oversight

Financial Audit: Federal Deposit Insurance Corporation's 1998 and 1997 Financial Statements

Published by the Government Accountability Office on 1999-06-30.

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

                  United States General Accounting Office

GAO               Report to the Congress




June 1999
                  FINANCIAL AUDIT

                  Federal Deposit
                  Insurance
                  Corporation’s 1998 and
                  1997 Financial
                  Statements




GAO/AIMD-99-202
                                                                                            Comptroller General
                                                                                            of the United States
United States General Accounting Office
Washington, D.C. 20548



                                    B-280808                                                                  Letter

                                    June 30, 1999

                                    To the President of the Senate and the
                                    Speaker of the House of Representatives

                                    This report presents our opinions on the financial statements of the Bank
                                    Insurance Fund, the Savings Association Insurance Fund, and the FSLIC
                                    Resolution Fund (FRF) for the years ended December 31, 1998 and 1997.
                                    These financial statements are the responsibility of the Federal Deposit
                                    Insurance Corporation (FDIC), the administrator of the three funds. This
                                    report also presents (1) our opinion on FDIC management's assertions
                                    regarding the effectiveness of its internal control as of December 31, 1998,
                                    and (2) our evaluation of FDIC's compliance with laws and regulations
                                    during 1998. In addition, it discusses FDIC's progress in correcting an
                                    internal control weakness detected during our 1997 audits. The report also
                                    provides information on the Year 2000 (Y2K) and insured financial
                                    institutions, ongoing litigation affecting FRF, and the current status of
                                    FRF’s liquidation activities and funding.

                                    We conducted our audits pursuant to the provisions of section 17(d) of the
                                    Federal Deposit Insurance Act, as amended (12 U.S.C. 1827(d)), and in
                                    accordance with generally accepted government auditing standards.

                                    We are sending copies of this report to Senator Phil Gramm, Chairman, and
                                    Senator Paul Sarbanes, Ranking Minority Member, Senate Committee on
                                    Banking, Housing and Urban Affairs and to Representative James Leach,
                                    Chairman, and Representative John LaFalce, Ranking Minority Member,
                                    House Committee on Banking and Financial Services. We are also sending
                                    copies to the Honorable Donna Tanoue, Chairman of the Board of
                                    Directors of the Federal Deposit Insurance Corporation; the Honorable
                                    Alan Greenspan, Chairman of the Board of Governors of the Federal
                                    Reserve System; the Honorable John Hawke Jr., Comptroller of the
                                    Currency; the Honorable Ellen Seidman, Director of the Office of Thrift
                                    Supervision; the Honorable Robert Rubin, Secretary of the Treasury;




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the Honorable Jacob J. Lew, Director of the Office of Management and
Budget; and other interested parties.




David M. Walker
Comptroller General
 of the United States




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Page 3     GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
Contents



Letter                                                                                                1


Letter                                                                                                6


Bank Insurance Fund’s                                                                                20
Financial Statements    Statements of Financial Position                                             20
                        Statements of Income and Fund Balance                                        21
                        Statements of Cash Flows                                                     22
                        Notes to Financial Statements                                                23


Savings Association                                                                                  41
Insurance Fund’s        Statements of Financial Position                                             41
                        Statements of Income and Fund Balance                                        42
Financial Statements    Statements of Cash Flows                                                     43
                        Notes to Financial Statements                                                44


FSLIC Resolution                                                                                     60
Fund’s Financial        Statements of Financial Position                                             60
                        Statements of Income and Accumulated Deficit                                 61
Statements              Statements of Cash Flows                                                     62
                        Notes to Financial Statements                                                63


Appendix I                                                                                           84
Comments From the
Federal Deposit
Insurance Corporation

Appendix II                                                                                          85
GAO Contacts
and Staff
Acknowledgements

Tables                  Table 1: FRF’s Estimated Funds Available as of December 31, 1998             17




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          Contents




Figures   Figure 1: Y2K Ratings for FDIC-Insured Institutions as of April 30, 1999 12
          Figure 2: Y2K Assessment Ratings for Service Providers and Software
            Vendors, as of April 30, 1999                                          13




          Abbreviations

          BIF        Bank Insurance Fund
          FDIC       Federal Deposit Insurance Corporation
          FFIEC      Federal Financial Institutions Examination Council
          FIRREA     Financial Institutions Reform, Recovery, and Enforcement Act
          FMFIA      Federal Managers’ Financial Integrity Act of 1982
          FRF        FSLIC Resolution Fund
          FSLIC      Federal Savings and Loan Insurance Corporation
          REFCORP    Resolution Funding Corporation
          RTC        Resolution Trust Corporation
          SAIF       Savings Association Insurance Fund
          SAVE       Standard Asset Valuation Estimation
          Y2K        Year 2000



          Page 5                  GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
                                                                                                               Comptroller General
                                                                                                               of the United States
United States General Accounting Office
Washington, D.C. 20548



                                    B-280808                                                                                          Letter

                                    To the Board of Directors
                                    Federal Deposit Insurance Corporation

                                    We have audited the statements of financial position as of December 31,
                                    1998 and 1997, of the three funds administered by the Federal Deposit
                                    Insurance Corporation (FDIC), the related statements of income and fund
                                    balance (accumulated deficit), and the statements of cash flows for the
                                    years then ended. In our audits of the Bank Insurance Fund (BIF), the
                                    Savings Association Insurance Fund (SAIF), and the FSLIC Resolution
                                    Fund (FRF), we found

                                    • the financial statements of each fund were fairly presented in all
                                      material respects;
                                    • FDIC management fairly stated that internal control in place on
                                      December 31, 1998, was effective in assuring that there were no material
                                      misstatements in the financial statements of the three funds
                                      administered by FDIC (including safeguarding of assets from material
                                      loss), and assuring material compliance with selected laws and
                                      regulations; and
                                    • no reportable noncompliance with laws and regulations we tested.

                                    The following sections discuss our conclusions in more detail. They also
                                    present information on (1) the scope of our audits, (2) Year 2000 (Y2K) and
                                    insured financial institutions, (3) the current status of the goodwill
                                    litigation cases, (4) the current status of FRF’s liquidation activities and
                                    funding, (5) FDIC's progress in addressing a reportable condition1
                                    identified during our 1997 audits, and (6) our evaluation of the
                                    Corporation's comments on a draft of this report.




                                    1
                                     Reportable conditions involve matters coming to the auditor's attention relating to significant
                                    deficiencies in the design or operation of internal control that, in the auditor's judgment, could
                                    adversely affect an entity's ability to (1) properly record, process, and summarize transactions to permit
                                    the preparation of financial statements in accordance with generally accepted accounting principles
                                    (including safeguarding of assets) and (2) ensure the execution of transactions in accordance with laws
                                    and regulations that could have a direct and material effect on the financial statements.




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Opinion on Bank         The financial statements and accompanying notes present fairly, in all
                        material respects, in conformity with generally accepted accounting
Insurance Fund's        principles, the Bank Insurance Fund’s financial position as of December 31,
Financial Statements    1998 and 1997, and the results of its operations and its cash flows for the
                        years then ended.



Opinion on Savings      The financial statements and accompanying notes present fairly, in all
                        material respects, in conformity with generally accepted accounting
Association Insurance   principles, the Savings Association Insurance Fund’s financial position as
Fund's Financial        of December 31, 1998 and 1997, and the results of its operations and its
                        cash flows for the years then ended.
Statements

Opinion on FSLIC        The financial statements and accompanying notes present fairly, in all
                        material respects, in conformity with generally accepted accounting
Resolution Fund's       principles, the FSLIC Resolution Fund’s financial position as of
Financial Statements    December 31, 1998 and 1997, and the results of its operations and its cash
                        flows for the years then ended.

                        As discussed in note 10 of FRF's financial statements, a significant
                        contingency exists from approximately 120 lawsuits pending in the United
                        States Court of Federal Claims concerning the counting of goodwill assets
                        as part of regulatory capital. Based on information currently available, a
                        reasonable estimate cannot be made regarding future losses and
                        settlements related to these cases. Information on the current status of the
                        goodwill cases is presented later in this report.



Opinion on FDIC         For the three funds administered by FDIC, we evaluated FDIC
                        management’s assertions about the effectiveness of its internal control
Management's            designed to provide reasonable assurance that the following objectives are
Assertions About the    met:
Effectiveness of        • reliability of financial reporting – transactions are properly recorded,
Internal Control          processed, and summarized to permit the preparation of financial
                          statements in accordance with generally accepted accounting principles
                          (including safeguarding of assets) and




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                         • compliance with applicable laws and regulations – transactions are
                           executed in accordance with laws and regulations that could have a
                           direct and material effect on the financial statements.

                         FDIC management fairly stated that internal control in place on
                         December 31, 1998, provided reasonable assurance that misstatements,
                         losses, or noncompliance, material in relation to the financial statements
                         would be prevented or detected on a timely basis. FDIC management made
                         this assertion based on criteria established under the Federal Managers'
                         Financial Integrity Act of 1982 (FMFIA).



Compliance With Laws     Our tests for compliance with selected provisions of laws and regulations
                         disclosed no instances of noncompliance that would be reportable under
and Regulations          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.



Objectives, Scope, and   FDIC's management is responsible for

Methodology              • preparing the annual financial statements in conformity with generally
                           accepted accounting principles;
                         • establishing, maintaining, and assessing internal control to provide
                           reasonable assurance that the broad control objectives of FMFIA are
                           met; and
                         • complying with applicable laws and regulations.

                         We are responsible for obtaining reasonable assurance about whether

                         • the financial statements are free of material misstatement and presented
                           fairly, in all material respects, in conformity with generally accepted
                           accounting principles and
                         • FDIC management's assertion about the effectiveness of internal
                           control is fairly stated, in all material respects, based upon the criteria
                           established under FMFIA.

                         We are also responsible for testing compliance with selected provisions of
                         laws and regulations and for performing limited procedures with respect to
                         certain other information appearing in FDIC’s annual financial report.




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In order to fulfill these responsibilities, we

• examined, on a test basis, evidence supporting the amounts and
  disclosures in the financial statements;
• assessed the accounting principles used and significant estimates made
  by management;
• evaluated the overall presentation of the financial statements;
• obtained an understanding of internal control related to financial
  reporting, including safeguarding of assets, compliance with laws and
  regulations, including the execution of transactions in accordance with
  management's authority;
• tested relevant internal controls over financial reporting, including
  safeguarding of assets, and compliance, and evaluated management’s
  assertion about the effectiveness of internal control; and
• tested compliance with selected provisions of the Federal Deposit
  Insurance Act, as amended; the Chief Financial Officers Act of 1990; and
  the Federal Home Loan Bank Act, as amended.

We did not evaluate all internal controls relevant to operating objectives as
broadly defined by FMFIA, such as those controls relevant to preparing
statistical reports and ensuring efficient operations. We limited our
internal control testing to those controls necessary to achieve the
objectives outlined in our opinion on management's assertion about the
effectiveness of internal control. Because of inherent limitations in
internal control, misstatements, losses, or noncompliance may
nevertheless occur and not be detected. We also caution that projecting
our evaluation 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 controls may deteriorate.

We conducted our audits from July 1998 through May 1999. We did our
work in accordance with generally accepted government auditing
standards.

FDIC provided comments on a draft of this report. FDIC's comments are
discussed and evaluated in the “Corporation Comments and Our
Evaluation” section and are reprinted in appendix I.




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Information on Y2K      Insured financial institutions face an unprecedented challenge in preparing
                        their computer systems for the Y2K date change. Banks and thrifts are
and Insured Financial   vulnerable to Y2K problems due to their widespread reliance on computer
Institutions            systems to make loans, invest deposits, transfer funds, issue credit cards,
                        calculate interest, and handle routine business functions. In addition,
                        many critical financial institution functions are dependent on public
                        infrastructure such as telecommunications and electric power networks,
                        which could also encounter difficulties or interruptions in service due to
                        the Y2K problem.

                        Addressing the Y2K problem on time has been and will continue to be a
                        tremendous challenge. FDIC, the Office of the Comptroller of the
                        Currency, the Board of Governors of the Federal Reserve System, and the
                        Office of Thrift Supervision (the regulators), have made considerable
                        progress in assisting banks and thrifts in their Y2K efforts, and identifying
                        those institutions at a high risk of not remediating their systems on time.
                        Since June 1996, when their Y2K oversight efforts began, FDIC and the
                        other regulators have taken many important steps to alert financial
                        institutions of the risks associated with the Y2K problem and to assess
                        institutions’ progress in mitigating the risks.2

                        To raise awareness, FDIC and the other regulators issued letters to all
                        insured banks and thrifts describing the Y2K problem and special risks
                        facing financial institutions, and recommended approaches to planning and
                        managing effective Y2K programs. In addition, the regulators provided
                        extensive guidance to assist financial institutions in critical Y2K tasks,
                        including guidance on (1) Y2K project management, (2) addressing Y2K
                        business risks, (3) assessing risk from customers, service providers, and
                        software vendors, (4) testing systems for Y2K readiness, (5) contingency
                        planning, and (6) establishing effective Y2K customer awareness programs.
                        FDIC and the other regulators have also undertaken extensive outreach
                        efforts to raise the Y2K awareness of insured financial institutions and the
                        public.

                        To assess institutions’ progress in addressing Y2K issues, the regulators
                        have performed a series of high-level and more detailed assessments




                        2
                         Year 2000 Computing Crisis: Federal Depository Institution Regulators Are Making Progress, But
                        Challenges Remain (GAO/T-AIMD-98-305, September 17, 1998).




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for each institution.3 These supervisory efforts have generally been divided
into three phases. Phase I focused on institutions’ awareness, assessment,
and renovation efforts. Phase II focused on the institutions’ testing efforts
and credit risk assessments. Phase III is currently in process and will
continue throughout 1999, and will focus on implementation, business
resumption and contingency planning, customer awareness initiatives, and
liquidity planning. In addition, during Phase III the regulators plan to pay
particular attention to those institutions identified as having risk for
potential Y2K problems.

Based on Y2K assessments through April 30, 1999, the regulators have
found that the vast majority of financial institutions have acceptable
performance in key phases of the Y2K project management process,
including awareness, assessment, renovation, testing, and implementation.
As discussed in the notes to BIF’s and SAIF’s financial statements,
97.7 percent of insured financial institutions were rated by the regulators as
having made satisfactory progress in their Y2K project management
through Phase II. Those institutions held 98.7 percent of industry assets.
Of the remaining 2.3 percent of institutions rated by the regulators as less
than satisfactory, 216 institutions are rated as “needs improvement” and
21 institutions are considered as having made “unsatisfactory” progress.
See figure 1.




3
 As a result of these assessments, the regulators have assigned each institution one of the following
ratings: satisfactory, needs improvement, or unsatisfactory. Generally, institutions are considered
“satisfactory” if they exhibit acceptable performance in all key phases of the Y2K project management
process as set forth in the May 5, 1997, Federal Financial Institutions Examination Council (FFIEC)
Interagency Statement. A “needs improvement” rating results from less than acceptable performance
under FFIEC guidelines; however, project weaknesses can be readily corrected within the existing
project management framework. An “unsatisfactory” rating results from poor performance under
FFIEC guidelines where weaknesses are serious and are not easily corrected within the existing project
management framework. See note 7 to BIF’s financial statements and note 6 to SAIF’s financial
statements for additional information.




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Figure 1: Y2K Ratings for FDIC-Insured Institutions as of April 30, 1999
                       0.2%
                2.1%




                       97.7%




    Satis factory (10,159 institutions )
    Needs Im provem ent (216 institutions )
    Uns atis factory (21 ins titutions )

Source: FDIC Division of Supervision.


Virtually all banks and thrifts rely on service providers and software
vendors for at least a portion of their data processing services. The
regulators have also completed Phase II assessments of service providers
and software vendors that provide data processing services or software to
the industry. Of the 257 service providers and software vendors examined,
as of April 30, 1999, the regulators reported that 97.3 percent showed
satisfactory progress. Of the remaining servicers rated by the regulators as
less than satisfactory, 5 were rated as “needs improvement” and 2 were
rated as having made “unsatisfactory” progress. See figure 2.




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Figure 2: Y2K Assessment Ratings for Service Providers and Software Vendors, as
of April 30, 1999

                        0.8%
                 1.9%




                        97.3%




           Satisfactory (250 companies)
           Needs Improvement (5 companies)
           Unsatisfactory (2 companies)

Source: FDIC Division of Supervision.


The FDIC and the other regulators have stated that they will focus
additional attention throughout the remainder of 1999 on those institutions
and service providers not rated satisfactory. Due to the short time frame
remaining until the year 2000, the regulators have stated that they will
adopt a more aggressive stance to achieve the necessary remedial action at
institutions rated less than satisfactory.

Although the regulators reported that the vast majority of institutions,
service providers, and software vendors had made satisfactory progress on
mitigating their Y2K risks through April 30, 1999, uncertainties still exist
regarding the potential for Y2K problems. Y2K assessment ratings do not
constitute certification of a financial institution’s Y2K readiness. They
reflect an institution’s ongoing progress in addressing Y2K issues at a
certain point in time. It is possible that ratings could change over time. In
addition, because of the unprecedented nature of the Y2K problem,
unanticipated events could occur for which the institution was not
prepared. Institutions are required, however, to design Y2K contingency
plans to mitigate the risks associated with unsuccessful implementation of
their Y2K efforts, and to provide assurance that core business functions
will continue if one or more computer systems fail. Institutions could also
encounter difficulties due to the Y2K problems of third parties. Therefore,




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                        it is difficult to determine which institutions, if any, could ultimately fail
                        due to potential Y2K problems.

                        As stated in the notes to FDIC’s financial statements, BIF and SAIF are
                        subject to potential loss from financial institutions that may fail due to Y2K
                        problems. In order to assess exposure to BIF and SAIF as a result of
                        potential Y2K failures, FDIC evaluated Y2K assessment results, as well as
                        the financial condition and supervisory ratings for all institutions. As of
                        December 31, 1998, FDIC has not identified any probable losses to BIF and
                        SAIF from Y2K failures. Further, any reasonably possible losses from Y2K
                        failures were not estimable as of December 31, 1998. During 1999, FDIC
                        and the other regulators are continuing to collect data on the impact of
                        banks’ and thrifts’ potential Y2K problems on the deposit insurance funds,
                        and plan to take supervisory action as necessary to minimize any potential
                        impact to the insurance funds.



Current Status of the   As discussed in note 10 of FRF's financial statements, a significant
                        contingency exists from approximately 120 lawsuits pending against the
Goodwill Litigation     United States government in the United States Court of Federal Claims.
Cases                   These lawsuits assert that certain agreements were breached when
                        Congress enacted and the Office of Thrift Supervision implemented the
                        Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA),
                        which affected the thrift industry. The legislation changed the computation
                        for regulatory capital requirements, thereby eliminating the special
                        accounting treatment previously allowed for goodwill assets acquired
                        when institutions merged with or acquired failing thrifts. The changes in
                        regulatory treatment of goodwill assets caused some institutions to fall out
                        of capital compliance. In such cases, institutions had to take action to meet
                        capital requirements or they were subject to regulatory action.

                        On July 1, 1996, the United States Supreme Court concluded that the
                        government is liable for damages in three cases, consolidated for appeal to
                        the Supreme Court, in which the changes in regulatory treatment required
                        by FIRREA led the government to not honor its contractual obligations
                        related to the accounting treatment of goodwill assets. The cases were
                        then referred back to the Court of Federal Claims for trials to determine the
                        amount of damages. On July 23, 1998, the Department of the Treasury
                        determined, based on an opinion of the Department of Justice, that FRF is
                        legally available to satisfy all judgments and settlements in the goodwill
                        litigation involving supervisory action or assistance agreements, in which
                        FSLIC was a party to those agreements. Treasury further determined that



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                          FRF is the appropriate source of funds for payment of any such judgments
                          and settlements. During 1998, FDIC paid $103.3 million in settlements for
                          four cases. Two of the settlements were related to cases that had been
                          consolidated for appeal to the Supreme Court.

                          Subsequent to December 31, 1998, damage awards in two goodwill-related
                          cases have been decided. On April 9, 1999, the Court of Federal Claims
                          ruled that the federal government must pay Glendale Federal Bank
                          $908.9 million for breaching the contract that allowed the thrift to count
                          goodwill toward regulatory capital.4 The plaintiffs were seeking up to
                          $2 billion in damages. Both the plaintiffs and the Department of Justice are
                          expected to appeal the decision. In another case the Court of Federal
                          Claims awarded $23 million in damages on April 16, 1999, to California
                          Federal Bank, which had been seeking more than $1 billion in damages.
                          California Federal is expected to appeal the decision.

                          Because of the expected appeals and the differences in awarding damages
                          in the above cases, the final outcome of both cases is uncertain. With
                          regard to the remaining cases, the outcome of each case and the amount of
                          any possible damages remain uncertain. However, FDIC has concluded
                          that it is probable that FRF will be required to pay additional, possibly
                          substantial amounts as a result of future judgments and settlements.
                          Because of the uncertainties surrounding the cases, such losses are
                          currently not estimable.



