oversight

Audit of Federal Deposit Insurance Corporation for the Year Ended June 30, 1970--Limited by Agency Restriction on Access to Bank Examination Records

Published by the Government Accountability Office on 1971-02-18.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

REPORT TO THE C




Audit of Federal Deposit Insurance
Corporation For The Year Ended
June 30, 1970 - Limited By Agency
Restriction on Access to Bank
Examination Records   B-1 14831




BY THE COMPTROLLER GENERAL
OF THE UNITED STATES



                    FEB.18,1971
                  COMPTROLLER     GENERAL     OF      THE    UNITED     STATES
                                WASHINGTON.    D.C.     20548




   B-114831




    To the President   of the Senate and the
‘1) Speaker  of the House of Representatives

          This is our report      on the audit of the Federal    De-
1 posit Insurance     Corporation      for the year ended June 30,
  197’0, pursuant   to section     17(c) of the Federal  Deposit   In-
  surance    Act (12 U.S.C.     1827).

           Copies of this report      are being sent to the Director,
   Office of Management      and Budget; the Secretary      of the Trea-
   sury; and the Chairman       of the Board of Directors,     Federal
   Deposit   Insurance   Corporation.




                                                                      Comptroller     General
                                                                      of the United   States




              -         50TH ANNIVERSARY                    1921- 1971
I
I             COMPJ'ROLLER
                         GENERAL'S                      AUDIT OF FEDERAL DEPOSIT INSURANCE
I           ' REPORTTO THE CONGRESS                     CORPORATION FOR THE YEAR ENDED JUNE 30,
I                                                       1970--LIMITED BY AGENCY RESTRICTION ON
I
I                                                       ACCESS TO BANK EXAMINATION RECORDS
I
                                                        B-114831
I
I                                      Is
I
             DIGEST
             ------
I
I
I
I            WHYTHE AUDIT WASMADE
I
                  The General Accounting  Office          (GAO) is required by law (12 U.S.C.
                  1827) to make an annual audit           of the Federal Deposit Insurance
                  Corporation.


             FINDINGS AND CONCLUSIONS
                  As in prior years,      GAO was unable to fully       discharge   its audit respon-
                  sibilities   because the Corporation        would not permit unrestricted      access
                  to examination    reports,   files,     and other records relative      to the banks
                  it insures.    GAO believes      that access to these records is essential        be-
                  cause they contain facts,        opinions,    and recommendations     of vital impor-
    I
                  tance to the conduct of the Corporation's            affairs.   (See pp. 6 and 7.)

                  The respective   positions   of GAO and the Corporation    on this matter are
                  set forth   in detail   in GAO's report    to the Congress on audit of the
                  Federal Deposit Insurance      Corporation   for the year ended June 30, 1964
                  (B-1 14831, February 28, 1966).

                  The financial   statements     in this report were prepared by the Corpora-
                  tion.   These financial     statements    do not show an estimate   of the lia-
                  bility  which the Corporation       may incur as a result   of problem condi-
                                                                                    *
                  tions existing    in insured banks.

                  Because GAO did not have unrestricted         access to examination     reports
    I             and related  documentation,     it could not (1) ascertain      whether bank
    I
                  examinations   were of sufficient      scope and could be relied      upon to iden-
                  tify  all banks that should have been classified         as problem banks and
                  (2) evaluate   the significance     of any possible    adverse effect     of prob-
                  lem banks on the financial      position    of the Corporation.

                  For these reasons GAO cannot express an overall                    opinion on the accom-
                  panying financial    statements     forfiscal        year 1970.          However, except
                  for the comments as to the estimated            liability        relating    to problem
                  conditions   in insured banks, GAO believes               that the individual       amounts
        I
                  shown in the financial     statements       are fairly        stated as of June 30,
        I         1970, and for the fiscal      year then ended, in conformity                 with gener-
        I         ally accepted accounting      principles       applied on a basis consistent             with
        I
        I         that of the preceding year.         (See p. 17.)
        I
               Tear Sheet
        I
        I                                                                        FEB.18,1971
        I
        I                                                  1
        I
        I
RECOiQWENDAT~OTiS
               OR SUGGESTIOX5'

     See comments under      the two following      headings.


AGENCY ACTIONS AND UNRESOLVEDISSUES

     Both the Corporation   and GAO believe that the law supports               their respec-
     tive positions   on the access-to-records     problem. Repeated            efforts  to
     resolve the matter administratively       have failed.

    The Chairman of the Board of Directors        of      the Corporation      advised GAO
    that the Corporation   continued    to be'lieve       that legislative      clarifica-
    tion may be required    if the problem is to          be resolved,      but the Corpora-
    tion continues   to oppose permitting    GAO to         have unrestricted      access to
    the records.


MATTERS FOR CONSIDERATION BY THE CONGRESS

     On January 3, 1969, a bill          (H.R. 40) was introduced in the House of C"'1::s I
     Representatives       by the Chairman of the House Committee on Banking and
     Currency to amend the Federal Deposit Insurance Act.           The bill    provided
     that GAO have access to all records used by the Corporation,            including
     examination     reports    of the Federal Reserve banks and of the Comptroller
     of the Currency.         GAO supported the enactment of the bill;   however, it
     did not come before the Congress prior to the adjournment          of the Ninety-
     first  Congress.        (See p. 7.)

