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1999 Annual Report

Savings Association Insurance Fund

Federal Deposit Insurance Corporation
Savings Association Insurance Fund Statements of Financial Position at December 31
Dollars in Thousands

1999

1998

Assets

Cash and cash equivalents

$

146,186

$

666,736

Cash and other assets: Restricted for SAIF-member exit fees (Note 3) (Includes cash and cash equivalents of $23.3 million and $55.2 million at December 31, 1999 and December 31, 1998, respectively)

268,490

253,790

Investment in U.S. Treasury obligations, net (Note 4) (Market value of investments at December 31, 1999 and December 31, 1998 was $9.8 billion and $9.4 billion, respectively)

9,979,572

9,061,786

Interest receivable on investments and other assets, net

153,558

140,699

Receivables from thrift resolutions, net (Note 5)

62,244

8,857

Total Assets

$

10,610,050

$

10,131,868

Liabilities

Accounts payable and other liabilities

$

4,888

$

7,247

Contingent liability for anticipated failure of insured institutions (Note 6)

56,000

31,000

SAIF-member exit fees and investment proceeds held in
escrow (Note 3)

268,490

253,790

Total Liabilities

329,378

292,037

Commitments and off-balance-sheet exposure (Note 10)

Fund Balance

Accumulated net income

10,312,416

9,835,577

Unrealized (loss)/gain on available-for-sale securities, net (Note 4)

(31,744)

4,254

Total Fund Balance

10,280,672

9,839,831

Total Liabilities and Fund Balance

$

10,610,050

$

10,131,868

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

Federal Deposit Insurance Corporation

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

Dollars in Thousands

1999

1998

Revenue

Interest on U.S. Treasury obligations

$

585,830

$

562,750

Assessments (Note 7)

15,116

15,352

Gain on conversion of benefit plan (Note 9)

0

5,464

Other revenue

49

293

Total Revenue

600,995

583,859

Expenses and Losses

Operating expenses

92,882

84,628

Provision for insurance losses

30,648

31,992

Other insurance expenses

626

9

Total Expenses and Losses

124,156

116,629

Net Income

476,839

467,230

Unrealized (loss)/gain on available-for-sale securities, net (Note 4)

(35,998)

4,286

Comprehensive Income

440,841

471,516

Fund Balance - Beginning

9,839,831

9,368,315

Fund Balance - Ending

$

10,280,672

$

9,839,831

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

Federal Deposit Insurance Corporation

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

Dollars in Thousands

1999

1998

Cash Flows From Operating Activities

Cash provided by:

Interest on U.S. Treasury obligations

$

606,244

$

597,596

Assessments

15,384

13,991

Entrance and exit fees, including interest on exit fees
(Note 3)

15,487

10,306

Recoveries from thrift resolutions

5,775

1,119

Recoveries from conversion of benefit plan

2,264

0

Miscellaneous receipts

46

67

Cash used by:

Operating expenses

(91,789)

(85,248)

Disbursements for thrift resolutions

(64,494)

(5,414)

Miscellaneous disbursements

(306)

0

Net Cash Provided by Operating Activities (Note 12)

488,611

532,417

Cash Flows From Investing Activities

Cash provided by:

Maturity of U.S. Treasury obligations, held-to-maturity

1,635,000

1,840,000

Maturity of U.S. Treasury obligations, available-for-sale

425,000

0

Cash used by:

Purchase of U.S. Treasury obligations, held-to-maturity

(1,326,004)

(1,402,352)

Purchase of U.S. Treasury obligations, available-for-sale

(1,775,103)

(438,225)

Net Cash Used by Investing Activities

(1,041,107)

(577)

Net (Decrease) Increase in Cash and Cash Equivalents

(552,496)

531,840

Cash and Cash Equivalents - Beginning

721,984

190,144

Unrestricted Cash and Cash Equivalents - Ending

146,186

666,736

Restricted Cash and Cash Equivalents - Ending

23,302

55,248

Cash and Cash Equivalents - Ending

$

169,488

$

721,984

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

NOTES TO THE FINANCIAL STATEMENTS
December 31, 1999 and 1998



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

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

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

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

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

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

 