Current Status of FRF’s   FDIC, as administrator of FRF, is responsible for liquidating the assets and
                          liabilities of the former Resolution Trust Corporation (RTC), 5 as well as the
Liquidation Activities    former FSLIC’s assets and liabilities. As of December 31, 1998, FRF held
and Funding               total assets valued at $10.5 billion. Of that total, $4.6 billion was held in
                          cash and investments, with $5.9 billion remaining to be liquidated. As of
                          December 31, 1998, FRF’s liabilities had been reduced to $138 million. The
                          reduction was mainly due to FRF paying off the note to the Federal
                          Financing Bank, which was issued to RTC to provide working capital for
                          RTC’s liquidation activities. In addition to the liabilities shown on FRF’s
                          Statements of Financial Position, FRF is subject to significant future


                          4Glendale   Federal Bank was one of the three cases consolidated for appeal to the Supreme Court.

                          5
                           On January 1, 1996, FRF assumed responsibility for all remaining assets and liabilities of the
                          former RTC.




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contingent liabilities resulting from the goodwill litigation cases, as noted
in the previous section.

As of December 31, 1998, FRF’s total accumulated deficit was
$125.2 billion. FRF’s accumulated deficit represents the realized losses to
date for all RTC and FSLIC-related liquidation activity, as well as future
estimated losses from assets and liabilities not yet liquidated.
Uncertainties still exist with regard to the unrealized losses, and the final
amount of total losses will not be known with certainty until all remaining
assets and liabilities are liquidated.

In total, $135.5 billion was received to cover liabilities and losses
associated with the former FSLIC and RTC resolution activities. Of the
$135.5 billion total, $91.3 billion6 was received by RTC and $44.2 billion was
received by FRF to cover losses and expenses associated with failed
institutions from RTC’s caseload and to cover losses associated with the
former FSLIC activities.

As shown in table 1, after reducing the total amount of funding received by
the amount of recorded accumulated deficit, an estimated $10.3 billion in
funds will remain available. FRF consists of two distinct pools of assets
and liabilities: one composed of the assets and liabilities of FSLIC
transferred to FRF on August 9, 1989 (FRF-FSLIC) and the other composed
of the RTC assets and liabilities transferred to FRF on January 1, 1996
(FRF-RTC). Of the $10.3 billion in funds available, $2.1 billion is available
to FRF-FSLIC and $8.2 billion is available to FRF-RTC.




6
 FIRREA provided an initial $50 billion to RTC. The Resolution Trust Corporation Funding Act of 1991
provided an additional $30 billion. The Resolution Trust Corporation Refinancing, Restructuring, and
Improvement Act of 1991 provided $25 billion in December 1991, of which $6.7 billion was obligated
prior to the April 1, 1992, deadline. In December 1993, the RTC Completion Act removed the
April 1, 1992, deadline, thus making the remaining $18.3 billion available to RTC for resolution
activities. Prior to RTC's termination on December 31, 1995, RTC drew down $4.6 billion of the
$18.3 billion that was made available by the RTC Completion Act.




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Table 1: FRF’s Estimated Funds Available as of December 31, 1998
(Dollars in billions)
                                     FRF-FSLIC                   FRF-RTC                  Total FRF
Total funds received                        $44.2                    $91.3                   $135.5
Less: accumulated
deficit                                      42.1                      83.1                    125.2
Estimated funds
available                                    $ 2.1                    $ 8.2                   $ 10.3

Funds available in FRF-FSLIC will be used to pay future liabilities of the
FRF-FSLIC, including the contingency related to the goodwill litigation
cases. Because additional and possibly substantial amounts could be paid
out of the FRF-FSLIC for the goodwill cases, FRF has been provided with
an indefinite appropriation for the payment of judgments and settlements
in the goodwill litigation, without fiscal year limitation. 7

The RTC Completion Act requires FDIC to deposit in the general fund of
the Treasury any funds transferred to RTC pursuant to the Completion Act
but not needed for RTC-related losses. In total, RTC drew down $4.6 billion
of funding provided by the act. After providing for all outstanding RTC
liabilities, FDIC must transfer to the Resolution Funding Corporation
(REFCORP) the net proceeds from the sale of RTC-related assets.

Any such funds transferred to REFCORP are to pay the interest on
REFCORP bonds issued to provide funding for the early RTC resolutions.
Any payments to REFCORP benefit the U.S. Treasury, which is otherwise
obligated to pay the interest on the bonds. The final amount of unused
funds will not be known with certainty until all of FRF’s remaining assets
and liabilities are liquidated.




7
 Section 130 of the Department of Justice Appropriation Act, 1999, appropriates for paying judgments
against the United States and compromise settlements in the goodwill cases “such sums as may be
necessary, to remain available until expended.” We believe section 130 establishes an indefinite,
permanent appropriation. FDIC has not expressed a view on the permanency of section 130 and the
President’s budget proposes clarifying language for the fiscal year 2000 appropriation act, which is
designed to provide FDIC with a permanent appropriation.




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Progress on Prior   In our 1997 audit report8 on the three funds administered by FDIC, we
                    identified one reportable condition that affected FDIC's ability to ensure
Year’s Reportable   that internal control objectives were achieved. The weakness related to
Condition           FDIC’s internal controls designed to ensure that assets valued outside of
                    FDIC’s Standard Asset Valuation Estimation (SAVE) process were
                    accurately and appropriately valued. During our 1997 audits, we found
                    significant errors in the estimated recoveries for a portfolio of partnership
                    interests, and we found unsupported recoveries and other errors in the
                    estimated recoveries for another portfolio of debt and equity securities.

                    During 1998, FDIC developed standard valuation methodologies for assets
                    previously valued outside of its SAVE process. FDIC’s objective was to
                    establish consistent asset valuation methodologies for those assets. FDIC
                    also clearly designated responsibility for valuing those assets and for
                    reviewing completed valuations. While we continued to find some
                    instances where recovery estimates for FRF assets were not fully
                    supported, we concluded that they were isolated problems that were not
                    significant to FRF’s financial statements. We will discuss this matter
                    further in a management letter.

                    We did not identify any reportable conditions during our 1998 audits.
                    However, we noted other less significant matters involving FDIC’s internal
                    accounting and electronic data processing general controls that we will be
                    reporting separately to FDIC in two management letters.



Corporation         In commenting on a draft of this report, FDIC acknowledged the
                    importance of an effective internal control program, and stated a
Comments and Our    commitment to achieving corporate objectives by ensuring that the
Evaluation          Corporation operates within an environment conducive to strong internal
                    controls. FDIC also stated that it will continue to monitor the other
                    matters discussed in the audit report, including the Y2K issues related to
                    insured financial institutions, the goodwill litigation cases, and FRF’s




                    8
                     Financial Audit: Federal Deposit Insurance Corporation's 1997 and 1996 Financial Statements
                    (GAO/AIMD-98-204, June 29, 1998).




                    Page 18                         GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
B-280808




 liquidation activities and funding. We also plan to monitor these issues as
a part of our audits of FDIC’s 1999 financial statements.




David M. Walker
Comptroller General
 of the United States

May 14, 1999




Page 19                 GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
Bank Insurance Fund’s Financial Statements


Statements of Financial Position



                 Bank Insurance Fund



                 Federal Deposit Insurance Corporation

                 Bank Insurance Fund Statements of Financial Position at December 31
                 Dollars in Thousands
                                                                                                                          1998                 1997
                 Assets
                 Cash and cash equivalents                                                                         $          2,117,644    $         219,207
                 Investment in U.S. Treasury obligations, net (Note 3)                                                       26,125,695           26,598,825
                 (Market value of investments at December 31, 1998 and December 31, 1997 was $27.5 billion and
                 $27.1 billion, respectively)

                 Interest receivable on investments and other assets, net                                                        690,586                472,818
                 Receivables from bank resolutions, net (Note 4)                                                                 747,948              1,109,035
                 Assets acquired from assisted banks and terminated receiverships, net
                   (Note 5)                                                                                                      27,373               60,724
                 Property and equipment, net (Note 6)                                                                           209,615              145,061
                 Total Assets                                                                                      $         29,918,861    $      28,605,670

                 Liabilities
                 Accounts payable and other liabilities                                                            $             229,984   $           228,955
                 Estimated liabilities for: ( Note 7)
                 Anticipated failure of insured institutions                                                                      32,000                11,000
                 Assistance agreements                                                                                            15,125                31,952
                 Litigation losses                                                                                                22,301                13,500
                 Asset securitization guarantees                                                                                   7,141                27,715
                 Total Liabilities                                                                                               306,551               313,122
                 Commitments and off-balance-sheet exposure (Note 12)
                 Fund Balance
                 Accumulated net income                                                                                      29,601,395           28,292,672
                 Unrealized gain/(loss) on available-for-sale securities, net (Note 3)                                           10,915                 (124)

                 Total Fund Balance                                                                                          29,612,310           28,292,548

                 Total Liabilities and Fund Balance                                                                $         29,918,861    $      28,605,670

                   The accompanying notes are an integral part of these financial statements.




                                                              Page 20                                            GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
                                                         Bank Insurance Fund’s Financial Statements




Statements of Income and Fund Balance



                Bank Insurance Fund




                Federal Deposit Insurance Corporation

                Bank Insurance Fund Statements of Income and Fund Balance for the Years Ended December 31
                Dollars in Thousands

                                                                                                       1998                   1997
                Revenue
                Interest on U.S. Treasury obligations                                            $            1,674,344   $          1,519,276
                Interest on advances and subrogated claims                                                       67,350                 22,073
                Gain on conversion of benefit plan (Note 11)                                                    200,532                      0
                Revenue from assets acquired from assisted banks and terminated
                  receiverships                                                                                  20,926                 38,000
                Assessments (Note 8)                                                                             21,688                 24,711
                Other revenue                                                                                    15,422                 11,558
                Total Revenue                                                                                 2,000,262              1,615,618

                Expenses and Losses
                Operating expenses                                                                             697,604                605,214
                Provision for insurance losses (Note 9)                                                        (37,699)              (495,296)
                Expenses for assets acquired from assisted banks and terminated
                  receiverships                                                                                 29,803                 65,901
                Interest and other insurance expenses                                                            1,831                  1,506
                Total Expenses and Losses                                                                      691,539                177,325

                Net Income                                                                                    1,308,723              1,438,293
                Unrealized gain/(loss) on available-for-sale securities, net (Note 3)                            11,039                   (124)

                Comprehensive Income                                                                          1,319,762              1,438,169

                Fund Balance - Beginning                                                                  28,292,548             26,854,379

                Fund Balance - Ending                                                           $         29,612,310      $      28,292,548

                 The accompanying notes are an integral part of these financial statements.




                                                         Page 21                              GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
                                                         Bank Insurance Fund’s Financial Statements




Statements of Cash Flows



                Bank Insurance Fund




                Federal Deposit Insurance Corporation

                Bank Insurance Fund Statements of Cash Flows for the Years Ended December 31
                Dollars in Thousands

                                                                                                       1998                    1997
                Cash Flows From Operating Activities
                Cash provided from:
                 Interest on U.S. Treasury obligations                                           $            1,788,937    $          1,480,060
                 Recoveries from bank resolutions                                                               881,802               3,826,273
                 Recoveries from assets acquired from assisted banks
                   and terminated receiverships                                                                 54,207                 141,765
                 Assessments                                                                                    22,931                  22,201
                 Miscellaneous receipts                                                                         27,990                  24,951
                Cash used for:
                 Operating expenses                                                                           (711,020)               (580,515)
                 Disbursements for bank resolutions                                                           (420,691)               (298,943)
                 Disbursements for assets acquired from assisted banks
                   and terminated receiverships                                                                 (37,391)                (67,231)
                 Miscellaneous disbursements                                                                     (7,959)                (11,771)
                Net Cash Provided by Operating Activities (Note 14)                                           1,598,806               4,536,790

                Cash Flows From Investing Activities
                Cash provided from:
                 Maturity and sale of U.S. Treasury obligations, held-to-maturity                             5,850,000               6,300,000
                 Maturity and sale of U.S. Treasury obligations, available-for-sale                             185,456                       0
                Cash used for:
                 Purchase of property and equipment                                                           (51,058)                      0
                 Purchase of U.S. Treasury obligations, held-to-maturity                                   (4,478,337)            (10,373,695)
                 Purchase of U.S. Treasury obligations, available-for-sale                                 (1,206,430)               (502,020)
                Net Cash Provided From (Used by) Investing Activities                                         299,631              (4,575,715)

                Net Increase (Decrease) in Cash and Cash Equivalents                                          1,898,437                (38,925)
                Cash and Cash Equivalents - Beginning                                                           219,207                258,132
                Cash and Cash Equivalents - Ending                                              $             2,117,644    $           219,207

                 The accompanying notes are an integral part of these financial statements.




                                                         Page 22                              GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
                                                Bank Insurance Fund’s Financial Statements




Notes to Financial Statements



                       Notes to the Financial Statements
                       Bank Insurance Fund
                       December 31, 1998 and 1997
                       1. Legislative History and Operations of the Bank Insurance Fund

                       Legislative History
                       The U.S. Congress created the Federal Deposit Insurance Corporation (FDIC) through enactment of
                       the Banking Act of 1933. The FDIC was created to restore and maintain public confidence in the
                       nation's banking system.

                       The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) was enacted
                       to reform, recapitalize, and consolidate the federal deposit insurance system. The FIRREA created
                       the Bank Insurance Fund (BIF), the Savings Association Insurance Fund (SAIF), and the FSLIC
                       Resolution Fund (FRF). It also designated the FDIC as the administrator of these funds. All three
                       funds are maintained separately to carry out their respective mandates.

                       The BIF and the SAIF are insurance funds responsible for protecting insured depositors in operating
                       banks and thrift institutions from loss due to institution failures. The FRF is a resolution fund
                       responsible for winding up the affairs of the former Federal Savings and Loan Insurance Corporation
                       (FSLIC) and liquidating the assets and liabilities transferred from the former Resolution Trust
                       Corporation (RTC).

                       Pursuant to FIRREA, an active institution’s insurance fund membership and primary federal
                       supervisor are generally determined by the institution’s charter type. Deposits of BIF-member
                       institutions are generally insured by the BIF; BIF members are predominantly commercial and
                       savings banks supervised by the FDIC, the Office of the Comptroller of the Currency, or the Federal
                       Reserve. Deposits of SAIF-member institutions are generally insured by the SAIF; SAIF members
                       are predominantly thrifts supervised by the Office of Thrift Supervision.

                       In addition to traditional banks and thrifts, several other categories of institutions exist. The Federal
                       Deposit Insurance Act (FDI Act), Section 5(d)(3), provides that a member of one insurance fund
                       may, with the approval of its primary federal supervisor, merge, consolidate with, or acquire the
                       deposit liabilities of an institution that is a member of the other insurance fund without changing
                       insurance fund status for the acquired deposits. These institutions with deposits insured by both
                       insurance funds are referred to as “Oakars” or Oakar banks. The FDI Act, Section 5(d)(2)(G),
                       allows SAIF-member thrifts to convert to a bank charter and retain their SAIF membership. These
                       institutions are referred to as “Sassers.” The Home Owners’ Loan Act (HOLA), Section 5(o), allows
                       BIF-member banks to convert to a thrift charter and retain their BIF membership. These institutions
                       are referred to as “HOLAs” or HOLA thrifts.

                       Other Significant Legislation
                       The Competitive Equality Banking Act of 1987 established the Financing Corporation (FICO) as a
                       mixed-ownership government corporation whose sole purpose was to function as a financing vehicle
                       for the FSLIC.




                                                Page 23                             GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
                         Bank Insurance Fund’s Financial Statements




The Omnibus Budget Reconciliation Act of 1990 (1990 OBR Act) and the Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDICIA) made changes to the FDIC's assessment
authority (see Note 8) and borrowing authority. The FDICIA also requires the FDIC to: 1) resolve
troubled institutions in a manner that will result in the least possible cost to the deposit insurance
funds and 2) maintain the insurance funds at 1.25 percent of insured deposits or a higher percentage
as circumstances warrant.

The Deposit Insurance Funds Act of 1996 (DIFA) was enacted to provide for: 1) the capitalization of
the SAIF to its designated reserve ratio (DRR) of 1.25 percent by means of a one-time special
assessment on SAIF-insured deposits; 2) the expansion of the assessment base for payments of the
interest on obligations issued by the FICO to include all FDIC-insured banks and thrifts; 3)
beginning January 1, 1997, the imposition of a FICO assessment rate on BIF-assessable deposits that
is one-fifth of the rate for SAIF-assessable deposits through the earlier of December 31,1999, or the
date on which the last savings association ceases to exist; 4) the payment of the annual FICO interest
obligation of approximately $790 million on a pro rata basis between banks and thrifts on the earlier
of January 1, 2000, or the date on which the last savings association ceases to exist; 5) authorization
of BIF assessments only if needed to maintain the fund at the DRR; 6) the refund of amounts in the
BIF in excess of the DRR with such refund not to exceed the previous semiannual assessment; and
7) the merger of the BIF and the SAIF on January 1, 1999, if no insured depository institution is a
savings association on that date. Subsequently, Congress did not enact legislation during 1998 to
either merge the BIF and the SAIF or to eliminate the thrift charter.

Recent Legislative Initiatives
Congress continues to focus on legislative proposals to achieve modernization of the financial
services industry. Some of these proposals, if enacted into law, may have a significant impact on the
BIF and/or the SAIF. However, these proposals continue to vary and FDIC management cannot
predict which provisions, if any, will ultimately be enacted.

Operations of the BIF
The primary purpose of the BIF is to: 1) insure the deposits and protect the depositors of BIF-insured
banks and 2) resolve failed banks, including managing and liquidating their assets. In addition, the
FDIC, acting on behalf of the BIF, examines state-chartered banks that are not members of the
Federal Reserve System. The FDIC also provides assistance to troubled banks and monitors
compliance with the assistance agreements.

The BIF is primarily funded from the following sources: 1) interest earned on investments in U.S.
Treasury obligations and 2) BIF assessment premiums.

Additional funding sources are U.S. Treasury and Federal Financing Bank (FFB) borrowings, if
necessary. The 1990 OBR Act established the FDIC's authority to borrow working capital from the
FFB on behalf of the BIF and the SAIF. The FDICIA increased the FDIC's authority to borrow for
insurance losses from the U.S. Treasury, on behalf of the BIF and the SAIF, from $5 billion to $30
billion. The FDICIA also established a limitation on obligations that can be incurred by the BIF,
known as the maximum obligation limitation (MOL). At December 31, 1998, the MOL for the BIF
was $51.7 billion.

The VA, HUD and Independent Agencies Appropriations Acts of 1999 and 1998 appropriated $34.7
million for fiscal year 1999 (October 1, 1998, through September 30, 1999) and $34 million for




                         Page 24                            GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
                         Bank Insurance Fund’s Financial Statements




fiscal year 1998 (October 1, 1997, through September 30, 1998), respectively, for operating
expenses incurred by the Office of Inspector General (OIG). These Acts mandate that the funds are
to be derived from the BIF, the SAIF, and the FRF.

2. Summary of Significant Accounting Policies

General
These financial statements pertain to the financial position, results of operations, and cash flows of
the BIF and are presented in accordance with generally accepted accounting principles (GAAP).
These statements do not include reporting for assets and liabilities of closed banks for which the
FDIC acts as receiver or liquidating agent. Periodic and final accountability reports of the FDIC's
activities as receiver or liquidating agent are furnished to courts, supervisory authorities, and others
as required.

Use of Estimates
FDIC management makes estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from these estimates.
Where it is reasonably possible that changes in estimates will cause a material change in the
financial statements in the near term, the nature and extent of such changes in estimates have been
disclosed.

Cash Equivalents
Cash equivalents are short-term, highly liquid investments with original maturities of three months
or less. Cash equivalents primarily consist of Special U.S. Treasury Certificates.

Investments in U.S. Treasury Obligations
Investments in U.S. Treasury obligations are recorded pursuant to the provisions of the Statement of
Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and
Equity Securities.” SFAS No. 115 requires that securities be classified in one of three categories:
held-to-maturity, available-for-sale, or trading. Securities designated as held-to-maturity are
intended to be held to maturity and are shown at amortized cost. Amortized cost is the face value of
securities plus the unamortized premium or less the unamortized discount. Amortizations are
computed on a daily basis from the date of acquisition to the date of maturity. Beginning in 1997,
the BIF designated a portion of its securities as available-for-sale. These securities are shown at fair
value with unrealized gains and losses included in the fund balance. Realized gains and losses are
included in other revenue when applicable. Interest on both types of securities is calculated on a
daily basis and recorded monthly using the effective interest method. The BIF does not have any
securities classified as trading.

Allowance for Losses on Receivables From Bank Resolutions and Assets Acquired From
Assisted Banks and Terminated Receiverships
The BIF records a receivable for the amounts advanced and/or obligations incurred for resolving
troubled and failed banks. The BIF also records as an asset the amounts paid for assets acquired
from assisted banks and terminated receiverships. Any related allowance for loss represents the
difference between the funds advanced and/or obligations incurred and the expected repayment. The
latter is based on estimates of discounted cash recoveries from the assets of assisted or failed banks,
net of all estimated liquidation costs.




