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Federal Deposit
Insurance Corporation

Each depositor insured to at least $250,000 per insured bank

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2008 Annual Report

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IV. Financial Statements and Notes

Deposit Insurance Fund (DIF) – Cont.

5. Property and Equipment, Net

Property and Equipment, Net at December 31
Dollars in Thousands
  2008 2007
Land $37,352 $37,352
Buildings (including leasehold improvements) 281,401 276,626
Application software (includes work-in-process) 173,872 145,693
Furniture, fixtures, and equipment 84,574 71,138
Accumulated depreciation (208,438) (178,948)
Total $368,761 $351,861

The depreciation expense was $55 million and
$63 million for December 31, 2008 and 2007, respectively.

6. Liabilities Due to Resolutions
As of December 31, 2008, DIF recorded liabilities totaling $4.7 billion to three receiverships (IndyMac Bank, Downey Savings & Loan, and PFF Bank & Trust) representing the value of assets transferred from the receiverships to the acquirer/conservator for use in funding the deposits assumed by the acquirer/conservator.

7. Contingent Liabilities for:
Anticipated Failure of Insured Institutions
The DIF records a contingent liability and a loss provision for DIF-insured institutions that are likely to fail within one year of the reporting date, absent some favorable event such as obtaining additional capital or merging, when the liability becomes probable and reasonably estimable.

The contingent liability is derived by applying expected failure rates and loss rates to institutions based on supervisory ratings, balance sheet characteristics, and projected capital levels. In addition, institution-specific analysis is performed on those institutions where failure is imminent absent institution management resolution of existing problems, or where additional information is available that may affect the estimate of losses. Due to the rapid deterioration in industry conditions, the FDIC modified the process of establishing the loss reserve by identifying vulnerable institutions deemed likely to have failure risks similar to those on the problem bank list based on certain financial ratios and other risk measures. The FDIC also increased loss rates for institutions included in the reserve to reflect the results of recent valuations of loan portfolios of imminent failures and current year resolutions. As of December 31, 2008 and 2007, the contingent liabilities for anticipated failure of insured institutions were $24.0 billion and $124.3 million, respectively.

In addition to these recorded contingent liabilities, the FDIC has identified risk in the financial services industry that could result in an additional loss to the DIF should potentially vulnerable insured institutions ultimately fail. As a result of these risks, the FDIC believes that it is reasonably possible that the DIF could incur additional estimated losses up to approximately $25.1 billion. The actual losses, if any, will largely depend on future economic and market conditions and could differ materially from this estimate.

During 2008, financial market disruptions evolved into a crisis that challenged the soundness and profitability of some FDIC-insured institutions. Declining housing and equity prices, financial market turmoil, and deteriorating economic conditions exerted significant stress on banking industry performance and threatened the viability of some institutions, particularly those that had significant exposure to higher risk residential mortgages or residential construction loans. In 2008, 25 banks with combined assets of about $361 billion failed. It is uncertain how long and how deep this downturn will be. Supervisory and market data suggest that the banking industry will continue to experience elevated levels of stress over the coming year. The FDIC continues to evaluate the ongoing risks to affected institutions in light of the deterioration in economic and financial conditions, and the effect of 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. The FDIC recorded a probable litigation loss of $200 million and has determined that there are no reasonably possible losses from unresolved cases.

Other Contingencies
Representations and Warranties
As part of the FDIC’s efforts to maximize the return from the sale of assets from bank and thrift resolutions, representations and warranties, and guarantees were offered on certain loan sales. In general, the guarantees, representations, and warranties on loans sold relate to the completeness and accuracy of loan documentation, the quality of the underwriting standards used, the accuracy of the delinquency status when sold, and the conformity of the loans with characteristics of the pool in which they were sold. With the exception of the IndyMac resolution described in Note 4, there were no loans sold subject to representations and warranties, and guarantees during 2008. As of December 31, 2008, the total amount of loans sold subject to unexpired representations and warranties, and guarantees was $8.1 billion. There were no contingent liabilities from any of the outstanding claims asserted in connection with representations and warranties at December 31, 2008 and 2007, respectively.

In addition, future losses could be incurred until the contracts offering the representations and warranties, and guarantees have expired, some as late as 2032. Consequently, the FDIC believes it is possible that additional losses may be incurred by the DIF from the universe of outstanding contracts with unasserted representation and warranty claims. However, because of the uncertainties surrounding the timing of when claims may be asserted, the FDIC is unable to reasonably estimate a range of loss to the DIF from outstanding contracts with unasserted representation and warranty claims.

Purchase and Assumption Indemnification
In connection with Purchase and Assumption agreements for resolutions in 2008 and 2007, FDIC in its receivership capacity generally indemnifies the purchaser of a failed institution’s assets and liabilities in the event a third party asserts a claim against the purchaser unrelated to the explicit assets purchased or liabilities assumed at the time of failure. The FDIC in its Corporate capacity is a secondary guarantor if and when a receiver is unable to pay. These indemnifications generally extend for a term of six years after the date of institution failure. The FDIC is unable to estimate the maximum potential liability for these types of guarantees as the agreements do not specify a maximum amount and any payments are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. During 2008 and 2007, the FDIC in its Corporate capacity has not made any indemnification payments under such agreements and no amount has been accrued in the accompanying financial statements with respect to these indemnification guarantees (see Note 15).


Last Updated 06/18/2009

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