    In prior audit reports        to the Congress on audit of the Federal Deposit
    Insurance   Corporation,      GAO recommended that the Federal Deposit Insur-
    ance Act be amended to (1) require             the Corporation      to pay the Govern-
    ment's share of the costs of providing               retirement   and disability     bene-
    fits   from creation     of the Corporation        through June 30, 1957, and reim-
    burse the employees' compensation            fund for benefit       payments made sub-
    sequent to the creation         of the Corporation         and (2) change the require-
    ment for an annual audit of the Corporation                 by GAO from a fiscal-year
    basis to a calendar-year         basis.    Both the Corporation        and GAO believe
    that these recommendations         are still      valid.     (See p. 14.)
                         Contents      --
                                                                Page

DIGEST                                                            1

CHAPTER

  1       INTRODUCTION                                            3
              Examinations     of insured     banks               4
  2       CONTINUEDRESTRICTION ON ACCESSTO REPORTS
          AND RECORDSON BANK EXAMINATIONS                         6
  3       PROBLEMBANKSAND BANK FAILURES                           8
             Problem banks                                        8
             Bank failures                                       10

          CONTINGENTLIABILITIES                                  12

          STATUS OF PRIOR YEARS' RECOMMENDATIONS                 14
          SCOPEOF AUDIT                                          16
          OPINION OF FINANCIAL STATEMENTS                        17
FINANCIAL STATEMENTS

  1       Comparative statement of financial condi-
            tion as of June 30, 1970, and June 30,
            1969                                                 21
  2       Comparative statement of income and deposit
            insurance fund, fiscal  years ended June 30,
            1970, and June 30, 1969                              22
  3       Sources and application of funds,           fiscal
            year ended June 30, 1970                             23
  4       Analysis of deposit insurance         fund from in-
            ception to June 30, 1970                             24
          Notes to financial     statements                      25
                                                                    Page
APPENDIX

   I       Letter   dated January   14, 1971, from       the Fed-
              eral Deposit  Insurance      Corporation     to the
              General Accounting    Office                           29
  COMPTROLLERGENERAL'S                      AUDIT OF FEDERAL DEPOSIT INSURANCE
' REPORTTO THE CONGRESS                     CORPORATION FOR THE YEAR ENDED JUNE 30,
                                            1970--LIMITED BY AGENCY RESTRICTION ON
                                            ACCESS TO BANK EXAMINATION RECORDS
                                            B-114831


 DIGEST
 ------

  WHYTHE AUDIT iAS MADE
      The General Accounting  Office         (GAO) is required by law (12 U.S.C.
      1827) to make an annual audit          of the Federal Deposit Insurance
      Corporation.


 FINDINGS AND CONCLUSIONS
      As in prior years, GAO was unable to fully          discharge   its audit respon-
      sibilities   because the Corporation       would not permit unrestricted     access
      to examination    reports,  files,     and other records relative     to the banks
      it insures.    GAO believes     that access to these records is essential        be-
      cause they contain facts,       opinions,   and recommendations     of vital impor-
      tance to the conduct of the Corporation's          affairs.   (See pp. 6 and 7.)

      The respective      positions   of GAO and the Corporation    on this matter are
      set forth    in detail     in GAO's report    to the Congress on audit of the
      Federal Deposit Insurance         Corporation   for the year ended June 30, 1964
      (B-114831,     February 28, 1966).

      The financial   statements     in this report were prepared by the Corpora-
      tion.   These financial     statements    do not show an estimate   of the lia-
      bility  which the Corporation       may incur as a result   of problem condi-
      tions existing    in insured banks.

      Because GAO did not have unrestricted         access to examination     reports
      and related  documentation,     it could not (1) ascertain      whether bank
      examinations   were of sufficient      scope and could be relied      upon to iden-
      tify  all banks that should have been classified         as problem banks and
      (2) evaluate   the significance     of any possible    adverse effect     of prob-
      lem banks on the financial      position    of the Corporation.

      For these reasons GAO cannot express an overall                   opinion on the accom-
      panying financial   statements     for .fiscal      year 1970.          However, except
      for the conrnents as to the estimated          liability        relating    to problem
      conditions  in insured banks, GAO believes               that the individual       amounts
      shown in the financial    statements      are fairly         stated as of June 30,
      1970, and for the fiscal     year then ended, in conformity                 with gener-
      ally accepted accounting     principles      applied on a basis oonsistent              with
      that of the preceding year.         (See p. 17,)
RECOMMENDATIONSOR SUGGESTIONS

     See comments under     the two following      headings.


AGENCY ACTIONS AND UNRESOLVEDISSUES

     Both the Corporation  and GAO believe that the law supports               their   respec-
     tive positions  on the access-to-records     problem. Repeated            efforts    to
     resolve the matter administratively      have failed.

    The Chairman of the Board of Directors        of     the Corporation      advised GAO
    that the Corporation   continued    to believe       that legislative      clarifica-
    tion may be required    if the problem is to         be resolved,      but the Corpora-
    tion continues   to oppose permitting    GAO to        have unrestricted      access to
    the records.


MATTERS FOR CONSIDERATION BY THE CONGRESS

    On January 3, 1969, a bill          (H.R. 40) was introduced in the House of
    Representatives       by the Chairman of the House Committee on Banking and
    Currency to amend the Federal Deposit Insurance Act.           The bill    provided
    that GAO have access to all records used by the Corporation,            including
    examination     reports    of the Federal Reserve banks and of the Comptroller
    of the Currency.         GAO supported the enactment of the bill;   however, it
    did not come before the Congress prior to the adjournment          of the Ninety-
    first  Congress.        (See p. 7.)

