This is the accessible text file for GAO report number GAO-07-371 
entitled 'Financial Audit: Federal Deposit Insurance Corporation Funds' 
2006 and 2005 Financial Statements' which was released on February 14, 
2007. 

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Report to the Congress: 

February 2007: 

Financial Audit: 

Federal Deposit Insurance Corporation Funds' 2006 and 2005 Financial 
Statements: 

GAO-07-371: 

GAO Highlights: 

Highlights of GAO-07-371, a report to the Congress 

Why GAO Did This Study: 

GAO is required to annually audit the financial statements of the 
Deposit Insurance Fund (DIF) and FSLIC Resolution Fund (FRF), which are 
administered by the Federal Deposit Insurance Corporation (FDIC). GAO 
is responsible for obtaining reasonable assurance about whether FDICís 
financial statements for DIF and FRF are presented fairly in all 
material respects, in conformity with U.S. generally accepted 
accounting principles, and whether FDIC maintained effective internal 
control over financial reporting and compliance. Also, GAO is 
responsible for testing FDICís compliance with selected laws and 
regulations. 

Created in 1933 to insure bank deposits and promote sound banking 
practices, FDIC plays an important role in maintaining public 
confidence in the nationís financial system. In 1989, legislation to 
reform the federal deposit insurance system created three funds to be 
administered by FDIC: the Bank Insurance Fund (BIF) and the Savings 
Association Insurance Fund (SAIF), which protect bank and savings 
deposits, and FRF, which was created to close out the business of the 
former Federal Savings and Loan Insurance Corporation. In accordance 
with subsequent legislation passed in 2006, FDIC merged the BIF and 
SAIF into the newly established DIF on March 31, 2006. 

What GAO Found: 

In GAOís opinion, FDIC fairly presented, in all material respects, the 
2006 and 2005 financial statements for the two funds it administersóDIF 
and FRF. GAO also found that FDIC had effective internal control over 
financial reporting and compliance for each fund. GAO did not find 
reportable instances of noncompliance with the laws and regulations it 
tested. 

On February 8, 2006, the President signed into law the Federal Deposit 
Insurance Reform Act of 2005 (the Act). Among its provisions, the Act 
called for the merger of the BIF and SAIF into a single deposit 
insurance fund. In 2006 the former BIF and SAIF were merged. The merger 
resulted in a new reporting entity, and financial results of the newly 
formed DIF were retrospectively applied as though they had been 
combined at the beginning of the reporting year as well as for prior 
periods presented for comparative purposes. 

In our prior year audit, we identified a reportable condition related 
to FDICís information system controls. Specifically, FDIC had 
implemented a new financial system and, in doing so, did not ensure 
that controls were adequate to accommodate its new systems environment. 
During 2006, FDIC corrected many of these weaknesses and implemented 
mitigating or compensating controls. We concluded that the remaining 
issues related to information systems controls did not constitute a 
significant deficiency as of December 31, 2006. 

However, continued management commitment to an effective information 
security program will be essential to ensure that the corporationís 
financial and sensitive information will be adequately protected. In 
light of the evolving nature of information security with new exposures 
and threats continuing to develop, the corporationís information 
security program will need to dynamically adapt to address changing 
information security challenges. As FDIC continues to enhance its new 
financial system, which is based on an integrated financial management 
software package, the corporationís reliance on controls implemented in 
the single, integrated financial system will increase. 

GAO noted other less significant matters involving FDICís internal 
controls, including information system controls, and will be reporting 
separately to FDIC management on these matters. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-371]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Steven J. Sebastian at 
(202) 512-3406 or sebastians@gao.gov. 

[End of section] 

Contents: 

Transmittal Letter: 

Auditor's Report: 

Opinion on DIF's Financial Statements: 

Opinion on FRF's Financial Statements: 

Opinion on Internal Control: 

Compliance with Laws and Regulations: 

Objectives, Scope, and Methodology: 

FDIC Comments and Our Evaluation: 

Deposit Insurance Fund's Financial Statements: 

Balance Sheet: 

Statement of Income and Fund Balance: 

Statement of Cash Flows: 

Notes to the Financial Statements: 

FSLIC Resolution Fund's Financial Statements: 

Balance Sheet: 

Statement of Income and Fund Balance: 

Statement of Cash Flows: 

Notes to the Financial Statements: 

Appendixes: 

Appendix I: Comments from Federal Deposit Insurance Corporation: 

Appendix II: Staff Acknowledgments: 

Abbreviations: 

BIF: Bank Insurance Fund: 

CFO: Chief Financial Officer: 

DIF: Deposit Insurance Fund: 

FDIC: Federal Deposit Insurance Corporation: 

FMFIA: Federal Managers' Financial Integrity Act: 

FRF: FSLIC Resolution Fund: 

FSLIC: Federal Savings and Loan Insurance Corporation: 

SAIF: Savings Association Insurance Fund:: 

February 13, 2007: 

The President of the Senate: 
The Speaker of the House of Representatives: 

This report presents our opinions on whether the financial statements 
of the Deposit Insurance Fund (DIF) and the FSLIC Resolution Fund (FRF) 
are presented fairly, in all material respects, and in conformity with 
U.S. generally accepted accounting principles for the years ended 
December 31, 2006, and 2005. These financial statements are the 
responsibility of the Federal Deposit Insurance Corporation (FDIC), the 
administrator of the two funds. This report also presents (1) our 
opinion on the effectiveness of FDIC's internal control over financial 
reporting and compliance for each of the funds as of December 31, 2006, 
and (2) our evaluation of FDIC's compliance with selected laws and 
regulations during 2006. 

On February 8, 2006, the President signed into law the Federal Deposit 
Insurance Reform Act of 2005 (the Act). Among its provisions, the Act 
called for the merger of the Bank Insurance Fund (BIF) and Savings 
Association Insurance Fund (SAIF) into a single deposit insurance fund. 
In accordance with the Act, FDIC merged the BIF and SAIF into the newly 
established DIF on March 31, 2006. The financial results of the newly 
formed DIF were retrospectively applied as though they had been 
combined at the beginning of the reporting year as well as for prior 
periods presented for comparative purposes. 

Section 17 of the Federal Deposit Insurance Act, as amended (12 U.S.C. 
1827(d)), requires GAO to conduct an annual audit of DIF and FRF in 
accordance with U.S. generally accepted government auditing standards. 
These provisions also stipulate that GAO report on the results of its 
annual audit of the two funds' financial statements no later than July 
15 of the year following the year under audit, or 6Ĺ months after the 
end of the reporting period. However, for the fourth consecutive year, 
and at the request of FDIC management, GAO completed its audits of the 
two funds' financial statements on a significantly accelerated 
reporting time frame. This would not have been possible without the 
tremendous cooperation and dedicated efforts of both FDIC management 
and staff and the GAO team conducting the audits. 

We are sending copies of this report to the Chairman and Ranking 
Minority Member of the Senate Committee on Banking, Housing, and Urban 
Affairs; the Chairman and Ranking Minority Member of the House 
Committee on Financial Services; the Chairman of the Board of Directors 
of the Federal Deposit Insurance Corporation; the Chairman of the Board 
of Governors of the Federal Reserve System; the Comptroller of the 
Currency; the Director of the Office of Thrift Supervision; the 
Secretary of the Treasury; the Director of the Office of Management and 
Budget; and other interested parties. In addition, this report will be 
available at no charge on GAO's Web site at [Hyperlink, 
http://www.gao.gov]. 

This report was prepared under the direction of Steven J. Sebastian, 
Director, Financial Management and Assurance, who can be reached on 
(202) 512-3406 or sebastians@gao.gov. If I can be of further 
assistance, please call me at (202) 512-5500. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. GAO staff who made key contributions to 
this report are listed in appendix II. 

Signed by: 

David M. Walker: 
Comptroller General of the United States: 

Auditor's Report To the Board of Directors: 
The Federal Deposit Insurance Corporation: 

We have audited the balance sheets as of December 31, 2006, and 2005, 
for the two 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 Deposit Insurance Fund (DIF) and the 
FSLIC Resolution Fund (FRF), we found: 

* the financial statements of each fund are presented fairly, in all 
material respects, in conformity with U.S. generally accepted 
accounting principles; 

* FDIC had effective internal control over financial reporting and 
compliance with laws and regulations for each fund; and: 

* no reportable noncompliance with laws and regulations we tested. 

The following sections discuss our conclusions in more detail. They 
also present information on the scope of our audits and our evaluation 
of FDIC management's comments on a draft of this report. 

Opinion on DIF's Financial Statements: 

The financial statements, including the accompanying notes, present 
fairly, in all material respects, in conformity with U.S. generally 
accepted accounting principles, DIF's financial position as of December 
31, 2006, and 2005, and the results of its operations and its cash 
flows for the years then ended. 

As discussed in note 1 to DIF's financial statements, on February 8, 
2006, the President signed into law the Federal Deposit Insurance 
Reform Act of 2005 (the Act). Among its provisions, the Act called for 
the merger of the Bank Insurance Fund (BIF) and Savings Association 
Insurance Fund (SAIF) into a single deposit insurance fund. In 
accordance with the Act, on March 31, 2006, FDIC established the DIF 
with the merger of the BIF and SAIF. As further discussed in note 2 to 
DIF's financial statements, the merger resulted in a new reporting 
entity. The financial results of the newly formed DIF were 
retrospectively applied as though they had been combined at the 
beginning of the reporting year as well as for prior periods presented 
for comparative purposes. 

Opinion on FRF's Financial Statements: 

The financial statements, including the accompanying notes, present 
fairly, in all material respects, in conformity with U.S. generally 
accepted accounting principles, FRF's financial position as of December 
31, 2006, and 2005, and the results of its operations and its cash 
flows for the years then ended. 

Opinion on Internal Control: 

FDIC management maintained, in all material respects, effective 
internal control over financial reporting (including safeguarding 
assets) and compliance as of December 31, 2006, that provided 
reasonable assurance that misstatements, losses, or noncompliance 
material in relation to FDIC's financial statements for each fund would 
be prevented or detected on a timely basis. Our opinion is based on 
criteria established under 31 U.S.C. 3512 (c), (d) [commonly known as 
the Federal Managers' Financial Integrity Act (FMFIA)]. 

In our prior year audit,[Footnote 1] we reported on weaknesses we 
identified in FDIC's information system controls, which we considered 
to be a reportable condition.[Footnote 2] Specifically, FDIC had 
implemented a new financial system May 2005 and, in doing so, did not 
ensure that controls were adequate to accommodate its new systems 
environment. 

