected
cash flow analyses using market-based assumptions (see Note 3).
[End of table]
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.
[End of section]
Appendix I: Comments from the Federal Deposit Insurance Corporation:
FDIC:
Federal Deposit Insurance Corporation:
Deputy to the Chairman and CFO:
550 17th Street NW:
Washington, D.C. 20429-9990:
March 14, 2011:
Mr. Steven J. Sebastian:
Director, Financial Management and Assurance:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Re: FDIC Management Response on the GAO 2010 Financial Statements
Audit Report:
Dear Mr. Sebastian:
Thank you for the opportunity to review and comment on the U.S.
Government Accountability Office's (GAO's) draft report titled,
Financial Audit: Federal Deposit Insurance Corporation Funds' 2010 and
2009 Financial Statements, GAO-11-412. We are pleased that the Federal
Deposit Insurance Corporation (FDIC) received an unqualified opinion
for the nineteenth consecutive year on the financial statements of its
funds: the Deposit Insurance Fund (DIF) and the FSLIC Resolution Fund
(FRF). Also, GAO reported that the FDIC had effective internal control
over financial reporting and compliance with laws and regulations for
each fund, and there was no reportable noncompliance with the laws and
regulations that were tested.
During the audit year, the FDIC management and staff worked diligently
to resolve the material weakness and significant deficiency internal
control issues that were reported in the 2009 audit. We took
significant steps to strengthen controls over the loss share
estimation process and the information systems security and will
continue to make improvements in these areas in the coming audit year.
Our dedication to sound financial management remains a top priority.
In complying with audit standards that require management to provide a
written assertion about the effectiveness of its internal control over
financial reporting, the FDIC has prepared Management's Report on
Internal Control over Financial Reporting (see attachment). The report
acknowledges management's responsibility for establishing and
maintaining internal control over financial reporting and provides the
FDIC's conclusion regarding the effectiveness of its internal control.
We want to thank the GAO staff for their professionalism and
dedication during the audit and look forward to a productive and
successful relationship during the 2011 audit. If you have any
questions or concerns, please do not hesitate to contact me.
Sincerely,
Signed by:
Steven. O. App:
Deputy to the Chairman And Chief Financial Officer:
[End of letter]
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 conformity 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, 2010, through its enterprise risk management
program that seeks to comply with the spirit of the following
standards, among others: Federal Managers' Financial Integrity Act of
1982 (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 the above assessment, management concluded that, as of
December 31, 2010, FDIC's internal control over financial reporting is
effective based on the criteria established in FMFIA.
Federal Deposit Insurance Corporation:
March 14, 2011:
[End of section]
Footnotes:
[1] A third fund to be managed by FDIC, the Orderly Liquidation Fund,
established by section 210 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376, 1506
(July 21, 2010), is unfunded and conducted no transactions during the
fiscal years covered by this audit.
[2] Pub. L. No. 111-203, 124 Stat. 1376 (July 21, 2010).
[3] GAO, Financial Audit: Federal Deposit Insurance Corporation Funds'
2009 and 2008 Financial Statements, [hyperlink,
http://www.gao.gov/products/GAO-10-705] (Washington, D.C.: June 25,
2010).
[4] A material weakness is a deficiency, or a combination of
deficiencies, in internal control such that there is a reasonable
possibility that a material misstatement of the entity's financial
statements will not be prevented, or detected and corrected on a
timely basis. A deficiency in internal control exists when the design
or operation of a control does not allow management or employees, in
the normal course of performing their assigned functions, to prevent,
or detect and correct misstatements on a timely basis.
[5] In 2009, and continuing in 2010, FDIC increasingly used whole bank
purchase and assumption transactions with accompanying loss-share
agreements as the primary means of resolving failed financial
institutions. Under such an agreement, FDIC sells a failed institution
to an acquirer with an agreement that FDIC, through the DIF, will
share in losses the acquirer experiences in servicing and disposing of
assets purchased and covered under the loss-share agreement.
[6] GAO, Management Report: Opportunities for Improvements in FDIC's
Internal Controls and Accounting Procedures, [hyperlink,
http://www.gao.gov/products/GAO-11-23R] (Washington, D.C.: Nov. 30,
2010).
[7] A significant deficiency is a control deficiency, or combination
of deficiencies, in internal control that is less severe than a
material weakness, yet important enough to merit attention by those
charged with governance.
[8] GAO, Information Security: Federal Deposit Insurance Corporation
Needs to Mitigate Control Weaknesses, [hyperlink,
http://www.gao.gov/products/GAO-11-29] (Washington, D.C.: Nov. 30,
2010).
[End of section]
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