Other Significant Legislation

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

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

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

The DIFA required the establishment of a Special Reserve of the SAIF if, on January 1, 1999, the reserve ratio exceeded the DRR of 1.25 percent. The reserve ratio exceeded the DRR by approximately 0.14 percent on January 1, 1999. As a result, $978 million was placed in a Special Reserve of the SAIF and was administered by the FDIC. On November 12, 1999, the Gramm-Leach-Bliley Act (GLBA), (Public Law 106-102), was enacted which eliminated the SAIF Special Reserve.

The GLBA was enacted in order to modernize the financial services industry that includes banks, brokerages, insurers, and other financial service providers. The GLBA will, among other changes, lift restrictions on affiliations among banks, securities firms, and insurance companies. It will also expand the financial activities permissible for financial holding companies and insured depository institutions, their affiliates and subsidiaries. The GLBA provides for a greater degree of functional regulation of securities and insurance activities conducted by banks and their affiliates. The GLBA also governs affiliations of thrifts that are in financial holding companies and provides for functional regulation of such thrifts’ affiliates.

 

Recent Legislative Initiatives

Congress continues to focus on legislative proposals that would affect the deposit insurance funds. Some of these proposals, such as the merger of the SAIF and the BIF and the rebate of the insurance funds, may have a significant impact on the SAIF and the BIF, if enacted into law. However, these proposals continue to vary and FDIC management cannot predict which provisions, if any, will ultimately be enacted.

 

Operations of the SAIF

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

The SAIF is primarily funded from the following sources: 1) interest earned on investments in U.S. Treasury obligations and 2) SAIF assessment premiums. Additional funding sources are borrowings from the U.S. Treasury, the Federal Financing Bank (FFB), and the Federal Home Loan Banks, if necessary. The 1990 OBR Act established the FDIC’s authority to borrow working capital from the FFB on behalf of the SAIF and the BIF. The FDICIA increased the FDIC’s authority to borrow for insurance losses from the U.S. Treasury, on behalf of the SAIF and the BIF, from $5 billion to $30 billion. The FDICIA also established a limitation on obligations that can be incurred by the SAIF, known as the maximum obligation limitation (MOL). At December 31, 1999, the MOL for the SAIF was $16.7 billion.

 

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 SAIF assets and liabilities to ensure that liquidation proceeds are distributed in accordance with applicable laws and regulations. Also, the income and expenses attributable to receiverships are accounted for as transactions of those receiverships. Liquidation expenses paid by the SAIF on behalf of the receiverships are recovered from those receiverships.

 

2. Summary of Significant Accounting Policies
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General

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

 

Use of Estimates

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

 

Cash Equivalents

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

 

Investments in U.S. Treasury Obligations

Investments in U.S. Treasury obligations are recorded pursuant to the Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that securities be classified in one of three categories: held-to-maturity, available-for-sale, or trading. Securities designated as held-to-maturity are 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. Securities designated as available-for-sale are shown at fair value with unrealized gains and losses included in Comprehensive Income. Realized gains and losses are included in the Statements of Income and Fund Balance as components of Net Income. Interest on both types of securities is calculated on a daily basis and recorded monthly using the effective interest method. The SAIF does not designate any securities as trading.

 

Allowance for Losses on Receivables from Thrift Resolutions

The SAIF records a receivable for the amounts advanced and/or obligations incurred for resolving failing and failed thrifts. Any related allowance for loss represents the difference between the funds advanced and/or obligations incurred and the expected repayment. The latter is based on estimates of discounted cash recoveries from the assets of assisted or failed thrifts, net of all estimated liquidation costs.

 

Cost Allocations Among Funds

Operating expenses not directly charged to the funds are allocated to all funds administered by the FDIC using workload-based-allocation percentages. These percentages are developed during the annual corporate planning process and through supplemental functional analyses.

 

Postretirement Benefits Other Than Pensions

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

 

Disclosure About Recent Accounting Standards Pronouncements

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

Other recent pronouncements are not applicable to the financial statements.