During 2006, FDIC corrected many of these weaknesses and implemented 
mitigating or compensating controls to provide protection for the 
corporation's financial and sensitive information in the new systems 
environment. These improvements enabled us to conclude that the 
remaining issues related to information systems controls do not 
constitute a significant deficiency. However, continued management 
commitment to an effective information security program will be 
essential to ensure that the corporation's financial and sensitive 
information will be adequately protected. In light of the evolving 
nature of information security, and with new exposures and threats 
continuing to develop, the corporation's information security program 
will need to dynamically adapt to address changing information security 
challenges. As FDIC continues to enhance its new financial system, 
which is based on an integrated financial management software package, 
the corporation's reliance on controls implemented in the single, 
integrated financial system will increase. The continued effectiveness 
of FDIC's controls will be dependent on sound implementation of the 
integrated financial management software and its operations. 

We did identify control deficiencies during our 2006 audits that we do 
not consider to be significant deficiencies. We will be reporting 
separately to FDIC management on these matters. 

Compliance with Laws and Regulations: 

Our tests for compliance with selected provisions of laws and 
regulations disclosed no instances of noncompliance that would be 
reportable under U.S. generally accepted government auditing standards. 
However, the objective of our audits was not to provide an opinion on 
overall compliance with laws and regulations. Accordingly, we do not 
express such an opinion. 

Objectives, Scope, and Methodology: 

FDIC management is responsible for (1) preparing the annual financial 
statements in conformity with U.S. generally accepted accounting 
principles; (2) establishing, maintaining, and assessing internal 
control to provide reasonable assurance that the broad control 
objectives of FMFIA are met; and (3) complying with applicable laws and 
regulations. 

We are responsible for obtaining reasonable assurance about whether (1) 
the financial statements are presented fairly, in all material 
respects, in conformity with U.S. generally accepted accounting 
principles; and (2) management maintained effective internal control, 
the objectives of which are the following: 

* financial reporting--transactions are properly recorded, processed, 
and summarized to permit the preparation of financial statements in 
conformity with U.S. generally accepted accounting principles; and 
assets are safeguarded against loss from unauthorized acquisition, use, 
or disposition; and: 

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

We are also responsible for testing compliance with selected provisions 
of laws and regulations that could have a direct and material effect on 
the financial statements. 

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 assets) and compliance with laws and 
regulations; 

* tested relevant internal controls over financial reporting and 
compliance, and evaluated the design and operating effectiveness of 
internal control; 

* considered FDIC's process for evaluating and reporting on internal 
control based on criteria established by FMFIA; and: 

* tested compliance with certain laws and regulations, including 
selected provisions of the Federal Deposit Insurance Act, as amended, 
the Federal Deposit Insurance Reform Act of 2005, and the Chief 
Financial Officers Act of 1990. 

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 controls over financial 
reporting and compliance. Because of inherent limitations in internal 
control, misstatements due to error or fraud, 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 did not test compliance with all laws and regulations applicable to 
FDIC. We limited our tests of compliance to those laws and regulations 
that could have a direct and material effect on the financial 
statements for the year ended December 31, 2006. We caution that 
noncompliance may occur and not be detected by these tests and that 
such testing may not be sufficient for other purposes. 

We performed our work in accordance with U.S. generally accepted 
government auditing standards. 

FDIC Comments and Our Evaluation: 

In commenting on a draft of this report, FDIC's Chief Financial Officer 
(CFO) was pleased to receive unqualified opinions on the DIF and FRF 
financial statements and to note that there were no material weaknesses 
identified during the 2006 audits. FDIC's CFO appreciated that we 
recognized the improvements that FDIC made over the past year to its 
information systems environment. Also, the CFO stated that FDIC's 
sustained commitment to enhancing information systems controls 
adequately addressed the concerns that we highlighted in the prior year 
report and enabled us to conclude that the remaining issues related to 
such controls do not constitute a significant deficiency. Finally, the 
CFO stated that FDIC's goal is to maintain an effective information 
security program going forward, and has pledged to work diligently to 
resolve control issues that we identified during the 2006 audits, as 
well as any that may arise in the future. 

The complete text of FDIC's comments is reprinted in appendix I. 

Signed by: 

David M. Walker: 
Comptroller General of the United States: 
January 31, 2007: 

[End of section] 

Deposit Insurance Fund's Financial Statements: 

Balance Sheet: 

Deposit Insurance Fund (combined BIF and SAIF for 2005 - Note 2): 

Federal Deposit Insurance Corporation: 

Deposit Insurance Fund Balance Sheet at December 31: 

Dollars in Thousands: 

Assets: Cash and cash equivalents; 
2006: $2,953,995; 
2005: $3,209,444. 

Assets: Cash and other assets: Restricted for SAIF-member exit fee: 
(Note 8) (Includes cash and cash equivalents of $20.9 million at 
December 31, 2005); 
2006: 0; 
2005: $341,656. 

Assets: Investment in U.S. Treasury obligations, net: (Note 3): Held-to 
maturity securities; 
2006: $37,184,214; 
2005: $34,253,237. 

Assets: Investment in U.S. Treasury obligations, net: (Note 3): 
Available-for-sale securities; 
2006: $8,958,566; 
2005: $9,987,223. 

Assets: Interest receivable on investments and other assets, net: 
2006: $747,715; 
2005: $737,566. 

Assets: Receivables from resolutions, net (Note 4); 
2006: $538,991; 
2005: $533,474. 

Assets: Property and equipment, net (Note 5); 
2006: $376,790; 
2005: $378,064. 

Total Assets; 
2006: $50,760,271; 
2005: $49,440,664. 

Liabilities: Accounts payable and other liabilities; 
2006: $154,283; 
2005: $296,540. 

Liabilities: Postretirement benefit liability  (Note 11); 
2006: $129,906; 
2005: 0. 

Liabilities: Contingent liabilities for (Note 6): Anticipated failure 
of insured institutions; 
2006: $110,775; 
2005: $5,366. 

Liabilities: Contingent liabilities for (Note 6): Litigation losses; 
2006: $200,000; 
2005: $200,500. 

Liabilities: SAIF-member exit fees and investment proceeds held in 
escrow (Note 8); 
2006: 0; 
2005: $341,656. 

Total Liabilities; 
2006: $594,964; 
2005: $844,062. 

Commitments and off balance sheet exposure (Note 12). 

Fund balance: Accumulated net income; 
2006: $49,929,226; 
2005: $48,190,062. 

Fund balance: Unrealized gain on available-for-sale securities, net 
(Note 3); 
2006: $233,822; 
2005: $406,540. 

Fund balance: Unrealized postretirement benefit gain (Note 11); 
2006: $2,259; 
2005: $48,596,602. 

Total liabilities and Fund balance; 
2006: $50,760,271; 
2005: $49,440,664. 

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

[End of table] 

Statement of Income and Fund Balance: 

Deposit Insurance Fund (combined BIF and SAIF for 2005 - Note 2): 

Federal Deposit Insurance Corporation: 

Deposit Insurance Fund Statement of Income and Fund Balance for the 
Years Ended December 31: 

Dollars in Thousands. 

Revenue: Interest on U.S. Treasury obligations; 
2006: $2,240,723; 
2005: $2,341,505. 

Revenue: Exit fees earned (Note 8); 
2006: $345,295; 
2005: 0. 

Revenue: Assessments (Note 7); 
2006: $31,945; 
2005: $60,884. 

Revenue: Other revenue; 
2006: $25,565; 
2005: $18,073. 

Total Revenue; 
2006: $2,643,528; 
2005: $2,420,462. 

Expenses and losses: Operating expenses (Note 9); 
2006: $950,618; 
2005: $965,652. 

Expenses and losses: Provision for insurance losses (Note 10); 
2006: ($52,097); 
2005: ($160,170). 

Expenses and losses: Insurance and other expenses; 
2006: $5,843; 
2005: $3,821. 

Total Expenses and losses;  
2006: $904,364; 
2005: $809,303. 

Net income; 
2006: $1,739,164; 
2005: $1,611,159. 

Net income: Unrealized loss on available-for-sale securities, net; 
2006: ($172,718); 
2005: ($521,350). 

Net income: Unrealized postretirement benefit gain; 
2006: $2,259; 
2005: 0. 

Comprehensive Income; 
2006: $1,568,705; 
2005: $1,089,809. 

Fund balance - Beginning; 
2006: $48,596,602; 
2005: $47,506,793. 

Fund balance - Ending; 
2006: $50,165,307; 
2005: $48,596,602.  

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

[End of table]

Statement of Cash Flows: 

Deposit Insurance Fund (combined BIF and SAIF for 2005 - Note 2): 

Federal Deposit Insurance Corporation: 

Deposit Insurance Fund Statement of Cash Flows for the Years Ended 
December 31: 

Dollars in Thousands. 

Operating activities; Net Income; 
2006: $1,739,164; 
2005: $1,611,159. 

Operating activities; Net Income: Adjustments to reconcile net income 
to net cash provided by operating activities: Amortization of U.S. 
Treasury obligations; 
2006: $599,274; 
2005: $834,118. 

Operating activities; Net Income: Adjustments to reconcile net income 
to net cash provided by operating activities: Treasury inflation-
protected securities (TIPS) inflation adjustment; 
2006: ($109,394); 
2005: ($345,023). 

Operating activities; Net Income: Adjustments to reconcile net income 
to net cash provided by operating activities: Depreciation on property 
and equipment; 
2006: $52,919; 
2005: $56,006. 

Operating activities; Net Income: Adjustments to reconcile net income 
to net cash provided by operating activities: Provision for insurance 
losses; 
2006: ($52,097); 
2005: ($160,170). 

Operating activities; Net Income: Adjustments to reconcile net income 
to net cash provided by operating activities: Termination/adjustments 
of work-in-process accounts; 
2006: $433; 
2005: $178. 

Operating activities; Net Income: Adjustments to reconcile net income 
to net cash provided by operating activities: Exit fees earned; 
2006: ($345,295); 
2005: 0. 

Operating Activities: Change in Operating Assets and Liabilities: 
Decrease/(Increase) in unamortized premium and discount of U.S. 
Treasury obligations (restricted); 
2006: $1,359; 
2005: ($6,565). 

Operating Activities: Change in Operating Assets and Liabilities: 
(Increase)/Decrease in interest receivable and other assets; 
2006: ($14,635); 
2005: $5,590. 

Operating Activities: Change in Operating Assets and Liabilities: 
Decrease in receivable from resolutions; 
2006: $147,258; 
2005: $348,173. 

Operating Activities: Change in Operating Assets and Liabilities: 
(Decrease)/Increase in accounts payable and other liabilities; 
2006: ($166,822); 
2005: $27,145. 