     In prior  audit reports     to the Congress on audit of the Federal Deposit
     Insurance Corporation,      GAO recommended that the Federal Deposit Insur-
    ance Act be amended to (1) require           the Corporation      to pay the Govern-
    ment's share of the costs of providing             retirement    and disability    bene-
    fits   from creation    of the Corporation       through June 30, 1957, and reim-
    burse the employees'      compensation     fund for benefit       payments made sub-
    sequent to the creation       of the Corporation         and (2) change the require-
    ment for an annual audit of the Corporation               by GAO from a fiscal-year
    basis to a calendar-year       basis.    Both the Corporation        and GAO believe
    that these recommendations       are still      valid.     (See p. 14.)
                            CHAPTER1

                          INTRODUCTION

      The General Accounting Office has made an audit of the
Federal Deposit Insurance Corporation     for the fiscal  year
ended June 30, 1970.   The  scope  of the  audit is  set forth
on page 16 of this report.
        The Corporation   is an independent Government agency
which insures deposits in banks qualified       for deposit in-
surance.     Public Law 91-151, approved December 23, 1969,
increased the maximum amount of insurance for each deposi-
tor from $15,000 to $20,000.        National banks that are char-
tered by the Comptroller      of the Currency and all State
banks that are members of the Federal Reserve System are
required to be insured.       State banks that are not members
of the Federal Reserve System may become insured upon ap-
plication    for insurance and approval thereof.

       The Corporation also acts, when appointed to do so, as
receiver   for insured banks that have been closed.     As of
June 30, 1970, the Corporation    had 23 active receivership
cases.

      The Corporation's   operations   are financed from assess-
ments against insured banks and from income from its in-
vestments in U.S. Government securities.         The Corporation
is authorized    to borrow up to $3 billion    from the U.S.
Treasury when, in the judgment of the Board of Directors,
such funds are required    for insurance purposes.        This bor-
rowing authority    has never been used.     The deposit insur-
ance fund, representing    the accumulated net income of the
Corporation,   amounted to approximately     $4.2 billion     at
June 30, 1970. The amount of the fund was equivalent             to
1.4 percent of the insured deposits of $312.6 billion            in
the 13,818 banks insured by the Corporation        at June 30,
1970. Of the 13,818 banks, 8,014 were State nonmember,
1,166 were State member, and 4,638 were national          banks.

      I%nagement of the Corporation    is vested in the Board
of Directors  which is composed of three members--two members
are appointed by the President of the United States and the
third member is the Comptroller     of the Currency.

                                  3
      During    fiscal  year 1970, the membership of the Board
of Directors      was as follows:

                                                   Tenure of office
                                                  From             -To        -
Frank Wille, Chairman                        Apr.    1970       Present
K. A. Randall (Chairman from
   Apr. 1965 to Mar. 1970)                   Mar.    1964       Mar.      1970
William B. Camp, Comptroller of
   the Currency                              Nov.    1966       Fresent
Irvine H. Sprague                            Sept.   1968       Present

EXAMINATIONSOF INSURE3 BANKS

        The Corporation   makes regular examinations         of insured
State banks that are not members of the Federal Reserve
System. According to the Corporation,             these banks are ex-
amined to ascertain      their financial      condition,    compliance
with applicable      laws and regulations,      and operating poli-
cies and practices.       The banks are examined also to deter-
mine the condition      of their loan portfolios,         consideration
being given to such factors as the possibility              of undue
risk and overextension       of credit or undue concentration            in
a single line of credit,       the suitability       of their security
portfolios    from the standpoint      of liquidity      and quality,
the adequacy of their capital         and reserves,      and the effec-
tiveness of their internal        controls.     In addition,     overall
appraisals    of the banks' management are made.

        State banks that are members of the Federal Reserve
System are examined by the Federal Reserve banks.        National
banks are examined by the Comptroller      of the Currency.    We
are not informed as to the scope of the examinations        made
by the Federal Reserve banks and the Comptroller       of the
Currency,      Section 7(a)(2) of the Federal Deposit Insurance
Act (12 U.S.C, 1817) provides that the Corporation       have ac-
cess to reports on examinations      made by, and reports on
condition     made to, any Federal Reserve bank and the Comp-
troller     of the Currency.

      The Corporation reported that, for the period July 7,
1969, through July 2, 1970, it had examined 7,559 insured
State nonmember banks and had reviewed reports on

                                      4
 ,
examinations   made by the Federal Reserve banks of 338 State
member banks and by the Comptroller   of the Currency on 631
national   banks.




                                                                >)                 ‘.
                                                                     ‘,..,
                                                                             ‘. , r



                                                                             ._-
                                CHAPTER2

          CONTINUEDRESTRICTION ON ACCESSTO REPORTS

                AND RECORDSON BANK EXAMINATIONS

     As in prior years, we were unable to fully discharge
our audit responsibilities     under the Federal Deposit Insur-
ance Act because officials     of the Corporation     did not give
us unrestricted   access to examination   reports,     files,  and
other records maintained by the Corporation        relative   to the
banks it insures,    except for the records for closed banks.

       The positions    of GAO and the Corporation         on this mat-
ter are set forth in detail      in our report to the Congress
on audit of the Federal Deposit Insurance Corporation               for
the fiscal     year ended June 30, 1964 (B-114831, February 28,
1966).      The Chairman of the Board of Directors,          Federal De-
posit Insurance Corporation,       advised us by letter        dated
January 14, 1971, that the Corporation            continued to believe
that some kind of legislative       clarification       may be required
if the issues on our access to the Corporation's              records
are to be resolved,       The Chairman advised, however, that if
legislation     were to be considered by the Congress, the Cor-
poration would oppose its substance.