                         Page 25                              GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
                         Bank Insurance Fund’s Financial Statements




Receivership Operations
The FDIC is responsible for managing and disposing of the assets of failed institutions in an orderly
and efficient manner. The assets, and the claims against them, are accounted for separately to ensure
that liquidation proceeds are distributed in accordance with applicable laws and regulations. Also,
the income and expenses attributable to receiverships are accounted for as transactions of those
receiverships. Liquidation expenses incurred by the BIF on behalf of the receiverships are recovered
from those receiverships.

Cost Allocations Among Funds
Operating expenses not directly charged to the funds are allocated to all funds administered by the
FDIC. Workload-based-allocation percentages are developed during the annual corporate planning
process and through supplemental functional analyses.

Postretirement Benefits Other Than Pensions
The FDIC established an entity to provide the accounting and administration of postretirement
benefits on behalf of the BIF, the SAIF, and the FRF. Each fund pays its liabilities for these benefits
directly to the entity. The BIF’s unfunded net postretirement benefits liability for the plan is
presented in the BIF’s Statements of Financial Position.

Disclosure About Recent Accounting Standard Pronouncements
In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 132,
“Employers’ Disclosures about Pension and Other Postretirement Benefits.” The Statement
standardizes the disclosure requirements for pensions and other postretirement benefits to the extent
practicable. Although changes in the BIF’s disclosures for postretirement benefits have been made,
the impact is not material.

In June 1998, the FASB also issued SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities.” The Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other contracts, and for hedging
activities. The Statement requires that all derivatives be recognized either as assets or liabilities in
the statements of financial position and to measure those instruments at fair value. Based upon
analysis, derivative instruments of the BIF are immaterial to the financial statements.

In March 1998, the American Institute of Certified Public Accountants issued Statement of Position
(SOP) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use.” This Statement requires the development or purchase cost of internal-use software to be
treated as a capital asset. The FDIC adopted this Statement effective January 1, 1998. This asset is
presented in the “Property and equipment, net” line item in the BIF’s Statements of Financial
Position (see Note 6).

In June 1997, the FASB issued SFAS No. 130, “Reporting Comprehensive Income.” The FDIC
adopted SFAS No. 130 effective on January 1, 1997. Comprehensive income includes net income as
well as certain types of unrealized gain or loss. The only component of SFAS No. 130 that impacts
the BIF is unrealized gain or loss on securities classified as available-for-sale, which is presented in
the BIF’s Statements of Financial Position and the Statements of Income and Fund Balance.

Other recent pronouncements are not applicable to the financial statements.




                         Page 26                              GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
                         Bank Insurance Fund’s Financial Statements




Depreciation
The FDIC has designated the BIF as administrator of property and equipment used in its operations.
Consequently, the BIF includes the cost of these assets in its financial statements and provides the
necessary funding for them. The BIF charges the other funds rental and service fees representing an
allocated share of its annual depreciation expense.

Prior to January 1, 1998, only buildings owned by the Corporation were depreciated. On January 1,
1998, FDIC began capitalizing the development and purchase cost of internal-use software in
accordance with the requirements of SOP 98-1. The FDIC also began to capitalize the cost of
furniture, fixtures, and general equipment. These costs were expensed in prior years on the basis
that the costs were immaterial. The expanded capitalization policy had no material impact on the
financial position or operation of the BIF.

The Washington, D.C. office buildings and the L. William Seidman Center in Arlington, Virginia,
are depreciated on a straight-line basis over a 50-year estimated life. The San Francisco
condominium offices are depreciated on a straight-line basis over a 35-year estimated life.
Leasehold improvements will be capitalized and depreciated over the lesser of the remaining life of
the lease or the estimated useful life of the improvements, if determined to be material. Capital
assets depreciated on a straight-line basis over a five-year estimated life include mainframe
equipment; furniture, fixtures and general equipment; and internal-use software. Personal computer
equipment is depreciated on a straight-line basis over a three-year estimated life.

Related Parties
The nature of related parties and a description of related party transactions are disclosed throughout
the financial statements and footnotes.

Reclassifications
Reclassifications have been made in the 1997 financial statements to conform to the presentation
used in 1998.

3. Investment in U.S. Treasury Obligations, Net

Cash received by the BIF is invested in U.S. Treasury obligations with maturities exceeding three
months unless cash is needed to meet the liquidity needs of the fund. The BIF’s current portfolio
includes securities classified as held-to-maturity and available-for-sale. The BIF also invests in
Special U.S. Treasury Certificates that are included in the “Cash and cash equivalents” line item.

For 1998, the gross realized gain on securities classified as available-for-sale was $224 thousand.
The gain is included in the “Other revenue” line item. Proceeds from the sale were $186 million.
The cost of the securities sold was determined on a specific identification basis. There were no sales
in 1997.




                         Page 27                            GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
                           Bank Insurance Fund’s Financial Statements




U.S. Treasury Obligations at December 31, 1998
Dollars in Thousands
                                                                Unrealized   Unrealized
               Yield at         Face           Amortized         Holding      Holding        Market
  Maturity     Purchase         Value            Cost             Gains       Losses         Value

                                            Held-to-Maturity
  Less than
                5.57%      $     2,120,000 $      2,133,448 $        10,597 $         0 $     2,144,045
   one year
   1-3 years    6.04%            5,525,000        5,564,524         148,112           0       5,712,636
   3-5 years    6.19%            5,965,000        6,345,044         322,126           0       6,667,170
  5-10 years    6.01%           10,295,000       10,566,047         864,116           0      11,430,163
     Total                 $    23,905,000 $     24,609,063 $     1,344,951 $         0 $    25,954,014

                                            Available-for-Sale
  Less than
                5.09%      $      940,000 $        946,726 $          4,947 $         0 $      951,673
  one year
  1-3 years     5.63%              550,000          558,991           5,968           0         564,959
    Total                  $     1,490,000 $      1,505,717 $        10,915 $         0 $     1,516,632

                           Total Investment in U.S. Treasury Obligations, Net
    Total                  $    25,395,000 $     26,114,780 $     1,355,866 $         0 $    27,470,646



U.S. Treasury Obligations at December 31, 1997
Dollars in Thousands
                                                                Unrealized   Unrealized
                Yield at        Face           Amortized         Holding      Holding        Market
  Maturity     Purchase         Value            Cost             Gains       Losses         Value

                                            Held-to-Maturity
  Less than
                5.58%      $     5,250,000 $      5,240,657 $         5,369 $    (5,650) $    5,240,375
  one year
   1-3 years    5.83%            5,280,000        5,330,281          26,113      (7,413)      5,348,983
   3-5 years    6.15%            5,490,000        5,685,279          89,744      (6,895)      5,768,128
  5-10 years    6.57%            9,500,000        9,840,712         439,733           0      10,280,445
     Total                 $    25,520,000 $     26,096,929 $       560,959 $   (19,958) $   26,637,931

                                            Available-for-Sale
  1-3 years     5.67%             490,000          502,020              19         (143)       501,896

                           Total Investment in U.S. Treasury Obligations, Net
    Total                  $    26,010,000 $     26,598,949 $       560,978 $   (20,101) $   27,139,827

In 1998, the unamortized premium, net of unamortized discount, was $720 million. In 1997, the
unamortized premium, net of the unamortized discount, was $589 million.




                           Page 28                               GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
                         Bank Insurance Fund’s Financial Statements




4. Receivables From Bank Resolutions, Net

The bank resolution process takes different forms depending on the unique facts and circumstances
surrounding each failing or failed institution. Payments for institutions that fail are made to cover
obligations to insured depositors and represent claims by the BIF against the receiverships’ assets.
There were three bank failures in 1998 and one in 1997, with assets of $370 and $26 million,
respectively.

As of December 31, 1998 and 1997, the FDIC, in its receivership capacity for BIF-insured
institutions, held assets with a book value of $1.6 billion and $2.5 billion, respectively (including
cash and miscellaneous receivables of $480 million and $1 billion at December 31, 1998 and 1997,
respectively). These assets represent a significant source of repayment of the BIF’s receivables from
bank resolutions. The estimated cash recoveries from the management and disposition of these
assets that are used to derive the allowance for losses are based in part on a statistical sampling of
receivership assets. The sample was constructed to produce a statistically valid result. These
estimated recoveries are regularly evaluated, but remain subject to uncertainties because of potential
changes in economic conditions. These factors could cause the BIF’s and other claimants’ actual
recoveries to vary from the level currently estimated.

Receivables From Bank Resolutions, Net at December 31
Dollars in Thousands
                                                                          1998            1997
Assets from open bank assistance                                      $    112,045 $       140,035
Allowance for losses                                                        (10,727)        (38,497)
Net Assets From Open Bank Assistance                                       101,318         101,538

Receivables from closed banks                                            18,656,746    23,268,950
Allowance for losses                                                    (18,010,116)  (22,261,453)
Net Receivables From Closed Banks                                           646,630     1,007,497
Total                                                                 $     747,948 $   1,109,035


5. Assets Acquired From Assisted Banks and Terminated Receiverships, Net

The BIF has acquired assets from certain troubled and failed banks by either purchasing an
institution's assets outright or purchasing the assets under the terms specified in each resolution
agreement. In addition, the BIF can purchase assets remaining in a receivership to facilitate
termination. The methodology to estimate cash recoveries from these assets, which are used to
derive the related allowance for losses, is the same as that for receivables from bank resolutions (see
Note 4).

The BIF recognizes revenue and expenses on these acquired assets. Revenue consists primarily of
interest earned on performing mortgages and commercial loans. Expenses are recognized for the
management and liquidation of these assets.




                         Page 29                             GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
                           Bank Insurance Fund’s Financial Statements




Assets Acquired From Assisted Banks and Terminated Receiverships, Net at December 31
Dollars in Thousands
                                                                               1998         1997
Assets acquired from assisted banks and terminated receiverships           $    169,712 $    256,237
Allowance for losses                                                           (142,339)    (195,513)
Total                                                                      $     27,373 $     60,724


6. Property and Equipment, Net

Property and Equipment, Net at December 31
Dollars in Thousands
                                                                               1998         1997
Land                                                                      $      29,631 $     29,631
Buildings                                                                       152,078      151,443
PC/LAN/WAN equipment                                                             15,612            0
Application software                                                              1,892            0
Mainframe equipment                                                                 354            0
Furniture, fixtures, and general equipment                                          764            0
Telephone equipment                                                                 460            0
Work in Progress - Application Software                                          49,630            0
Accumulated depreciation                                                        (40,806)     (36,013)
Total                                                                     $     209,615 $    145,061


7. Estimated Liabilities for:

Anticipated Failure of Insured Institutions
The BIF records an estimated liability and a loss provision for banks (including Oakar and Sasser
financial institutions) that are likely to fail, absent some favorable event such as obtaining additional
capital or merging, when the liability becomes probable and reasonably estimable.

The estimated liabilities for anticipated failure of insured institutions as of December 31, 1998 and
1997, were $32 million and $11 million, respectively. The estimated liability is derived in part from
estimates of recoveries from the management and disposition of the assets of these probable bank
failures. Therefore, they are subject to the same uncertainties as those affecting the BIF's receivables
from bank resolutions (see Note 4). This could affect the ultimate costs to the BIF from probable
failures.

There are other banks where the risk of failure is less certain, but still considered reasonably
possible. Should these banks fail, the BIF could incur additional estimated losses of about $204
million.

The accuracy of these estimates will largely depend on future economic conditions. The FDIC's
Board of Directors (Board) has the statutory authority to consider the estimated liability from
anticipated failures of insured institutions when setting assessment rates.




                           Page 30                                 GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
                         Bank Insurance Fund’s Financial Statements




Year 2000 Anticipated Failures
The BIF is also subject to a potential loss from banks that may fail if they are unable to become Year
2000 compliant in a timely manner. In May 1997, the federal financial institution regulatory
agencies developed a program to conduct uniform reviews of all FDIC-insured institutions’ Year
2000 readiness. The program assesses the five key phases of an institution’s Year 2000 conversion
efforts: 1) awareness, 2) assessment, 3) renovation, 4) validation, and 5) implementation. The
reviews classify each institution as Satisfactory, Needs Improvement, or Unsatisfactory.

Satisfactory: Year 2000 efforts of financial institutions and independent data centers are considered
“Satisfactory” if they exhibit acceptable performance in all key phases of the Year 2000 project
management process as set forth in the May 5, 1997, Federal Financial Institutions Examination
Council (FFIEC) Interagency Statement on the Year 2000 and subsequent guidance documents.
Performance is satisfactory when project weaknesses are minor in nature and can be readily
corrected within the existing project management framework. The institution’s remediation progress
to date meets or nearly meets expectations laid out in its Year 2000 project plan. Senior
management and the board recognize and understand Year 2000 risk, are active in overseeing
institutional corrective efforts, and have ensured that the necessary resources are available to address
this risk area.

Needs Improvement: Year 2000 efforts of financial institutions and independent data centers are
evaluated as “Needs Improvement” if they exhibit less than acceptable performance in all key phases
of the Year 2000 project management process. Project weaknesses are evident, even if deficiencies
are correctable within the existing project management framework. The institution’s remediation
progress to date is behind the schedule laid out in its Year 2000 project plan. Senior management or
the board is not fully aware of the status of Year 2000 correction efforts, may not have committed
sufficient financial or human resources to address this risk, or may not fully understand Year 2000
implications.

Unsatisfactory: Year 2000 efforts of financial institutions and independent data centers are
considered “Unsatisfactory” if they exhibit poor performance in any of the key phases of the Year
2000 project management process. Project weaknesses are serious in nature and are not easily
corrected within the existing project management framework. The institution’s remediation progress
is seriously behind the schedule laid out in its Year 2000 project plan. Senior management and the
board do not understand or recognize the impact that the Year 2000 will have on the institution.
Management or the board commitment is limited or their oversight activities are not evident.

Based on data updated through April 30, 1999, 10,159 institutions with $6.4 trillion in assets have
received a Satisfactory rating, 216 institutions with $80 billion in assets a Needs Improvement
rating, and 21 institutions with $1 billion in assets an Unsatisfactory rating (data includes BIF- and
SAIF-insured institutions). Although the initial results of the uniform reviews are encouraging, the
Year 2000 issue is unprecedented. Therefore, it is difficult to determine which institutions, if any,
will ultimately fail. Further, estimates of the cost of resolving Year 2000 failures are complicated by
the uncertain nature of technological disruptions and the associated impact on the BIF, if any.
Failures caused solely by liquidity problems would pose substantially less exposure to the BIF. Year
2000 failures could conceivably be such liquidity failures. The possibility that any such failure
would occur is quite speculative in view of actions taken by the Federal Reserve Board to ensure
sufficient liquidity and currency to meet the cash needs of insured banks.




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                         Bank Insurance Fund’s Financial Statements




Failures could occur because of the familiar capital insolvency (liabilities exceeding assets) if a
substantial number of bank borrowers were unable to repay loans due to their own lack of
preparedness for the Year 2000. Insured banks are required to be aware of the measures taken by
key customers to protect themselves against adverse impact from the advent of Year 2000, and
compliance with such requirements is monitored via the regulatory examination program. The
extent to which insured institutions, if any, ultimately experience this type of failure is not
measurable.

Financial institutions are required to design a Year 2000 contingency plan to mitigate the risks
associated with the failure of systems at critical dates (Business Resumption Contingency Planning).
A business resumption contingency plan is designed to provide assurance that core business
functions will continue if one or more systems fail.

In order to assess exposure to the BIF from Year 2000 potential failures, the FDIC evaluated all
information relevant to such an assessment, to include Year 2000 on-site examination results,
institution capital levels and supervisory examination composite ratings, and other institution past
and current financial characteristics. As a result of this assessment, we conclude that, as of
December 31, 1998, there are no probable losses to the BIF from Year 2000 failures. Further, any
reasonably possible losses from Year 2000 failures were not estimable. During the remainder of
1999, the regulatory agencies will continue their Year 2000 reviews and the FDIC will continue to
assess this potential liability.

Assistance Agreements
The estimated liabilities for assistance agreements resulted from several large transactions where
problem assets were purchased by an acquiring institution under an agreement that calls for the
FDIC to absorb credit losses and pay related costs for funding and asset administration, plus an
incentive fee.

Litigation Losses
The BIF records an estimated loss for unresolved legal cases to the extent those losses are considered
probable and reasonably estimable. In addition to the amount recorded as probable, the FDIC has
determined that losses from unresolved legal cases totaling $178 million are reasonably possible.

Asset Securitization Guarantees
As part of the FDIC’s efforts to maximize the return from the sale or disposition of assets from bank
resolutions, the FDIC has securitized some receivership assets. To facilitate the securitizations, the
BIF provided limited guarantees to cover certain losses on the securitized assets up to a specified
maximum. In exchange for backing the limited guarantees, the BIF received assets from the
receiverships in an amount equal to the expected exposure under the guarantees. At December 31,
1998 and 1997, the BIF had an estimated liability under the guarantees of $7 million and $28
million, respectively. The maximum off-balance-sheet exposure under the limited guarantees is
presented in Note 12.

8. Assessments

The 1990 OBR Act removed caps on assessment rate increases and authorized the FDIC to set
assessment rates for BIF members semiannually, to be applied against a member's average




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                         Bank Insurance Fund’s Financial Statements




assessment base. The FDICIA: 1) required the FDIC to implement a risk-based assessment system;
2) authorized the FDIC to increase assessment rates for BIF-member institutions as needed to ensure
that funds are available to satisfy the BIF's obligations; 3) required the FDIC to build and maintain
the reserves in the insurance funds to 1.25 percent of insured deposits; and 4) authorized the FDIC to
increase assessment rates more frequently than semiannually and impose emergency special
assessments as necessary to ensure that funds are available to repay U.S. Treasury borrowings. In
May 1995, the BIF reached the FDICIA mandated capitalization level of 1.25 percent of insured
deposits.

The DIFA (see Note 1) provided, among other things, for the elimination of the mandatory minimum
assessment formerly provided for in the FDI Act. It also provided for the expansion of the
assessment base for payments of the interest on obligations issued by the FICO to include all FDIC-
insured institutions (including banks, thrifts, and Oakar and Sasser financial institutions). On
January 1, 1997, BIF-insured banks began paying a FICO assessment. The FICO assessment rate on
BIF-assessable deposits is one-fifth the rate for SAIF-assessable deposits. The annual FICO interest
obligation of approximately $790 million will be paid on a pro rata basis between banks and thrifts
on the earlier of January 1, 2000, or the date on which the last savings association ceases to exist.

The FICO assessment has no financial impact on the BIF. The FICO assessment is separate from the
regular assessments and is imposed on banks and thrifts, not on the insurance funds. The FDIC, as
administrator of the BIF and the SAIF, is acting solely as a collection agent for the FICO. During
1998 and 1997, $341 million and $338 million respectively, were collected from banks and remitted
to the FICO.

The FDIC uses a risk-based assessment system that charges higher rates to those institutions that
pose greater risks to the BIF. To arrive at a risk-based assessment for a particular institution, the
FDIC places each institution in one of nine risk categories, using a two-step process based first on
capital ratios and then on other relevant information. The Board reviews premium rates
semiannually. The assessment rate averaged approximately 0.08 cents per $100 of assessable
deposits for 1998 and 1997. On October 27, 1998, the Board voted to retain the BIF assessment
schedule of 0 to 27 cents per $100 of assessable deposits (annual rates) for the first semiannual
period of 1999.

9. Provision for Insurance Losses

Provision for insurance losses was a negative $38 million and a negative $495 million for 1998 and
1997, respectively. In 1998 and 1997, the negative provision resulted primarily from decreased
losses expected for assets in liquidation. The following chart lists the major components of the
negative provision for insurance losses.




                         Page 33                             GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
                             Bank Insurance Fund’s Financial Statements




Provision for Insurance Losses for the Years Ended December 31
Dollars in Thousands
                                                                                1998          1997
Valuation adjustments:
Open bank assistance                                                       $      (2,431) $    (12,180)
Closed banks                                                                     (53,926)     (356,347)
Assets acquired from assisted banks and terminated receiverships                   2,222       (47,245)
Total                                                                            (54,135)     (415,772)
Contingencies:
Anticipated failure of insured institutions                                       29,000       (59,000)
Assistance agreements                                                             (8,322)      (12,716)
Asset securitization guarantees                                                  (13,043)       (6,558)
Litigation                                                                         8,801        (1,250)
Total                                                                             16,436       (79,524)
Reduction in Provision for Insurance Losses                                $     (37,699) $   (495,296)

10. Pension Benefits, Savings Plans, and Accrued Annual Leave

Eligible FDIC employees (all permanent and temporary employees with appointments exceeding
one year) are covered by either the Civil Service Retirement System (CSRS) or the Federal
Employee Retirement System (FERS). The CSRS is a defined benefit plan, which is offset with the
Social Security System in certain cases. Plan benefits are determined on the basis of years of
creditable service and compensation levels. The CSRS-covered employees also can contribute to the
tax-deferred Federal Thrift Savings Plan (TSP).

The FERS is a three-part plan consisting of a basic defined benefit plan that provides benefits based
on years of creditable service and compensation levels, Social Security benefits, and the TSP.
Automatic and matching employer contributions to the TSP are provided up to specified amounts
under the FERS.

During 1998, there was an open season that allowed employees to switch from CSRS to FERS. This
did not have a material impact on BIF’s operating expenses.

