Federal Deposit
Insurance Corporation

To the Board of Directors
The Federal Deposit Insurance Corporation

In our audits of the 2012 and 2011 financial statements of the Deposit Insurance Fund (DIF) and the FSLIC Resolution Fund (FRF), both of which are administered by the Federal Deposit Insurance Corporation (FDIC)¹, we found

• the financial statements of the DIF and the FRF as of and for the years ended December 31, 2012, and 2011, are presented fairly, in all material respects, in accordance with U.S. generally accepted accounting principles;
• FDIC maintained, in all material respects, effective internal control over financial reporting relevant to the DIF and the FRF as of December 31, 2012; and
• no reportable noncompliance with provisions of laws and regulations we tested.

The following sections discuss in more detail (1) our reports on the financial statements and internal control, including two matters of emphasis related to improvements in the banking industry's and the DIF's financial condition, and the expiration of the Temporary Liquidity Guarantee Program; (2) our report on compliance with laws and regulations; and (3) agency comments and our evaluation.

Reports on the Financial Statements and Internal Control

In accordance with Section 17 of the Federal Deposit Insurance Act, as amended, and the Government Corporation Control Act, we have audited the financial statements of the DIF and FRF, both of which are administered by FDIC. The DIF statements comprise the balance sheets as of December 31, 2012 and 2011; the related statements of income and fund balance, and cash flows for the years then ended; and the related notes to the financial statements. The FRF statements comprise the balance sheets as of December 31,2012 and 2011; the related statements of income and accumulated deficit, and cash flows for the years then ended; and the related notes to the financial statements. We also have audited FDIC's internal control over financial reporting relevant to the DIF and the FRF as of December 31, 2012, based on criteria established under 31 U.S.C. § 3512(c), (d), commonly known as the Federal Managers' Financial Integrity Act of 1982 (FMFIA).

We conducted our audits in accordance with U.S. generally accepted government auditing standards. We believe that the audit evidence we obtained is sufficient and appropriate to provide a basis for our audit opinions.

Management's Responsibility

FDIC management is responsible for (1) the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; (2) maintaining effective internal control over financial reporting, including the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; (3) evaluating the effectiveness of internal control over financial reporting based on the criteria established under FMFIA; and (4) providing its assertion about the effectiveness of internal control over financial reporting as of December 31, 2012, based on its evaluation, included in the accompanying Management Report on Internal Control over Financial Reporting in Appendix 1.

Auditor's Responsibility

Our responsibility is to express opinions on these financial statements and
opinions on FDIC's internal control over financial reporting relevant to the DIF and the FRF based on our audits. U.S. generally accepted government auditing standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement, and whether effective internal control over financial reporting was maintained in all material respects as of December 31, 2012.

An audit of financial statements involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the auditor's assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit of financial statements also involves evaluating the appropriateness of the accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, evaluating the design and operating effectiveness of internal control based on the assessed risk, and testing relevant internal control over financial reporting. Our audit of internal control also considered the entity's process for evaluating and reporting on internal control over financial reporting based on criteria established under FMFIA. Our audits also included performing such other procedures as we considered necessary in the circumstances.

We did not evaluate all internal controls relevant to operating objectives as broadly established under FMFIA, such as those controls relevant to preparing performance information and ensuring efficient operations. We limited our internal control testing to testing controls over financial reporting. Our internal control testing was for the purpose of expressing an opinion on whether effective internal control over financial reporting was maintained, in all material respects. Consequently, our audit may not identify all deficiencies in internal control over financial reporting that are less severe than a material weakness.²

Definitions and Inherent Limitations of Internal Control

An entity's internal control over financial reporting is a process effected 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 accordance 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.

Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct misstatements due to fraud or error. 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 the policies or procedures may deteriorate.

Opinions

In our opinion:

• The DIF's financial statements present fairly, in all material respects, the DIF's financial position as of December 31, 2012, and 2011; the results of its operations; and its cash flows for the years then ended, in accordance with U.S. generally accepted accounting principles.

• The FRF's financial statements present fairly, in all material respects, the FRF's financial position as of December 31, 2012, and 2011; the results of its operations; and its cash flows for the years then ended, in accordance with U.S generally accepted accounting principles.

• FDIC maintained, in all material respects, effective internal control over financial reporting relevant to the DIF as of December 31,2012, based on criteria established under FMFIA.

• FDIC maintained, in all material respects, effective internal control over financial reporting relevant to the FRF as of December 31,2012, based on criteria established under FMFIA.
  

In our 2011 audit report³ we reported a significant deficiency⁴ concerning the effectiveness of controls over FDIC's process for deriving and reporting estimates of losses to the DIF from resolution transactions involving shared loss agreements.⁵ During 2012, FDIC corrected the underlying control issues that constituted the significant deficiency.

During our 2012 audit, we identified deficiencies in FDIC's internal control that we do not consider to be material weaknesses or significant deficiencies. Nonetheless, these deficiencies warrant FDIC management's attention. We have communicated these matters to FDIC management and, where appropriate, will report on them separately.