        We believe that access to the records of the Corpora-
tion's    Division    of Bank Supervision       is essential    to a mean-
 ingful audit of the Corporation          by GAO. That Division          em-
ploys approximately        77 percent of the Corporation's          total
personnel,      and the efforts    and reports of the Division           are
an essential      and integral    part of the operations        of the Cor-
poration.       The Division's    reports on insured banks contain
facts,    opinions,    and recommendations of vital          importance to
the conduct of the Corporation's           affairs.     Without full and
complete access to these reports and the supporting                 documen-
tation,    we cannot evaluate important information             affecting
the Corporation's       financial    operations     and condition.

     Because of restrictions     on access to the records, we
were unable to ascertain     (1) whether bank examinations  were
of sufficient scope and could be relied upon to identify      all
banks that should have been classified     as problem banks,
 (2) whether the Corporation      had taken effective    follow-up
action on findings   disclosed      by the bank examiners, and (3)
the significance   of any possible adverse effect        of problem
banks on the financial     position    of the Corporation,

      Both the Corporation  and GAO believe that the present           .
law supports their respective   positions.   Repeated efforts
to resolve this matter administratively    have been unsuccess-
ful.

       On January 3, 1969, the Chairman of the Committee on
Banking and Currency introduced       a bill   (H.R. 40) in the
House of Representatives,     Ninety-first     Congress, to amend
the Federal Deposit Insurance Act.          The bill provided that
GAOhave access to all records used by the Corporation,           in-
cluding examination reports      of the Federal Reserve banks and
of the Comptroller    of the Currency.       GAO supported the en-
actment of this bill;     however, it did not come before the
Congress for action prior to the adjournment of the Ninety-
first   Congress.




                                 7
                                   CHAPTER3

                      PROBLEPI:
                             BANKSAND BANK FAILURES

PROBLEMBANKS

       The Corporation   classifies     problem banks as serious
problem banks and other problem banks.             It defines a serious
problem bank as one that threatens ultimately             to involve the
Corporation    in a financial     outlay unless drastic       changes
can be brought about,       Other problem banks are defined by
the Corporation     as banks of lesser degree of vulnerability,
including   those which give cause for more than ordinary
concern and require aggressive         supervisory    attention.

      The Corporationes estimates of the number of banks and
insured deposits of the serious problem banks and other
problem banks at June 30, 1970, and 1969, are shown below.

                                                                 Estimated
                                                            insured deposits
                                   Humber of banks                (note a>
                                 June 30,   June 30,       June 30,       June 30,
                                   1970       1969            1970          1969

                                                              (000 omitted)
Serious problem banks:
     State nonmember banks           40         18     $     558,213    $     213,207
     State member banks               4          3           147,006           55,926
     National banks                  10         10           145,008          165,537
             Total                   54          31          850,227          434,670
Other      problem banks:
        State nonmember banks       149        144      1,071,459        1,061,448
        State member banks           14          9      1,137,373            99,890
        National   banks             27         28         287,432          513,268
             Total                  190        181      2,496,264        1,674,606
Total                              244         g.J     $39346,491      $2,109,276

aEffective      December 23, 1969, the maximum amount of insurance          for   each
 account      was increased from $15,000 to $20,000.




                                          8
There were 32 more banks classified        as problem banks at
June 30, 1970, than at June 30, 1969.
                           ..
      During fiscal.year      1970, 108 banks were removed from
the classification      of problem banks--102 banks because of
improvements in their management or financial         condition  and
six banks because of their failure.         During the fiscal   year,
140.other    banks were added by the Corporation      to the prob-
lem bank classification,       making a total of 244 at June 30,
1970.

       To correct problem conditions          at an insured bank, the
Corporation,    with the assistance       of the appropriate       banking
regulatory    body, attempts to obtain the cooperation             of the
bank's management in improving the bank's operations                and
financial    condition.     When corrective       action is not obtain-
able by this method, the Corporation            is authorized     under
section 202 of the Financial        Institutions       Supervisory   Act
of 1966 (12 UIS;C.' 1818) to-‘take:corrective            measures--such
as the issuance of cease-and&desist            orders to insured banks
engaged in,unsafe       and unsound practices       and the suspension
or removal of,bank,officers        and dire'ctors,      subject to cer-
tain protective      standards and procedures.          This authority
expires on June 30, 1972.

      When unsafe and unsound practices   persist,  the Corpo-
ration is authorized    under section 8(a) of the Federal De-
posit Insurance Act to tiommence proceedings which may re-
sult in the termination    of the deposit insurance coverage
of the bank.

      The accompanying financial   statements do not show an
estimate of the liability   which the Corporation    may incur
as a result  of problem conditions    existing in insured banks.
BANK FAILURES

     During the fiscal  years 1966 through 1970, 26 insured
banks failed,  as shown in the following  tabulation.

                                   Number of insured banks which failed
Fiscal                                           State
 year                        Total       Nonmember     Member       National

 1966                                5                   3                                                2
 1967                                5                   4                      1
 1968                                3                   1                                                2

 1969
 1970                          - 76                    - 53                    -2                        - 2'
         Total                                                                 -3                        I7

       The Corporation  estimated that, for the seven banks
which failed   during fiscal    year 1970, the total payments
required to discharge its insurance indemnity liability
would be about $27,752,000 and that its estimated losses
thereon would be about $6,000,000,      as shown below.

