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1997 Annual Report

Notes to the Financial Statement
Savings Association Insurance Fund
December 31, 1997 and 1996

  1. Legislative History and Operations of the Savings Association Insurance Fund
  2. Summary of Significant Accounting Policies
  3. Investment in U.S. Treasury Obligations, Net
  4. Entrance and Exit Fees Receivable, Net
  5. Receivables From Bank Resolutions, Net
  6. Estimated Liabilities for:
  7. Assessments
  8. Pension Benefits, Savings Plans, Postemployment Benefits and Accrued Annual Leave
  9. Postretirement Benefits Other than Pensions
  10. Commitments and Off-Balance Sheet Exposure
  11. Disclosures about the Fair Value of Financial Instruments
  12. Supplementary Information Relating to the Statements of Cash Flows
  13. Year 2000 Compliance Expenses
  14. Subsequent Events

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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 three funds. All three funds are maintained separately to carry out their respective mandates.

The SAIF and the BIF are insurance funds responsible for protecting depositors in operating thrift institutions and banks from loss due to failure of the institution. 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.

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 (see "Operations of the SAIF" below). The FDICIA also requires the FDIC to: 1) resolve troubled institutions in a manner that will result in the least possible cost to the deposit insurance funds and 2) maintain the insurance funds at 1.25 percent of insured deposits or a higher percentage as circumstances warrant.

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

In addition, DIFA requires the establishment of a Special Reserve of the SAIF. If on January 1, 1999, the reserve ratio of the SAIF exceeds the designated reserve ratio (DRR) of 1.25 percent, the amount that the reserve ratio exceeds the DRR will be placed in the Special Reserve of the SAIF. The Special Reserve will be administered by the FDIC and invested in accordance with provisions outlined in the Federal Deposit Insurance Act (FDI Act).

Also, DIFA provides: 1) exemptions from the special assessment for certain institutions; 2) a 20 percent adjustment of the special assessment for certain Oakar banks and certain other institutions; and 3) assessment rates for SAIF members not lower than the assessment rates for BIF members with comparable risk.

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. In this capacity, the SAIF has financial responsibility for all SAIF-insured deposits held by SAIF-member institutions and BIF-member banks designated as Oakar banks.

The Oakar bank provisions are found in Section 5(d)(3) of the FDI Act. The provisions allow, with the approval of the acquiring institution’s appropriate federal regulatory authority, any insured institution that belongs to one insurance fund to merge, consolidate with, or acquire the deposit liabilities of an institution that belongs to the other insurance fund without paying entrance and exit fees, under two principal conditions. One condition is that although the acquiring institution continues to belong to its own insurance fund (primary fund), the institution becomes obliged to pay assessments to the fund of which the acquired institution was a member (secondary fund). The secondary fund assessments are keyed to the amount of the deposits so acquired. The other condition is that if the acquiring institution should fail, the losses resulting from the failure are allocated between the two insurance funds according to a formula that is likewise keyed to the amount of the acquired deposits. "Sasser" banks are SAIF members that converted to a bank charter in accordance with Section 5 (d)(2)(G) of the FDI Act.

The SAIF is primarily funded from the following sources: 1) interest earned on investments in U.S. Treasury obligations; 2) SAIF assessment premiums; and 3) borrowings from Federal Home Loan Banks, the U.S. Treasury, and the Federal Financing Bank (FFB), 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, 1997, the MOL for the SAIF was $16.9 billion.

The VA, HUD and Independent Agencies Appropriations Act, 1998, Public Law 105-65 appropriated $34 million for fiscal year 1998 (October 1, 1997, through September 30, 1998) for operating expenses incurred by the Office of Inspector General (OIG). The Act mandates that the funds are to be derived from the SAIF, the BIF, and the FRF. In prior years, the OIG funding was not submitted to Congress as part of the appropriation process.


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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

The SAIF considers cash equivalents to be short-term, highly liquid investments with original maturities of three months or less.