Although the BIF contributes a portion of pension benefits for eligible employees, it does not
account for the assets of either retirement system. The BIF also does not have actuarial data for
accumulated plan benefits or the unfunded liability relative to eligible employees. These amounts
are reported on and accounted for by the U.S. Office of Personnel Management (OPM).

Eligible FDIC employees also may participate in a FDIC-sponsored tax-deferred savings plan with
matching contributions. The BIF pays its share of the employer's portion of all related costs.

The BIF’s pro rata share of the Corporation’s liability to employees for accrued annual leave is
approximately $38.4 million and $35.7 million at December 31, 1998 and 1997, respectively.




                             Page 34                               GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
                          Bank Insurance Fund’s Financial Statements




P ension B enefits a nd Savings P lans E xpenses fo r the Y ea rs E nded D ecem ber 31
D ollars in T housands

                                                                       199 8             199 7
C SR S/FER S D isability Fund                                   $         1,16 6 $            488
C ivil Service R etirem ent System                                       10,4 77            8,70 8
Federal Em p lo yee Retirem ent System (B asic B enefit)                 27,8 57           28,6 61
FD IC Savings Plan                                                       17,5 34           16,9 74
Federal T hrift Savings P lan                                            10,9 91           10,5 68
T otal                                                         $         68,0 25 $         65,3 99

11. Postretirement Benefits Other Than Pensions

On January 2, 1998, BIF's obligation under SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions,” for postretirement health benefits was reduced when
over 6,500 employees enrolled in the Federal Employees Health Benefits (FEHB) Program for their
future health insurance coverage. The OPM assumed the BIF’s obligation for postretirement health
benefits for these employees at no initial enrollment cost.

In addition, legislation was passed that allowed the remaining 2,600 retirees and near-retirees
(employees within five years of retirement) in the FDIC health plan to also enroll in the FEHB
Program for their future health insurance coverage, beginning January 1, 1999. The OPM assumed
the BIF’s obligation for postretirement health benefits for retirees and near retirees for a fee of $150
million. The OPM is now responsible for postretirement health benefits for all employees and
covered retirees. The FDIC will continue to be obligated for dental and life insurance coverage for as
long as the programs are offered and coverage is extended to retirees.

OPM’s assumption of the health care obligation constitutes both a settlement and a curtailment as
defined by SFAS No. 106. This conversion resulted in a gain of $201 million to the BIF.




                          Page 35                            GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
                             Bank Insurance Fund’s Financial Statements




Postretirement Benefits Other Than Pensions
Dollars in Thousands
                                                                           1998            1997
Funded Status at December 31
Fair value of plan assets (a)                                       $        67,539 $       356,447
Less: Benefit obligation                                                     67,539         378,227
Under/(Over) Funded Status of the plans                             $             0 $        21,780

Accrued benefit liability recognized in the
 Statements of Financial Position                                   $             0 $        39,231

Expenses and Cash Flows for the Period Ended December 31
Net periodic benefit cost                                           $        (1,942) $        3,305
Employer contributions                                                         6,299          4,064
Benefits paid                                                                  6,299          4,064

Weighted-Average Assumptions at December 31
Discount rate                                                                 4.50%           5.75%
Expected return on plan assets                                                4.50%           5.75%
Rate of compensation increase                                                 4.00%           4.00%
(a) Invested in U.S. Treasury obligations.

For measurement purposes, the per capita cost of covered health care benefits was assumed to
increase by an annual rate of 8.75 percent for 1998. Further, the rate was assumed to decrease
gradually each year to a rate of 7.75 percent for the year 2000 and remain at that level thereafter.

12. Commitments and Off-Balance-Sheet Exposure

Commitments

Leases
The BIF's allocated share of the FDIC’s lease commitments totals $177.2 million for future years.
The lease agreements contain escalation clauses resulting in adjustments, usually on an annual basis.
The allocation to the BIF of the FDIC’s future lease commitments is based upon current
relationships of the workloads among the BIF, the FRF, and the SAIF. Changes in the relative
workloads could cause the amounts allocated to the BIF in the future to vary from the amounts
shown below. The BIF recognized leased space expense of $47.7 million and $43.6 million for the
years ended December 31, 1998 and 1997, respectively.


L ease C ommitm ents
D ollars in T housands

     1999              2000             2001      2002          2003        2004 and T hereafter
   $39,287           $34,699          $27,905   $24,423       $15,096             $35,765




                             Page 36                         GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
                              Bank Insurance Fund’s Financial Statements




Asset Securitization Guarantees
As discussed in Note 7, the BIF provided certain limited guarantees to facilitate securitization
transactions. The table below gives the maximum off-balance-sheet exposure the BIF has under
these guarantees.


Asset Securitization Guarantees at December 31
Dollars in Thousands
                                                                                                1998                 1997
Maximum exposure under the limited guarantees                                         $          481,313 $            481,313
Less: Guarantee claims paid (inception-to-date)                                                  (27,253)             (19,231)
Less: Amount of exposure recognized as an estimated liability (see Note 7)                        (7,141)             (27,715)
Maximum Off-Balance-Sheet Exposure Under the Limited Guarantees                       $          446,919 $            434,367


Concentration of Credit Risk
As of December 31, 1998, the BIF had $18.8 billion in gross receivables from bank resolutions and
$170 million in assets acquired from assisted banks and terminated receiverships. An allowance for
loss of $18 billion and $142 million, respectively, has been recorded against these assets. The
liquidating entities’ ability to make repayments to the BIF is largely influenced by the economy of
the area in which they are located. The BIF's maximum exposure to possible accounting loss for
these assets is shown in the table below.


Concentration of Credit Risk at December 31, 1998
Dollars in Millions
                                            Southeast       Southwest   Northeast   Midwest Central       West       Total
Receivables from bank resolutions, net              $9            $35        $575         $11        $2      $116       $748
Assets acquired from assisted banks and
                                                        0          21           5          0          0          1           27
terminated receiverships, net
Total                                               $9            $56        $580         $11        $2      $117       $775


Other Off-Balance-Sheet Risk

Deposit Insurance
As of December 31, 1998, deposits insured by the BIF totaled approximately $2.1 trillion. This
would be the accounting loss if all depository institutions were to fail and the acquired assets
provided no recoveries.

13. Disclosures About the Fair Value of Financial Instruments

Cash equivalents are short-term, highly liquid investments and are shown at current value. The fair
market value of the investment in U.S. Treasury obligations is disclosed in Note 3 and is based on
current market prices. The carrying amount of interest receivable on investments, short-term
receivables, and accounts payable and other liabilities approximates their fair market value. This is
due to their short maturities or comparisons with current interest rates.

The net receivables from bank resolutions primarily include the BIF’s subrogated claim arising from
payments to insured depositors. The receivership assets that will ultimately be used to pay the




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                         Bank Insurance Fund’s Financial Statements




corporate subrogated claim are valued using discount rates that include consideration of market risk.
These discounts ultimately affect the BIF’s allowance for loss against the net receivables from bank
resolutions. Therefore, the corporate subrogated claim indirectly includes the effect of discounting
and should not be viewed as being stated in terms of nominal cash flows.

Although the value of the corporate subrogated claim is influenced by valuation of receivership
assets (see Note 4), such receivership valuation is not equivalent to the valuation of the corporate
claim. Since the corporate claim is unique, not intended for sale to the private sector, and has no
established market, it is not practicable to estimate its fair market value.

The FDIC believes that a sale to the private sector of the corporate claim would require
indeterminate, but substantial discounts for an interested party to profit from these assets because of
credit and other risks. In addition, the timing of receivership payments to the BIF on the subrogated
claim does not necessarily correspond with the timing of collections on receivership assets.
Therefore, the effect of discounting used by receiverships should not necessarily be viewed as
producing an estimate of market value for the net receivables from bank resolutions.

The majority of the net assets acquired from assisted banks and terminated receiverships (except real
estate) is comprised of various types of financial instruments, including investments, loans and
accounts receivables. Like receivership assets, assets acquired from assisted banks and terminated
receiverships are valued using discount rates that include consideration of market risk. However,
assets acquired from assisted banks and terminated receiverships do not involve the unique aspects
of the corporate subrogated claim, and therefore the discounting can be viewed as producing a
reasonable estimate of fair market value.




                         Page 38                             GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
                                 Bank Insurance Fund’s Financial Statements




14. Supplementary Information Relating to the Statements of Cash Flows

Reconciliation of Net Income to Net Cash Provided by Operating Activities for the Years Ended December 31
Dollars inThousands
                                                                                             1998            1997
Net Income                                                                              $   1,308,723   $   1,438,293
Adjustments to Reconcile Net Income to Net Cash Provided by Operating
Activities
Income Statement Items:
Provision for insurance losses                                                               (37,699)       (495,296)
Amortization of U.S. Treasury obligations                                                    133,705          60,261
Gain on sale of investments                                                                     (224)              0
Gain on conversion of benefit plan                                                          (200,532)              0
Depreciation on property and equipment                                                         3,745           3,339

Change in Assets and Liabilities:
(Increase) in interest receivable on investments and other assets                            (39,983)         (87,996)
Decrease in receivables from bank resolutions                                                417,444        3,600,647
Decrease in assets acquired from assisted banks and terminated receiverships                  31,129          60,693
Increase (Decrease) in accounts payable and other liabilities                                   6,534         (21,997)
(Decrease) in estimated liabilities for anticipated failure of insured institutions            (8,000)         (5,000)
(Decrease) in estimated liabilities for assistance agreements                                  (8,505)         (6,147)
(Decrease) in estimated liabilities for asset securitization guarantees                        (7,531)        (10,007)
Net Cash Provided by Operating Activities                                               $   1,598,806 $     4,536,790

15. Year 2000 Issues

State of Readiness
The FDIC, as administrator for the BIF, is conducting a corporate-wide effort to ensure that all FDIC
information systems are Year 2000 compliant. This means the systems must accurately process date
and time data in calculations, comparisons, and sequences after December 31, 1999, and be able to
correctly deal with leap-year calculations in 2000. The Year 2000 Oversight Committee is
comprised of FDIC division management that oversees the Year 2000 effort.

The FDIC’s Division of Information Resources Management (DIRM) leads the internal Year 2000
effort, under the direction of the Oversight Committee. DIRM used a five-phase approach for
ensuring that all FDIC systems and software are Year 2000 compliant. The five phases are:

Awareness
The first phase of compliance focuses on defining the Year 2000 problem and gaining executive-
level support and sponsorship for the effort.

Assessment
The second phase of compliance focuses on assessing the Year 2000 impact on the Corporation as a
whole.




                                 Page 39                                         GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
                         Bank Insurance Fund’s Financial Statements




Renovation
The third phase of compliance focuses on converting, replacing or eliminating selected platforms,
applications, databases, and utilities, while modifying interfaces as appropriate.

Platform is a broad term that encompasses computer hardware (including mainframe computers,
servers, and personal computers) and software (including computer languages and operating
systems). Utility programs, or “utilities,” provide file management capabilities, such as sorting,
copying, comparing, listing and searching, as well as diagnostic and measurement routines that
check the health and performance of the system.

Validation
The fourth phase of compliance focuses on testing, verifying and validating converted or replaced
platforms, applications, databases, and utilities.

Implementation
The fifth phase of compliance focuses on implementing converted or replaced platforms,
applications, databases, utilities, and interfaces.

The Awareness, Assessment, and Renovation phases are complete. The Validation phase is
scheduled to be completed during January 1999 when all production applications will be validated
for Year 2000 readiness. Implementation of the majority of production applications in Year 2000
ready status will be completed by March 31, 1999. Validation and implementation of new systems
and modifications to existing systems will continue throughout 1999.

Year 2000 Estimated Costs
Year 2000 compliance expenses for the BIF are estimated at $34.7 million and $1.6 million at
December 31, 1998 and 1997, respectively. These expenses are reflected in the “Operating
expenses” line item of the BIF’s Statements of Income and Fund Balance. Future expenses are
estimated to be $49 million. Year 2000 estimated future costs are included in the FDIC’s budget.

Risks of Year 2000 Issues

The FDIC’s Division of Supervision has an ongoing aggressive initiative to assess the BIF’s
supervised financial institutions for Year 2000 compliance. Other BIF-insured institutions are being
assessed by their respective regulatory agencies. The BIF is subject to a potential loss from financial
institutions that may fail as a result of Year 2000 related issues. Refer to “Estimated Liabilities for:
Anticipated Failure of Insured Institutions – Year 2000 Anticipated Failures” (Note 7) for additional
information.

No potential loss with internal system failure has been estimated due to the extensive planning and
validation that has occurred.

Contingency Plans
DIRM is currently developing a disaster recovery plan and contingency plans specific to each
mission-critical application.

Other divisions within the FDIC are working together to develop contingency plans to be prepared if
any FDIC-insured financial institution fails as a result of lack of Year 2000 preparedness.




                         Page 40                             GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
Savings Association Insurance Fund’s
Financial Statements

Statements of Financial Position



                 Savings Association Insurance Fund



                 Federal Deposit Insurance Corporation

                 Savings Association Insurance Fund Statements of Financial Position at December 31
                 Dollars in Thousands
                                                                                                                         1998                   1997
                 Assets
                 Cash and cash equivalents                                                                        $              666,736    $           141,392

                 Cash and other assets: Restricted for SAIF-member exit fees (Note 3)
                 (Includes cash and cash equivalents of $55.248 thousand and $48.752 thousand at                                 253,790                239,548
                 December 31, 1998 and December 31, 1997, respectively)

                 Investment in U.S. Treasury obligations, net (Note 4)
                 (Market value of investments at December 31, 1998 and December 31, 1997 was $9.4 billion and                   9,061,786              9,106,386
                 $9.2 billion, respectively)
                 Interest receivable on investments and other assets                                                           140,699                   122,678
                 Receivables from thrift resolutions, net (Note 5)                                                               8,857                     5,176
                 Total Assets                                                                                     $         10,131,868      $          9,615,180

                 Liabilities
                 Accounts payable and other liabilities                                                           $                 7,247   $              7,317

                 Estimated liability for anticipated failure of insured institutions (Note 6)                                     31,000                        0

                 SAIF-member exit fees and investment proceeds held in escrow (Note 3)                                           253,790                239,548
                 Total Liabilities                                                                                               292,037                246,865
                 Commitments and off-balance-sheet exposure (Note 10)
                 Fund Balance
                 Accumulated net income                                                                                         9,835,577              9,368,347
                 Unrealized gain/(loss) on available-for-sale securities, net (Note 4)                                              4,254                    (32)

                 Total Fund Balance                                                                                             9,839,831              9,368,315

                 Total Liabilities and Fund Balance                                                               $         10,131,868      $          9,615,180

                 The accompanying notes are an integral part of these financial statements.




                                                              Page 41                                           GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
                                                          Savings Association Insurance Fund’s
                                                          Financial Statements




Statements of Income and Fund Balance




                Savings Association Insurance Fund



                Federal Deposit Insurance Corporation

                Savings Association Insurance Fund Statements of Income and Fund Balance for the Years Ended December 31
                Dollars in Thousands

                                                                                                      1998                   1997
                Revenue
                Interest on U.S. Treasury obligations                                          $              562,750    $           535,463
                Assessments (Note 7)                                                                           15,352                 13,914
                Gain on conversion of benefit plan (Note 9)                                                     5,464                      0
                Other revenue                                                                                     293                    535
                Total Revenue                                                                                 583,859                549,912

                Expenses and Losses
                Operating expenses                                                                             84,628                 71,865
                Provision for insurance losses                                                                 31,992                 (1,879)
                Other insurance expenses                                                                            9                      0
                Total Expenses and Losses                                                                     116,629                 69,986

                Net Income                                                                                    467,230                479,926
                Unrealized gain/(loss) on available-for-sale securities, net (Note 4)                           4,286                    (32)

                Comprehensive Income                                                                          471,516                479,894

                Fund Balance - Beginning                                                                     9,368,315              8,888,421

                Fund Balance - Ending                                                          $             9,839,831   $          9,368,315

                The accompanying notes are an integral part of these financial statements.




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                                                          Savings Association Insurance Fund’s
                                                          Financial Statements




Statements of Cash Flows




                Savings Association Insurance Fund



                Federal Deposit Insurance Corporation

                Savings Association Insurance Fund Statements of Cash Flows for the Years Ended December 31
                Dollars in Thousands

                                                                                                      1998                     1997
                Cash Flows From Operating Activities
                Cash provided from:
                 Interest on U.S. Treasury obligations                                         $               597,596     $            544,094
                 Assessments                                                                                    13,991                 (146,766)
                 Entrance and exit fees, including interest on exit fees (Note 3)                               10,306                   13,596
                 Recoveries from thrift resolutions                                                              1,119                   14,728
                 Miscellaneous receipts                                                                             67                     (219)
                Cash used for:
                 Operating expenses                                                                            (85,248)                 (75,298)
                 Disbursements for thrift resolutions                                                           (5,732)                  (2,693)
                 Disbursements for Oakar banks                                                                     318                        0
                 Miscellaneous disbursements                                                                         0                       (7)
                Net Cash Provided by Operating Activities (Note 12)                                            532,417                  347,435

                Cash Flows From Investing Activities
                Cash provided from:
                 Maturity of U.S. Treasury obligations, held-to-maturity                                     1,840,000                1,740,000
                Cash used for:
                 Purchase of U.S. Treasury obligations, held-to-maturity                                     (1,402,352)              (2,133,119)
                 Purchase of U.S. Treasury obligations, available-for-sale                                     (438,225)                (152,125)
                Net Cash Used by Investing Activities                                                              (577)                (545,244)

                Net Increase (Decrease) in Cash and Cash Equivalents                                           531,840                 (197,809)
                Cash and Cash Equivalents - Beginning                                                          190,144                  387,953
                Cash and Cash Equivalents - Ending                                             $               721,984     $            190,144

                The accompanying notes are an integral part of these financial statements.




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Notes to Financial Statements

                       Notes to the Financial Statements
                       Savings Association Insurance Fund
                       December 31, 1998 and 1997

                       1. Legislative History and Operations of the Savings Association Insurance Fund

                       Legislative History
                       The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) was
                       enacted to reform, recapitalize, and consolidate the federal deposit insurance system. The
                       FIRREA created the Savings Association Insurance Fund (SAIF), the Bank Insurance Fund
                       (BIF), and the FSLIC Resolution Fund (FRF). It also designated the Federal Deposit Insurance
                       Corporation (FDIC) as the administrator of these funds. All three funds are maintained
                       separately to carry out their respective mandates.

                       The SAIF and the BIF are insurance funds responsible for protecting insured depositors in
                       operating thrift institutions and banks from loss due to institution failures. The FRF is a
                       resolution fund responsible for winding up the affairs of the former Federal Savings and Loan
                       Insurance Corporation (FSLIC) and liquidating the assets and liabilities transferred from the
                       former Resolution Trust Corporation (RTC).

                       Pursuant to the Resolution Trust Corporation Completion Act of 1993 (RTC Completion Act),
                       resolution responsibility transferred from the RTC to the SAIF on July 1, 1995. Prior to that
                       date, thrift resolutions were the responsibility of the RTC (January 1, 1989 through June 30,
                       1995) or the FSLIC (prior to 1989).

                       Pursuant to FIRREA, an active institution’s insurance fund membership and primary federal
                       supervisor are generally determined by the institution’s charter type. Deposits of SAIF-member
                       institutions are generally insured by the SAIF; SAIF members are predominantly thrifts
                       supervised by the Office of Thrift Supervision (OTS). Deposits of BIF-member institutions are
                       generally insured by the BIF; BIF members are predominantly commercial and savings banks
                       supervised by the FDIC, the Office of the Comptroller of the Currency, or the Federal Reserve.

                       In addition to traditional thrifts and banks, several other categories of institutions exist. The
                       Federal Deposit Insurance Act (FDI Act), Section 5(d)(3), provides that a member of one
                       insurance fund may, with the approval of its primary federal supervisor, merge, consolidate with,
                       or acquire the deposit liabilities of an institution that is a member of the other insurance fund
                       without changing insurance fund status for the acquired deposits. These institutions with
                       deposits insured by both insurance funds are referred to as “Oakars” or Oakar banks. The
                       transactions specified in Section 5(d)(3) can take place without paying entrance and exit fees,
                       under two principal conditions. One condition is that although the acquiring institution continues
                       to belong to its own insurance fund (primary fund), the institution becomes obliged to pay
                       assessments to the fund that insured the deposits of the acquired institution (secondary fund).
                       The secondary fund assessments are keyed to the amount of the secondary fund deposits so
                       acquired. The other condition is that if the acquiring institution should fail, the losses resulting
                       from the failure are allocated between the two insurance funds according to a formula that is
                       likewise keyed to the amount of the acquired secondary fund deposits. The FDI Act, Section
                       5(d)(2)(G), allows SAIF-member thrifts to convert to a bank charter and retain their SAIF
                       membership. These institutions are referred to as “Sassers.” The Home Owners’ Loan Act
                       (HOLA), Section 5(o), allows BIF-member banks to convert to a thrift charter and retain their
                       BIF membership. These institutions are referred to as “HOLAs” or HOLA thrifts.




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Other Significant Legislation
The Competitive Equality Banking Act of 1987 established the Financing Corporation (FICO) as
a mixed-ownership government corporation whose sole purpose was to function as a financing
vehicle for the FSLIC.