                                                                                  Estimated
                                                                               liability    paid    Estimated
                                                                  Date            or payable         loss to
                                     Bank                        closed             (note a)       Corporation
First National Bank of Ursa, Ursa, Illinois                      8-20-69        $ 1,529,ooo        $     500,000
The Big Lake State Bank, Big Lake, Texas                         8-2s69b          2,364,OOO
The First State Bank, Aransas Pass, Texas,
   Aransas Pass, Texas                                           9- 2-69C           7,494,ooo            900,000
The First National Bank of Coalville,   Coalville,
   utah                                                         lo-   3-6gd         3,245,OOO            200,000
State Bank of Prairie City, Prairie City,
   Iowa                                                          2-23-70            3,571,ooo          1,000,000
The Peoples State Savings Bank, Auburn, Michigan                 4-18-70            8,346,OOO          3,000,000
Farmers Bank of Petersburg, Petersburg, Kentucky                 6-25-70            1,203,OOO            400,000
                                                                                $27,752 .OOO       $6,000 .OOO

aDoes not include      liquidation       expenses incurred    or collections     received.
bMerged with     the newly chartered        Reagan State Bank of Big Lake, Texas.
%erged with      the newly   chartered      First   State Bank of Aransas Pass, Texas.

%e rged with     the Walker Bank and Trust          Company of Salt Lake City,        Utah.




                                                       10
      The Corporation,     in discharging its insurance indem-
nity liability      for the seven banks which failed,   paid the
depositors     of four of the banks the amount of their insured
deposits in exchange for the depositors'      claims upon the
banks' assets and took action to facilitate        the merger of
the other three banks with other insured banks.

      The Corporation    purchased the assets of the failed
banks that were not taken over by the assuming banks, and
the amount paid became part of the assets acquired by the
assuming banks.     The assets acquired by the Corporation        are
to be liquidated    and the proceeds applied in payment to the
Corporation    for (1) its investment in the acquired assets,
(2) its expenses incurred      in maintaining    and liquidating
the acquired assets, and (3) interest         on the unliquidated
investment in the acquired assets and the accumulated ex-
penses at the rate of 4 percent a year.          Any remaining pro-
ceeds and other assets are to be returned to the failed
banks.
       The Corporation's       records showed that the bank fail-
ures in the last several years resulted             from various combi-
nations of unsound and deceptive practices              in operations,
including      misuse of bank funds by bank officers,           directors,
and owners; substandard loans and excessive appraisals                   of
collateral;      unwarranted loans in which bank officials,              di-
rectors,      and owners had personal financial         interests;     loans
in excess of the limit prescribed            by law; broker-solicited
funds in certificates         of deposit and related unwarranted
out-of-territory       lending;    inadequate capital;      unsatisfac-
tory management; and defalcations.




                                      11
                                   CHAPTER 4

                         CONTINGENT LIABILITIES

        The Corporation"s       General    Counsel advised   us that there             -
were six legal       actions    pending    against the Corporation      at
June 30, 1970, and estimated            that the Corporation      might have
a total    liability      of about $2.7 million      in connection     with
these actions.        This amount is included        in the Corporation's
reserve    for losses       shown on the statement     of financial     con-
dition.

      The Corporation's      General        Counsel is of the opinion
that the legal      actions  against        the Corporation      in certain
other   cases are without      merit.         The more significant       cases
in this    category    are described        below.

        One case involves          an action     by eight      directors      of the
closed Public          Bank, Detroit,      Michigan,      seeking      to set aside
the closing         of the bank and the transfer             of its assets to
the Bank of the Commonwealth,               Detroit,      Michigan.         The pri-
mary relief         sought is the return         of the Public         Bank to its
former     status      as an operating      bank and the transfer             of the
Corporation's          $10 million    guaranty       fund from the Bank of the
Commonwealth         to the Public     Bank.      The action        also involves
a claim for damages of an amount not disclosed                         in the com-
plaint.       The Corporation's        General      Counsel considers           it
highly     unlikely        that there will     be any judgment           for damages
against     the Corporation.          The General        Counsel advised          us
that,    in another          case, the same type of issues had been de-
cided in favor           of the Corporation       in September         1967 by the
circuit     court      for Wayne County,       Michigan.

        A second case involves         a claim for damages totaling
$7.5 million      against     the Corporation      and other defendants
concerning     matters    arising    from the closing        of two banks--
San Francisco      National      Bank and The First        National   Bank of
Marlin,    Texas.     The Corporation       was dismissed        from the ac-
tion;    however an appeal        is pending to a U.S. circuit           court
of appeals.       The Corporation's        General   Counsel informed        us
that he believed       the case was without         merit.




                                          12
      A third case involves a claim for damages of approxi-
mately $50 million     against the Corporation        in its corporate
capacity and as receiver      of the San Francisco National Bank
and The First National Bank of Marlin,          Texas, as well as
against certain    other defendants.       Previously     the Corporation
had filed suit against the claimant and his interests             seek-
ing judgment for approximately       $700,000.      In January 1970
an Order for Dismissal and Summary Judgment was signed by
the District    Judge entering judgment in favor of the Corpora-
tion.    Although the plaintiff    may still     appeal the decision,
the Corporation's     General Counsel believes        that such an
appeal is without merit.




