The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) was
enacted to reform, recapitalize, and consolidate the federal deposit insurance system. The
FIRREA created the Savings Association Insurance Fund (SAIF), the Bank Insurance Fund
(BIF), and the FSLIC Resolution Fund (FRF). It also designated the Federal Deposit
Insurance Corporation (FDIC) as the administrator of these funds. All three funds are
maintained separately to carry out their respective mandates.
The SAIF and the BIF are insurance funds responsible for protecting insured depositors
in operating thrift institutions and banks from loss due to institution failures. The FRF
is a resolution fund responsible for winding up the affairs of the former Federal Savings
and Loan Insurance Corporation (FSLIC) and liquidating the assets and liabilities
transferred from the former Resolution Trust Corporation (RTC).
Pursuant to the Resolution Trust Corporation Completion Act of 1993 (RTC Completion
Act), resolution responsibility transferred from the RTC to the SAIF on July 1, 1995.
Prior to that date, thrift resolutions were the responsibility of the RTC (January 1, 1989
through June 30, 1995) or the FSLIC (prior to 1989).
Pursuant to FIRREA, an active institutions insurance fund membership and primary
federal supervisor are generally determined by the institutions charter type.
Deposits of SAIF-member institutions are generally insured by the SAIF; SAIF members are
predominantly thrifts supervised by the Office of Thrift Supervision (OTS). Deposits of
BIF-member institutions are generally insured by the BIF; BIF members are predominantly
commercial and savings banks supervised by the FDIC, the Office of the Comptroller of the
Currency, or the Federal Reserve.
In addition to traditional thrifts and banks, several other categories of institutions
exist. The Federal Deposit Insurance Act (FDI Act), Section 5(d)(3), provides that a
member of one insurance fund may, with the approval of its primary federal supervisor,
merge, consolidate with, or acquire the deposit liabilities of an institution that is a
member of the other insurance fund without changing insurance fund status for the acquired
deposits. These institutions with deposits insured by both insurance funds are referred to
as "Oakars" or Oakar banks. The transactions specified in Section 5(d)(3) can
take place without paying entrance and exit fees, under two principal conditions. One
condition is that although the acquiring institution continues to belong to its own
insurance fund (primary fund), the institution becomes obliged to pay assessments to the
fund that insured the deposits of the acquired institution (secondary fund). The secondary
fund assessments are keyed to the amount of the secondary fund deposits so acquired. The
other condition is that if the acquiring institution should fail, the losses resulting
from the failure are allocated between the two insurance funds according to a formula that
is likewise keyed to the amount of the acquired secondary fund deposits. The FDI Act,
Section 5(d)(2)(G), allows SAIF-member thrifts to convert to a bank charter and retain
their SAIF membership. These institutions are referred to as "Sassers." The Home
Owners Loan Act (HOLA), Section 5(o), allows BIF-member banks to convert to a thrift
charter and retain their BIF membership. These institutions are referred to as
"HOLAs" or HOLA thrifts.
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 FDICs
assessment authority (see Note 7) and borrowing authority. The FDICIA also requires the
FDIC to: 1) resolve troubled institutions in a manner that will result in the least
possible cost to the deposit insurance funds and 2) maintain the insurance funds at 1.25
percent of insured deposits or a higher percentage as circumstances warrant.
The Deposit Insurance Funds Act of 1996 (DIFA) was enacted to provide for: 1) the
capitalization of the SAIF to its designated reserve ratio (DRR) of 1.25 percent by means
of a one-time special assessment on SAIF-insured deposits; 2) the expansion of the
assessment base for payments of the interest on obligations issued by the FICO to include
all FDIC-insured banks and thrifts; 3) beginning January 1, 1997, the imposition of a FICO
assessment rate for SAIF-assessable deposits that is five times the rate for
BIF-assessable deposits through the earlier of December 31, 1999, or the date on which the
last savings association ceases to exist; 4) the payment of the annual FICO interest
obligation of approximately $790 million on a pro rata basis between banks and thrifts on
the earlier of January 1, 2000, or the date on which the last savings association ceases
to exist; 5) authorization of SAIF assessments only if needed to maintain the fund at the
DRR; 6) the refund of amounts in the SAIF in excess of the DRR with such refund not to
exceed the previous semiannual assessment; 7) assessment rates for SAIF members not lower
than the assessment rates for BIF members with comparable risk; and 8) the merger of the
SAIF and the BIF on January 1, 1999, if no insured depository institution is a savings
association on that date. Subsequently, Congress did not enact legislation during 1998 to
either merge the SAIF and the BIF or to eliminate the thrift charter.