Operating Activities: Change in Operating Assets and Liabilities: 
Increase in postretirement benefit liability; 
2006: $129,906; 
2005: 0. 

Operating Activities: Change in Operating Assets and Liabilities: 
(Decrease in contingent liabilities for litigation losses; 
2006: 0; 
2005: ($182).

Operating Activities: Change in Operating Assets and Liabilities: 
Increase in exit fees and investment proceeds held in escrow; 
2006: $3,639; 
2005: $28,556. 

Net cash provided by Operating activities; 
2006: $1,985,709; 
2005: $2,398,985. 

Investing activities: Provided by: Maturity of U.S. Treasury 
obligations, held-to-maturity; 
2006: $5,955,000; 
2005: $8,220,000. 

Investing activities: Provided by: Maturity of U.S. Treasury 
obligations, available-for-sale; 
2006: $845,000; 
2005: $1,830,000. 

Investing activities: Used by: Purchase of property and equipment; 
2006: ($11,721); 
2005: ($47,197). 

Investing activities: Used by: Purchase of U.S. Treasury obligations, 
held-to-maturity; 
2006: ($9,050,372); 
2005: ($11,693,984). 

Net Cash Used by Investing activities; 
2006: ($2,262,093); 
2005: ($1,691,181). 

Net (Decrease)/Increase in cash and cash equivalents; 
2006: ($276,384); 
2005: $707,804. 

Cash and cash equivalents - beginning; 
2006: $3,230,379; 
2005: $2,522,575. 

Unrestricted cash and cash equivalents - Ending; 
2006: $2,953,995; 
2005: $3,209,444. 

Restricted Cash and Cash equivalents - Ending; 
2006: 0; 
2005: $20,935. 

Cash and cash equivalents - Ending; 
2006: $2,953,995; 
2005: $3,230,376. 

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

[End of table] 

Notes to the Financial Statements: 

Notes to the Financial Statements Deposit Insurance Fund December 31, 
2006 and 2005: 

1. Legislation and Operations of the Deposit Insurance Fund: 

Overview: 

The Federal Deposit Insurance Corporation (FDIC) is the independent 
deposit insurance agency created by Congress in 1933 to maintain 
stability and public confidence in the nation's banking system. 
Provisions that govern the operations of the FDIC are generally found 
in the Federal Deposit Insurance (FDI) Act, as amended, (12 U.S.C. 
1811, et seq). In carrying out the purposes of the FDI Act, as amended, 
the FDIC insures the deposits of banks and savings associations 
(insured depository institutions), and in cooperation with other 
federal and state agencies promotes the safety and soundness of insured 
depository institutions by identifying, monitoring and addressing risks 
to the deposit insurance fund. An active institution's primary federal 
supervisor is generally determined by the institution's charter type. 
Commercial and savings banks are supervised by the FDIC, the Office of 
the Comptroller of the Currency, or the Federal Reserve Board, while 
thrifts are supervised by the Office of Thrift Supervision. 

The Deposit Insurance Fund (DIF) was established on March 31, 2006 as a 
result of the merger of the Bank Insurance Fund (BIF) and the Savings 
Association Insurance Fund (SAIF) pursuant to the recently enacted 
deposit insurance reform legislation. The FDIC is the administrator of 
the DIF and the FSLIC Resolution Fund (FRF). These funds are maintained 
separately to carry out their respective mandates. 

The DIF is an insurance fund responsible for protecting insured bank 
and thrift depositors from loss due to institution failures. The FRF is 
a resolution fund responsible for the sale of remaining assets and 
satisfaction of liabilities associated with the former Federal Savings 
and Loan Insurance Corporation and the Resolution Trust Corporation. 

Recent Legislation: 

The Federal Deposit Insurance Reform Act of 2005 (Reform Act [Title II, 
Subtitle B of Public Law 109-171, 120 Stat. 9]) was enacted on February 
8, 2006. Companion legislation, the Federal Deposit Insurance Reform 
Conforming Amendments Act of 2005 (Public Law 109-173, 119 Stat. 3601), 
was enacted on February 15, 2006. In addition to merging the BIF and 
the SAIF, the legislation: 1) requires the deposit of funds into the 
DIF for SAIF-member exit fees that had been restricted and held in 
escrow; 2) provides FDIC with greater discretion to charge insurance 
assessments and to impose more sensitive risk-based pricing; 3) 
annually permits the designated reserve ratio to vary between 1.15 and 
1.50 percent of estimated insured deposits, thereby eliminating the 
statutorily fixed designated reserve ratio of 1.25 percent; 4) 
generally requires the declaration and payment of dividends from the 
DIF if the reserve ratio of the DIF equals or exceeds 1.35 percent of 
estimated insured deposits at the end of a calendar year; 5) grants a 
one-time assessment credit for each eligible insured depository 
institution or its successor based on an institution's proportionate 
share of the aggregate assessment base of all eligible institutions at 
December 31, 1996; and 6) immediately increases coverage for certain 
retirement accounts to $250,000 and allows the FDIC to increase all 
deposit insurance coverage, under certain circumstances, to reflect 
inflation every five years beginning January 1, 2011. See Note 7 for a 
more detailed discussion of these reforms. 

Operations of the DIF: 

The primary purpose of the DIF is to: 1) insure the deposits and 
protect the depositors of DIF-insured institutions and 2) resolve DIF- 
insured failed institutions upon appointment of FDIC as receiver in a 
manner that will result in the least possible cost to the DIF. 

The DIF is primarily funded from: 1) interest earned on investments in 
U.S. Treasury obligations and 2) deposit insurance assessments. 
Additional funding sources, if necessary, are borrowings from the U.S. 
Treasury, Federal Financing Bank, Federal Home Loan Banks, and insured 
depository institutions. The FDIC has borrowing authority from the U.S. 
Treasury up to $30 billion for insurance purposes on behalf of the DIF. 
On December 15, 2006, the FDIC entered into a Note Purchase Agreement 
with the Federal Financing Bank in an amount not exceeding $40 billion. 
The Note Purchase Agreement, if needed, will enhance DIF's ability to 
fund large deposit insurance obligations and deal with large 
institution resolutions. 

A statutory formula, known as the Maximum Obligation Limitation (MOL), 
limits the amount of obligations the DIF can incur to the sum of its 
cash, 90 percent of the fair market value of other assets, and the 
amount authorized to be borrowed from the U.S. Treasury. The MOL for 
the DIF was $79.7 billion and $78.2 billion as of December 31, 2006 and 
2005, respectively. 

Receivership Operations: 

The FDIC is responsible for managing and disposing of the assets of 
failed institutions in an orderly and efficient manner. The assets held 
by receivership entities, and the claims against them, are accounted 
for separately from DIF assets and liabilities to ensure that 
receivership proceeds are distributed in accordance with applicable 
laws and regulations. Accordingly, income and expenses attributable to 
receiverships are accounted for as transactions of those receiverships. 
Receiverships are billed by the FDIC for services provided on their 
behalf. 

2. Summary of Significant Accounting Policies: 

General: 

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

Merger of the Funds: 

The merger of the BIF and SAIF into the newly established DIF was 
accounted for by combining the carrying value of each Fund's assets and 
liabilities. Since this merger results in a new reporting entity, 
financial results of the newly formed DIF were retrospectively applied 
as though they had been combined at the beginning of the reporting year 
as well as for full prior year periods reported for comparative 
purposes. 

Use of Estimates: 

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. The more significant 
estimates include allowance for loss on receivables from resolutions, 
the estimated losses for anticipated failures and litigation, and the 
postretirement benefit obligation. 

Cash Equivalents: 

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

Investment in U.S. Treasury Obligations: 

DIF funds are required to be invested in obligations of the United 
States or in obligations guaranteed as to principal and interest by the 
United States; the Secretary of the U.S. Treasury must approve all such 
investments in excess of $100,000. The Secretary has granted approval 
to invest DIF funds only in U.S. Treasury obligations that are 
purchased or sold exclusively through the Bureau of the Public Debt's 
Government Account Series (GAS) program. 

DIF's investments in U.S. Treasury obligations are either classified as 
held-to-maturity or available-for-sale. Securities designated as held- 
to-maturity 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, except for callable 
U.S. Treasury securities, which are amortized to the first call date. 
Securities designated as available-for-sale are shown at market value, 
which approximates fair value. Unrealized gains and losses are included 
in Comprehensive Income. Realized gains and losses are included in the 
Statement of Income and Fund Balance as components of Net Income. 
Income on both types of securities is calculated and recorded on a 
daily basis using the effective interest method. 

Capital Assets and Depreciation: 

The FDIC buildings are depreciated on a straight-line basis over a 35 
to 50 year estimated life. Leasehold improvements are 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. 

Disclosure about Recent Accounting Pronouncements: 

In September 2006, the Financial Accounting Standards Board issued 
Statement of Financial Accounting Standards (SFAS) No. 158, Employers' 
Accounting for Defined Benefit Pension and Other Postrefrement Plans - 
an amendment of FASB Statements No. 87, 88,106, and 132(R). For FDIC's 
postretirement benefits other than pensions, this pronouncement amends 
the recognition and disclosure requirements of SFAS No. 106 and SFAS 
No. 132(R). 

The pronouncement requires recognition o^ 1) the funded status of the 
plan as an asset or liability, 2) the cumulative actuarial gains/losses 
and prior service costs/credits as accumulated comprehensive income, 
and 3) the changes in the actuarial gains/losses and prior service 
costs/credits for the period as other comprehensive income. The FDIC 
adopted SFAS No. 158 for the 2006 calendar year financial statements. 
As a result, the FDIC recognized the underfunded status (difference 
between the accumulated postretirement benefit obligation and the plan 
assets at fair value) as a liability and the cumulative actuarial 
gains/losses and prior service costs/credits are shown as accumulated 
other comprehensive income on the Balance Sheet. In addition, the 
changes in the actuarial gains/losses and prior service costs/credits 
for the period are recognized as other comprehensive income on the 
Statement of Income and Fund Balance. Prior to this change, the net 
postretirement benefit obligation (comprised of both the underfunded 
status and unrecognized actuarial gains/losses and prior service costs/ 
credits) was recognized as a liability on the Balance Sheet. 

Retrospective application is not permitted or required by the 
Statement. See Note 11 for specifics regarding postretirement benefits 
other than pensions. 

Related Parties: 

The nature of related parties and a description of related party 
transactions are discussed in Note 1 and disclosed throughout the 
financial statements and footnotes. 