                                   13
                              CHAPTER5

                              STATUS OF
                 PRIOR YEARS' RECOMMENDATIONS

      In our prior   audit   reports   we recommended:

      1. That the Federal Deposit Insurance        Act be amended
         to require the Corporation  to:

         a. Pay into the civil     service retirement       and dis-
            ability   fund the Government's share of the cost
            of providing   retirement    and disability      benefits
            for the Corporation's      employees for the period
            from the creation of the Corporation          through
            June 30, 1957. Starting with the first            pay pe-
            riod in July 1957, the Corporation          began paying
            its share of these costs.

         b. Pay into the employees' compensation fund the
            amount of benefit payments made from such fund on
            account of the Corporation's  employees for all
            periods subsequent to the creation   of the Corpora-
            tion.

         c. Pay into the Treasury as miscellaneous        receipts
            a fair portion of the cost of administering          the
            civil  service retirement    system and the employ-
            ees ' compensation fund for all periods subse-
            quent to the creation     of the Corporation.

     2. That section 17(c) of the Federal Deposit Insurance
        Act (12 U.S.C. 1827(c)) be amended to require that
        GAOmake its reports of audits on a calendar-year
        basis rather than on a fiscal-year basis.

      Proposed legislation   to amend the act was introduced
in prior years but was not acted upon by the Congress.        No
new legislation   covering these matters was introduced    in
the Ninety-first   Congress.




                                  14
     .

      Both the Corporation    and GAO believe that the adoption
of the above recommendations would result in a more equi-
table allocation    of the cost of retirement,    disability,    and
compensation benefits between the Federal Government and the
Corporation    and would eliminate  the inconsistency      in the pe-
riods covered by the annual reports of GAO and the Corpora-
tion.




                                                                            L                ,‘.

                                                                                       :.
                                                                        I        ‘,.:’
                                                                                 : 1.
                                                                            .-    .,,

                                                                                        ;.




                                  15
                            c

                                   CHAPTER6
                                                         ~     ,.   ._j'
                                'SCOPEQF AUDIT          ' .
                                                                  ,
      Our audit of the Corporatkon consisted princ.i.pally                of-
an examination      of its statement of financial        condition      as
of June 30, 1970, the related           statements of income and de-'
posit insurance fund and of sources and application                  of
funds for the year then ended, and the statement of analysis
of the deposit insurance fund from its inception,                  We were
unable to ascertain       the possible adverse effect of problem
banks on the financial        position     of the Corporation       because
of the restrictions        imposed by Corporation     officials       on our
access to examination reports and related data.                 (See pa 6.)
We believe that unrestricted           access to such reports and
records is indispensable        for a. proper examination        of the
Corporation's     financial    statements,

        Our examination was made in accordance with generally
accepted auditing      standards and, with the foregoing    excep-
tion concerning review of bank examination reports and re-
lated data, included such tests of the accounting records
and such other auditing       procedures as we considered neces-
sary in the circumstances       and appropriate   in view of the
effectiveness     of the system of internal     control and the work
performed by the Corporation's        internal  auditors,,




                                      16
                             CHAPTER7

                OPINION OF FINANCIAL, STATEMENTS

       The financial  statements in this report were prepared
by the Corporation.      These financial   statements do not show
an estimate of the liability      which the Corporation      may in-
cur as a result of problem conditions       existing    in insured
banks.    Because we did not have unrestricted        access to ex-
amination reports and related      documentation     on insured banks
 (see p. 61, we could not (1) ascertain       whether bank exami-
nations were of sufficient      scope and could be relied upon
to identify    all banks that should have been classified        as
problem banks and (2) evaluate the significance           of any pos-
sible adverse effect of problem banks on the financial           po-
sition   of the Corporation.

       For these reasons we cannot express an overall         opinion
on the accompanying financial      statements for fiscal      year
1970. However, in our opinion,        except for the foregoing
comments as to the estimated liability       relating     to problem
conditions    existing in insured banks, the individual         amounts
shown in the financial    statements are fairly       stated as of
June 30, 1970, and for the fiscal       year then ended, in con-
formity with generally    accepted accounting      principles    ap-
plied on a basis consistent     with that of the preceding
year.




                                  17
mANCIAL   STATEMENTS




                                      .,.
                               ‘.;
                              _--

                                     ,-’

                       L   :...:




     19
                                                                                                                                          SCHEDULE1


                                                              FEDERALDEPOSITINSURANCECORPORATION
                                                          COMPARATIVE
                                                                    STATEMENT
                                                                            OF FIhANCIAL CONDITION

                                                                   JUNE 30, 1970, AND JUNE 30, 1969

                                                                                    June 30. 1970                                         tune   30.       1969
                ASSETS

CASH                                                                                          s          7,277,964                                     $           b,546,959

U.S. GOVERNMENT  OBLIGATIONS:
    Securities at amortized cost                              $4,453,946.801a                                            $4,132,850,95~b
    Accrued interest receivable                                   52.530.692                      4.506.477.493           _ 48.493.511                     4,181,344,464

ASSETSACQUIREDIN RECEIVERSHIPAND DEPOSIT
  ASSUMPTIONTRANSACTIONS:
    Special assistance to insured banks                                  8,676,257                                           10,000,000
    Subrogated claims of depositors against
      closed insured banks                                             30,778,842                                            22,287,830
    Net insured balances of depositors in
      closed insured banks, to be subrogated
      when paid--see related liability                                   1.625.450                                                533,245
    Equity in assets acquired under agreements
      with insured banks                                               13,250,771                                            11.806,671
    Assets purchased outright                                                 15.5otl                                               14.595

                                                                       54,346,828                                            44,642,341

    Less reserve for losses                                            28,832.794                      25,514,034            25.409.790                           19,232,551
MISCELLANEOUS
            ASSETS                                                                                          391,760                                                   318,266
LAND AND OFFICE BUILDING, less depreciation
  on building                                                                                            7,432,097                                                 7,567,301