 

Related Parties

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

 

Reclassifications

Reclassifications have been made in the 1998 financial statements to conform to the presentation used in 1999.

 

3. Cash and Other Assets: Restricted for SAIF-Member Exit Fees line
The SAIF collects entrance and exit fees for conversion transactions when an insured depository institution converts from the BIF to the SAIF (resulting in an entrance fee) or from the SAIF to the BIF (resulting in an exit fee). Regulations approved by the FDIC’s Board of Directors (Board) and published in the Federal Register on March 21, 1990, directed that exit fees paid to the SAIF be held in escrow.

The FDIC and the Secretary of the Treasury will determine when it is no longer necessary to escrow such funds for the payment of interest on obligations previously issued by the FICO. These escrowed exit fees are invested in U.S. Treasury securities pending determination of ownership. The interest earned is also held in escrow. There were no conversion transactions during 1999 and 1998 that resulted in an exit fee to the SAIF.

As of December 31, 1999, the unamortized premium, net of unamortized discount, was $6.0 million. As of December 31, 1998, the unamortized premium, net of the unamortized discount, was $3.4 million.

 

Cash and Other Assets: Restricted for SAIF-Member Exit Fees at December 31
Dollars in Thousands

1999

1998

Cash and cash equivalents

$

23,302

$

55,248

Investment in U.S. Treasury obligations, net

239,975

193,350

Interest receivable on U.S. Treasury obligations

4,529

4,190

Exit fees receivable

684

1,002

Total

$

268,490

$

253,790

U.S. Treasury Obligations, Net at December 31, 1999 (Restricted for SAIF-Member Exit Fees)

Dollars in Thousands

Maturity

Stated
Yield at
Purchase

Face Value

Amortized Cost

Unrealized Holding Gains

Unrealized Holding Losses

Market Value

Held-to-Maturity

1-3 years

5.90%

$

115,000

$

115,336

$

0

$

(876)

$

114,460

3-5 years

6.30%

55,000

56,131

217

(582)

55,766

5-10 years

5.20%

64,000

68,508

0

(5,265)

63,243

Total

$

234,000

$

239,975

$

217

$

(6,723)

$

233,469

U.S. Treasury Obligations, Net at December 31, 1998 (Restricted for SAIF-Member Exit Fees)

Dollars in Thousands

Maturity

Stated
Yield at Purchase

Face Value

Amortized Cost

Unrealized Holding Gains

Unrealized Holding Losses

Market Value

Held-to-Maturity

1-3 years

5.52%

$

15,000

$

15,359

$

335

$

0

$

15,694

3-5 years

6.12%

135,000

134,722

6,550

0

141,272

5-10 years

5.69%

40,000

43,269

2,156

0

45,425

Total

$

190,000

$

193,350

$

9,041

$

0

$

202,391

 

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

In 1999, the FDIC purchased $935.7 million (adjusted par value) of Treasury inflation-indexed securities (TIIS) for the SAIF. Unlike a traditional Treasury security, the par value of a TIIS is indexed to and increases with the Consumer Price Index (CPI). Hence, these securities provide a measure of protection for the SAIF in the event of unanticipated inflation.

As of December 31, 1999 and 1998, the book value of Investment in U.S. Treasury obligations, net is $10.0 billion and $9.1 billion, respectively. The book value is computed by adding the amortized cost of the held-to-maturity securities to the market value of the available-for-sale securities.

As of December 31, 1999, the unamortized premium, net of unamortized discount, was $130.5 million. As of December 31, 1998, the unamortized premium, net of the unamortized discount, was $152.5 million.