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

As of December 31, 2006 and 2005, the book value of investments in U.S. 
Treasury obligations, net, was $46.1 billion and $44.2 billion, 
respectively. As of December 31, 2006, the DIF held $9.2 billion of 
Treasury inflation-protected securities (TIPS). These securities are 
indexed to increases or decreases in the Consumer Price Index for All 
Urban Consumers (CPI-U). Additionally, the DIF held $6.1 billion of 
callable U.S. Treasury bonds at December 31, 2006. Callable U.S. 
Treasury bonds may be called five years prior to the respective bonds' 
stated maturity on their semi-annual coupon payment dates upon 120 days 
notice. 

U.S. Treasury obligations at December 31, 2006: 

Dollars in Thousands: 

Hel-to-Maturity. 

Maturity(a): U.S. Treasury notes and bonds: Within 1 year; 
Yield at purchase(b): 4.58%; 
Face Value: $6,401,000; 
Net carrying amount: $6,448,905; 
Unrealized holding gains: $3,389; 
Unrealized holding losses(c): ($20,704); 
Market Value: $6,431,590. 

Maturity(a): U.S. Treasury notes and bonds: After 1 year through 5 
years; 
Yield at purchase(b): 4.47%; 
Face Value: $15,500,000; 
Net carrying amount: $16,276,424; 
Unrealized holding gains: $91,703; 
Unrealized holding losses(c): ($196,635); 
Market Value: $16,171,492. 

Maturity(a): U.S. Treasury notes and bonds: After 5 years through 10 
years; 
Yield at purchase(b): 4.68%; 
Face Value: $9,025,000; 
Net carrying amount: $9,690,085; 
Unrealized holding gains: $36,025; 
Unrealized holding losses(c): ($42,270); 
Market Value: $9,683,840. 

Maturity(a): U.S. Treasury notes and bonds: After 10 years; 
Yield at purchase(b): 5.01%; 
Face Value: $2,445,000; 
Net carrying amount: $3,247,814; 
Unrealized holding gains: $57,589; 
Unrealized holding losses(c): ($3,227); 
Market Value: $3,302,176. 

Maturity(a): U.S. Treasury inflation-protected securities: After 1 year 
through 5 years; 
Yield at purchase(b): 3.83%; 
Face Value: $926,751; 
Net carrying amount: $926,844; 
Unrealized holding gains: $21,185; 
Unrealized holding losses(c): 0; 
Market Value: $948,029. 

Maturity(a): U.S. Treasury inflation-protected securities: After 5 
years through 10 years; 
Yield at purchase(b): 2.41%; 
Face Value: $568,345; 
Net carrying amount: $594,142; 
Unrealized holding gains: 0; 
Unrealized holding losses(c):($778);  
Market Value: $593,364. 

Maturity(a): Total; 
Yield at purchase(b): [Empty]; 
Face Value: $34,866,096; 
Net carrying amount: $37,184,214; 
Unrealized holding gains: $209,891; 
Unrealized holding losses(c): ($263,614); 
Market Value: $37,130,491. 

Available-for-sale. 

Maturity(a): U.S. Treasury notes and bonds: Within 1 year; 
Yield at purchase(b): 3.85%; 
Face Value: $1,225,000; 
Net carrying amount: $1,269,835; 
Unrealized holding gains: 0; 
Unrealized holding losses(c): ($9,208); 
Market Value: $1,260,627. 

Maturity(a): U.S. Treasury inflation-protected securities: After 1 year 
through 5 years; 
Yield at purchase(b): 3.80%; 
Face Value: $7,443,478; 
Net carrying amount: $7,454,909; 
Unrealized holding gains: $243,030; 
Unrealized holding losses(c): 0; 
Market Value: $7,697,939. 

Maturity(a): Total; 
Yield at purchase(b): [Empty]; 
Face Value: $8,668,478; 
Net carrying amount: $8,724,744; 
Unrealized holding gains: $243,030; 
Unrealized holding losses(c): ($9,208); 
Market Value: $8,958,566. 

Total Investment in the U.S. treasury Obligations, Net. 

Total;  
Yield at purchase(b): [Empty]; 
Face Value: $43,534,574; 
Net carrying amount: $45,908,958; 
Unrealized holding gains: $452,921; 
Unrealized holding losses(c): ($272,822); 
Market Value: $46,089,057. 

(a) For purposes of this table, all callable securities are assumed to 
mature on their first call dales. Their yields al purchase are reported 
as their yield to first call date. 

(b) For TIPS, the yields in the above table are staled al their real 
yields al purchase, not their effective yields. Effective yields on 
TIPS include a long-term annual inflation assumption as measured by the 
CPI-U. The long-term CPI-U consensus forecast is 2.2 percent, based on 
figures issued by the Congressional Budget Office and Blue Chip 
Economic Indicators in early 2006. 

(c) All unrealized losses occurred as a result of changes in market 
interest rates. FDIC has the ability and intent to hold the related 
securities until maturity. As a result, all unrealized losses are 
considered temporary. However, of the $273 million reported as total 
unrealized losses, $237 million is recognized as unrealized losses 
occuring over a period of 12 months or longer with a market value of 
$13.3 billion applied to the affected securities. 

[End of table] 

U.S. Treasury Obligations at December 31, 2005: 

Dollars in Thousands: 

Held-to-Maturity. 

Maturity(a): U.S. Treasury notes and bonds: Within 1 year; 
Yield at Purchase(b): 5.19%; 
Face Value: $5,920,000; 
Net carrying amount: $5,942,398; 
Unrealized holding gain: $29,554; 
Unrealized holding losses(c): ($18,187); 
Market value: $5,953,765. 

Maturity(a): U.S. Treasury notes and bonds: After 1 year through 5 
years; 
Yield at Purchase(b): 4.47%; 
Face Value: $18,680,000; 
Net carrying amount: $19,872,850; 
Unrealized holding gain: $219,864; 
Unrealized holding losses(c): ($187,672); 
Market value: $19,905,042. 

Maturity(a): U.S. Treasury notes and bonds: After 5 years through 10 
years; 
Yield at Purchase(b): 4.53%; 
Face Value: $5,350,000; 
Net carrying amount: $5,674,953; 
Unrealized holding gain: $62,578; 
Unrealized holding losses(c): ($13,184); 
Market value: $5,724,347. 

Maturity(a): U.S. Treasury notes and bonds: After 10 years; 
Yield at Purchase(b): 4.72%; 
Face Value: $1,420,000; 
Net carrying amount: $1,848,524; 
Unrealized holding gain: $31,668; 
Unrealized holding losses(c): 0; 
Market value: $1,880,192. 

Maturity(a): U.S. inflation-protected securities: After 1 through 5 
years; 
Yield at Purchase(b): 3.83%; 
Face Value: $914,596; 
Net carrying amount: $914,512; 
Unrealized holding gain: $40,784; 
Unrealized holding losses(c): 0; 
Market value: $955,296. 

Maturity(a): Total; 
Yield at Purchase(b): [Empty]; 
Face Value: $32,284,596; 
Net carrying amount: $34,253,237; 
Unrealized holding gain: $384,448; 
Unrealized holding losses(c): ($219,043); 
Market value: $34,418,642. 

Available-for-Sale. 

Maturity(a): U.S. Treasury notes and bonds: Within 1 year; 
Yield at Purchase(b): 3.71%; 
Face Value: $845,000; 
Net carrying amount: $898,720; 
Unrealized holding gain: $696; 
Unrealized holding losses(c): ($6,870); 
Market value: $892,546. 

Maturity(a): U.S. Treasury notes and bonds: After 1 year through 5 
years; 
Yield at Purchase(b): 3.86%; 
Face Value: $1,225,000; 
Net carrying amount: $1,324,055; 
Unrealized holding gain: $4,967; 
Unrealized holding losses(c): ($16,448); 
Market value: $1,312,574. 

Maturity(a): U.S. Treasury inflation-protected securities: After 1 year 
through 5 years; 
Yield at Purchase(b): 3.97%; 
Face Value: $5,119,864; 
Net carrying amount: $5,122,414; 
Unrealized holding gain: $280,679; 
Unrealized holding losses(c): 0; 
Market value: $5,403,093. 

Maturity(a): U.S. Treasury inflation-protected securities: After 5 
years through 10 years; 
Yield at Purchase(b): 3.39%; 
Face Value: $2,225,975; 
Net carrying amount: $2,235,494; 
Unrealized holding gain: $143,516; 
Unrealized holding losses(c): 0; 
Market value: $2,379,010. 

Maturity(a): Total; 
Yield at Purchase(b): [Empty]; 
Face Value: $9,41,839; 
Net carrying amount: $9,580,683; 
Unrealized holding gain: $429,858; 
Unrealized holding losses(c): ($23,318); 
Market value: $9,987,223. 

Total investment in U.S. Treasury Obligations, Net. 

Total; 
Yield at Purchase(b): [Empty]; 
Face Value: $41,700,435; 
Net carrying amount: $43,833,920; 
Unrealized holding gain: $814,306; 
Unrealized holding losses(c): ($242,361); 
Market value: $44,405,865. 

(a) For purposes of this table, all callable securities are assumed to 
mature on their first call dates. Their yields at purchase are reported 
as their yield to first call date. 

(b) For TIPS, the yields in the above table are stated at their real 
yields at purchase, not their effective yields. Effective yields on 
TIPS include a long-term annual inflation assumption as measured by the 
CPI-U. The long-term CPI-U consensus forecast is 2.2 percent, based on 
figures issued by the Congressional Budget Office and Blue Chip 
Economic Indicators in early 2005. 

(c) All unrealized losses occurred as a result of changes in market 
interest rates. FDIC has the ability and intent to hold the related 
securities until maturity. As a result, all unrealized losses are 
considered temporary. However, of the $242 million reported as total 
unrealized losses, $116 million is recognized as unrealized losses 
occuring over a period of 12 months or longer with a market value of 
$5.0 billion applied to the affected securities. 

[End of table] 

As of December 31, 2006 and 2005, the unamortized premium, net of the 
unamortized discount, was $2.4 billion and $2.1 billion, respectively. 

4. Receivables From Resolutions, Net: 

The receivables from resolutions include payments made by the DIF to 
cover obligations to insured depositors, advances to receiverships for 
working capital, and administrative expenses paid on behalf of 
receiverships. Any related allowance for loss represents the difference 
between the funds advanced and/or obligations incurred and the expected 
repayment. Assets held by DIF receiverships are the main source of 
repayment of the DIF's receivables from closed banks and thrifts. As of 
December 31, 2006, there were 25 active receiverships, with no failures 
in the current year. 