FURNITURE, FIXTURESANDEQUIPMENT                                                                   .mv-1                                                                         1

                      Total assets                                                            $*093.349                                                $4,215,009,542

       LIABILITIES AND DEPOSITINSURANCEFLIND (note 1)
ACCOUNTS
       PAYABLEANII ACCRUEDLIABILITIES                                                         s          2,635,593                                     $           1.687,272
EARNESTMONEY,ESCROW
                  FUNDSAND COLLECTIONS
  HELD FOR OTHERS                                                                                           873,296                                                   634,699

ACCRUEDANNLIALLEAVEOF EMPLOYEES                                                                          2,466,172                                                 1,936.524

DUE INSUREDBANKS:
    Net assessment income credits (note 2):
        Available July 1, 1970, and July 1,
          1969, respectively                                  $      220.230,665                                         $ 202,136,109
        Available July 1, 1971, and July 1,
          1970, respectively  (estimnted)                            106,124,tiOJ                                           110,813,242
    Other                                                                      94,043                326,449,511                    69.57$                    313,%.8,929

NET INSUREDBALAKCESOF DEPOSITORSIN CLOSED
  INSUREDm--See    related asset                                                                         1.625.450                                                    533.245

                      Total liabilities                                                              334.050,022                                              317,810,669
DEPOSITINSURANCEFUND, net income accumulated
  since inception (schedule 2 and note 3)                                                         4,213,043,327                                            3,897,198,873
                      Total liabilities    and deposit
                        insurance fund                                                        $4.547.093.342                                           $4.215.009.542

GAOnotes:
    aAt June 30, 1970--face     value $4,480.946,000.      cost $4.439,527,970,              market value $3.940,076,936.

    bAt June 30, 1969--face     value $4,153,287,000,      cost $4,121.393,360,              market value $3,702,778,497.
The notes following   schedule 4 are an integral        part of this           statement.
The opinion   of the General Accounting Office     on these financial                statements      Is set forth     on page 17.




                                                                                     21
     SCHEDULE2


                                              FbDEPXLDEPOSIT Ii&XJRA~.C~CORPORATION

                                   CU~X'ARATIVLSTATLIZNT OF INCOt'.'. AM DEPOSIT INSURANCEFUND
                                      FISCAL YLARS thDED JUNE 30, 1970, AKD .IUNE 30, 1'169


                                                                   I--__      Fiscal year
                                                                                      ------I--1970               -------   Fiscal_ye_ar       1969

INCONE:
     Deposit insurance assessments (note 2):
         Assessments earned during the year                        $366,019,786                                   $J50,2SO,555
         Less net sssessnient income credits
            to insured banhs--estimated                              215.515.945           $ 150,503,841            2J&YW~                 $      136,373,265
         Adjustments of assessments earned
            In prior years                                                                  --      146,?32                                -----L-      46 514

                                                                                                  150,650,073                                     136,419,784
     Eiet income from U.S. Government
        securities                                                                                207,356,357                                     177,130,462
     Other income                                                                           --         629,587                                           1,786
                  Total   income                                                            ---I353,636,047                                    313.552.032
EXPENSESAN3 LOSSES:
   Administrative   and operating expenses:
       Salaries and wages                                             25,256,947                                     19.765,021
       Civil Service retirement    fund and
          FICA payments                                                1,650,819                                      1,260,928
       Travel expenses                                                 6,336,886                                      5,102,321
       Office rentals,   communications and
          other expenses                                               5,437,300                  38,681,952          4,356,6X                    30,484,888

     Provisions    for      insurance losses:
          Applicable        to banks assisted in the
            current       fiscal year                                  6,OOO.OOO                                      2,701,OOO
          Adjustments         applicable to banks
            assisted        in prior years                          - -2,521.206                    3,478,794        -4,248,209                   -1,547,209

    Nonrecoverable insurance expenses incurred
      to protect depositors--net                                                           ----       630,841                              ----       478 250

                  Total Fxpensss and losses                                                --42,791,5x                                     _      29,415.929
NET INCOm--ADDITION TO THE DEPOSIT INSURANCE
  J?Uh?)FOR ThE YEAR                                                                             3X,844,454                                    284,136,103

DEPOSIT INSURANCEFUND, at the beginning
  of the year                                                                              3,897,19S>E                                     3.613.062.770

DEPOSIT INSURANCEFl,XII, at the end of the year,
  net income accumulated since inception
  (schedule 4 and note 3)                                                                 $4,213,043.32_?                              $3,897,198,873


The notes following        schedule 4 are an integral      part   of this   statement.

The opinion       of the General Accounting     Office   on these financial        statements      is set forth   on page 17.




                                                                      22
                                                                          SCHEDULE3




                          SOUXCES AbiD AF'PLICATIOS OF FUXDS

                           FISCAL YEAR ENDED JUNE 30, 1970


FUNDS PIXOVIDED BY:
    Net deposit insurance       assessments                           $150,65O,C73
    Income from U.S. Government securities,
       less amortized      net discounts                                202,108,618
    Maturities      and sales of U.S. Government
       securities                                                       383,205,OOO
    Collections      on assets acquired in receiver-
       ship and deposit assumption       transactions                    19,883,928
    Increase      in assessment credits    due insured
       banks                                                           -482           -
         Total   funds   provided                                     $769aJL20k
                                                                       --.
                                                                       --Ic
FUNDS APPLIED TO:
    Administrative,     operating, and insurance
      expenses, less miscellaneous       credits                      $ 38,0X,360
    Acquisition     of assets in receivership    and
      deposit assumption transactions                                     28,552,OOO
    Purchase of U.S. Government securities                              693,053,079
    Net changes in other assets and liabilities                         -2654,762
                                                                              -
         Total   funds   applied                                      $769-201
                                                                       --d     -_I
                                                                       -

The opinion of the General Accounting         Office     on these   financial    state-
ments is set forth on page 17.