U.S. Treasury Obligations, Net at December 31, 1999 (Unrestricted)

Dollars in Thousands

Maturity

Stated Yield at Purchase (a)

Face Value

Amortized Cost

Unrealized Holding Gains

Unrealized Holding Losses

Market Value

Held-to-Maturity

Less than one year

5.93%

$

1,630,000

$

1,631,605

$

1,020

$

(1,154)

$

1,631,471

1-3 years

5.97%

2,915,000

2,937,618

280

(14,021)

2,923,877

3-5 years

6.34%

705,000

739,940

2,131

(4,218)

737,853

5-10 years

5.61%

2,713,214

2,771,691

5,896

(126,467)

2,651,120

Total

$

7,963,214

$

8,080,854

$

9,327

$

(145,860)

$

7,944,321

Available-for-Sale

Less than one year

5.62%

$

150,000

$

150,379

$

22

$

(14)

$

150,387

1-3 years

5.17%

80,000

81,096

0

(1,046)

80,050

3-5 years

6.28%

240,000

255,838

0

(2,151)

253,687

5-10 years

5.03%

1,447,582

1,443,149

0

(28,555)

1,414,594

Total

$

1,917,582

$

1,930,462

$

22

$

(31,766)

$

1,898,718

Total Investment in U.S. Treasury Obligations, Net

Total

$

9,880,796

$

10,011,316

$

9,349

$

(177,626)

$

9,843,039

(a) For Treasury inflation-indexed securities (TIIS), the yields in the above table include their stated real yields at purchase, not their effective yields. Effective yields on TIIS would include the stated real yield at purchase plus an inflation adjustment of 2.6%, which was the latest year-over-year increase in the CPI as reported by the Bureau of Labor Statistics on December 14, 1999. These effectiveyields are 6.47% and 6.71% for TIIS classified as held-to-maturity and available-for-sale, respectively.

U.S. Treasury Obligations, Net at December 31, 1998 (Unrestricted)

Dollars in Thousands

Maturity

Stated Yield at Purchase

Face Value

Amortized Cost

Unrealized Holding Gains

Unrealized Holding Losses

Market Value

Held-to-Maturity

Less than one year

5.82%

$

1,490,000

$

1,496,779

$

8,790

$

0

$

1,505,569

1-3 years

5.96%

3,585,000

3,609,527

88,035

0

3,697,562

3-5 years

6.04%

1,640,000

1,703,669

76,027

0

1,779,696

5-10 years

6.00%

1,613,000

1,664,974

117,633

0

1,782,607

Total

$

8,330,000

$

8,474,949

$

290,485

$

0

$

8,765,434

Available-for-Sale

Less than one year

5.55%

$

370,000

$

373,840

$

2,172

$

0

$

376,012

1-3 years

5.61%

205,000

208,743

2,082

0

210,825

Total

$

575,000

$

582,583

$

4,254

$

0

$

586,837

Total Investment in U.S. Treasury Obligations, Net

Total

$

8,905,000

$

9,057,532

$

294,739

$

0

$

9,352,271

 

5. Receivables from Thrift Resolutions, Net
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The thrift resolution process takes different forms depending on the unique facts and circumstances surrounding each failing or failed institution. Payments for institutions that fail are made to cover obligations to insured depositors and represent claims by the SAIF against the receiverships’ assets. There was one thrift failure in 1999 with assets at failure of $63 million and SAIF outlays of $63 million, and no thrift failures in 1998.

As of December 31, 1999 and 1998, the FDIC, in its receivership capacity for SAIF-insured institutions, held assets with a book value of $114.0 million and $46.1 million, respectively (including cash and miscellaneous receivables of $104.0 million and $45.7 million at December 31, 1999, and 1998, respectively). These assets represent a significant source of repayment of the SAIF’s receivables from thrift resolutions. The estimated cash recoveries from the management and disposition of these assets that are used to derive the allowance for losses are based in part on a statistical sampling of receivership assets. The sample was constructed to produce a statistically valid result. These estimated recoveries are regularly evaluated, but remain subject to uncertainties because of potential changes in economic conditions. These factors could cause the SAIF’s and other claimants’ actual recoveries to vary from the level currently estimated.

 

6. Contingent Liabilities for:
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Anticipated Failure of Insured Institutions

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

The contingent liabilities for anticipated failure of insured institutions as of December 31, 1999 and 1998, were $56 million and $31 million, respectively. The contingent liability is derived in part from estimates of recoveries from the management and disposition of the assets of these probable thrift failures. Therefore, these estimates are subject to the same uncertainties as those affecting the SAIF’s receivables from thrift resolutions (see Note 5). Consequently, this could affect the ultimate cost to the SAIF from probable failures.