As of December 31, 2006 and 2005, DIF receiverships held assets with a 
book value of $655 million and $745 million, respectively (including 
cash, investments, and miscellaneous receivables of $348 million and 
$370 million at December 31, 2006 and 2005, respectively). The 
estimated cash recoveries from the management and disposition of these 
assets that are used to derive the allowance for losses are based on a 
sampling of receivership assets in liquidation. Assets in the 
judgmental sample, which represents 97 percent of the asset book value 
for all active DIF receiverships, are generally valued by estimating 
future cash recoveries, net of applicable liquidation cost estimates, 
and then discounting these net cash recoveries using current market- 
based risk factors based on a given asset's type and quality. Resultant 
recovery estimates are extrapolated to the non-sampled assets in order 
to derive the allowance for loss on the receivable. These estimated 
recoveries are regularly evaluated, but remain subject to uncertainties 
because of potential changes in economic and market conditions. Such 
uncertainties could cause the DIF's actual recoveries to vary from the 
level currently estimated. 

As of December 31, 2006, the DIF allowance for loss was $4.1 billion. 
The allowance for loss is equivalent to 88 percent of the gross 
receivable. Of the remaining 12 percent of the gross receivable, the 
amount of credit risk is limited since 89.1 percent of the receivable 
will be repaid from receivership cash, investments, and a promissory 
note fully secured by a letter of credit. 

5. Property and Equipment, Net: 

Property and Equipment, Net at December 31; 

Dollars in Thousands. 

Land; 
2006: $37,352; 
2005: $37,352. 

Buildings (includes construction-in-process); 
2006: $284,871; 
2005: $272,861. 

Application software (includes work-in-process); 
2006: $259,744; 
2005: $241,424. 

Furniture, fixtures, and equipment; 
2006: $161,127; 
2005: $140,728. 

Accumulated depreciation; 
2006: ($323,274); 
2005: ($273,789). 

Retirements; 
2006: ($43,030); 
2005: ($40,512). 

Total; 
2006: $376,790; 
2005: $378, 064. 

[End of table] 

The depreciation expense was $53 million and $56 million for December 
31, 2006 and 2005, respectively. 

6. Contingent Liabilities for: 

Anticipated Failure of Insured Institutions: 

The DIF records a contingent liability and a loss provision for DIF- 
insured institutions that are likely to fail within one year of the 
reporting date, absent some favorable event such as obtaining 
additional capital or merging, when the liability becomes probable and 
reasonably estimable. 

The contingent liability is derived by applying expected failure rates 
and loss rates to institutions based on supervisory ratings, balance 
sheet characteristics, and projected capital levels. In addition, 
institution-specific analysis is performed on those institutions where 
failure is imminent absent institution management resolution of 
existing problems, or where additional information is available that 
may affect the estimate of losses. As of December 31, 2006 and 2005, 
the contingent liabilities for anticipated failure of insured 
institutions were $110.8 million and $5.4 million, respectively. 

In addition to these recorded contingent liabilities, the FDIC has 
identified additional risk in the financial services industry that 
could result in an additional loss to the DIF should potentially 
vulnerable insured institutions ultimately fail. This risk results from 
the presence of various high-risk banking business activities that are 
particularly vulnerable to adverse economic and market conditions. Due 
to the uncertainty surrounding such conditions in the future, there are 
institutions other than those with losses included in the contingent 
liability for which the risk of failure is less certain, but still 
considered reasonably possible. As a result of these risks, the FDIC 
believes that it is reasonably possible that the DIF could incur 
additional estimated losses up to approximately $0.6 billion. 

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

Litigation Losses: 

The DIF records an estimated loss for unresolved legal cases to the 
extent that 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 $0.6 
million are reasonably possible. 

Other Contingencies: 

Representations and Warranties: 

As part of the FDIC's efforts to maximize the return from the sale of 
assets from bank and thrift resolutions, representations and 
warranties, and guarantees were offered on certain loan sales. In 
general, the guarantees, representations, and warranties on loans sold 
relate 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 total amount 
of loans sold subject to unexpired representations and warranties, and 
guarantees was $8.1 billion as of December 31, 2006. There were no 
contingent liabilities from any of the outstanding claims asserted in 
connection with representations and warranties at December 31, 2006 and 
2005, respectively. 

In addition, future losses could be incurred until the contracts 
offering the representations and warranties, and guarantees have 
expired, some as late as 2032. Consequently, the FDIC believes it is 
possible that additional losses may be incurred by the DIF from the 
universe of outstanding contracts with unasserted representation and 
warranty claims. However, because of the uncertainties surrounding the 
timing of when claims may be asserted, the FDIC is unable to reasonably 
estimate a range of loss to the DIF from outstanding contracts with 
unasserted representation and warranty claims. 

7. Assessments: 

The Federal Deposit Insurance Corporation Improvement Act of 1991 
(FDICIA) required the FDIC to establish a risk-based assessment system, 
charging higher rates to those insured depository institutions that 
posed greater risks to the DIF. To arrive at a risk-based assessment 
for a particular institution, the FDIC placed each institution in one 
of nine risk categories based on capital ratios and supervisory 
examination data. Based on FDIC's evaluation of the institutions under 
the risk-based premium system and due to the limitations imposed by the 
Deposit Insurance Funds Act of 1996 (DIFA) and the continued health of 
the banking and thrift industries, most institutions were not charged 
an assessment for a number of years. In addition, the FDIC was required 
by statute to maintain the insurance funds at a designated reserve 
ratio (DRR) of not less than 1.25 percent of estimated insured deposits 
(or a higher percentage as circumstances warranted). Of the 
institutions assessed, the assessment rate averaged approximately 5 
cents and 10 cents per $100 of assessable deposits for 2006 and 2005, 
respectively. During 2006 and 2005, $32 million and $61 million were 
recognized as assessment income from institutions, respectively. 

The assessment process will significantly change as of January 1, 2007. 
The Reform Act (enacted in February 2006) and the implementing 
regulations (published in November 2006): 

* provide the FDIC with greater discretion to charge insurance 
assessments, eliminate the cap on assessments for the best-rated 
institutions, and provide that no insured institution may be barred 
from the lowest risk category solely because of its size. By 
regulation, the FDIC has placed each institution into one of four risk 
categories for risk-based assessment purposes, so that all insured 
depository institutions will be required to pay assessments; 

* establish a range for the DRR from 1.15 to 1.50 percent of estimated 
insured deposits and eliminate the fixed DRR of 1.25 percent. The FDIC 
is required to annually publish the DRR and has, by regulation, set the 
DRR at 1.25 percent for 2007; 

* grant a one-time assessment credit of approximately $4.7 billion to 
certain eligible insured depository institutions (or their successors) 
based on the assessment base of the institution as of December 31, 
1996, as compared to the combined aggregate assessment base of all 
eligible institutions; and: 

* require the FDIC to annually determine if a dividend should be paid, 
based on the statutory requirements generally to declare dividends if. 
1) the reserve ratio of the DIF exceeds 1.50 percent of estimated 
insured deposits, for the full amount in excess of the amount required 
to maintain the reserve ratio at 1.50 percent, or 2) if the reserve 
ratio equals or exceeds 1.35 percent of estimated insured deposits but 
is no greater than 1.50 percent, for one-half of the amount in excess 
of the amount required to maintain the reserve ratio at 1.35 percent. 

Assessments continue to be levied on institutions for payments of the 
interest on obligations issued by the Financing Corporation (FICO). The 
FICO was established as a mixed-ownership government corporation to 
function solely as a financing vehicle for the FSLIC. The annual FICO 
interest obligation of approximately $790 million is paid on a pro rata 
basis using the same rate for banks and thrifts. The FICO assessment 
has no financial impact on the DIF and is separate from deposit 
insurance assessments. The FDIC, as administrator of the DIF, acts 
solely as a collection agent for the FICO. During 2006 and 2005, $788 
million and $780 million, respectively, were collected and remitted to 
the FICO. 

8. Exit Fees Earned: 

From the early to mid-1990s, the SAIF collected entrance and exit fees 
for conversion transactions when an insured depository institution 
converted from the BIF to the SAIF (resulting in an entrance fee) or 
from the SAIF to 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: 1) exit fees paid to 
the SAIF be held in escrow, and 2) the Board 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 were invested in U.S. Treasury 
securities pending determination of ownership. The interest earned was 
also held in escrow and as a result of the above, the SAIF did not 
recognize exit fees or any interest earned as revenue. 

The recent deposit insurance legislation removed the restriction on 
SAIF-member exit fees held in escrow and the funds were deposited into 
the general (unrestricted) fund of the DIF. The exit fees plus earned 
interest, a total of $345 million, are recognized as revenue at their 
carrying value on the Income Statement for 2006 and are classified on 
the Balance Sheet as a combination of Cash and cash equivalents, 
Investments in U.S. Treasury obligations, net, and Interest receivable 
on investments. At December 31, 2005, the exit fees and earned interest 
are shown on the Balance Sheet line items of Cash and other assets: 
Restricted for SAIF-member exit fees (an asset) and SAIF-member exit 
fees and investment proceeds held in escrow (a liability). 

9. Operating Expenses: 

Operating expenses were $951 million for 2006, compared to $966 million 
for 2005. The chart below lists the major components of operating 
expenses. 

Operating expenses for the Years Ended December 31: 

Dollars in Thousands. 

Salaries and benefits; 
2006: $619,452; 
2005: $645,418. 

Outside services; 
2006: $124,045; 
2005: $113,416. 

Travel; 
2006: $49,408; 
2005: $45,732. 

Buildings and leased space; 
2006: $65,929; 
2005: $71,480. 

Software/Hardware maintenance; 
2006: $27,139; 
2005: $33,366. 

Depreciation of property and equipment; 
2006: $52,919; 
2005: $55,989. 

Other; 
2006: $22,124; 
2005: $21,959. 

Services billed to receiverships; 
2006: ($10,398); 
2005: ($21,708). 

Total; 
2006: $950,618; 
2005: $965,652. 

[End of table] 

10. Provision for Insurance Losses: 

Provision for insurance losses was a negative $52 million for 2006 and 
a negative $160 million for 2005. The following chart lists the major 
components of the provision for insurance losses. 

Provision for Insurance Losses for the Years Ended December 31: 

Dollars in Thousands: 

Valuation adjustments: Closed banks and thrifts; 
2006: ($152,776); 
2005: ($159,421). 

valuation adjustments: Other assets; 
2006: ($4,230); 
2005: $3,762. 

Total Valuation Adjustments; 
2006: ($157,006); 
2005: ($155,659). 

Contingent Liabilities Adjustments: Anticipated failure of insured 
institutions; 
2006: $105,409; 
2005: ($4,852). 

Contingent Liabilities Adjustments: Litigation losses; 
2006: ($500); 
2005: $200). 

Contingent Liabilities Adjustments: Other contingencies; 
2006: 0; 
2005: $141. 