                                         23
SCHEDULE4




    InsurarLce ass,ossrJelIts                                                                 $5,264,613,323
    Less net assessment                   income credits                                       2 4Qcr 5"2
                                                                                               -L/L?.  2. -L455
                                                                                                             --I.
            Xet insurance              ass~~ss!nents                                           2,766,090,86S

    Incoac!:e    fror?i     u . s.    Govu,rmmt         securities                             1,937,803,8X
    Other operatins      ixolae    (principally
       interest    and allowable     return     from
      deposit insurance        assumption and
      receivership     cases)



TZPENSES AX2 LOSSES:
    Administrative       and operating    expenses                                                 361,122,668
    Deposit insurance        losses and expenses                                                    59,148,169
    Interest     paicl to the Secretary     of the
       Trzsury     on retired     capital  stock

            Total         expenses      and losses

XPCSIT IKSURAKCX FUXD, MX IXCOI-IE ACCWULATED
  SIXCE IIFCEPTIOP: (note 3)


The notes       following            schedule       4 are an integral           part     of this       statement.

The opinion of the General                        Accounting         Office   on these     financial        statements
is set forth on page 17.




                                                         24
                           XYrES
                           .---- --._ TO ----*
                                          FI::A:rCIAL
                                                    -I---.-STilix.EN%S
                                                 __e,          .-_- __---


1.   Capital stock -das retiT&        by payments        to the Urited             States   Treasury
     in 1947 and 1.948.

2.   Represents    the portion    of the Corpcraticn's     net assessment income
     for the preceding calendar year anti an esLimated portion           of such
     income for the first      half 0i the current     calendar year :Jhich: pursuaTjt
     to the Federal Deposit Insurance         Act (12 U.S.C. 1217), shall he
     credited   against assessmnts       becoming due frox insured bmks, after                           .
     the end of the current       fiscal  year and after    the end of the following
     fiscal   year, respectively.

3.   The deposit insurance     fund represents     the accumlated    net incone of
     the Corporation   and is available      for 'ensuring deposits    and payrzent of
     expenses.    The borrowing    authority    of $3 billion   from the United States
     Treasury has never been used.

4.   These statements   do not include accountability                      for     the assets and
     liabilities  of the closed insured banks for                  which         the Corporation  acts
     as receiver  or liquidating    agent.




                                              25
.


    APPENDIX




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                   . . ::
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                 I. ‘;




          27
                                                                                           APPENDIX I
                                                                                               Page 1
                                         ""3
                                      ,;&$      FtDERAL DEPOSIT INSURANCE CORPORATION,   Washlngtnn,[!   C 30429
                                       -, .-’



c?F+-ICE   Ol-   Tiii     CIiA!RMAN




                                                                           January   14,     197 1



Mr. Eugene L. Pahl
Assistant   Director   - Civil Division
United States General Accounting        Office
Washington,      D. C.    20548

Dear Mr.                Pahl:

This is in response to your letter of December    23, 1970, with which you
enclosed   copies of a draft of your proposed report to the Congress  on the
audit of this Corporation   for the year ended June 30, 1970.

We have noted again your views and qualifications            with respect to ac-
cess to our confidential         reports and records on bank examinations.         As
you know, our position         on this question   has been expressed    fully in the
past.    It continues    to appear that some kind of legislative     clarification
may be required if the issues are to be resolved.           We have also noted,
however,     that if legislation      were to be considered by the Congress,       we
would have to oppose its substance.

Also in the area of legislation,     we continue to concur in the proposal that
the Federal Deposit     Insurance   Act be amended as to the Corporation’s
posture with respect to its contributions       to the civil service retirement         and
employees’    compensation     system and funds.       Additionally,     the Corporation
concurs in your proposal that Section 17 (c) of the Federal Deposit              Insur-
ance Act be amended to require that GAO make its reports of audits on a
calendar-year    basis rather than on a fiscal-year       basis.     If the foregoing
legislation   should be introduced     and considered,      the Corporation     would
 support it.

We reiterate     the point that we continue to have some question                as to
whether anything        is gained by including        in your proposed    “Statement      of
Financial    Condition”     notes which refer to the market value of the Corpora-
tion’s portfolio     of Government      securities.      It remains our view that market
values have little relevance         in this Statement       or in the Corporation’s
management       of its portfolio  inasmuch        as the great bulk of OUT securities         is
held as a deposit insurance         fund.     On that basis,      market value at any
point in time has very little meaning in stating the Corporation’s                   financial
condition.


                                                              29
   APPENDIX I
       Page 2

  Mr. Eugene L. Pahl
  Assistant   Director-Civil           Division
  U . S. General Accounting             Office                                 January   14,197l




                                        [See GAO note.]



  Beyond these comments,               after review of your proposed draft, we have
  no additional  suggestions             and appreciate the opportunity you have pro-
  vided for the expression             of our views.

                                                         Sincerely,




                                                         Frank Wille
                                                         Chairman



GAO note:                Refers   to information             contained   in draft   report
                         but deleted     in final          report.




U.S. GA* Wamk.,   B.C.



                                                    30