Investments in U.S. Treasury Obligations

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

Allowance for Losses on Receivables From Thrift Resolutions

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

Receivership Operations

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

Cost Allocations Among Funds

Certain operating expenses (including personnel, administrative, and other indirect expenses) not directly charged to each fund under the FDIC’s management are allocated based on percentages developed during the business planning process. The cost of furniture, fixtures, and equipment purchased by the FDIC on behalf of the three funds under its administration is allocated among these funds on a similar basis. The SAIF expenses its share of these allocated costs at the time of acquisition because of their immaterial amounts. The FDIC includes the cost of buildings used in operations in the BIF’s financial statements. The BIF charges SAIF a rental fee representing an allocated share of its annual depreciation.

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 remaining net postretirement benefits liability for the plan is recognized in the SAIF’s Statement of Financial Position.

Disclosure About Recent Financial Accounting Standards Board Pronouncement

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

In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The FDIC intends to adopt SFAS No. 131 effective on January 1, 1998; however, management anticipates that the SAIF, as a non-publicly held enterprise, will not be affected by SFAS No. 131. Other recent pronouncements issued by the FASB 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 1996 financial statements to conform to the presentation used in 1997.


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3. Investment in U.S. Treasury Obligations, Net
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All cash received by the SAIF is invested in U.S. Treasury obligations with maturities exceeding three months unless the cash is used: 1) to defray operating expenses; 2) for outlays related to liquidation activities; or 3) for investments in U.S. Treasury one-day special certificates, which are included in the cash and cash equivalents line item. In 1997 and 1996, $185 million and $190 million, respectively, were restricted and invested in U.S. Treasury notes (see Note 4). The related interest earned on these invested funds was also held as restricted funds. Prior to 1997, all investments were designated "held-to-maturity" (see Note 2).

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U.S. Treasury Obligations at December 31, 1997
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U.S. Treasury Obligations at December 31, 1997

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U.S. Treasury Obligations at December 31, 1996
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U.S. Treasury Obligations at December 31, 1996

In 1997, the unamortized premium, net of unamortized discount, was $116.8 million. In 1996, the unamortized premium, net of unamortized discount, was $64.1 million.


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4. Entrance and Exit Fees Receivable, Net
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The SAIF receives entrance and exit fees for conversion transactions when an insured depository institution converts from the BIF to the SAIF (resulting in an entrance fee) or from the SAIF to the BIF (resulting in an exit fee). Regulations approved by the FDIC’s Board of Directors 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. Interest on these investments was $12.1 million and $11.1 million for 1997 and 1996, respectively. For 1997, restricted assets included: $49 million in cash and cash equivalents, $185 million of investments in U.S. Treasury obligations, net, $1.4 million in exit fees receivable and $4 million in interest receivable. For 1996, restricted assets included: $31 million in cash and cash equivalents, $190 million of investments in U.S. Treasury obligations, net, $3.5 million in exit fees and $3.7 million in interest receivable. There were no conversion transactions during 1997 and only one conversion transaction in 1996 that resulted in an exit fee to the SAIF.


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5. Receivables From Thrift Resolutions, Net
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The FDIC resolution process takes different forms depending on the unique facts and circumstances surrounding each failing or failed institution. Payments to prevent a failure are made to operating institutions when cost and other criteria are met. Such payments may facilitate a merger or allow a troubled institution to continue operations. Payments for institutions that fail are made to cover the institution’s obligation to insured depositors’ and represent a claim by the SAIF against the receiverships’ assets. There were no thrift failures in 1997.

The FDIC, as receiver for failed thrifts, engages in a variety of strategies at the time of failure to maximize the return from the sale or disposition of assets. A failed thrift acquirer can purchase selected assets at the time of resolution and assume full ownership, benefit, and risk related to such assets. The receiver may also engage in other types of transactions as circumstances warrant. As described in Note 2, an allowance for loss is established against the receivable from thrift resolutions.

As of December 31, 1997 and 1996, the FDIC, in its receivership capacity for SAIF-insured institutions, held assets with a book value of $56.6 million and $78.2 million, respectively (including cash and miscellaneous receivables of $40 million and $42.3 million at December 31, 1997 and 1996, 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 affect the SAIF’s and other claimants’ actual recoveries from the level currently estimated.


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6. Estimated Liabilities for:
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Anticipated Failure of Insured Institutions

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

The estimated liabilities for anticipated failure of insured institutions as of December 31, 1997 and 1996, were zero and $4 million, respectively. The estimated liability is derived in part from estimates of recoveries from the management and disposition of the assets of these probable failures. Therefore, they are subject to the same uncertainties as those affecting the SAIF’s receivables from thrift resolutions (see Note 5). This could affect the ultimate costs to the SAIF from probable thrift failures.