Total Contingent Liabilities Adjustments;  
2006: $104,909; 
2005: ($4,511). 

Total; 
2006: ($52,097); 
2005: ($160,170). 

[End of table] 

11. Employee Benefits: 

Pension Benefits, Savings Plans and Postemployment Benefits: 

Eligible FDIC employees (permanent and term employees with appointments 
exceeding one year) are covered by the federal government retirement 
plans, either the Civil Service Retirement System (CSRS) or the Federal 
Employees Retirement System (FERS). Although the DIF contributes a 
portion of pension benefits for eligible employees, it does not account 
for the assets of either retirement system. The DIF 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. 

Eligible FDIC employees also may participate in a FDIC-sponsored tax- 
deferred 401 (k) savings plan with matching contributions up to five 
percent. Under the Federal Thrift Savings Plan (TSP), FDIC provides 
FERS employees with an automatic contribution of 1 percent of pay and 
an additional matching contribution up to 4 percent of pay. CSRS 
employees also can contribute to the TSP. However, CSRS employees do 
not receive agency matching contributions. 

Prior to 2006, the FDIC reduced its workforce with a voluntary buyout 
program, and to a lesser extent, reduction-in-force actions resulting 
in separation or severance payments. The 2006 and 2005 related costs 
for these reductions are included in the "Operating expenses" line item 
in the Income Statement. 

Pension Benefits, Savings Plans Expenses and Postemployment Benefits 
for the Years Ended December 31: 

Dollars in Thousands: 

Civil Service Retirement System; 
2006: $6,808; 
2005: $7,632. 

Federal Employees Retirement System (Basic Benefit); 
2006: $38,915; 
2005: $38,458. 

FDIC Savings Plan; 
2006: $20,681; 
2005: $20,886. 

Federal Thrift Savings Plan; 
2006: $15,328; 
2005: $15,228. 

Separation Incentive Payment; 
2006: 0; 
2005: $22,371. 

Severance Pay; 
2006: $39; 
2005: $2,733. 

Total; 
2006: $81,771; 
2005: $107,308. 

[End of table] 

Postretirement Benefits Other Than Pensions: 

The FDIC provides certain life and dental insurance coverage for its 
eligible retirees, the retirees' beneficiaries, and covered dependents. 
Retirees eligible for life insurance coverage are those who have 
qualified due to: 1) immediate enrollment upon appointment or five 
years of participation in the plan and 2) eligibility for an immediate 
annuity. The life insurance program provides basic coverage at no cost 
to retirees and allows converting optional coverages to direct-pay 
plans. Dental coverage is provided to all retirees eligible for an 
immediate annuity. 

At December 31, 2006, the DIF's accumulated postretirement benefit 
obligation, representing the underfunded status of the plan, was $129.9 
million, which is recognized in the "Postretirement benefit liability" 
line item on the Balance Sheet. The cumulative actuarial gains/losses 
(changes in assumptions and plan experience) and prior service costs/ 
credits (changes to plan provisions that increase or decrease benefits) 
was $2.3 million at December 31, 2006, which is reported as accumulated 
other comprehensive income in the "Unrealized postretirement benefit 
gain" line item on the Balance Sheet. At December 31, 2005, the net 
postretirement benefit liability (the underfunded status adjusted for 
any unrecognized actuarial gains/losses and prior service costs/ 
credits) of $126.7 million is recognized in the "Accounts payable and 
other liabilities" line item. 

The DIF's expense for postretirement benefits in 2006 and 2005 was $9.0 
million and $10.3 million, respectively, which is included in the 
current and prior year's operating expenses on the Statement of Income 
and Fund Balance. The changes in the actuarial gains/losses and prior 
service costs/credits for 2006 of $2.3 million are reported as other 
comprehensive income in the "Unrealized postretirement benefit gain" 
line item. Key actuarial assumptions used in the accounting for the 
plan include the discount rate of 4.75 percent, the rate of 
compensation increase of 4.00 percent, and the dental coverage trend 
rate of 6.70 percent. See Note 2 regarding the recent issuance of a 
relevant FASB accounting pronouncement. 

12. Commitments and Off-Balance-Sheet Exposure: 

Commitments: 

Leased Space: 

The FDIC's lease commitments total $62.9 million for future years. The 
lease agreements contain escalation clauses resulting in adjustments, 
usually on an annual basis. The DIF recognized leased space expense of 
$30 million and $39 million for the periods ended December 31, 2006 and 
2005, respectively. 

Leased Space Commitments: 

Dollars in Thousands: 

2007: $21,491; 
2008: $15,723; 
2009: $13,552; 
2010: $6,334; 
2011: $3,727; 
2012/Thereafter: $2,026. 

Off-Balance-Sheet Exposure: 

Deposit Insurance: 

As of September 30, 2006, the estimated insured deposits for DIF were 
$4.1 trillion. This estimate is derived primarily from quarterly 
financial data submitted by insured depository institutions to the 
FDIC. This estimate represents the accounting loss that would be 
realized if all insured 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 fair 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, due to their short 
maturities and/or comparability with current interest rates. 

The net receivables from resolutions primarily include the DIF'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 
DIF's allowance for loss against the net receivables from 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 
DIF 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 
resolutions. 

[End of section] 

FSLIC Resolution Fund's Financial Statements: 

Balance Sheet: 

FSLIC Resolution Fund: 

Federal Deposit Insurance Corporation: 

FSLIC Resolution Fund Balance Sheet at December 31: 

Dollars in Thousands: 

Assets: Cash and cash equivalents; 
2006: $3,616,466; 
2005: $3,602,703. 

Assets: Receivables from thrift resolutions and other assets, net (Note 
3); 
2006: $36,730; 
2005: $38,746. 

Assets: Receivables from U.S. Treasury for goodwill judgments (Note 4); 
2006: $251,827; 
2005: 0. 

Total Assets; 
2006: $3,905,023; 
2005: $3,641,449. 

Liabilities: Accounts payable and other liabilities; 
2006: $5,497; 
2005: $7,799. 

Liabilities: Contingent liabilities for litigation losses and 
other(Note 4); 
2006: $279,327; 
2005: $257,503. 

Total Liabilities; 
2006: $284,824; 
2005: $265,302. 

Resolution Equity(Note 5): Contributed capital; 
2006: $127,453,996; 
2005: $127,007,441. 

Resolution Equity(Note 5): Accumulated deficit; 
2006: ($123,833,797); 
2005: ($123,631,294). 

Total Resolution Equity;  
2006: $3,620,199; 
2005: $3,376,147. 

Total liabilities and resolution equity; 
2006: $3,905,023; 
2005: $3,641,449. 

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

[End of table] 

Statement of Income and Fund Balance: 

FSLIC Resolution Fund: 

Federal Deposit Insurance Corporation: 

FSLIC Resolution Fund Statement of Income and Accumulated Deficit for 
the Years Ended December 31: 

Dollars in Thousands: 

Revenue: Interest on U.S. Treasury obligations; 
2006: $151,648; 
2005: $98,260. 

Revenue: Other revenue; 
2006: $17,650; 
2005: $24,176. 

Total Revenue; 
2006: $169,298; 
2005: $122,436. 

Expenses and Losses: Operating expenses; 
2006: $12,002; 
2005: $24,626. 

Expenses and Losses: Provision for losses; 
2006: ($19,257); 
2005: ($16,112). 

Expenses and Losses: Goodwill/Guarini litigation expenses(Note 4); 
2006: $411,056; 
2005: $975,598. 

Expenses and Losses: Recovery of tax benefits; 
2006: ($34,783); 
2005: ($45,946). 

Expenses and Losses: Other expenses; 
2006: $2,783; 
2005: $10,333. 

Total Expenses and Losses; 
2006: $371,801; 
2005: $948,499. 

Net (Loss); 
2006: ($202,503); 
2005: ($826,063). 

Accumulated deficit - Beginning; 
2006: ($123,631,294); 
2005: ($122,805,231). 

Accumulated Deficit - Ending; 
2006: ($123,833,797); 
2005: ($123,631,294). 

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

[End of table] 

Statement of Cash Flows: 

FSLIC Resolution Fund: 

Federal Deposit Insurance Corporation: 
FSLIC Resolution Fund Statement of Cash Flows for the Years Ended 
December 31: 

Dollars in Thousands. 

Operating activities: Net (Loss); 
2006: ($202,503); 
2005: ($826,063). 

Operating activities: Net (Loss): Adjustments to reconcile net (loss) 
to net cash (used by) operating activities: Provision for losses;  
2006: ($19,257); 
2005: ($16,112). 

Operating activities: Change is assets and liabilities: Decrease in 
receivables from thrift resolutions and other assets; 
2006: $21,273; 
2005: $59,630. 

Operating activities: Change is assets and liabilities: 
(Decrease)/Increase in accounts payable and other liabilities; 
2006: (2,302); 
2005: $2,196. 

Operating activities: Change is assets and liabilities: Increase in 
contingent liabilities for litigation losses and other; 
2006: $21,824; 
2005: $257,104. 

Net Cash (Used by) Operating Activities; 
2006: ($180,965); 
2005: ($523,245). 

Operating activities: Financing Activities: Provided by: U.S. treasury 
payments for goodwill litigations; 
2006: $194,728; 
2005: $624,564. 

Net cash provided by Financing Activities; 
2006: $194,728; 
2005: $624,564. 

Net Increase in Cash and Cash Equivalents; 
2006: $13,763; 
2005: $101,319. 

Cash and Cash equivalents - Beginning; 
2006: $3,602,703; 
2005; $3,501,384. 

Cash and Cash equivalents - Ending; 
2006: $3,616,466; 
2005: $3,602,703. 

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

[End of table] 

Notes to the Financial Statements: 

Notes to the Financial Statements FSLIC Resolution Fund December 31, 
2006 and 2005: 

1. Legislative History and Operations/Dissolution of the FSLIC 
Resolution Fund: 

Legislative History: 

The Federal Deposit Insurance Corporation (FDIC) is the independent 
deposit insurance agency created by Congress in 1933 to maintain 
stability and public confidence in the nation's banking system. 
Provisions that govern the operations of the FDIC are generally found 
in the Federal Deposit Insurance (FDI) Act, as amended, (12 U.S.C. 
1811, et seq). In carrying out the purposes of the FDI Act, as amended, 
the FDIC insures the deposits of banks and savings associations, and in 
cooperation with other federal and state agencies promotes the safety 
and soundness of insured depository institutions by identifying, 
monitoring and addressing risks to the deposit insurance funds 
established in the FDI Act, as amended. In addition, FDIC is charged 
with responsibility for the sale of remaining assets and satisfaction 
of liabilities associated with the former Federal Savings and Loan 
Insurance Corporation (FSLIC) and the Resolution Trust Corporation 
(RTC). 