There are other thrifts where the risk of failure is less certain, but still considered reasonably possible. Should these thrifts fail, the SAIF could incur additional estimated losses ranging from $1 million to $87 million.

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

 

Year 2000 Anticipated Failures

The SAIF is also subject to a potential loss from thrifts that may fail if they are unable to become Year 2000 compliant in a timely manner. In May 1997, the federal financial institution regulatory agencies developed a program to conduct uniform reviews of all FDIC-insured institutions’ Year 2000 readiness. The program assessed the five key phases of an institution’s Year 2000 conversion efforts: 1) awareness, 2) assessment, 3) renovation, 4) validation, and 5) implementation. The reviews classified each institution as Satisfactory, Needs Improvement, or Unsatisfactory. Performance was defined as Satisfactory when Year 2000 weaknesses were minor in nature and could be readily corrected within the program management framework.

In order to assess exposure to the SAIF from Year 2000 potential failures, the FDIC evaluated all information relevant to such an assessment, to include multiple Year 2000 on-site examination results, institution capital levels and supervisory examination composite ratings, and other institution past and current financial characteristics. Based on data updated through December 31, 1999, all SAIF-insured institutions have received a Satisfactory rating. As a result of this assessment, we conclude that, as of December 31, 1999, there are no probable or reasonably possible losses to the SAIF from Year 2000 failures.

 

Litigation Losses

The SAIF records an estimated loss for unresolved legal cases to the extent those losses are considered probable and reasonably estimable. For 1999 and 1998, no legal cases were deemed probable in occurrence. The FDIC has determined that losses from unresolved legal cases totaling $620 thousand are reasonably possible.

 

7. Assessments
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The 1990 OBR Act removed caps on assessment rate increases and authorized the FDIC to set assessment rates for SAIF members semiannually, to be applied against a member’s average assessment base. The FDICIA: 1) required the FDIC to implement a risk-based assessment system; 2) authorized the FDIC to increase assessment rates for SAIF-member institutions as needed to ensure that funds are available to satisfy the SAIF’s obligations; 3) required the FDIC to build and maintain the reserves in the insurance funds to 1.25 percent of insured deposits; and 4) authorized the FDIC to increase assessment rates more frequently than semiannually and impose emergency special assessments as necessary to ensure that funds are available to repay U.S. Treasury borrowings.

The DIFA (see Note 1) provided, among other things, for the capitalization of the SAIF to its DRR of 1.25 percent by means of a one-time special assessment on SAIF-insured deposits. The SAIF achieved its required capitalization by means of a $4.5 billion special assessment effective October 1, 1996. Since October 1996, the SAIF has maintained a capitalization level at or higher than the DRR of 1.25 percent of insured deposits. As of December 31, 1999, the capitalization level for the SAIF is 1.45 percent of estimated insured deposits.

The DIFA provided for the elimination of the mandatory minimum assessment formerly provided for in the FDI Act. It also provided for the expansion of the assessment base for payments of the interest on obligations issued by the FICO to include all FDIC-insured institutions (including thrifts, banks, and Oakar and Sasser financial institutions). It also made the FICO assessment separate from regular assessments, effective on January 1, 1997.

The FICO assessment has no financial impact on the SAIF. The FICO assessment is separate from the regular assessments and is imposed on thrifts and banks, not on the insurance funds. The FDIC, as administrator of the SAIF and the BIF, is acting solely as a collection agent for the FICO. During 1999 and 1998, $426 million and $446 million, respectively, was collected from SAIF-member institutions and remitted to the FICO.

The FDIC uses a risk-based assessment system that charges higher rates to those institutions that pose greater risks to the SAIF. To arrive at a risk-based assessment for a particular institution, the FDIC places each institution in one of nine risk categories, using a two-step process based first on capital ratios and then on other relevant information. The assessment rate averaged approximately 0.20 cents and 0.21 cents per $100 of assessable deposits for 1999 and 1998, respectively. On November 8, 1999, the Board voted to retain the SAIF assessment schedule at the annual rate of 0 to 27 cents per $100 of assessable deposits for the first semiannual period of 2000. The Board reviews premium rates semiannually.

