Federal Deposit
Insurance Corporation

2009 Annual Report

IV. Financial Statements and Notes

Deposit Insurance Fund (DIF) - Cont.

9. Assessments

The FDI Act, as amended, requires a risk-based assessment system. The Act allows the FDIC discretion in defining risk and, by regulation, the FDIC has established several assessment risk categories based upon supervisory and capital evaluations. On March 4, 2009, the Board issued a final rule on Assessments to: 1) make it fairer and more sensitive to risk, 2) improve the way the risk-based assessment system differentiates risk among insured institutions, and 3) increase deposit insurance assessment rates to raise assessment revenue to help meet the requirements of the Restoration Plan. The assessment rate averaged approximately 23.32 cents and 4.18 cents per $100 of the assessment base, as defined in part 327.5(b) of FDIC Rules and Regulations, for 2009 and 2008, respectively. (The assessment rate would have been 16.19 cents if the special assessment imposed on June 30, 2009 was excluded from the 2009 assessment income.)

In compliance with provisions of the FDI Act, as amended, and implementing regulations, the FDIC is required to:

• annually establish and publish a designated reserve ratio (DRR) within the statutory range from 1.15 to 1.50 percent of estimated insured deposits. As of December 31, 2009, the DIF reserve ratio was (0.39) percent of estimated insured deposits and the FDIC has set the DRR at 1.25 percent for 2010;
• adopt a DIF restoration plan to return the reserve ratio to 1.15 percent generally within eight years, if the reserve ratio falls below 1.15 percent or is expected to fall below 1.15 percent within six months (see paragraph titled, Amended Restoration Plan);
• annually determine if a dividend should be paid, based on the statutory requirement generally to declare dividends for one-half of the amount between 1.35 and 1.50 percent and all amounts exceeding 1.50 percent.

Assessment Revenue
During 2009, the FDIC implemented actions to supplement DIF's revenue through a special assessment and liquidity through prepaid assessments from insured depository institutions:

• On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment on each insured depository institution's total assets minus Tier 1 capital as reported in its report of condition as of June 30, 2009. The special assessment of $5.5 billion was collected on September 30, 2009, at the same time the regular quarterly risk-based assessment for the second quarter 2009 was collected.
• On November 17, 2009, the FDIC issued a Final Rule, Prepaid Assessments, to address the DIF's liquidity needs to pay for projected near-term failures and to ensure that the deposit insurance system remains industry-funded. Pursuant to the Rule, on December 30, 2009, a majority of insured depository institutions prepaid estimated quarterly risk-based assessments of $45.7 billion for the period October 2009 through December 2012. The prepaid amount was based on maintaining assessment rates at their current levels through the end of 2010 and adopting a uniform 3 basis point increase in assessment rates effective January 1, 2011. An institution's quarterly risk-based deposit insurance assessments thereafter will be offset by the amount prepaid until that amount is exhausted or until June 30, 2013, when any amount remaining would be returned to the institution.
  Prepaid assessments were mandatory for all institutions, but the FDIC exercised its discretion as supervisor and insurer to exempt an institution from the prepayment requirement if the FDIC determined that the prepayment would adversely affect the safety and soundness of the institution. In addition, institutions were allowed to request exemption from payment under certain circumstances.

For those institutions that prepaid assessments, the DIF recognized revenue of $3.0 billion for the fourth quarter insurance period. The remaining prepaid amount of $42.7 billion is included in the "Unearned revenue—prepaid assessments" line item on the Balance Sheet. For those institutions that did not prepay assessments, the "Assessments Receivable, net" line item of $281 million represents the estimated gross premiums due from insured depository institutions for the fourth quarter of the year. The actual deposit insurance assessment for the fourth quarter was billed and collected at the end of the first quarter of 2010. During 2009 and 2008, $17.7 billion and $3.0 billion, respectively, were recognized as assessment revenue from institutions.