There are other institutions where the risk of failure is less certain, but still considered reasonably possible. Should these institutions fail, the SAIF could incur additional estimated losses of about $50 million.

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

Litigation Losses

The SAIF records an estimated loss for unresolved legal cases to the extent those losses are considered probable and reasonably estimable. For 1997 and 1996, FDIC identified no legal cases that met the criteria for recognition in the financial statements. The FDIC’s Legal Division has determined that losses from unresolved legal cases totaling $7 million are reasonably possible.


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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 designated reserve ratio of 1.25 percent by means of a one-time special assessment on SAIF- insured deposits. Effective on October 1, 1996, the SAIF achieved its required capitalization by means of a $4.5 billion special assessment.

Prior to January 1, 1997, the FICO had priority over the SAIF for receiving and utilizing SAIF assessments to ensure availability of funds for interest on the FICO’s debt obligations. Accordingly, the SAIF recognized as assessment revenue only that portion of SAIF assessments not required by the FICO. Assessments on the SAIF-insured deposits held by BIF-member Oakar or SAIF- member Sasser institutions prior to January 1, 1997, were not subject to draws by the FICO and thus, were retained in SAIF in their entirety. FICO assessments collected and remitted during 1996 were $808 million.

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

The FICO assessment has no financial impact on the SAIF since the FICO assessment is separate from the regular assessment, and the FICO assessment is imposed on thrifts and not on the SAIF. The FDIC as administrator of the SAIF is acting solely as a collection agent for the FICO. During 1997, $454 million was collected from savings associations and remitted to the FICO.

The FDIC uses a risk-based assessment system that charges higher rates to those institutions that pose greater risks to the SAIF. To arrive at a risk-based assessment for a particular institution, the FDIC places each institution in one of nine risk categories using a two-step process based first on capital ratios and then on other relevant information.

The FDIC Board of Directors (Board) reviews premium rates semiannually. In December 1996, the Board set SAIF assessment rates to a range of 0 to 27 cents per $100 of assessable deposits (annual rates). The new rates, which are identical to those previously approved for BIF members, were effective on October 1, 1996, for Oakar and Sasser financial institutions, and effective on January 1, 1997, for all other SAIF-insured institutions. The assessment rate averaged approximately 0.39 cents and 20.4 cents per $100 of assessable deposits for 1997 and 1996, respectively.

Total assessment revenue for 1997 and 1996 was $13.9 million and $5.2 billion, respectively. Assessment revenue for 1996 included the one-time special assessment of $4.5 billion required to capitalize SAIF. The SAIF refunded a total of $219 million (including $2.9 million in interest) to Oakar and Sasser financial institutions in 1996 and 1997. Refunds were necessary because fourth quarter 1996 assessment rates were set prior to SAIF’s capitalization.

On November 12, 1997, the Board voted to retain the SAIF assessment schedule of 0 to 27 cents per $100 of assessable deposits (annual rates) for the first semiannual period of 1998.


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

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

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 an FDIC-sponsored tax-deferred savings plan with matching contributions. The SAIF pays its share of the employer’s portion of all related costs.

Due to a substantial decline in the FDIC’s workload, the Corporation developed a staffing reduction program, a component of which is a voluntary separation incentive plan, or buyout. Corporate-wide buyout plans have been offered to eligible employees. The buyouts have not had a material effect on the SAIF.

The SAIF pro rata share of the Corporation’s liability to employees for accrued annual leave is approximately $3 million and $4 million at December 31, 1997 and 1996, respectively.

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Pension Benefits and Savings Plans Expenses
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Pension Benefits and Savings Plans Expenses


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9. Postretirement Benefits Other than Pensions
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The FDIC provides certain health, dental, and life insurance coverage for its eligible retirees, the retirees’ beneficiaries and covered dependents. Retirees eligible for health and/or 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. Dental coverage is provided to all retirees eligible for an immediate annuity.

The FDIC is self-insured for hospital/medical, prescription drug, mental health and chemical dependency coverage. Additional risk protection was purchased through stop-loss and fiduciary liability insurance. All claims are administered on an administrative services only basis with the hospital/medical claims administered by Aetna Life Insurance Company, the mental health and chemical dependency claims administered by OHS Foundation Health Psychcare Inc., and the prescription drug claims administered by Caremark.