The Omnibus Budget Reconciliation Act of 1990 (1990 OBR Act) and the Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDICIA) made changes to the FDIC's
assessment authority (see Note 7) and borrowing authority. The FDICIA also requires the FDIC
to: 1) resolve troubled institutions in a manner that will result in the least possible cost to the
deposit insurance funds and 2) maintain the insurance funds at 1.25 percent of insured deposits
or a higher percentage as circumstances warrant.

The Deposit Insurance Funds Act of 1996 (DIFA) was enacted to provide for: 1) the
capitalization of the SAIF to its designated reserve ratio (DRR) of 1.25 percent by means of a
one-time special assessment on SAIF-insured deposits; 2) the expansion of the assessment base
for payments of the interest on obligations issued by the FICO to include all FDIC-insured banks
and thrifts; 3) beginning January 1, 1997, the imposition of a FICO assessment rate for SAIF-
assessable deposits that is five times the rate for BIF-assessable deposits through the earlier of
December 31, 1999, or the date on which the last savings association ceases to exist; 4) the
payment of the annual FICO interest obligation of approximately $790 million on a pro rata basis
between banks and thrifts on the earlier of January 1, 2000, or the date on which the last savings
association ceases to exist; 5) authorization of SAIF assessments only if needed to maintain the
fund at the DRR; 6) the refund of amounts in the SAIF in excess of the DRR with such refund
not to exceed the previous semiannual assessment; 7) assessment rates for SAIF members not
lower than the assessment rates for BIF members with comparable risk; and 8) the merger of the
SAIF and the BIF on January 1, 1999, if no insured depository institution is a savings association
on that date. Subsequently, Congress did not enact legislation during 1998 to either merge the
SAIF and the BIF or to eliminate the thrift charter.

Recent Legislative Initiatives
Congress continues to focus on legislative proposals to achieve modernization of the financial
services industry. Some of these proposals, if enacted into law, may have a significant impact on
the SAIF and/or the BIF. However, these proposals continue to vary and FDIC management
cannot predict which provisions, if any, will ultimately be enacted.

Operations of the SAIF
The primary purpose of the SAIF is to: 1) insure the deposits and protect the depositors of SAIF-
insured institutions and 2) resolve failed SAIF-insured institutions including managing and
liquidating their assets. In this capacity, the SAIF has financial responsibility for all SAIF-
insured deposits held by SAIF-member institutions and by BIF-member banks designated as
Oakar banks.

The SAIF is primarily funded from the following sources: 1) interest earned on investments in
U.S. Treasury obligations and 2) SAIF assessment premiums. Additional funding sources are
borrowings from the U.S. Treasury, the Federal Financing Bank (FFB), and the Federal Home
Loan Banks, if necessary. The 1990 OBR Act established the FDIC's authority to borrow
working capital from the FFB on behalf of the SAIF and the BIF. The FDICIA increased the
FDIC's authority to borrow for insurance losses from the U.S. Treasury, on behalf of the SAIF
and the BIF, from $5 billion to $30 billion. The FDICIA also established a limitation on




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obligations that can be incurred by the SAIF, known as the maximum obligation limitation
(MOL). At December 31, 1998, the MOL for the SAIF was $17.3 billion.

The VA, HUD and Independent Agencies Appropriations Acts of 1999 and 1998 appropriated
$34.7 million for fiscal year 1999 (October 1, 1998, through September 30, 1999) and $34
million for fiscal year 1998 (October 1, 1997, through September 30, 1998), respectively, for
operating expenses incurred by the Office of Inspector General (OIG). These Acts mandate that
the funds are to be derived from the SAIF, the BIF, and the FRF.

2. Summary of Significant Accounting Policies

General
These financial statements pertain to the financial position, results of operations, and cash flows
of the SAIF and are presented in accordance with generally accepted accounting principles
(GAAP). These statements do not include reporting for assets and liabilities of closed thrift
institutions for which the FDIC acts as receiver or liquidating agent. Periodic and final
accountability reports of the FDIC's activities as receiver or liquidating agent are furnished to
courts, supervisory authorities, and others as required.

Use of Estimates
FDIC management makes estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from these estimates.
Where it is reasonably possible that changes in estimates will cause a material change in the
financial statements in the near term, the nature and extent of such changes in estimates have
been disclosed.

Cash Equivalents
Cash equivalents are short-term, highly liquid investments with original maturities of three
months or less. Cash equivalents primarily consist of Special U.S. Treasury Certificates.

Investments in U.S. Treasury Obligations
Investments in U.S. Treasury obligations are recorded pursuant to the provisions of the
Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain
Investments in Debt and Equity Securities.” SFAS No. 115 requires that securities be classified
in one of three categories: held-to-maturity, available-for-sale, or trading. Securities designated
as held-to-maturity are intended to be held to maturity and are shown at amortized cost.
Amortized cost is the face value of securities plus the unamortized premium or less the
unamortized discount. Amortizations are computed on a daily basis from the date of acquisition
to the date of maturity. Beginning in 1997, the SAIF designated a portion of its securities as
available-for-sale. These securities are shown at fair value with unrealized gains and losses
included in the fund balance. Realized gains and losses are included in other revenue when
applicable. Interest on both types of securities is calculated on a daily basis and recorded
monthly using the effective interest method. The SAIF does not have any securities classified as
trading.

Allowance for Losses on Receivables From Thrift Resolutions
The SAIF records a receivable for the amounts advanced and/or obligations incurred for
resolving troubled and failed thrifts. Any related allowance for loss represents the difference
between the funds advanced and/or obligations incurred and the expected repayment. The latter




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is based on estimates of discounted cash recoveries from the assets of assisted or failed thrifts,
net of all estimated liquidation costs.

Receivership Operations
The FDIC is responsible for managing and disposing of the assets of failed institutions in an
orderly and efficient manner. The assets, and the claims against them, are accounted for
separately to ensure that liquidation proceeds are distributed in accordance with applicable laws
and regulations. Also, the income and expenses attributable to receiverships are accounted for as
transactions of those receiverships. Liquidation expenses incurred by the SAIF on behalf of the
receiverships are recovered from those receiverships.

Cost Allocations Among Funds
Operating expenses not directly charged to the funds are allocated to all funds administered by
the FDIC. Workload-based-allocation percentages are developed during the annual corporate
planning process and through supplemental functional analyses.

Postretirement Benefits Other Than Pensions
The FDIC established an entity to provide the accounting and administration of postretirement
benefits on behalf of the SAIF, the BIF, and the FRF. Each fund pays its liabilities for these
benefits directly to the entity. The SAIF’s unfunded net postretirement benefits liability for the
plan is presented in the SAIF’s Statements of Financial Position.

Disclosure About Recent Accounting Standards Pronouncements
In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 132,
“Employers’ Disclosures about Pension and Other Postretirement Benefits.” The Statement
standardizes the disclosure requirements for pensions and other postretirement benefits to the
extent practicable. Although changes in the SAIF’s disclosures for postretirement benefits have
been made, the impact is not material.

In June 1997, the FASB issued SFAS No. 130, “Reporting Comprehensive Income.” The FDIC
adopted SFAS No. 130 effective on January 1, 1997. Comprehensive income includes net
income as well as certain types of unrealized gain or loss. The only component of SFAS No. 130
that impacts the SAIF is unrealized gain or loss on securities classified as available-for-sale,
which is presented in the SAIF’s Statements of Financial Position and the Statements of Income
and Fund Balance.

Other recent pronouncements are not applicable to the financial statements.

Related Parties
The nature of related parties and a description of related party transactions are disclosed
throughout the financial statements and footnotes.

Reclassifications
Reclassifications have been made in the 1997 financial statements to conform to the presentation
used in 1998.

3. Cash and Other Assets: Restricted for SAIF-Member Exit Fees
The SAIF receives entrance and exit fees for conversion transactions when an insured depository
institution converts from the BIF to the SAIF (resulting in an entrance fee) or from the SAIF to




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 the BIF (resulting in an exit fee). Regulations approved by the FDIC's Board of Directors
(Board) and published in the Federal Register on March 21, 1990, directed that exit fees paid to
the SAIF be held in escrow.

The FDIC and the Secretary of the Treasury will determine when it is no longer necessary to
escrow such funds for the payment of interest on obligations previously issued by the FICO.
These escrowed exit fees are invested in U.S. Treasury securities pending determination of
ownership. The interest earned is also held in escrow. There were no conversion transactions
during 1998 and 1997 that resulted in an exit fee to the SAIF.

C a sh a n d O th er A sse ts: R e str ic te d fo r S A IF -M e m b e r E x it F e es a t D e c e m b e r 3 1
D o llars in T h o u sa n d s
                                                                                     1998                      1997
C a sh a n d c a sh eq u iv a le n ts                                       $           5 5 ,2 4 8   $            4 8 ,7 5 2
In v e stm e n ts in U .S . T re a su ry o b lig atio n s, n e t                      1 9 3 ,3 5 0              1 8 5 ,3 9 0
In te re st re c eiv ab le o n U .S . T rea su ry o b lig a tio n s                       4 ,1 9 0                  3 ,9 8 1
E x it fe e s re c eiv ab le                                                              1 ,0 0 2                  1 ,4 2 5
T o ta l                                                                    $         2 5 3 ,7 9 0   $          2 3 9 ,5 4 8




U.S. Treasury Obligations at December 31, 1998 (Restricted)
Dollars in Thousands
                                                                        Unrealized        Unrealized
                  Yield at             Face              Amortized       Holding           Holding             Market
  Maturity        Purchase             Value               Cost           Gains            Losses              Value

                                                     Held-to-Maturity
   1-3 years        5.52%       $          15,000 $              15,359 $           335 $                0 $        15,694
   3-5 years        6.12%                 135,000               134,722           6,550                  0         141,272
  5-10 years        5.69%                  40,000                43,269           2,156                  0          45,425
     Total                      $         190,000 $             193,350 $         9,041 $                0 $       202,391



U.S. Treasury Obligations at December 31, 1997 (Restricted)
Dollars in Thousands
                                                                        Unrealized        Unrealized
                  Yield at             Face              Amortized       Holding           Holding             Market
  Maturity        Purchase             Value               Cost           Gains            Losses              Value

                                                     Held-to-Maturity
   Less than
                    5.68%       $          40,000 $              40,058 $           11 $                 0 $        40,069
   one year
   3-5 years        5.95%                 100,000               100,182             833                  0         101,015
  5-10 years        6.46%                  45,000                45,150           1,439                  0          46,589
     Total                      $         185,000 $             185,390 $         2,283 $                0 $       187,673

In 1998, the unamortized premium, net of unamortized discount, was $3.4 million. In 1997, the
unamortized premium, net of the unamortized discount, was $390 thousand.




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4. Investment in U.S. Treasury Obligations, Net
Cash received by the SAIF is invested in U.S. Treasury obligations with maturities exceeding
three months unless cash is needed to meet the liquidity needs of the fund. The SAIF’s current
portfolio includes securities classified as held-to-maturity and available-for-sale. The SAIF also
invests in Special U.S. Treasury Certificates that are included in the “Cash and cash equivalents”
line item.

U.S. Treasury Obligations at December 31, 1998 (Unrestricted)
Dollars in Thousands
                                                            Unrealized   Unrealized
               Yield at        Face           Amortized      Holding      Holding       Market
  Maturity     Purchase        Value            Cost          Gains       Losses        Value

                                          Held-to-Maturity
  Less than
                5.82%      $    1,490,000 $     1,496,779 $       8,790 $         0 $    1,505,569
  one year
   1-3 years    5.96%           3,585,000       3,609,527        88,035           0      3,697,562
   3-5 years    6.04%           1,640,000       1,703,669        76,027           0      1,779,696
  5-10 years    6.00%           1,615,000       1,664,974       117,633           0      1,782,607
     Total                 $    8,330,000 $     8,474,949 $     290,485 $         0 $    8,765,434

                                          Available-for-Sale
  Less than
                5.55%      $      370,000 $       373,840 $       2,172 $         0 $     376,012
  one year
  1-3 years     5.61%             205,000         208,743         2,082           0       210,825
    Total                  $      575,000 $       582,583 $       4,254 $         0 $     586,837

                          Total Investment in U.S. Treasury Obligations, Net
    Total                  $    8,905,000 $     9,057,532 $     294,739 $         0 $    9,352,271




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U.S. Treasury Obligations at December 31, 1997 (Unrestricted)
Dollars in Thousands
                                                            Unrealized   Unrealized
               Yield at        Face           Amortized      Holding      Holding          Market
  Maturity     Purchase        Value            Cost          Gains       Losses           Value

                                          Held-to-Maturity
  Less than
                5.91%      $    1,650,000 $     1,647,211 $       2,751 $       (319) $     1,649,643
  one year
   1-3 years    5.87%           3,415,000       3,451,362        16,852        (3,309)      3,464,905
   3-5 years    6.03%           2,510,000       2,541,949        26,808          (969)      2,567,788
  5-10 years    6.47%           1,265,000       1,313,739        49,888             0       1,363,627
     Total                 $    8,840,000 $     8,954,261 $      96,299 $      (4,597) $    9,045,963

                                          Available-for-Sale
  1-3 years     5.67%      $      150,000 $       152,157 $         32 $         (64) $      152,125

                          Total Investment in U.S. Treasury Obligations, Net
    Total                  $    8,990,000 $     9,106,418 $      96,331 $      (4,661) $    9,198,088

In 1998, the unamortized premium, net of unamortized discount, was $152.5 million. In 1997,
the unamortized premium, net of the unamortized discount, was $116.4 million.

5. Receivables From Thrift Resolutions, Net

The thrift resolution process takes different forms depending on the unique facts and
circumstances surrounding each failing or failed institution. Payments for institutions that fail
are made to cover obligations to insured depositors and represent claims by the SAIF against the
receiverships’ assets. There were no thrift failures in 1998, or in 1997.

As of December 31, 1998 and 1997, the FDIC, in its receivership capacity for SAIF-insured
institutions, held assets with a book value of $46.1 million and $56.6 million, respectively
(including cash and miscellaneous receivables of $45.7 million and $40 million at December 31,
1998 and 1997, respectively). These assets represent a significant source of repayment of the
SAIF’s receivables from thrift resolutions. The estimated cash recoveries from the management
and disposition of these assets that are used to derive the allowance for losses are based in part
on a statistical sampling of receivership assets. The sample was constructed to produce a
statistically valid result. These estimated recoveries are regularly evaluated, but remain subject
to uncertainties because of potential changes in economic conditions. These factors could cause
the SAIF’s and other claimants’ actual recoveries to vary from the level currently estimated.

6. Estimated Liabilities for:

Anticipated Failure of Insured Institutions
The SAIF records an estimated liability and a loss provision for thrifts (including Oakar and
Sasser financial institutions) that are likely to fail, absent some favorable event such as obtaining
additional capital or merging, when the liability becomes probable and reasonably estimable.




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The estimated liabilities for anticipated failure of insured institutions as of December 31, 1998
and 1997, were $31 million and zero, respectively. The estimated liability is derived in part from
estimates of recoveries from the management and disposition of the assets of these probable
thrift failures. Therefore, they are subject to the same uncertainties as those affecting the SAIF's
receivables from thrift resolutions (see Note 5). This could affect the ultimate costs to the SAIF
from probable failures.

There are other thrifts where the risk of failure is less certain, but still considered reasonably
possible. Should these thrifts fail, the SAIF could incur additional estimated losses of about $77
million.

The accuracy of these estimates will largely depend on future economic conditions. The Board
has the statutory authority to consider the estimated liability from anticipated failures of insured
institutions when setting assessment rates.

Year 2000 Anticipated Failures
The SAIF is also subject to a potential loss from thrifts that may fail if they are unable to become
Year 2000 compliant in a timely manner. In May 1997, the federal financial institution
regulatory agencies developed a program to conduct uniform reviews of all FDIC-insured
institutions’ Year 2000 readiness. The program assesses the five key phases of an institution’s
Year 2000 conversion efforts: 1) awareness, 2) assessment, 3) renovation, 4) validation, and 5)
implementation. The reviews classify each institution as Satisfactory, Needs Improvement, or
Unsatisfactory.

Satisfactory: Year 2000 efforts of financial institutions and independent data centers are
considered “Satisfactory” if they exhibit acceptable performance in all key phases of the Year
2000 project management process as set forth in the May 5, 1997, Federal Financial Institutions
Examination Council (FFIEC) Interagency Statement on the Year 2000 and subsequent guidance
documents. Performance is satisfactory when project weaknesses are minor in nature and can be
readily corrected within the existing project management framework. The institution’s
remediation progress to date meets or nearly meets expectations laid out in its Year 2000 project
plan. Senior management and the board recognize and understand Year 2000 risk, are active in
overseeing institutional corrective efforts, and have ensured that the necessary resources are
available to address this risk area.

Needs Improvement: Year 2000 efforts of financial institutions and independent data centers are
evaluated as “Needs Improvement” if they exhibit less than acceptable performance in all key
phases of the Year 2000 project management process. Project weaknesses are evident, even if
deficiencies are correctable within the existing project management framework. The institution’s
remediation progress to date is behind the schedule laid out in its Year 2000 project plan. Senior
management or the board is not fully aware of the status of Year 2000 correction efforts, may not
have committed sufficient financial or human resources to address this risk, or may not fully
understand Year 2000 implications.

Unsatisfactory: Year 2000 efforts of financial institutions and independent data centers are
considered “Unsatisfactory” if they exhibit poor performance in any of the key phases of the
Year 2000 project management process. Project weaknesses are serious in nature and are not
easily corrected within the existing project management framework. The institution’s
remediation progress is seriously behind the schedule laid out in its Year 2000 project plan.




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Senior management and the board do not understand or recognize the impact that the Year 2000
will have on the institution. Management or the board commitment is limited or their oversight
activities are not evident.

Based on data updated through April 30, 1999, 10,159 institutions with $6.4 trillion in assets
have received a Satisfactory rating, 216 institutions with $80 billion in assets a Needs
Improvement rating, and 21 institutions with $1 billion in assets an Unsatisfactory rating (data
includes SAIF- and BIF-insured institutions). Although the initial results of the uniform reviews
are encouraging, the Year 2000 issue is unprecedented. Therefore, it is difficult to determine
which institutions, if any, will ultimately fail. Further, estimates of the cost of resolving Year
2000 failures are complicated by the uncertain nature of technological disruptions and the
associated impact on the SAIF, if any. Failures caused solely by liquidity problems would pose
substantially less exposure to the SAIF. Year 2000 failures could conceivably be such liquidity
failures. The possibility that any such failure would occur is quite speculative in view of actions
taken by the Federal Reserve Board to ensure sufficient liquidity and currency to meet the cash
needs of insured thrifts.

Failures could occur because of the familiar capital insolvency (liabilities exceeding assets) if a
substantial number of thrift borrowers were unable to repay loans due to their own lack of
preparedness for the Year 2000. Insured thrifts are required to be aware of the measures taken
by key customers to protect themselves against adverse impact from the advent of Year 2000,
and compliance with such requirements is monitored via the regulatory examination program.
The extent to which insured institutions, if any, ultimately experience this type of failure is not
measurable.

Financial institutions are required to design a Year 2000 contingency plan to mitigate the risks
associated with the failure of systems at critical dates (Business Resumption Contingency
Planning). A business resumption contingency plan is designed to provide assurance that core
business functions will continue if one or more systems fail.

In order to assess exposure to the SAIF from Year 2000 potential failures, the FDIC evaluated all
information relevant to such an assessment, to include Year 2000 on-site examination results,
institution capital levels and supervisory examination composite ratings, and other institution
past and current financial characteristics. As a result of this assessment, we conclude that, as of
December 31, 1998, there are no probable losses to the SAIF from Year 2000 failures. Further,
any reasonably possible losses from Year 2000 failures were not estimable. During the
remainder of 1999, the regulatory agencies will continue their Year 2000 reviews and the FDIC
will continue to assess this potential liability.

Litigation Losses
The SAIF records an estimated loss for unresolved legal cases to the extent those losses are
considered probable and reasonably estimable. For 1998 and 1997, no legal cases were deemed
probable in occurrence. In 1998, no unresolved legal cases were identified as reasonably
possible.

7.   Assessments

The 1990 OBR Act removed caps on assessment rate increases and authorized the FDIC to set
assessment rates for SAIF members semiannually, to be applied against a member's average




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assessment base. The FDICIA: 1) required the FDIC to implement a risk-based assessment
system; 2) authorized the FDIC to increase assessment rates for SAIF-member institutions as
needed to ensure that funds are available to satisfy the SAIF's obligations; 3) required the FDIC
to build and maintain the reserves in the insurance funds to 1.25 percent of insured deposits; and
4) authorized the FDIC to increase assessment rates more frequently than semiannually and
impose emergency special assessments as necessary to ensure that funds are available to repay
U.S. Treasury borrowings.

The DIFA (see Note 1) provided, among other things, for the capitalization of the SAIF to its
DRR of 1.25 percent by means of a one-time special assessment on SAIF-insured deposits. The
SAIF achieved its required capitalization by means of a $4.5 billion special assessment effective
October 1, 1996.