The U.S. Congress created the 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 RTC-effective on August 9, 1989. 
Further, the FIRREA established the Resolution Funding Corporation 
(REFCORP) to provide part of the initial funds used by the RTC for 
thrift resolutions. 

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 (FRF-FSLIC), and the other composed of the 
RTC assets and liabilities (FRF-RTC). The assets of one pool are not 
available to satisfy obligations of the other. 

Pursuant to the Federal Deposit Insurance Reform Act of 2005, the Bank 
Insurance Fund and the Savings Association Insurance Fund were merged 
into a new fund, the Deposit Insurance Fund (DIF). The FDIC is the 
administrator of the FRF and the DIF. These funds are maintained 
separately to carry out their respective mandates. 

Operations/Dissolution 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 REFCORP to 
pay the interest on the REFCORP bonds. In addition, the FRF-FSLIC has 
available until expended $602.2 million in appropriations to 
facilitate, if required, efforts to wind up the resolution activity of 
the FRF-FSLIC. 

The FDIC has conducted an extensive review and cataloging of FRF's 
remaining assets and liabilities and is continuing to explore 
approaches for concluding FRF's activities. An executive-level Steering 
Committee was established in 2003 to facilitate the FRF dissolution. 

Some of the issues and items that remain open in FRF are: 1) criminal 
restitution orders (generally have from 5 to 10 years remaining to 
enforce); 2) collections of settlements and judgments obtained against 
officers and directors and other professionals responsible for causing 
or contributing to thrift losses (generally have from 6 months to 12 
years remaining to enforce); 3) numerous assistance agreements entered 
into by the former FSLIC (FRF could continue to receive tax-sharing 
benefits through year 2008); 4) goodwill and Guarini litigation (no 
final date for resolution has been established; see Note 4); and 5) 
environmentally impaired owned real estate assets. The FDIC is 
considering whether enabling legislation or other measures may be 
needed to accelerate liquidation of the remaining FRF assets and 
liabilities. The FRF could realize substantial recoveries from the tax- 
sharing benefits, criminal restitution orders and professional 
liability claims ranging from $165 million to $271.4 million; however, 
any associated recoveries are not reflected in FRF's financial 
statements given the significant uncertainties surrounding the ultimate 
outcome. 

Receivership Operations: 

The FDIC is responsible for managing and disposing of the assets of 
failed institutions in an orderly and efficient manner. The assets held 
by receivership entities, and the claims against them, are accounted 
for separately from FRF assets and liabilities to ensure that 
receivership 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. 
Receiverships are billed by the FDIC for services provided on their 
behalf. 

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 
conformity with U.S. 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. 
Periodic and final accountability reports of the FDIC's activities as 
receiver are furnished to courts, supervisory authorities, and others 
as required. 

Use of Estimates: 

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. The more significant 
estimates include allowance for losses on receivables from thrift 
resolutions and the estimated losses for litigation. 

Provision for Losses: 

The provision for losses represents the change in the valuation of the 
receivables from thrift resolutions and other assets. 

Fair Value of Financial Instruments: 

Cash equivalents, which consist of Special U.S. Treasury Certificates, 
are short-term, highly liquid investments with original maturities of 
three months or less and are shown at fair value. The carrying amount 
of short-term receivables and accounts payable and other liabilities 
approximates their fair market value, due to their short maturities. 

The net receivable from thrift resolutions is influenced by the 
underlying valuation of receivership assets. This corporate receivable 
is unique and the estimate presented is not necessarily indicative of 
the amount that could be realized in a sale to the private sector. Such 
a sale would require indeterminate, but substantial, discounts for an 
interested party to profit from these assets because of credit and 
other risks. Consequently, it is not practicable to estimate its fair 
market value. 

Other assets primarily consist of credit enhancement reserves, which 
are valued by performing projected cash flow analyses using market- 
based assumptions (see Note 3). 

Disclosure about Recent Accounting Pronouncements: 

Recent accounting pronouncements have been adopted or deemed to be not 
applicable to the financial statements as presented. 

Related Parties: 

The nature of related parties and a description of related party 
transactions are discussed in Note 1 and disclosed throughout the 
financial statements and footnotes. 

Reclassifications: 

Reclassifications have been made in the 2005 financial statements to 
conform to the presentation used in 2006. 

3. Receivables From Thrift Resolutions and Other Assets, Net: 

Receivables From Thrift Resolutions: 

The receivables from thrift resolutions include payments made by the 
FRF to cover obligations to insured depositors, advances to 
receiverships for working capital, and administrative expenses paid on 
behalf of receiverships. Any related allowance for loss represents the 
difference between the funds advanced and/or obligations incurred and 
the expected repayment. Assets held by the FDIC in its receivership 
capacity for the former FSLIC and SAIF-insured institutions are a 
significant source of repayment of the FRF's receivables from thrift 
resolutions. As of December 31, 2006, 20 of the 850 FRF receiverships 
remain active primarily due to unresolved litigation, including 
goodwill matters. 

As of December 31, 2006 and 2005, FRF receiverships held assets with a 
book value of $33 million and $139 million, respectively (including 
cash, investments, and miscellaneous receivables of $26 million and 
$113 million at December 31, 2006 and 2005, respectively). The 
estimated cash recoveries from the management and disposition of these 
assets that are used to derive the allowance for losses are based on a 
sampling of receivership assets in liquidation. Assets in the 
judgmental sample, which represents 96 percent of the asset book value 
for all active FRF receiverships, are generally valued by estimating 
future cash recoveries, net of applicable liquidation cost estimates, 
and then discounting these net cash recoveries using current market- 
based risk factors based on a given asset's type and quality. Resultant 
recovery estimates are extrapolated to the non-sampled assets in order 
to derive the allowance for loss on the receivable. These estimated 
recoveries are regularly evaluated, but remain subject to uncertainties 
because of potential changes in economic and market conditions. Such 
uncertainties could cause the FRF's actual recoveries to vary from the 
level currently estimated. 

Other Assets: 

Other assets primarily include credit enhancement reserves valued at 
$20.2 million and $16.7 million as of December 31, 2006 and 2005, 
respectively. The credit enhancement reserves resulted from swap 
transactions where the former RTC received mortgage-backed securities 
in exchange for single-family mortgage loans. The RTC supplied credit 
enhancement reserves for the mortgage loans in the form of cash 
collateral to cover future credit losses over the remaining life of the 
loans. These reserves may cover future credit losses through 2020. 

Receivables From Thrift Resolutions and Other Assets, Net at December 
31: 

Dollars in Thousands. 

Receivables from closed thrifts; 
2006: $11,308,460; 
2005: $16,080,789. 

Allowance for losses; 
2006: ($11,299,448); 
2005: ($16,065,703). 

Receivables from Thrift Resolutions, Net; 
2006: $9,012; 
2005: $15,086. 

Other assets; 
2006: $27,718; 
2005: $23,660. 

Total; 
2006: $36,730; 
2005: $38,746. 

[End of table] 

Gross receivables from thrift resolutions subject the FRF to credit 
risk. An allowance for loss of $11.3 billion, or 99.9 percent of the 
gross receivable, was recorded as of December 31, 2006. Of the 
remaining 0.1 percent of the gross receivable, 65 percent is expected 
to be repaid from receivership cash and investments. 

4. Contingent Liabilities for: 

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 has determined 
that losses from unresolved legal cases totaling $3 million are 
reasonably possible. 

Additional Contingency: 

Goodwill Litigation: 

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 government to perform certain agreements 
to count goodwill toward regulatory capital, the plaintiffs were 
entitled to recover damages from the United States. Approximately 26 
remaining cases are pending against the United States based on alleged 
breaches of these agreements. 

On July 22, 1998, the Department of Justice's (DOJ's) Office of Legal 
Counsel (OLC) concluded that the FRF is legally available to satisfy 
all judgments and settlements in the goodwill litigation involving 
supervisory action or assistance agreements. OLC determined that 
nonperformance of these agreements was a contingent liability that was 
transferred to the FRF on August 9, 1989, upon the dissolution of the 
FSLIC. On July 23, 1998, the U.S. Treasury determined, based on OLC's 
opinion, that the FRF is the appropriate source of funds for payments 
of any such judgments and settlements. The FDIC General Counsel 
concluded that, 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. 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 or judgments arising 
out of the goodwill litigation. 

The goodwill lawsuits are against the United States and as such are 
defended by the DOJ. On November 15, 2006, the DOJ again informed the 
FDIC that it is "unable at this time to provide a reasonable estimate 
of the likely aggregate contingent liability resulting from the Winstar-
related cases." This uncertainty arises, in part, from the existence of 
significant unresolved issues pending at the appellate or trial court 
level, as well as the unique circumstances of each case. 

The FDIC believes that it is probable that additional amounts, possibly 
substantial, may be paid from the FRF-FSLIC as a result of judgments 
and settlements in the goodwill litigation. Based on representations 
from the DOJ, the FDIC is unable to estimate a range of loss to the FRF-
FSLIC from the goodwill litigation. However, the FRF can draw from an 
appropriation provided by Section 110 of the Department of Justice 
Appropriations Act, 2000 (Public Law 106-113, Appendix A, Title 1,113 
Star. 1501A-3, 1501A-20) such sums as may be necessary for the payment 
of judgments and compromise settlements in the goodwill litigation. 
This appropriation is to remain available until expended. Because an 
appropriation is available to pay such judgments and settlements, any 
liability for goodwill litigation should have a corresponding 
receivable from the U.S. Treasury and therefore have no net impact on 
the financial condition of the FRF-FSLIC. 

The FRF paid $194.7 million as a result of judgments and settlements in 
four goodwill cases for the year ended December 31, 2006, compared to 
$624.6 million for seven goodwill cases for the year ended December 31, 
2005. As described above, the FRF received appropriations from the U.S. 
Treasury to fund these payments. At December 31, 2006, the FRF accrued 
a $251.8 million contingent liability and offsetting receivable from 
the U.S. Treasury for judgments in two additional cases that were fully 
adjudicated as of year end. These funds were paid in January 2007. 

In addition, the FRF-FSLIC pays the goodwill litigation expenses 
incurred by DOJ based on a Memorandum of Understanding (MOU) dated 
October 2, 1998, between the FDIC and DOJ. Under the terms of the MOU, 
the FRF-FSLIC paid $17.5 million and $18.3 million to DOJ for fiscal 
years (FY) 2007 and 2006, respectively. DOJ returns any unused fiscal 
year funding to the FRF unless special circumstances warrant these 
funds be carried over and applied against current fiscal year charges. 
At September 30, 2006, DOJ had an additional $3.4 million in unused 
fiscal year 2006 funds that were applied against FY 2007 charges of 
$20.9 million. 