The life insurance program, underwritten by Metropolitan Life Insurance Company, provides basic coverage at no cost to retirees and allows converting optional coverages to direct-pay plans. Dental care is underwritten by Connecticut General Life Insurance Company and provides coverage at no cost to retirees.

The SAIF expensed $451 thousand and $168 thousand for net periodic postretirement benefit costs for the years ended December 31, 1997 and 1996, respectively. For measurement purposes for 1997, the FDIC assumed the following: 1) a discount rate of 5.75 percent; 2) an average long-term rate of return on plan assets of 5.75 percent; 3) an increase in health costs in 1997 of 9.75 percent (inclusive of general inflation of 2.5 percent), decreasing to an ultimate rate in the year 2000 and thereafter of 7.75 percent; and 4) an increase in dental costs for 1997 and thereafter of 4.5 percent (in addition to general inflation). Both the assumed discount rate and health care cost rate have a significant effect on the amount of the obligation and periodic cost reported.

If the health care cost rate was increased one percent, the accumulated postretirement benefit obligation as of December 31, 1997, would have increased by 20.2 percent. The effect of this change on the aggregate of service and interest cost for 1997 would be an increase of 23.5 percent.

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Net Periodic Postretirement Benefit Cost
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Net Periodic Postretirement Benefit Cost

As stated in Note 2, the FDIC established an entity to provide accounting and administration on behalf of the SAIF, the BIF, and the FRF. The SAIF funds its liability and these funds are being managed as "plan assets."

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Accumulated Postretirement Benefit Obligation and Funded Status at December 31
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Accumulated Postretirement Benefit Obligation and Funded Status at December 31


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10. Commitments and Off-Balance Sheet Exposure
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Commitments

Leases

The SAIF’s allocated share of the FDIC’s lease commitments totals $18.7 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 among the three funds in future years could change the amount of the FDIC’s lease payments that will be allocated to the SAIF. The SAIF recognized leased space expense of $3.3 million and $2.2 million for the years ended December 31, 1997 and 1996, respectively.

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Lease Commitments
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Lease Commitments

Other Off-Balance Sheet Risk

Deposit Insurance
As of December 31, 1997, deposits insured by the SAIF totaled approximately $690 billion. This would be the accounting loss if all depository institutions were to fail and the acquired assets provided no recoveries.


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

The net receivable from thrift resolutions primarily involves 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 receivable 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, 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 do not necessarily correspond with the timing of collections on receivership assets. Therefore, the effect of discounting used by receiverships should not necessarily be viewed as producing an estimate of market value for the net receivables from thrift resolutions.


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12. Supplementary Information Relating to the Statements of Cash Flows
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Reconciliation of Net Income to Net Cash Provided by Operating Activities
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Reconciliation of Net Income to Net Cash Provided by Operating Activities


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13. Year 2000 Compliance Expenses
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As part of its operations, the FDIC as administrator of the SAIF is assessing, testing, modifying or replacing as necessary its automated systems to ensure that these systems are Year 2000 compliant. As of December 31, 1997, the SAIF has not incurred, nor does management anticipate that the SAIF will incur, a material charge to earnings to ensure that its systems are Year 2000 compliant.

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. As of December 31, 1997, the potential liability, if any, is not estimable. During 1998 the FDIC will assess this potential liability.


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14. Subsequent Events
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Effective on January 4, 1998, all employees with five or more years until retirement were converted from the FDIC health plan to the Federal Employees Health Benefits (FEHB) program. This conversion resulted in a gain to the SAIF. Assuming enabling legislation is passed in the future, this conversion will also affect all retirees and employees within five years of retirement.

As part of this conversion, the OPM will become responsible for postretirement health benefits for employees with five or more years until retirement at no cost to the SAIF. If retirees and employees within five years of retirement are also converted in the future, the OPM will assume the SAIF’s obligation for postretirement health benefits for those individuals at a fee to be negotiated between the FDIC and the OPM.

Assuming enabling legislation is passed, management does not expect there will be a material gain or loss upon disposition of the SAIF’s postretirement health benefits obligation for retirees or employees within five years of retirement.

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