Prior to January 1, 1997, the FICO had priority over the SAIF for receiving and utilizing SAIF
assessments to ensure availability of funds for interest on the FICO’s debt obligations.
Accordingly, the SAIF recognized as assessment revenue only that portion of SAIF assessments
not required by the FICO. Assessments on the SAIF-insured deposits held by BIF-member
Oakar or SAIF-member Sasser institutions prior to January 1, 1997, were not subject to draws by
the FICO and, thus, were retained in SAIF in their entirety.

The DIFA expanded the assessment base for payments of the interest on obligations issued by
the FICO to include all FDIC-insured institutions (including banks, thrifts, and Oakar and Sasser
financial institutions) and made the FICO assessment separate from regular assessments,
effective on January 1, 1997.

The FICO assessment has no financial impact on the SAIF. The FICO assessment is separate
from the regular assessments and is imposed on thrifts and banks, not on the insurance funds.
The FDIC, as administrator of the SAIF and the BIF, is acting solely as a collection agent for the
FICO. During 1998 and 1997, $446 million and $454 million respectively, were collected from
savings associations and remitted to the FICO.

The FDIC uses a risk-based assessment system that charges higher rates to those institutions that
pose greater risks to the SAIF. To arrive at a risk-based assessment for a particular institution,
the FDIC places each institution in one of nine risk categories, using a two-step process based
first on capital ratios and then on other relevant information. The Board reviews premium rates
semiannually. The assessment rate averaged approximately 0.21 cents and 0.39 cents per $100
of assessable deposits for 1998 and 1997, respectively. On October 27, 1998, the Board voted to
retain the SAIF assessment schedule of 0 to 27 cents per $100 of assessable deposits (annual
rates) for the first semiannual period of 1999.

8. Pension Benefits, Savings Plans, and Accrued Annual Leave

Eligible FDIC employees (all permanent and temporary employees with appointments exceeding
one year) are covered by either the Civil Service Retirement System (CSRS) or the Federal
Employee Retirement System (FERS). The CSRS is a defined benefit plan, which is offset with
the Social Security System in certain cases. Plan benefits are determined on the basis of years of
creditable service and compensation levels. The CSRS-covered employees also can contribute to
the tax-deferred Federal Thrift Savings Plan (TSP).




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The FERS is a three-part plan consisting of a basic defined benefit plan that provides benefits
based on years of creditable service and compensation levels, Social Security benefits, and the
TSP. Automatic and matching employer contributions to the TSP are provided up to specified
amounts under the FERS.

During 1998, there was an open season that allowed employees to switch from CSRS to FERS.
This did not have a material impact on SAIF’s operating expenses.

Although the SAIF contributes a portion of pension benefits for eligible employees, it does not
account for the assets of either retirement system. The SAIF also does not have actuarial data for
accumulated plan benefits or the unfunded liability relative to eligible employees. These
amounts are reported on and accounted for by the U.S. Office of Personnel Management (OPM).

Eligible FDIC employees also may participate in a FDIC-sponsored tax-deferred savings plan
with matching contributions. The SAIF pays its share of the employer's portion of all related
costs.

The SAIF’s pro rata share of the Corporation’s liability to employees for accrued annual leave is
approximately $4.4 million and $3 million at December 31, 1998 and 1997, respectively.

P en sio n B enefits a n d Sa v ing s P la n s E xpen ses fo r th e Y ea rs E nd ed D ecem ber 3 1
D o llars in T ho usand
                                                                                1998               1997
C SR S/FE R S D isab ility Fund                                        $               140 $               44
C ivil S ervice R etirem ent S ystem                                                1 ,2 4 2             855
F ed eral E m p lo yee R etirem en t S ystem (B asic B en efit)                     3 ,0 0 2          2 ,2 4 2
F D IC S avings P lan                                                               1 ,9 4 7          1 ,4 4 6
F ed eral T h rift S av ings P lan                                                  1 ,1 7 6             840
T o ta l                                                               $            7 ,5 0 7 $        5 ,4 2 7

9. Postretirement Benefits Other Than Pensions

On January 2, 1998, SAIF's obligation under SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions,” for postretirement health benefits was reduced
when over 6,500 employees enrolled in the Federal Employees Health Benefits (FEHB) Program
for their future health insurance coverage. The OPM assumed the SAIF’s obligation for
postretirement health benefits for these employees at no initial enrollment cost.

In addition, legislation was passed that allowed the remaining 2,600 retirees and near-retirees
(employees within five years of retirement) in the FDIC health plan to also enroll in the FEHB
Program for their future health insurance coverage, beginning January 1, 1999. The OPM
assumed the SAIF’s obligation for postretirement health benefits for retirees and near retirees for
a fee of $3.7 million. The OPM is now responsible for postretirement health benefits for all
employees and covered retirees. The FDIC will continue to be obligated for dental and life
insurance coverage for as long as the programs are offered and coverage is extended to retirees.

OPM’s assumption of the health care obligation constitutes both a settlement and a curtailment
as defined by SFAS No. 106. This conversion resulted in a gain of $5.5 million to the SAIF.




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Postretirement Benefits Other Than Pensions
Dollars in Thousands
                                                                        1998              1997
Funded Status at December 31
Fair value of plan assets (a)                                    $         5,048   $        10,011
Less: Benefit obligation                                                   5,048             9,411
Under/(Over) Funded Status of the plans                          $             0   $          (600)

Accrued benefit liability recognized in the
 Statements of Financial Position                                $              0 $              867

Expenses and Cash Flows for the Period Ended December 31
Net periodic benefit cost                                        $         1,516 $               451
Employer contributions                                                        718                342
Benefits paid                                                                 718                342

 Weighted-Average Assumptions at December 31
 Discount rate                                                             4.50%             5.75%
 Expected return on plan assets                                            4.50%             5.75%
 Rate of compensation increase                                             4.00%             4.00%
(a) Invested in U.S. Treasury obligations.

For measurement purposes, the per capita cost of covered health care benefits was assumed to
increase by an annual rate of 8.75 percent for 1998. Further, the rate was assumed to decrease
gradually each year to a rate of 7.75 percent for the year 2000 and remain at that level thereafter.

10. Commitments and Off-Balance-Sheet Exposure

Commitments

Leases
The SAIF's allocated share of the FDIC’s lease commitments totals $20.2 million for future
years. The lease agreements contain escalation clauses resulting in adjustments, usually on an
annual basis. The allocation to the SAIF of the FDIC’s future lease commitments is based upon
current relationships of the workloads among the SAIF, the BIF and the FRF. Changes in the
relative workloads could cause the amounts allocated to the SAIF in the future to vary from the
amounts shown below. The SAIF recognized leased space expense of $4.8 million and $3.3
million for the years ended December 31, 1998 and 1997, respectively.

Lease C ommitments
D ollars in T housands
    1999             2000            2001        2002          2003         2004 and Thereafter
   $4,488           $3,963          $3,187      $2,788        $1,723              $4,079




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Other Off-Balance-Sheet Risk

Deposit Insurance
As of December 31, 1998, deposits insured by the SAIF totaled approximately $709 billion. This
would be the accounting loss if all depository institutions were to fail and the acquired assets
provided no recoveries.

11. Disclosures About the Fair Value of Financial Instruments

Cash equivalents are short-term, highly liquid investments and are shown at current value. The
fair market value of the investment in U.S. Treasury obligations is disclosed in Notes 3 and 4 and
is based on current market prices. The carrying amount of interest receivable on investments,
short-term receivables, and accounts payable and other liabilities approximates their fair market
value. This is due to their short maturities or comparisons with current interest rates. As
explained in Note 3, entrance and exit fees receivable are net of discounts calculated using an
interest rate comparable to U.S. Treasury Bill or Government bond/note rates at the time the
receivables are accrued.

The net receivables from thrift resolutions primarily include the SAIF’s subrogated claim arising
from payments to insured depositors. The receivership assets that will ultimately be used to pay
the corporate subrogated claim are valued using discount rates that include consideration of
market risk. These discounts ultimately affect the SAIF’s allowance for loss against the net
receivables from thrift resolutions. Therefore, the corporate subrogated claim indirectly includes
the effect of discounting and should not be viewed as being stated in terms of nominal cash
flows.

Although the value of the corporate subrogated claim is influenced by valuation of receivership
assets (see Note 5), such receivership valuation is not equivalent to the valuation of the corporate
claim. Since the corporate claim is unique, not intended for sale to the private sector, and has no
established market, it is not practicable to estimate its fair market value.

The FDIC believes that a sale to the private sector of the corporate claim would require
indeterminate, but substantial discounts for an interested party to profit from these assets because
of credit and other risks. In addition, the timing of receivership payments to the SAIF on the
subrogated claim does not necessarily correspond with the timing of collections on receivership
assets. Therefore, the effect of discounting used by receiverships should not necessarily be
viewed as producing an estimate of market value for the net receivables from thrift resolutions.




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12. Supplementary Information Relating to the Statements of Cash Flows

Reconciliation of Net Income to Net Cash Provided by Operating Activities for the Years Ended December 31
Dollars in Thousands
                                                                                        1998          1997
Net Income                                                                          $    467,230 $     479,926
Adjustments to Reconcile Net Income to Net Cash Provided by Operating
Activities
Income Statement Items:
Provision for insurance losses                                                           31,992         (1,879)
Amortization of U.S. Treasury obligations (unrestricted)                                 41,198         17,675
Gain on conversion of benefit plan                                                        5,464              0

Change in Assets and Liabilities:
Decrease (Increase) in amortization of U.S. Treasury obligations (restricted)               304             (147)
(Increase) in entrance and exit fees receivable, including interest receivable on
                                                                                         (20,187)            (33)
investments and other assets
(Increase) Decrease in receivables from thrift resolutions                               (4,700)        11,652
(Decrease) in accounts payable and other liabilities                                     (3,126)      (171,732)
Increase in exit fees and investment proceeds held in escrow                             14,242         11,973
Net Cash Provided by Operating Activities                                           $   532,417 $      347,435

13. Year 2000 Issues

State of Readiness
The FDIC, as administrator for the SAIF, is conducting a corporate-wide effort to ensure that all
FDIC information systems are Year 2000 compliant. This means the systems must accurately
process date and time data in calculations, comparisons, and sequences after December 31, 1999,
and be able to correctly deal with leap-year calculations in 2000. The Year 2000 Oversight
Committee is comprised of FDIC division management that oversees the Year 2000 effort.

The FDIC’s Division of Information Resources Management (DIRM) leads the internal Year
2000 effort, under the direction of the Oversight Committee. DIRM used a five-phase approach
for ensuring that all FDIC systems and software are Year 2000 compliant. The five phases are:

Awareness
The first phase of compliance focuses on defining the Year 2000 problem and gaining executive-
level support and sponsorship for the effort.

Assessment
The second phase of compliance focuses on assessing the Year 2000 impact on the Corporation
as a whole.

Renovation
The third phase of compliance focuses on converting, replacing or eliminating selected
platforms, applications, databases, and utilities, while modifying interfaces as appropriate.




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Platform is a broad term that encompasses computer hardware (including mainframe computers,
servers, and personal computers) and software (including computer languages and operating
systems). Utility programs, or “utilities,” provide file management capabilities, such as sorting,
copying, comparing, listing and searching, as well as diagnostic and measurement routines that
check the health and performance of the system.

Validation
The fourth phase of compliance focuses on testing, verifying and validating converted or
replaced platforms, applications, databases, and utilities.

Implementation
The fifth phase of compliance focuses on implementing converted or replaced platforms,
applications, databases, utilities, and interfaces.

The Awareness, Assessment, and Renovation phases are complete. The Validation phase is
scheduled to be completed during January 1999 when all production applications will be
validated for Year 2000 readiness. Implementation of the majority of production applications in
Year 2000 ready status will be completed by March 31, 1999. Validation and implementation of
new systems and modifications to existing systems will continue throughout 1999.

Year 2000 Estimated Costs
Year 2000 compliance expenses for the SAIF are estimated at $4.4 million and $191 thousand at
December 31, 1998 and 1997, respectively. These expenses are reflected in the “Operating
expenses” line item of the SAIF’s Statements of Income and Fund Balance. Future expenses are
estimated to be $6.2 million. Year 2000 estimated future costs are included in the FDIC’s
budget.

Risks of Year 2000 Issues

The OTS has an ongoing aggressive initiative to assess the SAIF’s insured financial institutions
for Year 2000 compliance. The SAIF is subject to a potential loss from financial institutions that
may fail as a result of Year 2000 related issues. Refer to “Estimated Liabilities for: Anticipated
Failure of Insured Institutions – Year 2000 Anticipated Failures” (Note 6) for additional
information.

No potential loss with internal system failure has been estimated due to the extensive planning
and validation that has occurred.

Contingency Plans
DIRM is currently developing a disaster recovery plan and contingency plans specific to each
mission-critical application.

Other divisions within the FDIC are working together to develop contingency plans to be
prepared if any FDIC-insured financial institution fails as a result of lack of Year 2000
preparedness.




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14. Subsequent Events

SAIF Special Reserve
DIFA requires the establishment of a Special Reserve of the SAIF if, on January 1, 1999, the
reserve ratio exceeds the DRR of 1.25 percent. The reserve ratio exceeded the DRR by
approximately 0.14 percent on January 1, 1999. As a result, $978 million was placed in a
Special Reserve of the SAIF and is being administered by the FDIC.

The Corporation may, in its sole discretion, transfer amounts from the Special Reserve to the
SAIF for an “emergency use.” An emergency use is authorized only if the reserve ratio of the
SAIF is less than 50 percent of the DRR and is expected to remain at less than 50 percent for
each of the next four calendar quarters. The Special Reserve must be excluded when calculating
the reserve ratio of the SAIF.




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Statements of Financial Position


                   FSLIC Resolution Fund



                   Federal Deposit Insurance Corporation

                   FSLIC Resolution Fund Statements of Financial Position at December 31
                   Dollars in Thousands
                                                                                                     1998                   1997
                   Assets
                   Cash and cash equivalents                                                   $            4,631,379   $          2,107,171
                   Receivables from thrift resolutions, net (Note 3)                                        1,388,579              2,570,486
                   Securitization funds held by trustee, net (Note 4)                                       2,796,646              4,890,568
                   Investment in securitization residual certificates (Note 5)                              1,538,339
                   Assets acquired from assisted thrifts and terminated receiverships,
                                                                                                              64,101                 73,051
                   net (Note 6)
                   Other assets, net (Note 7)                                                               40,721                     7,391
                   Total Assets                                                                $        10,459,765      $          9,648,667

                   Liabilities
                   Accounts payable and other liabilities                                      $              40,396    $           164,401
                   Notes payable - Federal Financing Bank borrowings (Note 8)                                      0                849,294
                   Liabilities from thrift resolutions (Note 9)                                               74,336                105,168
                   Estimated liabilities for: (Note 10)
                   Assistance agreements                                                                       4,852                   6,328
                   Litigation losses                                                                          18,340                   2,634
                   Total Liabilities                                                                         137,924               1,127,825
                   Commitments and concentration of credit risks (Note 15)
                   Resolution Equity (Note 12)
                   Contributed capital                                                                  135,490,741            135,493,762
                   Accumulated deficit                                                                 (125,243,229)          (126,972,920)
                   Unrealized gain on available-for-sale securities, net (Note 5)                            74,329
                   Accumulated deficit, net                                                            (125,168,900)          (126,972,920)
                   Total Resolution Equity                                                               10,321,841              8,520,842

                   Total Liabilities and Resolution Equity                                     $        10,459,765      $          9,648,667

                  The accompanying notes are an integral part of these financial statements.




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Statements of Income and Accumulated Deficit


                  FSLIC Resolution Fund



                  Federal Deposit Insurance Corporation

                  FSLIC Resolution Fund Statements of Income and Accumulated Deficit for the Years Ended December 31
                  Dollars in Thousands

                                                                                                     1998                   1997
                  Revenue
                  Interest on securitization funds held by trustee                             $             262,962    $            299,854
                  Interest on U.S. Treasury obligations                                                      109,045                  86,959
                  Interest on advances and subrogated claims                                                 212,645                 (28,348)
                  Gain on conversion of benefit plan (Note 14)                                                39,297                       0
                  Revenue from assets acquired from assisted thrifts and terminated
                                                                                                              40,124                  74,286
                  receiverships
                  Limited partnership equity interests and other revenue                                      31,593                  22,600
                  Total Revenue                                                                              695,666                 455,351

                  Expenses and Losses
                  Operating expenses                                                                         56,336                    16,732
                  Provision for losses (Note 11)                                                         (1,290,752)               (1,741,639)
                  Expenses for goodwill settlements and litigation                                          154,492                    33,833
                  Interest expense on FFB debt and other notes payable                                       22,413                   130,435
                  Expenses for assets acquired from assisted thrifts and terminated
                                                                                                              19,652                  65,175
                  receiverships
                  Other expenses                                                                              3,834                     4,412
                  Total Expenses and Losses                                                              (1,034,025)               (1,491,052)

                  Net Income                                                                                1,729,691              1,946,403
                  Unrealized gain on available-for-sale securities, net (Note 5)                               74,329                      0

                  Comprehensive Income                                                                      1,804,020              1,946,403

                  Accumulated Deficit - Beginning                                                      (126,972,920)          (128,919,323)

                  Accumulated Deficit - Ending                                                 $       (125,168,900)    $     (126,972,920)

                  The accompanying notes are an integral part of these financial statements.




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Statements of Cash Flows


                 FSLIC Resolution Fund



                 Federal Deposit Insurance Corporation

                 FSLIC Resolution Fund Statements of Cash Flows for the Years Ended December 31
                 Dollars in Thousands

                                                                                                    1998                    1997
                 Cash Flows From Operating Activities
                 Cash provided from:
                  Interest on U.S. Treasury obligations                                       $              109,045    $             86,966
                  Recoveries from thrift resolutions                                                         890,566               3,791,256
                  Recoveries from securitization funds held by trustee                                     2,390,945               1,078,815
                  Recoveries from limited partnership equity interests                                       188,801                 121,369
                  Recoveries from assets acquired from assisted thrifts
                  and terminated receiverships                                                               48,580                  483,524
                  Miscellaneous receipts                                                                      1,383                   13,962
                 Cash used for:
                  Operating expenses                                                                         (78,526)                (41,268)
                  Interest paid on notes payable                                                             (29,997)               (173,981)
                  Disbursements for thrift resolutions                                                      (177,365)               (390,632)
                  Disbursements for goodwill settlements and litigation expenses                            (154,492)                (26,610)
                  Disbursements for assets acquired from assisted thrifts and
                                                                                                             (26,952)               (176,933)
                  terminated receiverships
                  Miscellaneous disbursements                                                                   (220)                 (4,913)
                 Net Cash Provided by Operating Activities (Note 17)                                       3,161,768               4,761,555


                 Cash Flows From Investing Activities
                  Cash provided from:
                   Redemption of Securitization Residual Certificates, available-for-sale                   260,856
                  Cash used for:
                   Purchase of Residual Certificates, available-for-sale                                     (25,425)
                 Net Cash Provided from Investing Activities                                                235,431


                 Cash Flows From Financing Activities
                 Cash used for:
                  Return of U.S. Treasury payments                                                           (3,020)                   (8,053)
                  Repayments of Federal Financing Bank borrowings                                          (838,412)               (3,718,692)
                  Repayments of indebtedness from thrift resolutions                                        (31,559)                  (31,560)
                 Net Cash Used by Financing Activities                                                     (872,991)               (3,758,305)

                 Net Increase in Cash and Cash Equivalents                                                 2,524,208               1,003,250
                 Cash and Cash Equivalents - Beginning                                                     2,107,171               1,103,921
                 Cash and Cash Equivalents - Ending                                           $            4,631,379    $          2,107,171

                 The accompanying notes are an integral part of these financial statements.




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Notes to Financial Statements
                            Notes to the Financial Statements
                            FSLIC Resolution Fund
                            December 31, 1998 and 1997


                            1. Legislative History and Operations of the FSLIC Resolution Fund

                            Legislative History
                            The U.S. Congress created the Federal Savings and Loan Insurance Corporation (FSLIC)
                            through the enactment of the National Housing Act of 1934. The Financial Institutions
                            Reform, Recovery, and Enforcement Act of 1989 (FIRREA) abolished the insolvent
                            FSLIC, created the FSLIC Resolution Fund (FRF), and transferred the assets and
                            liabilities of the FSLIC to the FRF (except those assets and liabilities transferred to the
                            Resolution Trust Corporation (RTC)), effective on August 9, 1989. The FRF is
                            responsible for winding up the affairs of the former FSLIC.

                            The FIRREA was enacted to reform, recapitalize, and consolidate the federal deposit
                            insurance system. In addition to the FRF, FIRREA created the Bank Insurance Fund
                            (BIF) and the Savings Association Insurance Fund (SAIF). It also designated the Federal
                            Deposit Insurance Corporation (FDIC) as the administrator of these funds. All three
                            funds are maintained separately to carry out their respective mandates.

                            The FIRREA also created the RTC to manage and resolve all thrifts previously insured
                            by the FSLIC for which a conservator or receiver was appointed during the period
                            January 1, 1989, through August 8, 1992. The FIRREA established the Resolution
                            Funding Corporation (REFCORP) to provide part of the initial funds used by the RTC for
                            thrift resolutions. Additionally, funds were appropriated for RTC resolutions pursuant to
                            FIRREA, the RTC Funding Act of 1991, the RTC Refinancing, Restructuring and
                            Improvement Act of 1991, and the RTC Completion Act.