Emphasis of Matters

Improvement in the Banking Industry's and the DIFs Financial Condition

As discussed in note 8 to DIF's financial statements, the banking industry continued to recover in 2012. During 2012, 51 insured institutions with combined assets of $11.8 billion failed. The losses to the DIF from failures that occurred in 2012 were lower than the amount reserved at the end of 2011, as the aggregate number and size of institution failures in 2012— and their estimated cost to the DIF—were less than anticipated. DIF's contingent liability for anticipated failures declined from $6.5 billion at December 31, 2011 to $3.2 billion at December 31, 2012. As discussed in note 17 to the DIF's financial statements, through February 14,2013, two institutions have failed thus far during 2013.

As of December 31, 2012. the DIF had a fund balance of $33 billion, compared to a fund balance of $11.8 billion at December 31,2011. The DIF's ratio of reserves to estimated insured deposits as of the end of September of 2012 was 0.35 percent, compared to 0.17 percent at the end of 2011. This improvement was primarily attributable to increased revenue in 2012 and, as noted above, lower losses from failed institutions than estimated at December 31, 2011, and a reduction in estimated losses from anticipated failures at December 31, 2012. FDIC's long-range target is to maintain the reserve ratio at a minimum 2 percent.

Expiration of the Temporary Liquidity Guarantee Program

As discussed in note 16 to the DIF's financial statements, in an effort to counter the system-wide crisis in the nation's financial sector, FDIC established the Temporary Liquidity Guarantee Program (TLGP) on October 14, 2008, for insured depository institutions, designated affiliates and certain holding companies. At its inception, the TLGP consisted of two components: (1) the Transaction Account Guarantee Program (TAG) and (2) the Debt Guarantee Program (DGP). The TAG provided unlimited coverage for noninterest-bearing transaction accounts held by insured depository institutions on all deposit amounts exceeding the fully insured limit of $250,000 through December 31, 2010. The DGP permitted participating entities to issue FDIC-guaranteed senior unsecured debt through October 31, 2009. FDIC's guarantee for all such debt expired on December 31, 2012. The expiration of the guarantee period for the DGP marked the conclusion of the TLGP. As established under terms of the TLGP, all excess funds were transferred to the DIF. Accordingly, in 2012, the DIF recognized total "Other revenue" of $5.9 billion related to the TLGP. This revenue consisted of $5.2 billion of cash and a net receivable of $693 million included in "Receivables from resolutions, net." The net receivable represents estimated recoveries on payments made under the TLGP to cover obligations.

Our opinion on the DIF's financial statements is not modified with respect to these matters.

Report on Compliance with Laws and Regulations

In connection with our audits of the financial statements of the DIF and the FRF, both of which are administered by the FDIC, we have tested compliance with selected provisions of laws and regulations that have a direct and material effect on the DIF and FRF financial statements. We performed our tests of compliance in accordance with U.S. generally accepted government auditing standards.

Management's Responsibility

FDIC management is responsible for complying with applicable laws and regulations.

Auditor's Responsibility

Our responsibility is to test compliance with selected provisions of laws and regulations that have a direct and material effect on the financial statements. We did not test compliance with all laws and regulations applicable to FDIC. We limited our tests of compliance to selected provisions of laws and regulations that have a direct and material effect on the financial statements for the year ended December 31, 2012. We caution that noncompliance may occur and not be detected by these tests.

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.

Intended Purpose of Report on Compliance with Laws and Regulations

The purpose of this report is solely to describe the scope of our testing of compliance with laws and regulations, and the results of that testing, and not to provide an opinion on compliance with laws and regulations. This report is an integral part of an audit performed in accordance with U.S. generally accepted government auditing standards in considering compliance with laws and regulations. Accordingly, this report on compliance with laws and regulations is not suitable for any other purpose.

FDIC Comments and Our Evaluation

In commenting on a draft of this report, the FDIC's Chief Financial Officer (CFO) noted that the agency was pleased that we provided unmodified (unqualified) opinions on the DIF and FRF financial statements and that we reported that it had effective internal control over financial reporting and complied with tested provisions of laws and regulations.

FDIC's CFO also stated that FDIC is pleased that we acknowledged the agency's efforts to resolve the prior year significant deficiency related to estimating losses to DIF from shared-loss agreements. He also commented that FDIC will continue to focus on strengthening and improving its internal control environment, and that FDIC will continue its dedication to establishing sound financial management as a top priority in helping achieve the agency's mission.

James R. Dalkin
Director

Financial Management and Assurance

February 14, 2013

---

¹ A third fund 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 did not have any transactions during 2012 or 2011.

² A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting 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

³ GAO. Financial Audit: Federal Deposit Insurance Corporation Funds' 2011 and 2010 Financial Statements, GAO-12-416, (Washington, DC: Apr. 19, 2012).

⁴ A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit the attention of those charged with governance.

⁵ Under shared loss agreements FDIC sells a failed institution to an acquirer with an agreement that FDIC, through the DIF, will share in any losses the acquirer experiences in servicing and disposing of assets purchased and covered under the shared loss agreement. Typically these agreements are structured such that FDIC assumes 80 percent of any such losses.