 

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

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

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

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

Eligible FDIC employees also may participate in a FDIC-sponsored tax-deferred 401(k) savings plan with matching contributions. The SAIF pays its share of the employer’s portion of all related costs.

The SAIF’s pro rata share of the Corporation’s liability to employees for accrued annual leave is approximately $4.4 million at both December 31, 1999 and 1998.

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

Dollars in Thousands

1999

1998

CSRS/FERS Disability Fund

$

0

$

140

Civil Service Retirement System

1,276

1,242

Federal Employees Retirement System (Basic Benefit)

3,268

3,002

FDIC Savings Plan

2,029

1,947

Federal Thrift Savings Plan

1,267

1,176

Total

$

7,840

$

7,507

 

9. Postretirement Benefits Other Than Pensions
line
On January 2, 1998, the SAIF’s obligation under SFAS No. 106, "Employers’ Accounting for Postretirement Benefits Other Than Pensions," for postretirement health benefits was reduced when over 6,500 FDIC employees enrolled in the Federal Employees Health Benefits (FEHB) Program for their future health insurance coverage. The OPM assumed the SAIF’s obligation for postretirement health benefits for these employees at no initial enrollment cost. In addition, legislation was passed that allowed the remaining 2,600 FDIC retirees and near-retirees (employees within five years of retirement) in the FDIC health plan to also enroll in the FEHB Program for their future health insurance coverage, beginning January 1, 1999. The OPM assumed the SAIF’s obligation for postretirement health benefits for retirees and near retirees for a fee of $3.7 million. The OPM is now responsible for postretirement health benefits for all FDIC employees and covered retirees. The FDIC will continue to be obligated for dental and life insurance coverage for as long as the programs are offered and coverage is extended to retirees.

OPM’s assumption of the health care obligation constituted both a settlement and a curtailment as defined by SFAS No. 106. This conversion resulted in a gain of $5.5 million to the SAIF in 1998.

Postretirement Benefits Other Than Pensions

Dollars in Thousands

1999

1998

Funded Status at December 31

Fair value of plan assets (a)

$

5,160

$

5,048

Less: Benefit obligation

5,833

5,048

Under Funded Status of the Plans

$

673

$

0

Accrued benefit liability recognized in the Statements of Financial Position

$

673

$

0

Expenses and Cash Flows for the Period Ended December 31

Net periodic benefit cost

$

483

$

1,516

Employer contributions

129

718

Benefits paid

129

718

Weighted-Average Assumptions at December 31

Discount rate

4.50%

4.50%

Expected return on plan assets

4.50%

4.50%

Rate of compensation increase

3.00%

4.00%

(a) Invested in U.S. Treasury obligations.
Total dental coverage trend rates were assumed to be 7% per year, inclusive of general inflation. Dental costs were assumed to be subject to an annual cap of $2,000.

 

10. Commitments and Off-Balance-Sheet Exposureline
Commitments

Leases
The SAIF’s allocated share of the FDIC’s lease commitments totals $17.5 million for future years. The lease agreements contain escalation clauses resulting in adjustments, usually on an annual basis. The allocation to the SAIF of the FDIC’s future lease commitments is based upon current relationships of the workloads among the SAIF, the BIF, and the FRF. Changes in the relative workloads could cause the amounts allocated to the SAIF in the future to vary from the amounts shown below. The SAIF recognized leased space expense of $5.7 million and $4.8 million for the years ended December 31, 1999 and 1998, respectively.

 

Lease Commitments
Dollars in Thousands

2000

2001

2002

2003

2004

2005

$4,576

$4,023

$3,861

$2,670

$1,537

$821

Off-Balance-Sheet Exposure

Deposit Insurance
As of December 31, 1999, deposits insured by the SAIF totaled approximately $711 billion. This would be the accounting loss if all depository institutions were to fail and the acquired assets provided no recoveries.