                            The RTC’s resolution responsibility was extended through subsequent legislation from
                            the original termination date of August 8, 1992. Resolution responsibility transferred
                            from the RTC to the SAIF on July 1, 1995.

                            The RTC Completion Act of 1993 (RTC Completion Act) terminated the RTC as of
                            December 31, 1995. All remaining assets and liabilities of the RTC were transferred to
                            the FRF on January 1, 1996. Today, the FRF consists of two distinct pools of assets and
                            liabilities: one composed of the assets and liabilities of the FSLIC transferred to the FRF
                            upon the dissolution of the FSLIC on August 9, 1989 (FRF-FSLIC), and the other
                            composed of the RTC assets and liabilities transferred to the FRF on January 1, 1996
                            (FRF-RTC). The assets of one pool are not available to satisfy obligations of the other.

                            The RTC Completion Act requires the FDIC to return to the U.S. Treasury any funds that
                            were transferred to the RTC pursuant to the RTC Completion Act but not needed by the
                            RTC. The RTC Completion Act made available approximately $18 billion worth of
                            additional funding. The RTC actually drew down $4.556 billion.

                            The FDIC must transfer to the REFCORP the net proceeds from the FRF’s sale of RTC
                            assets, after providing for all outstanding RTC liabilities. Any such funds transferred to




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the REFCORP pay the interest on the REFCORP bonds issued to fund the early RTC
resolutions. Any such payments benefit the U.S. Treasury, which would otherwise be
obligated to pay the interest on the bonds (see Note 12).

Operations of the FRF
The FRF will continue operations until all of its assets are sold or otherwise liquidated
and all of its liabilities are satisfied. Any funds remaining in the FRF-FSLIC will be paid
to the U.S. Treasury. Any remaining funds of the FRF-RTC will be distributed to the
U.S. Treasury to repay RTC Completion Act appropriations and to the REFCORP to pay
the interest on the REFCORP bonds.

The FRF has been primarily funded from the following sources: 1) U.S. Treasury
appropriations; 2) amounts borrowed by the RTC from the Federal Financing Bank
(FFB); 3) amounts received from the issuance of capital certificates to REFCORP; 4)
funds received from the management and disposition of assets of the FRF; 5) the FRF’s
portion of liquidating dividends paid by FRF receiverships; and 6) interest earned on
Special U.S. Treasury Certificates purchased with proceeds of 4) and 5). If these sources
are insufficient to satisfy the liabilities of the FRF, payments will be made from the U.S.
Treasury in amounts necessary, as are appropriated by Congress, to carry out the
objectives of the FRF.

Public Law 103-327 provides $827 million in funding to be available until expended to
facilitate efforts to wind up the resolution activity of the FRF. The FRF received $165
million under this appropriation on November 2, 1995. In addition, Public Law 104-208
and Public Law 105-61 authorized the use by the Department of Justice (DOJ) of $26.1
million and $33.7 million, respectively, from the original $827 million in funding, thus
reducing the amount available to be expended to $602.2 million. The funding made
available to DOJ covers the reimbursement of reasonable expenses of litigation incurred
in the defense of claims against the U.S. arising from the goodwill litigation cases.

Additional goodwill litigation expenses incurred by DOJ will be paid directly from the
FRF-FSLIC based on a Memorandum of Understanding (MOU) dated October 2, 1998,
between FDIC and DOJ. Under the terms of the MOU, the FRF-FSLIC paid $51.2
million to DOJ during 1998. Separate funding for goodwill judgments and settlements is
available through Public Law 105-277 (see Note 10).

The VA, HUD and Independent Agencies Appropriations Acts of 1999 and 1998
appropriated $34.7 million for fiscal year 1999 (October 1, 1998, through September 30,
1999) and $34 million for fiscal year 1998 (October 1, 1997, through September 30,
1998), respectively, for operating expenses incurred by the Office of Inspector General
(OIG). These Acts mandate that the funds are to be derived from the FRF, the BIF, and
the SAIF.




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2. Summary of Significant Accounting Policies

General
These financial statements pertain to the financial position, results of operations, and cash
flows of the FRF and are presented in accordance with generally accepted accounting
principles (GAAP). These statements do not include reporting for assets and liabilities of
closed thrift institutions for which the FDIC acts as receiver or liquidating agent.
Periodic and final accountability reports of the FDIC’s activities as receiver or liquidating
agent are furnished to courts, supervisory authorities, and others as required.

Use of Estimates
FDIC management makes estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ from these
estimates. Where it is reasonably possible that changes in estimates will cause a material
change in the financial statements in the near term, the nature and extent of such changes
in estimates have been disclosed.

Cash Equivalents
Cash equivalents are short-term, highly liquid investments with original maturities of
three months or less. Cash equivalents primarily consist of Special U.S. Treasury
Certificates.

Investment in Securitization Residual Certificates
The Investment in Securitization Residual Certificates is recorded pursuant to the
provisions of the Statement of Financial Accounting Standards (SFAS) No. 115,
“Accounting for Certain Investments in Debt and Equity Securities.” SFAS No. 115
requires that securities be classified in one of three categories: held-to-maturity,
available-for-sale, or trading. The Investment in Securitization Residual Certificates is
classified as available-for-sale and is shown at fair value with unrealized gains and losses
included in Resolution Equity. Realized gains are included in the “Limited partnership
equity interests and other revenue” line item with realized losses included in the
“Provision for losses” line item when applicable. The FRF does not have any securities
classified as held-to-maturity or trading.

Allowance for Losses on Receivables From Thrift Resolutions and Assets Acquired
From Assisted Thrifts and Terminated Receiverships
The FRF records a receivable for the amounts advanced and/or obligations incurred for
resolving troubled and failed thrifts. The FRF also records as an asset the amounts paid
for assets acquired from assisted thrifts and terminated receiverships. Any related
allowance for loss represents the difference between the funds advanced and/or
obligations incurred and the expected repayment. The latter is based on estimates of
discounted cash recoveries from the assets of assisted or failed thrift institutions, net of
all estimated liquidation costs. Estimated cash recoveries also include dividends and
gains on sales from equity instruments acquired in resolution transactions.




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Receivership Operations
The FDIC is responsible for managing and disposing of the assets of failed institutions in
an orderly and efficient manner. The assets, and the claims against them, are accounted
for separately to ensure that liquidation proceeds are distributed in accordance with
applicable laws and regulations. Also, the income and expenses attributable to
receiverships are accounted for as transactions of those receiverships. Liquidation
expenses incurred by the FRF on behalf of the receiverships are recovered from those
receiverships.

Cost Allocations Among Funds
Operating expenses not directly charged to the funds are allocated to all funds
administered by the FDIC. Workload-based-allocation percentages are developed during
the annual corporate planning process and through supplemental functional analyses.

Postretirement Benefits Other Than Pensions
The FDIC established an entity to provide the accounting and administration of
postretirement benefits on behalf of the FRF, the BIF, and the SAIF. Each fund pays its
liabilities for these benefits directly to the entity. The FRF’s unfunded net postretirement
benefits liability for the plan is presented in FRF’s Statements of Financial Position.

Disclosure About Recent Accounting Standard Pronouncements

In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
132, “Employers’ Disclosures about Pension and Other Postretirement Benefits.” The
Statement standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable. Although changes in the FRF’s disclosures for
postretirement benefits have been made, the impact is not material.

In June 1997, the FASB issued SFAS No. 130, “Reporting Comprehensive Income.” The
FDIC adopted SFAS No. 130 effective on January 1, 1997. Comprehensive income
includes net income as well as certain types of unrealized gain or loss. The only
component of SFAS No. 130 that impacts the FRF is unrealized gain or loss on the
securitization residual certificates that are classified as available-for-sale, which is
presented in the FRF’s Statements of Financial Position and the Statements of Income
and Accumulated Deficit.

Other recent pronouncements are not applicable to the financial statements.

Wholly Owned Subsidiary
The Federal Asset Disposition Association (FADA) is a wholly owned subsidiary of the
FRF. The FADA was placed in receivership on February 5, 1990. Final judgment on the
remaining litigation was made on December 16, 1998. However, a final liquidating
dividend to the FRF was still pending at year-end. This liquidating dividend will be
disbursed during 1999. The investment in the FADA is accounted for using the equity
method and is included in the “Other assets, net” line item (see Note 7).




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Related Parties
National Judgments, Deficiencies, and Charge-offs Joint Venture Program. The former
RTC purchased assets from receiverships, conservatorships, and their subsidiaries to
facilitate the sale and/or transfer of selected assets to several joint ventures in which the
former RTC retained a financial interest. These assets are presented in “Assets acquired
from assisted thrifts and terminated receiverships, net” line item in the FRF’s Statements
of Financial Position.

Limited Partnership Equity Interests. Former RTC receiverships were holders of limited
partnership equity interests as a result of various RTC sales programs that included the
National Land Fund, Multiple Investor Fund, N-Series, and S-Series programs. Over the
past two years, the majority of the limited partnership equity interests were transferred
from the receiverships to the FRF. These assets are included in the “Receivables from
thrift resolutions, net” line item in the FRF’s Statements of Financial Position.

The nature of related parties and a description of related party transactions are disclosed
throughout the financial statements and footnotes.

Reclassifications
Reclassifications have been made in the 1997 financial statements to conform to the
presentation used in 1998.

3. Receivables From Thrift Resolutions, Net

The thrift resolution process took different forms depending on the unique facts and
circumstances surrounding each failing or failed institution. Payments to prevent a
failure were made to operating institutions when cost and other criteria were met. These
payments resulted in acquiring “Assets from open thrift assistance,” which are various
types of financial instruments from the assisted institutions.

As of December 31, 1998 and 1997, the FDIC, in its receivership capacity for the former
FSLIC and SAIF insured institutions, held assets with a book value of $2.6 billion and
$3.6 billion, respectively (including cash and miscellaneous receivables of $1.7 billion
and $1.4 billion at December 31, 1998 and 1997, respectively). These assets represent a
significant source of repayment of the FRF’s receivables from thrift resolutions. The
estimated cash recoveries from the management and disposition of these assets that are
used to derive the allowance for losses are based in part on a statistical sampling of
receivership assets. The sample was constructed to produce a statistically valid result.
These estimated recoveries are regularly evaluated, but remain subject to uncertainties
because of potential changes in economic conditions. These factors could cause the
FRF’s and other claimants’ actual recoveries to vary from the level currently estimated.




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Receivables From Thrift Resolutions, Net at December 31
Dollars in Thousands
                                                                  1998               1997
Assets from open thrift assistance                           $       529,123    $       804,217
Allowance for losses                                                (386,935)          (446,064)
Net Assets From Open Thrift Assistance                               142,188            358,153
Receivables from closed thrifts                                   72,727,268         76,680,026
Allowance for losses                                             (71,480,877)       (74,467,693)
Net Receivables From Closed Thrifts                                1,246,391          2,212,333
Total                                                        $     1,388,579    $     2,570,486

Representations and Warranties
The FRF estimated corporate losses related to the receiverships’ representations and
warranties as part of the FRF’s allowance for loss valuation. The allowance for these
losses was $81 million and $90 million as of December 31, 1998 and 1997, respectively.
There are additional amounts of representation and warranty claims that are considered
reasonably possible. As of December 31, 1998, the amount is estimated at $330 million.
The RTC provided guarantees, representations, and warranties on approximately $115
billion in unpaid principal balance of loans sold and approximately $141 billion in unpaid
principal balance of loans under servicing right contracts that had been sold. In general,
the guarantees, representations and warranties on loans sold related to the completeness
and accuracy of loan documentation, the quality of the underwriting standards used, the
accuracy of the delinquency status when sold, and the conformity of the loans with
characteristics of the pool in which they were sold. The representations and warranties
made in connection with the sale of servicing rights were limited to the responsibilities of
acting as a servicer of the loans. Future losses on representations and warranties could
significantly increase or decrease over the remaining life of the loans that were sold,
which could be as long as 20 years.

The estimated liability for representations and warranties associated with loan sales that
involved assets acquired from assisted thrifts and terminated receiverships are included in
“Accounts payable and other liabilities” ($5 million and $18 million for 1998 and 1997,
respectively).

4. Securitization Funds Held by Trustee, Net

In order to maximize the return from the sale or disposition of assets, the RTC engaged in
numerous securitization transactions. The RTC sold $42.4 billion of receivership,
conservatorship, and corporate loans to various trusts that issued regular pass-through
certificates through its mortgage-backed securities program. A portion of the proceeds
from the sale of the certificates was placed in credit enhancement escrow accounts
(escrow accounts) to cover future credit losses with respect to the loans underlying the
certificates. In addition, the escrow accounts were established to increase the likelihood
of full and timely distributions of interest and principal to the certificate holders and thus
increase the marketability of the certificates. FRF’s exposure from credit losses on loans
sold through the program is limited to the balance of the escrow accounts. The escrow




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account balance is reduced for claims paid and when the trustee releases the funds at the
termination of a securitization deal. Funds are also released if the trustee deems the
escrow account balance to be excessive.

Through December 1998, the amount of claims paid was approximately 19 percent of the
initial escrow accounts. At December 31, 1998 and 1997, escrow accounts totaled $2.9
billion and $5.2 billion, respectively. At December 31, 1998 and 1997, the allowance for
estimated future losses which would be paid from the escrow accounts totaled $0.1
billion and $0.3 billion, respectively.

The FRF earned interest income from the securitization funds held by trustee of $263
million during 1998 and $300 million during 1997.

5. Investment in Securitization Residual Certificates

As part of the securitization transactions described in Note 4, receivership and
conservatorship loans were sold to various trusts. In return, the receiverships received a
participation in the residual pass-through certificates (residual certificates) issued through
its mortgage-backed securities program. The residual certificates entitle the holder to any
cash flow from the sale of collateral remaining in the trust after the regular pass-through
certificates and actual termination expenses are paid.

In October 1998, the residual certificates were transferred from the receiverships to the
FRF. The $1.8 billion transferred to the FRF was offset by amounts owed by the
receiverships to the FRF. The residual certificates were adjusted to fair market value for
this transaction and as a result, FRF’s provision for losses decreased by $0.5 billion and
FRF’s resolution equity increased by $0.5 billion.

Realized gains and losses are recorded based on the difference between the proceeds at
termination and the cost of the original investment. In 1998, the FDIC received $241.3
million in proceeds from deals terminated by December 31, 1998. Additionally, at
termination, $48.8 million was deposited into the securitization funds held by trustee.
The realized gains are included in “Limited partnership equity interests and other
revenue” line item and the realized losses are included in the “Provision for losses” line
item. At December 31, 1998, realized gains were $2.7 million and realized losses were
$47.1 million.

In v e stm en t in S ecu ritiza tio n R esid ua l C ertifica tes a t D ec em b e r 3 1 , 1 9 9 8
D o llars in M illio ns
                                  U n rea lized              U n rea lized
                                    H o ld in g                H o ld in g                   M a rke t
           C o st                     G a in s                  L o sses                       V a lu e

        $ 1 ,4 6 4                    $81                          $7                        $ 1 ,5 3 8




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6. Assets Acquired From Assisted Thrifts and Terminated Receiverships, Net

The FRF's assets acquired from assisted thrifts and terminated receiverships includes:
1) assets the former FSLIC and the former RTC purchased from troubled or failed thrifts
and 2) assets the FRF acquired from receiverships and purchased under assistance
agreements. The methodology to estimate cash recoveries from these assets, which are
used to derive the related allowance for losses, is the same as that for receivables from
thrift resolutions (see Note 3).

The FRF recognizes revenue and expenses on these acquired assets. Revenue consists
primarily of interest earned on mortgage loans and proceeds from professional liability
claims. Expenses are recognized for the management and liquidation of these assets.

Assets Acquired From Assisted Thrifts and Terminated Receiverships, Net at December 31
Dollars in Thousands
                                                                            1998          1997
Assets acquired from assisted thrifts and terminated receiverships   $        216,006 $     277,607
Allowance for losses                                                         (151,905)     (204,556)
Total                                                                $         64,101 $      73,051

7. Other Assets, Net

Other Assets, Net at December 31
Dollars in Thousands
                                                                          1998            1997
Investment in FADA (Note 2)                                         $        15,000 $        15,000
Allowance for loss                                                          (11,074)        (11,074)
Investment in FADA, Net                                                       3,926           3,926
Accounts receivable                                                          33,200             607
Due from other government entities                                            3,595           2,858
Other Receivables                                                            36,795           3,465
Total                                                               $        40,721 $         7,391

8. Notes Payable – Federal Financing Bank Borrowings

Working capital was made available to the RTC under an agreement with the FFB to
fund the resolution of thrifts and for use in the RTC’s high-cost funds replacement and
emergency liquidity programs. The outstanding note was due to mature on January 1,
2010; however, the entire principal and interest amounts were paid on August 10, 1998.
The FFB borrowing authority ceased upon the termination of the RTC.

The note payable carried a floating rate of interest that was adjusted quarterly. The FFB
established the interest rate and during 1998 these rates ranged between 5.487 percent
and 5.228 percent.




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9. Liabilities From Thrift Resolutions

The FSLIC issued promissory notes and entered into assistance agreements to prevent the
default and subsequent liquidation of certain insured thrift institutions. These notes and
agreements required the FSLIC to provide financial assistance over time. Pursuant to
FIRREA, the FRF assumed these obligations. Notes payable and obligations for
assistance agreements are presented in the "Liabilities from thrift resolutions” line item.
Estimated future assistance payments are included in the "Estimated liabilities for:
Assistance agreements" line item (see Note 10).

Liabilities From Thrift Resolutions at December 31
Dollars in Thousands
                                                                   1998             1997
Capital instruments                                        $             0   $          725
Assistance agreement notes payable                                  62,360           94,680
Interest payable                                                       994            1,419
Other liabilities to thrift institutions                            10,982            8,344
Total                                                      $        74,336   $      105,168

10. Estimated Liabilities for:

Assistance Agreements
The estimated liabilities for assistance agreements are $5 million and $6 million at
December 31, 1998 and 1997, respectively. The liability represents an estimate of future
assistance payments to acquirers of troubled thrift institutions. The balances for both
years were not discounted because the remaining assistance agreements will terminate
within the next two years, and the discount adjustment was deemed to be immaterial.

There were 33 assistance agreements outstanding as of December 31, 1998 and 1997.
The last agreement is scheduled to expire in July 2000.

Litigation Losses
The FRF records an estimated loss for unresolved legal cases to the extent those losses
are considered probable and reasonably estimable. In addition to the amount recorded as
probable, the FDIC’s Legal Division has determined that losses from unresolved legal
cases totaling $144 million are reasonably possible.

Additional Contingency
In United States v. Winstar Corp., 518 U.S. 839 (1996), the Supreme Court held that
when it became impossible following the enactment of FIRREA in 1989 for the Federal
Home Loan Bank Board to perform certain agreements to count goodwill toward
regulatory capital, the plaintiffs were entitled to recover damages from the United States.
To date, approximately 120 lawsuits have been filed against the United States based on
alleged breaches of these agreements (Goodwill Litigation).




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On July 23, 1998, the U.S. Treasury determined, based on an opinion of the DOJ’s Office
of Legal Counsel (OLC) dated July 22, 1998, that the FRF is legally available to satisfy
all judgments and settlements in the Goodwill Litigation involving supervisory action or
assistance agreements. The U.S. Treasury further determined that the FRF is the
appropriate source of funds for payment of any such judgments and settlements.

The OLC opinion concluded that the nonperformance of these agreements was a
contingent liability that was transferred to the FRF on August 9, 1989, upon the
dissolution of the FSLIC. Under the analysis set forth in the OLC opinion, as liabilities
transferred on August 9, 1989, these contingent liabilities for future nonperformance of
prior agreements with respect to supervisory goodwill were transferred to the FRF-
FSLIC, which is that portion of the FRF encompassing the obligations of the former
FSLIC. On July 31, 1998, the FDIC Board of Directors authorized the payment of four
settlements in the Goodwill Litigation aggregating $103.3 million. This payment was
made from the FRF-FSLIC. The FRF-RTC, which encompasses the obligations of the
former RTC and was created upon the termination of the RTC on December 31, 1995, is
not available to pay any settlements and judgments arising out of the Goodwill Litigation.

The lawsuits comprising the Goodwill Litigation are against the United States and as
such are defended by the DOJ. On March 19, 1999, DOJ informed the FDIC that, "as a
practical matter, there are likely to be substantial recoveries against the government as
these matters proceed to resolution." DOJ also advised that "variations among the …
cases [are] so great, including [the government's] possible recovery of fraud related
damages and penalties against various plaintiffs, … [that] it is simply impossible to
predict what the overall outcome is likely to be."

The FDIC believes that it is probable that additional amounts, possibly substantial, may
be paid from the FRF-FSLIC as a result of future judgments and settlements in the
Goodwill Litigation. However, based on the response from the DOJ, the FDIC is unable
to estimate a range of loss to the FRF-FSLIC from the Goodwill Litigation or determine
whether any such loss would have a material effect on the financial condition of the FRF-
FSLIC.