The FDI Act, as amended, granted a one-time assessment credit of approximately $4.7 billion to certain eligible insured depository institutions (or their successors) based on the assessment base of the institution as of December 31, 1996, as compared to the combined aggregate assessment base of all eligible institutions. Of the credits granted, $2.7 million remained as of December 31, 2009.

Amended Restoration Plan
A Federal Register notice for Amendment of FDIC Restoration Plan was issued on October 2, 2009, amending DIF's Restoration Plan which was originally adopted on October 7, 2008 and subsequently amended on February 27, 2009. The Amended Restoration Plan addresses the need to return the DIF to its mandated minimum reserve ratio of 1.15 percent of estimated insured deposits. The Restoration Plan provided for the following: 1) the period of the Plan was extended to eight years; 2) current assessment rates will be maintained through December 31, 2010, with a uniform increase in risk-based assessment rates of 3 basis points effective January 1, 2011; and 3) at least semi-annually hereafter, the FDIC will update its loss and income projections for the Fund and, if necessary, will increase assessment rates prior to the end of the eight-year period, to return the reserve ratio to 1.15 percent.

Assessments Related to FICO
Assessments continue to be levied on institutions for payments of the interest on obligations issued by the Financing Corporation (FICO). The FICO was established as a mixed-ownership government corporation to function solely as a financing vehicle for the former FSLIC. The annual FICO interest obligation of approximately $790 million is paid on a pro rata basis using the same rate for banks and thrifts. The FICO assessment has no financial impact on the DIF and is separate from deposit insurance assessments. The FDIC, as administrator of the DIF, acts solely as a collection agent for the FICO. During 2009 and 2008, approximately $784 million and $791 million, respectively, was collected and remitted to the FICO.

10. Other Revenue

Guarantee Termination Fees

Bank of America
In January 2009, the FDIC, Treasury, and the Federal Reserve Bank of New York (federal parties) signed a Summary of Terms (Term Sheet) with Bank of America to guarantee or lend against a pool of up to $118.0 billion of financial instruments consisting of securities backed by residential and commercial real estate loans and corporate debt and related derivatives. In May 2009, prior to completing definitive documentation, Bank of America notified the federal parties of its desire to terminate negotiations with respect to the guarantee contemplated in the Term Sheet. All parties agreed that Bank of America received value for entering into the Term Sheet and that the federal parties should be compensated for out-of-pocket expenses and a fee equal to the amount Bank of America would have paid for the guarantee from the date of the signing of the Term Sheet through the termination date. Under the terms of the settlement, the federal parties received a total of $425 million. Of this amount, the FDIC received and recognized revenue of $92 million for the DIF. No losses were borne by the FDIC prior to the settlement.

Citigroup
In connection with the termination of the loss-share agreement with Citigroup, the DIF recognized revenue of $1.962 billion for the fair value of the trust preferred securities received as consideration for the guarantee as agreed to in the termination and recorded $231 million in dividends and interest from Citigroup (see Note 5).

Surcharges on FDIC-Guaranteed Debt
On June 3, 2009, the FDIC published a final rule in the Federal Register amending the Temporary Liquidity Guarantee Program (TLGP) to provide a limited extension of the Debt Guarantee Program (DGP) for insured depository institutions and other participating entities (see Note 16). The amendment also imposed surcharges on FDIC-guaranteed debt issued after March 31, 2009, with a maturity of one year or more. The DGP extensions, coupled with the surcharges, were designed to facilitate an orderly transition period for all participants to return to the non-guaranteed debt market and to reduce the potential for market disruptions at the end of the program. Unlike other TLGP fees, which are reserved for projected TLGP losses, the amount of surcharges collected were deposited into the DIF. During 2009, the DIF collected surcharges in the amount of $872 million.

11. Operating Expenses

Operating expenses were $1.3 billion for 2009, compared to $1 billion for 2008. The chart below lists the major components of operating expenses.

12. Provision for Insurance Losses

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