Guarini Litigation: 

Paralleling the goodwill cases are similar cases alleging that the 
government breached agreements regarding tax benefits associated with 
certain FSLIC-assisted acquisitions. These agreements allegedly 
contained the promise of tax deductions for losses incurred on the sale 
of certain thrift assets purchased by plaintiffs from the FSLIC, even 
though the FSLIC provided the plaintiffs with tax-exempt reimbursement. 
A provision in the Omnibus Budget Reconciliation Act of 1993 (popularly 
referred to as the "Guarini legislation") eliminated the tax deductions 
for these losses. 

Eight Guarini cases were originally filed seeking damages relating to 
the government's elimination of certain tax deductions. Seven of those 
eight cases have now concluded. One case settled in 2002 for $20,000, 
and a second case concluded in 2004 with no damage award. Judgments 
were paid in four cases in 2005 and 2006 for a total of $152.6 million. 
In a seventh case settled in 2006 for $99 million, the settlement 
agreement further obligates the FRF-FSLIC as a guarantor for all tax 
liabilities in the event the settlement amount is determined by tax 
authorities to be taxable. The maximum potential exposure under this 
guarantee through 2009 is approximately $81 million. After reviewing 
relevant case law in relation to the nature of the settlement, the FDIC 
believes that it is very unlikely the settlement will be subject to 
taxation. Therefore, the FRF is not expected to fund any payment under 
this guarantee and no liability has been recorded. The eighth Guarini 
case is currently before the U. S. Court of Federal Claims for 
consideration of one remaining issue. 

The FDIC has established a contingent liability of approximately $27.5 
million for the remaining Guarini litigation loss exposure. 

Representations and Warranties: 

As part of the RTC's efforts to maximize the return from the sale of 
assets from thrift resolutions, representations and warranties, and 
guarantees were offered on certain loan sales. The majority of loans 
subject to these agreements have been paid off, refinanced, or the 
period for filing claims has expired. The FDIC's estimate of maximum 
potential exposure to the FRF is $30 million based on an assessment of 
remaining portfolio balances still covered by representations and 
warranties. No claims in connection with representations and warranties 
have been asserted since 1998 on the remaining open agreements. Because 
of the age of the remaining portfolio and lack of claim activity, the 
FDIC does not expect new claims to be asserted in the future. 
Consequently, the financial statements at December 31, 2006 and 2005 do 
not include a liability for these agreements. 

5. Resolution Equity: 

As stated in the Legislative History section of 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. 

Resolution Equity at December 31, 2006: 

Dollars in Thousands. 

Contributed capital - beginning; 
FRF-FSLIC: $44,808,104; 
FRF-RTC: $82,199,337; 
FRF Consolidated: $127,007,441. 

Add: U.S. Treasury payments for goodwill litigation; 
FRF-FSLIC: $446,555; 
FRF-RTC: 0; 
FRF Consolidated: $446,555. 

Contributed capital - ending; 
FRF-FSLIC: $45,254,659; 
FRF-RTC: $82,199,337; 
FRF Consolidated: $127,453,996. 

Accumulated deficit; 
FRF-FSLIC: ($42,212,338); 
FRF-RTC: ($81,621,459); 
FRF Consolidated: ($123,833,797). 

Total; 
FRF-FSLIC: $3,042,321; 
FRF-RTC: $577,878; 
FRF Consolidated: $3,620,199. 

[End of table] 

Contributed Capital: 

The FRF-FSLIC and the former RTC received $43.5 billion and $60.1 
billion from the U.S. Treasury, respectively, to fund losses from 
thrift resolutions prior to July 1, 1995. Additionally, the FRF-FSLIC 
issued $670 million in capital certificates to the Financing 
Corporation (a mixed-ownership government corporation established to 
function solely as a financing vehicle for the FSLIC) and the RTC 
issued $31.3 billion of these instruments to the REFCORP. FIRREA 
prohibited the payment of dividends on any of these capital 
certificates. Through December 31, 2006, the FRF-RTC has returned 
$4.556 billion to the U.S. Treasury and made payments of $4.572 billion 
to the REFCORP. These actions serve to reduce contributed capital. 

During 2006, the FRF-FSLIC received $194.7 million for U.S. Treasury 
payments for goodwill litigation and established a receivable for 
$251.8 million (see Note 4). 

Accumulated Deficit: 

The accumulated deficit represents the cumulative excess of expenses 
over revenue for activity related to the FRF-FSLIC and the FRF-RTC. 
Approximately $29.8 billion and $87.9 billion were brought forward from 
the former FSLIC and the former RTC on August 9, 1989, and January 1, 
1996, respectively. The FRF-FSLIC accumulated deficit has increased by 
$12.4 billion, whereas the FRF-RTC accumulated deficit has decreased by 
$6.3 billion, since their dissolution dates. 

6. Employee Benefits: 

Pension Benefits: 

Eligible FDIC employees (permanent and term employees with appointments 
exceeding one year) are covered by the federal government retirement 
plans, either the Civil Service Retirement System (CSRS) or the Federal 
Employees Retirement System (FERS). 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. The FRF's 
pension-related expenses were $850 thousand and $2.9 million for 2006 
and 2005, respectively. 

Postretirement Benefits Other Than Pensions: 

The FRF no longer records a liability for the postretirement benefits 
of life and dental insurance as a result of FDIC's change in funding 
policy for these benefits and elimination of the separate entity 
formerly used to account for such estimated future costs. In 
implementing this change, management decided not to allocate either the 
plan assets or the revised net accumulated postretirement benefit 
obligation (a long-term liability) to the FRF due to the expected 
dissolution of the FRF. However, the FRF does continue to pay its 
proportionate share of the yearly claim expenses associated with these 
benefits. 

[End of section] 

Appendix I: Comments from Federal Deposit Insurance Corporation: 

FDIC: 
Federal Deposit Insurance Corporation: 
550 171h Street, N.W., 
Washington, D.C. 20429: 
Deputy to the Chairman & Chief Financial Officer: 

February 8, 2007: 

Mr. David M. Walker: 
Comptroller General of the United States: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Re: FDIC Management Response on the GAO 2006 Financial Statements Audit 
Report: 

Dear Mr. Walker: 

Thank you for the opportunity to comment on the U.S. Government 
Accountability Office's (GAO) draft audit report titled, Financial 
Audit: Federal Deposit Insurance Corporation Funds' 2006 and 2005 
Financial Statements, GAO-07-371. The report presents GAO's opinions on 
the calendar year 2006 and 2005 financial statements of the Deposit 
Insurance Fund (DIF) and the Federal Savings and Loan Insurance 
Corporation Resolution Fund (FRF). The report also presents GAO's 
opinion on the effectiveness of FDIC's internal controls as of December 
31, 2006, and GAO's evaluation o^ FDIC's compliance with selected laws 
and regulations. 

We are pleased to accept GAO's unqualified opinions on the DIF and the 
FRY financial statements and to note that there were no material 
weaknesses identified during the 2006 audits. The GAO reported that the 
funds' financial statements were presented fairly, in all material 
respects, in conformity with U.S. generally accepted accounting 
principles; FDIC had effective internal control over financial 
reporting and compliance with laws and regulations for each fund; and 
there were no instances of noncompliance with laws and regulations that 
were tested. 

In addition, we appreciate that GAO recognized the improvements that 
FDIC made over the past year to its information systems environment. We 
believe that our sustained commitment to enhancing information systems 
controls adequately addressed the concerns that GAO highlighted in the 
prior year report, thus enabling GAO to conclude that the remaining 
issues related to such controls do not constitute a significant 
deficiency. Our goal is to maintain an effective information security 
program going forward. Accordingly, we will work diligently to resolve 
any control issues that GAO identified during its 2006 audits, as well 
as any that may arise in the future. 

We took forward to continuing our cooperative working relationship with 
the GAO in the coming year. Our collaborative efforts and open 
communication at all levels of our organizations should ensure 
continued success. If you have any questions or concerns, please do not 
hesitate to contact me. 

Sincerely, 

Signed by: 

Steven O. App: 
Deputy to the Chairman and Chief Financial Officer: 

[End of section] 

Appendix II: Staff Acknowledgments: 

Acknowledgments: 

The following individuals made key contributions to this report: Gary 
P. Chupka, Verginie A. Amirkhanian, Patricia P. Blumenthal, Teressa M. 
Broadie-Gardner, Sharon O. Byrd, Gloria Cano, Daniel R. Castro, Lon C. 
Chin, Emily M. Clancy, Nina E. Crocker, Oliver A. Culley, Patrick R. 
Dugan, Mickie E. Gray, David B. Hayes, Sairah R. Ijaz, Kaelin P. Kuhn, 
Wing Y. Lam, Crystal D. Lazcano, Nina M. Marrero, Duc M. Ngo, Tammi 
Nguyen, Mary O. Osorno, Deborah R. Peay, Eduvina Rodriguez, Eugene E. 
Stevens, Henry I. Sutanto, Charles M. Vrabel, William F. Wadsworth, 
Gregory C. Wilshusen, Matthew L. Wood, and Gregory J. Ziombra. 

(196108): 

FOOTNOTES 

[1] GAO, Financial Audit: Federal Deposit Insurance Corporation Funds' 
2005 and 2004 Financial Statements, GAO-06-146 (Washington, D.C.: Mar. 
2, 2006). 

[2] Reportable conditions involve matters coming to the auditor's 
attention that, in the auditor's judgment, should be communicated 
because they represent significant deficiencies in the design or 
operation of internal control and could adversely affect FDIC's ability 
to meet the control objectives described in this report. In May 2006, 
the American Institute of Certified Public Accountants (AICPA) issued 
Statement on Auditing Standard (SAS) 112, which became effective for 
audits of financial statements for periods ending on or after December 
15, 2006. SAS 112 established standards and provides guidance on the 
auditor's responsibilities for identifying, evaluating, and 
communicating matters related to an entity's internal control over 
financial reporting identified in an audit of financial statements. 
Under the new SAS, the auditor is required to communicate control 
deficiencies that are significant deficiencies or material weaknesses 
in internal controls. A significant deficiency is a control deficiency, 
or combination of deficiencies, that adversely affects the entity's 
ability to initiate, authorize, record, process, or report financial 
data reliably in accordance with generally accepted accounting 
principles such that there is more than a remote likelihood that a 
misstatement of the entity's financial statements that is more than 
inconsequential will not be prevented or detected. As a result of SAS 
112, the term reportable condition is no longer used. 

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