Section 130 of the Department of Justice Appropriations Act, 1999 (Section 130), as
amended, provides to the FRF-FSLIC such sums as may be necessary for the payment of
judgments and settlements in the Goodwill Litigation, to remain available until expended.
In the Budget for Fiscal Year 2000, the President has requested a permanent
appropriation to the FRF-FSLIC of such sums as may be necessary for the payment of
judgments and settlements in the Goodwill Litigation, to remain available until expended.
It is anticipated that such an appropriation for the Goodwill Litigation judgments and
settlements will be adopted. As a consequence, the FDIC believes that even if the
Goodwill Litigation judgments and settlements were to exceed other available resources
of the FRF-FSLIC, an appropriation is currently available and, it is anticipated, will be
available in the future to pay such judgments and settlements. In these circumstances any
liabilities for the Goodwill Litigation should have no material impact on the financial
condition of the FRF-FSLIC. If an appropriation to the FRF-FSLIC were not available to
pay the Goodwill Litigation judgments and settlements, the liabilities of the FRF-FSLIC




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in respect of the Goodwill Litigation would be material and adversely affect the financial
condition of the FRF-FSLIC.

11. Provision for Losses

The provision for losses was a negative $1.3 billion and a negative $1.7 billion for 1998
and 1997, respectively. In both years, the negative provision resulted primarily from
decreased losses expected for assets in liquidation. The following chart lists the major
components of the negative provision for losses.

Provision for Losses for the Years Ended December 31
Dollars in Thousands
                                                             1998           1997
Valuation adjustments:
Open thrift assistance                               $          12,514 $        (77,900)
Recovery of tax benefits                                      (115,401)         (39,126)
Closed thrifts                                              (1,125,523)      (1,481,702)
Assets acquired from assisted thrifts and terminated
                                                              (66,709)        (242,253)
receiverships
Securitization funds held by trustee                           (58,207)        134,424
Investment in securitization residual certificates              47,076
Miscellaneous receivables                                          (42)             (88)
Total                                                       (1,306,292)      (1,706,645)
Contingencies:
Assistance agreements                                                0            1,961
Litigation                                                      15,540          (36,955)
Total                                                           15,540          (34,994)
Reduction in Provision for Losses                    $      (1,290,752) $    (1,741,639)

12. Resolution Equity

As stated in Note 1, the FRF is comprised of two distinct pools: The FRF-FSLIC and the
FRF-RTC. The FRF-FSLIC consists of the assets and liabilities of the former FSLIC.
The FRF-RTC consists of the assets and liabilities of the former RTC. Pursuant to legal
restrictions, the two pools are maintained separately and the assets of one pool are not
available to satisfy obligations of the other.

The following table shows the contributed capital, accumulated deficit, and resulting
resolution equity for each pool.




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Resolution Equity at December 31, 1998
Dollars in Thousands
                                                                                    FRF
                                         FRF-FSLIC           FRF-RTC            Consolidated
Contributed capital                 $      44,156,000    $    91,334,741    $      135,490,741
Accumulated deficit                       (42,057,685)       (83,185,544)         (125,243,229)
Less: Unrealized gain on
      AFS securities                                0             74,329                 74,329
 Accumulated deficit, net                 (42,057,685)       (83,111,215)          (125,168,900)
Total Resolution Equity             $       2,098,315    $     8,223,526    $        10,321,841

Resolution Equity at December 31, 1997
Dollars in Thousands
                                                                                    FRF
                                         FRF-FSLIC           FRF-RTC            Consolidated
Contributed capital                 $      44,156,000    $    91,337,762    $      135,493,762
Accumulated deficit                       (42,194,200)       (84,778,720)         (126,972,920)
Total Resolution Equity             $       1,961,800    $     6,559,042    $        8,520,842

Contributed Capital
To date, the former RTC and the FRF-FSLIC received $60.1 billion and $43.5 billion
from the U.S. Treasury, respectively. These payments were used to fund losses from
thrift resolutions prior to July 1, 1995. Additionally, the RTC issued $31.3 billion in
capital certificates to the REFCORP and the FRF-FSLIC issued $670 million of these
instruments to the FICO. FIRREA prohibited the payment of dividends on any of these
capital certificates.

Accumulated Deficit
The accumulated deficit represents the cumulative excess of expenses over revenue for
liquidation activity related to the former FSLIC and the former RTC ($29.7 billion and
$87.9 billion were brought forward from the FSLIC and RTC, respectively).

Resolution Equity Restrictions

FRF-FSLIC: The FRF-FSLIC has unrecorded, pending judgments and settlements that
are inestimable at this time and that could substantially reduce or eliminate the FRF-
FSLIC Resolution Equity (see Note 10).

FRF-RTC: The former RTC drew down $4.556 billion of the approximately $18 billion
made available by the RTC Completion Act. The RTC Completion Act requires the
FDIC to deposit in the general fund of the U.S. Treasury any funds transferred to the
RTC but not needed by the RTC. The FDIC will return these funds to the U.S. Treasury
pursuant to the RTC Completion Act. In addition, the FDIC must transfer net proceeds
from the sale of RTC assets to pay interest on the REFCORP bonds, after providing for
all outstanding RTC liabilities. Any such payments benefit the U.S. Treasury, which
would otherwise be obligated to pay the interest on the bonds (see Note 1).




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13. Pension Benefits, Savings Plans, and Accrued Annual Leave

Eligible FDIC employees (all permanent and temporary employees with appointments
exceeding one year) are covered by either the Civil Service Retirement System (CSRS)
or the Federal Employee Retirement System (FERS). The CSRS is a defined benefit
plan, which is offset with the Social Security System in certain cases. Plan benefits are
determined on the basis of years of creditable service and compensation levels. The
CSRS-covered employees also can contribute to the tax-deferred Federal Thrift Savings
Plan (TSP).

The FERS is a three-part plan consisting of a basic defined benefit plan that provides
benefits based on years of creditable service and compensation levels, Social Security
benefits, and the TSP. Automatic and matching employer contributions to the TSP are
provided up to specified amounts under the FERS.

During 1998, there was an open season that allowed employees to switch from CSRS to
FERS. This did not have a material impact on FRF’s operating expenses.

Although the FRF contributes a portion of pension benefits for eligible employees, it does
not account for the assets of either retirement system. The FRF also does not have
actuarial data for accumulated plan benefits or the unfunded liability relative to eligible
employees. These amounts are reported on and accounted for by the U.S. Office of
Personnel Management (OPM).

Eligible FDIC employees also may participate in a FDIC-sponsored tax-deferred savings
plan with matching contributions. The FRF pays its share of the employer's portion of all
related costs.

The FRF’s pro rata share of the Corporation’s liability to employees for accrued annual
leave is approximately $5.4 million and $11.2 million at December 31, 1998 and 1997,
respectively.

Pension Benefits and Savings Plans Expenses for the Years Ended D ecember 31
Dollars in Thousands
                                                                1998                1997
CSRS/FERS D isability Fund                              $            308 $                168
Civil Service Retirement System                                    1,382                2,047
Federal Employee Retirement System (Basic Benefit)                 4,438                9,473
FD IC Savings Plan                                                 2,619                4,893
Federal Thrift Savings Plan                                        1,675                3,264
Total                                                   $        10,422 $              19,845

14. Postretirement Benefits Other Than Pensions

On January 2, 1998, FRF's obligation under SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions,” for postretirement health benefits was
reduced when over 6,500 employees enrolled in the Federal Employees Health Benefits




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(FEHB) Program for their future health insurance coverage. The OPM assumed the
FRF’s obligation for postretirement health benefits for these employees at no initial
enrollment cost.

In addition, legislation was passed that allowed the remaining 2,600 retirees and near-
retirees (employees within five years of retirement) in the FDIC health plan to also enroll
in the FEHB Program for their future health insurance coverage, beginning January 1,
1999. The OPM assumed the FRF’s obligation for postretirement health benefits for
retirees and near retirees for a fee of $32 million. The OPM is now responsible for
postretirement health benefits for all employees and covered retirees. The FDIC will
continue to be obligated for dental and life insurance coverage for as long as the
programs are offered and coverage is extended to retirees.

OPM’s assumption of the health care obligation constitutes both a settlement and a
curtailment as defined by SFAS No. 106. This conversion resulted in a gain of $39
million to the FRF.

Postretirement Benefits Other Than Pensions
Dollars in Thousands
                                                                   1998            1997
Funded Status at December 31
Fair value of plan assets (a)                               $        14,337 $        68,010
Less: Benefit obligation                                             14,337          81,614
Under/(Over) Funded Status of the plans                     $             0 $        13,604

Accrued benefit liability recognized in the
 Statements of Financial Position                           $             0 $        19,099

Expenses and Cash Flows for the Period Ended December 31
Net periodic benefit cost                                   $          (919) $          1,150
Employer contributions                                                  886             1,280
Benefits paid                                                           886             1,280

 Weighted-Average Assumptions at December 31
 Discount rate                                                        4.50%             5.75%
 Expected return on plan assets                                       4.50%             5.75%
 Rate of compensation increase                                        4.00%             4.00%
(a) Invested in U.S. Treasury obligations.

For measurement purposes, the per capita cost of covered health care benefits was
assumed to increase by an annual rate of 8.75 percent for 1998. Further, the rate was
assumed to decrease gradually each year to a rate of 7.75 percent for the year 2000 and
remain at that level thereafter.




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15. Commitments and Concentration of Credit Risk

Commitments

Letters of Credit
The RTC had adopted special policies that included honoring outstanding
conservatorship and receivership collateralized letters of credit. This enabled the RTC to
minimize the impact of its actions on capital markets. In most cases, these letters of
credit were issued by thrifts that later failed and were used to guarantee tax exempt bonds
issued by state and local housing authorities or other public agencies to finance housing
projects for low and moderate income individuals or families. As of December 31, 1998
and 1997, securities pledged as collateral to honor these letters of credit totaled $21.4
million and $51.4 million, respectively. The FRF estimated corporate losses related to
the receiverships' letters of credit as part of the allowance for loss valuation. The
allowance for these losses was $7.6 million and $41.1 million as of December 31, 1998
and 1997, respectively.

Leases
The FRF's allocated share of the FDIC’s lease commitments totals $22.8 million for
future years. The lease agreements contain escalation clauses resulting in adjustments,
usually on an annual basis. The allocation to the FRF of the FDIC’s future lease
commitments is based upon current relationships of the workloads among the FRF, the
BIF, and the SAIF. Changes in the relative workloads could cause the amounts allocated
to the FRF in the future to vary from the amount shown below. The FRF recognized
leased space expense of $6.3 million and $18.2 million for the years ended December 31,
1998 and 1997, respectively.

Lease Commitments
Dollars in Thousands
    1999          2000          2001         2002          2003        2004 and Thereafter
   $4,776        $4,313        $3,520       $3,149        $2,035             $5,013

Concentration of Credit Risk

As of December 31, 1998, the FRF had gross receivables from thrift resolutions totaling
$73.3 billion, gross assets acquired from assisted thrifts and terminated receiverships
totaling $216 million, gross securitization funds held by trustee totaling $2.9 billion, and
an investment in securitization residual certificates totaling $1.5 billion. The allowance
for loss against receivables from thrift resolutions totaled $71.9 billion, the allowance
against the assets acquired from assisted thrifts and terminated receiverships totaled $152
million, and the allowance against the securitization funds held by trustee totaled $0.1
billion.

Cash recoveries may be influenced by economic conditions. Similarly, the value of the
investment in securitization residual certificates can be influenced by the economy of the




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area relating to the underlying loans and other assets. Accordingly, the FRF’s maximum
exposure to possible accounting loss is the recorded (net of allowance) value and is also
shown in the table below.

Concentration of Credit Risk at December 31, 1998
Dollars in Millions
                             Southeast Southwest Northeast Midwest Central      West      Total
Receivables from thrift
                                 $313       $165     $200    $127     $72        $512     $1,389
resolutions, net
Assets acquired from
assisted thrifts and
                                    0         42        1       0       0          21          64
terminated receiverships,
net
Securitization funds held by
                                  436        320      376      87      80        1,498       2,797
trustee
Investment in securitization
                                 319       192         200       68       55      704        1,538
residual certificates
Total                          $1,068     $719        $777     $282     $207    $2,735    $5,788

16. Disclosures About the Fair Value of Financial Instruments

Cash equivalents are short-term, highly liquid investments and are shown at current
value. The carrying amount of short-term receivables and accounts payable and other
liabilities approximates their fair market value. This is due to their short maturities or
comparisons with current interest rates.

The net receivables from thrift resolutions primarily include the FRF’s subrogated claim
arising from payments to insured depositors. The receivership assets that will ultimately
be used to pay the corporate subrogated claim are valued using discount rates that include
consideration of market risk. These discounts ultimately affect the FRF’s allowance for
loss against the net receivables from thrift resolutions. Therefore, the corporate
subrogated claim indirectly includes the effect of discounting and should not be viewed
as being stated in terms of nominal cash flows.

Although the value of the corporate subrogated claim is influenced by valuation of
receivership assets (see Note 3), such receivership valuation is not equivalent to the
valuation of the corporate claim. Since the corporate claim is unique, not intended for
sale to the private sector, and has no established market, it is not practicable to estimate
its fair market value.

The FDIC believes that a sale to the private sector of the corporate claim would require
indeterminate, but substantial discounts for an interested party to profit from these assets
because of credit and other risks. In addition, the timing of receivership payments to the
FRF on the subrogated claim does not necessarily correspond with the timing of
collections on receivership assets. Therefore, the effect of discounting used by




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receiverships should not necessarily be viewed as producing an estimate of market value
for the net receivables from thrift resolutions.

Like the corporate subrogated claim, the securitization credit enhancement reserves
involve an asset that is unique and is not intended for sale to the private sector. Therefore,
it is not practicable to estimate the fair market value of the securitization credit
enhancement reserves. These reserves are carried at net realizable value, which is the
book value of the reserves less the related allowance for loss (see Note 4).

The majority of the net assets acquired from assisted thrifts and terminated receiverships
(except real estate) is comprised of various types of financial instruments, including
investments, loans and accounts receivables. Like receivership assets, assets acquired
from assisted thrifts and terminated receiverships are valued using discount rates that
include consideration of market risk. However, assets acquired from assisted thrifts and
terminated receiverships do not involve the unique aspects of the corporate subrogated
claim, and therefore the discounting can be viewed as producing a reasonable estimate of
fair market value.

The investment in securitization residual certificates is adjusted to its fair value at each
reporting date using a valuation model which estimates the present value of estimated
expected future cash flows discounted for the various risks involved, including both
market and credit risks, as well as other attributes of the underlying assets.




                    Page 79                              GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
                        FSLIC Resolution Fund’s Financial
                        Statements




17. Supplementary Information Relating to the Statements of Cash Flows

Reconciliation of Net Income to Net Cash Provided by Operating Activities for the Years Ended December 31
Dollars in Thousands
                                                                                          1998               1997
Net Income                                                                         $     1,729,691 $        1,946,403

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Income Statement Items:
Interest on Federal Financing Bank borrowings                                               18,068             124,322
Provision for losses                                                                    (1,290,752)         (1,744,690)
Gain on conversion of benefit plan                                                         (39,297)                  0
OIG income recognized                                                                            0                 792

Change in Assets and Liabilities:
Decrease in receivables from thrift resolutions                                            663,799          3,360,072
Decrease in securitization funds held by trustee                                         2,152,129            779,071
Decrease in assets acquired from assisted thrifts and terminated receiverships              61,928            335,624
Decrease in other assets                                                                     5,982              8,480
(Decrease) Increase in accounts payable and other liabilities                             (125,545)            20,772
(Decrease) in accrued interest on notes payable                                            (28,950)          (173,484)
Increase (Decrease) in liabilities from thrift resolutions                                   2,294             (6,998)
Increase in estimated liabilities for litigation losses                                     13,897                  0
(Decrease) Increase in estimated liabilities for assistance agreements                      (1,476)           111,191
Net Cash Provided by Operating Activities                                          $     3,161,768 $        4,761,555


Noncash Investing Activity

In October 1998, the FRF acquired securitization residual certificates through a noncash
purchase from its receiverships. This noncash transaction valued at $1.8 billion was
applied to amounts owed by FRF receiverships which resulted in a reduction to the
“Receivable from thrift resolutions, net” line item and the creation of the “Investment in
securitization residual certificates” line item (see Note 5).

18. Year 2000 Issues

State of Readiness
The FDIC, as administrator for the FRF, is conducting a corporate-wide effort to ensure
that all FDIC information systems are Year 2000 compliant. This means the systems
must accurately process date and time data in calculations, comparisons, and sequences
after December 31, 1999, and be able to correctly deal with leap-year calculations in
2000. The Year 2000 Oversight Committee is comprised of FDIC division management
that oversees the Year 2000 effort.

The FDIC’s Division of Information Resources Management (DIRM) leads the internal
Year 2000 effort, under the direction of the Oversight Committee. DIRM used a five-




                        Page 80                                        GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
                  FSLIC Resolution Fund’s Financial
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phase approach for ensuring that all FDIC systems and software are Year 2000
compliant. The five phases are:

Awareness
The first phase of compliance focuses on defining the Year 2000 problem and gaining
executive-level support and sponsorship for the effort.

Assessment
The second phase of compliance focuses on assessing the Year 2000 impact on the
Corporation as a whole.

Renovation
The third phase of compliance focuses on converting, replacing or eliminating selected
platforms, applications, databases, and utilities, while modifying interfaces as
appropriate.

Platform is a broad term that encompasses computer hardware (including mainframe
computers, servers, and personal computers) and software (including computer languages
and operating systems). Utility programs, or “utilities,” provide file management
capabilities, such as sorting, copying, comparing, listing and searching, as well as
diagnostic and measurement routines that check the health and performance of the
system.

Validation
The fourth phase of compliance focuses on testing, verifying and validating converted or
replaced platforms, applications, databases, and utilities.

Implementation
The fifth phase of compliance focuses on implementing converted or replaced platforms,
applications, databases, utilities, and interfaces.

The Awareness, Assessment, and Renovation phases are complete. The Validation phase
is scheduled to be completed during January 1999 when all production applications will
be validated for Year 2000 readiness. Implementation of the majority of production
applications in Year 2000 ready status will be completed by March 31, 1999. Validation
and implementation of new systems and modifications to existing systems will continue
throughout 1999.

Year 2000 Estimated Costs
Year 2000 compliance expenses for the FRF are estimated at $2.1 million and $201
thousand at December 31, 1998 and 1997, respectively. These expenses are reflected in
the “Operating expenses” line item of the FRF’s Statements of Income and Accumulated
Deficit. Future expenses are estimated to be $2.6 million. Year 2000 estimated future
costs are included in the FDIC’s budget.




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                   FSLIC Resolution Fund’s Financial
                   Statements




Risks of Year 2000 Issues

No potential loss with internal system failure has been estimated due to the extensive
planning and validation that has occurred.

Contingency Plans
DIRM is currently developing a disaster recovery plan and contingency plans specific to
each mission-critical application.

19. Subsequent Events

On April 9, 1999, the United States Court of Federal Claims ruled that the federal
government must pay Glendale Federal Bank $908.9 million for breaching a contract that
allowed the thrift to count goodwill toward regulatory capital. Both the plaintiffs and the
DOJ are expected to appeal the decision. Additionally, on April 16, 1999, in a similar
case, another judge of the U.S. Court of Federal Claims, using a different analysis than
the one used by the judge in the Glendale Federal case, awarded California Federal Bank
$23 million. The California Federal Bank was seeking more than $1.0 billion in damages
and is expected to appeal the decision. The analyses of the damage issues in the two
cases appear to be irreconcilable. Due to the expected appeals and the conflicting
analyses in the two cases, the final outcome is uncertain.




                   Page 82                            GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
FSLIC Resolution Fund’s Financial
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Page 83                     GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
Appendix I

Comments From the Federal Deposit
Insurance Corporation                                                           AppeIx
                                                                                     ndi




              Page 84   GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
Appendix II

GAO Contacts and Staff Acknowledgements                                                               ApIpexndi




GAO Contacts          Robert W. Gramling (202) 512-9406
                      Jeanette M. Franzel (202) 512-9471
                      Lynda E. Downing (202) 512-9168



Acknowledgements      In addition to those named above, the following staff made key
                      contributions to this report: Wendy M. Albert, Gary P. Chupka, Dennis L.
                      Clarke, John C. Craig, Diane B. Davis, Norman C. Poage, James V. Rinaldi,
                      Miguel A. Salas, and Dale W. Seeley.

                      The following staff from the FDIC Office of Inspector General also
                      contributed to this report: Robert W. Allmang, James J. Ballenger, Arlene S.
                      Boateng, Warren V. Bush, H. Kenneth Copeland, Christopher P. Dodd,
                      W. Kevin Hainsworth, R. William Harrington, Paul S. Johnston, Dan Kolb,
                      Foxhall A. Parker, Michael L. Rexrode, Duane H. Rosenberg, Titus S.
                      Simmons, Ross E. Simms, Charles E. Thompson, Joseph E. Uricheck, and
                      R. Leon Wellons.




(917708)      L
              ertet   Page 85                 GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
Appendix II
GAO Contacts and Staff Acknowledgements




Page 86                   GAO/AIMD-99-202 FDIC’s 1998 and 1997 Financial Statements
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