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Federal Deposit
Insurance Corporation

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

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2009 Annual Report

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IV. Financial Statements and Notes

Deposit Insurance Fund (DIF) - Cont.

4. Receivables From Resolutions, Net

Receivables From Resolutions, Net at December 31
Dollars in Thousands
  2009 2008
Receivables from closed banks $ 98,647,508 $ 27,389,467
Receivables from operating banks 0 9,406,278
Allowance for losses (60,238,886) (21,030,280)
Total $ 38,408,622 $ 15,765,465

The receivables from resolutions include payments made by the DIF to cover obligations to insured depositors (subrogated claims), advances to resolution entities for working capital, and administrative expenses paid on behalf of resolution entities. Any related allowance for 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-sharing agreement are factored into the computation of the expected repayment. Assets held by DIF resolution entities are the main source of repayment of the DIF's receivables from resolutions.

As of December 31, 2009, there were 179 active receiverships which includes 140 established in 2009. As of December 31, 2009 and 2008, DIF resolution entities held assets with a book value of $49.3 billion and $45.8 billion, respectively (including cash, investments, and miscellaneous receivables of $7.7 billion and $5.1 billion, respectively). Ninety-nine percent of the current asset book value of $49.3 billion is held by resolution entities established in 2008 and 2009.

Estimated cash recoveries from the management and disposition of assets that are used to determine the allowance for losses were based on asset recovery rates from several sources including: actual or pending institution-specific asset disposition data; failed institution-specific asset valuation data; aggregate asset valuation data on several recently failed or troubled institutions; and empirical asset recovery data based on failures as far back as 1990. Methodologies for determining the asset recovery rates incorporate estimating future cash recoveries, net of applicable liquidation cost estimates, and discounting based on market-based risk factors applicable to a given asset's type and quality. The resulting estimated cash recoveries are then used to derive the allowance for loss on the receivables from these resolutions.

For failed institutions resolved using a whole bank purchase and assumption transaction with an accompanying loss-share agreement, the projected future loss-share payments 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 intrinsic value of the covered assets. The intrinsic value is determined using economic models that consider the quality and type of covered assets, current and future market conditions, risk factors and estimated asset holding periods.

Estimated asset recoveries are regularly evaluated during the year, but remain subject to uncertainties because of potential changes in economic and market conditions. Continuing economic uncertainties could cause the DIF's actual recoveries to vary significantly from current estimates.

Whole Bank Purchase and Assumption Transactions with Loss-sharing Agreements
The FDIC resolved 90 of the 140 failures in 2009 using a Whole Bank Purchase and Assumption resolution transaction with an accompanying Loss-Share Agreement on assets purchased by the acquirer. The acquiring institution assumes all of the deposits and purchases essentially all of the assets of a failed institution. The majority of the commercial and residential assets are purchased under a loss-share agreement, where the FDIC agrees to share in future losses experienced by the acquirer on those assets covered under the agreement. Loss-share agreements are used by the FDIC to keep assets in the private sector and minimize disruptions to loan customers.

Losses on the covered assets will be shared between the acquirer and the FDIC in its capacity as receiver of the failed institution when losses occur through the sale, foreclosure, loan modification, or the write-down of loans in accordance with the terms of the loss-share agreement. The agreement typically covers a 5 to 10 year period with the receiver covering 80 percent of the losses incurred by the acquirer up to a stated threshold amount (which varies by agreement) and the acquiring bank covering 20 percent. Any losses above the stated threshold amount will be reimbursed by the receiver at 95 percent of the losses booked by the acquirer. The estimated liability for loss-sharing is accounted for by the receiver and is considered in the determination of the DIF's allowance for loss against the corporate receivable from the resolution. As loss-share claims are asserted and proven, DIF receiverships will satisfy these loss-share payments using available liquidation funds and/or amounts due from the DIF for funding the deposits assumed by the acquirer (see Note 7).

Through December 31, 2009, 93 DIF receiverships are estimated to pay approximately $22.2 billion over the length of these loss-share agreements on approximately $126.4 billion in total covered assets at the inception date of these agreements. To date, 37 receiverships have made loss-share payments totaling $892.2 million.

Financial instruments that potentially subject the DIF to concentrations of credit risk are receivables from resolutions. The repayment of DIF's receivables from resolutions is primarily influenced by recoveries on assets held by DIF receiverships and payments on the covered assets under loss-sharing agreements. The majority of the $165.5 billion in remaining assets in liquidation ($41.4 billion) and current loss-share covered assets ($124.1 billion) are concentrated in commercial loans ($71.7 billion), residential loans ($70.3 billion), and securities ($14.7 billion). Most of the assets in these asset types originated from failed institutions located in California ($55.6 billion), Florida ($15.7 billion), Alabama ($15.6 billion), Texas ($11.3 billion), and Illinois ($7.3 billion).

Last Updated 07/16/2010

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