Asset Putbacks
Upon resolution of a failed thrift, the assets are placed into receivership and may be sold to an acquirer under an agreement that certain assets may be resold, or "putback," to the receivership. The values and time limits for these assets to be putback are defined within each agreement. It is possible that the SAIF could be called upon to fund the purchase of any or all of the "unexpired putbacks" at any time prior to expiration. The FDIC’s estimate of the volume of assets subject to repurchase under the existing agreements is $40.1 million. The actual amount subject to repurchase should be significantly lower because the estimate does not reflect subsequent collections on or sales of assets kept by the acquirer. It also does not reflect any decrease due to acts by the acquirers which might disqualify assets from repurchase eligibility. Repurchase eligibility is determined by the FDIC when the acquirer initiates the asset putback procedures. The FDIC projects that a total of $443 thousand in book value of assets will be putback.

 

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

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

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

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

 

12. Supplementary Information Relating to the Statements of Cash Flowsline

Reconciliation of Net Income to Net Cash Provided by Operating Activities for the Years Ended December 31

Dollars in Thousands

1999

1998

Net Income

$

476,839

$

467,230

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities

Income Statement Items:

Provision for insurance losses

30,648

31,992

Amortization of U.S. Treasury obligations (unrestricted)

51,708

41,198

TIIS inflation adjustment

(11,818)

0

Gain on conversion of benefit plan

0

5,464

Change in Assets and Liabilities:

Decrease in amortization of U.S. Treasury obligations (restricted)

808

304

(Increase) in entrance and exit fees receivable, including interest receivable on investments and other assets

(13,500)

(20,187)

(Increase) in receivables from thrift resolutions

(41,450)

(4,700)

(Decrease) in accounts payable and other liabilities

(2,325)

(3,126)

(Decrease) in contingent liability for anticipated failure of insured institutions

(17,000)

0

Increase in exit fees and investment proceeds held in escrow

14,701

14,242

Net Cash Provided by Operating Activities

$

488,611

$

532,417

 

13. Year 2000 Issues
line
State of Readiness

The FDIC, as administrator for the SAIF, conducted a corporate-wide effort to ensure that all FDIC information systems were Year 2000 compliant. This meant that systems must accurately process date and time data in calculations, comparisons, and sequences after December 31, 1999, and be able to correctly deal with leap-year calculations in 2000. An oversight committee comprised of FDIC division management directed the Year 2000 effort.

The FDIC’s Division of Information Resources Management (DIRM) led the Year 2000 effort, under the direction of the oversight committee. The internal Year 2000 team used a structured approach and rigorous program management as described in the U.S. General Accounting Office’s (GAO) Year 2000 Computing Crisis: An Assessment Guide. This methodology consisted of five phases under the overall umbrellas of Program and Project Management. The FDIC completed all of the recommended GAO phases: Awareness, Assessment, Renovation, Validation, and Implementation.

As a precautionary measure, the FDIC developed a Year 2000 Rollover Weekend Strategy to monitor the information systems during the transition into the year 2000. Contingency plans were in place for mission-critical application failures and for other systems. No major problems were anticipated due to the extensive planning and validation that occurred (see Note 14).

 

Year 2000 Estimated Costs

Year 2000 compliance expenses for the SAIF are estimated at $6.5 million and $4.4 million at December 31, 1999 and 1998, respectively. These expenses are reflected in the "Operating expenses" line of the SAIF’s Statements of Income and Fund Balance.

 

14. Subsequent Events
line
Year 2000 Effect on Internal Systems

On January 1, 2000, all FDIC systems were operating normally as a result of a corporate-wide effort to ensure that all FDIC information systems were Year 2000 compliant prior to December 31, 1999. No internal system failures have occurred and none are anticipated (see Note 13).

 

Year 2000 Effect on Anticipated Failures

As of May 5, 2000, no thrifts had failed due to Year 2000 related problems and none are anticipated. Refer to "Contingent Liabilities for: Year 2000 Anticipated Failures" (see Note 6).