Recent Legislative Initiatives
Congress continues to focus on legislative proposals to achieve modernization of the
financial services industry. Some of these proposals, if enacted into law, may have a significant impact on the
SAIF and/or the BIF. However, these proposals continue to vary and FDIC management cannot predict which
provisions, if any, will ultimately be enacted.
Operations of the SAIF
The primary purpose of the SAIF is to: 1) insure the deposits and protect the
depositors of SAIF-insured institutions and 2) resolve failed SAIF-insured institutions
including managing and liquidating their assets. In this capacity, the SAIF has financial
responsibility for all SAIF-insured deposits held by SAIF-member institutions and by
BIF-member banks designated as Oakar banks.
The SAIF is primarily funded from the following sources: 1) interest earned on
investments in U.S. Treasury obligations and 2) SAIF assessment premiums. Additional
funding sources are borrowings from the U.S. Treasury, the Federal Financing Bank (FFB),
and the Federal Home Loan Banks, if necessary. The 1990 OBR Act established the
FDICs authority to borrow working capital from the FFB on behalf of the SAIF and the
BIF. The FDICIA increased the FDICs 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, 1998, the MOL for the
SAIF was $17.3 billion.
The VA, HUD and Independent Agencies Appropriations Acts of 1999 and 1998 appropriated
$34.7 million for fiscal year 1999 (October 1, 1998, through September 30, 1999) and $34
million for fiscal year 1998 (October 1, 1997, through September 30, 1998), respectively,
for operating expenses incurred by the Office of Inspector General (OIG). These Acts
mandate that the funds are to be derived from the SAIF, the BIF, and the FRF.
2. Summary of Significant Accounting Policies
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 FDICs 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 are short-term, highly liquid investments with original maturities of
three months or less. Cash equivalents primarily consist of Special U.S. Treasury
Investments in U.S. Treasury Obligations
Investments in U.S. Treasury obligations are recorded pursuant to the provisions of the
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires that securities be
classified in one of three categories: held-to-maturity, available-for-sale, or trading.
Securities designated as held-to-maturity are intended to be held to maturity and are
shown at amortized cost. Amortized cost is the face value of securities plus the
unamortized premium or less the unamortized discount. Amortizations are computed on a
daily basis from the date of acquisition to the date of maturity. Beginning in 1997, the
SAIF designated a portion of its securities as available-for-sale. These securities are
shown at fair value with unrealized gains and losses included in the fund balance.
Realized gains and losses are included in other revenue when applicable. Interest on both
types of securities is calculated on a daily basis and recorded monthly using the
effective interest method. The SAIF does not have any securities classified as trading.
Allowance for Losses on Receivables From Thrift Resolutions
The SAIF records a receivable for the amounts advanced and/or obligations incurred for
resolving troubled and failed thrifts. Any related allowance for loss represents the
difference between the funds advanced and/or obligations incurred and the expected
repayment. The latter is based on estimates of discounted cash recoveries from the assets
of assisted or failed thrifts, net of all estimated liquidation costs.
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
Cost Allocations Among Funds
Operating expenses not directly charged to the funds are allocated to all funds
administered by the FDIC. Workload-based-allocation percentages are developed during the
annual corporate planning process and through supplemental functional analyses.
Postretirement Benefits Other Than Pensions
The FDIC established an entity to provide the accounting and administration of
postretirement benefits on behalf of the SAIF, the BIF, and the FRF. Each fund pays its
liabilities for these benefits directly to the entity. The SAIFs unfunded net
postretirement benefits liability for the plan is presented in the SAIFs Statements of Financial
Disclosure About Recent Accounting Standards Pronouncements
In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 132,
"Employers Disclosures about Pension and Other Postretirement Benefits."
The Statement standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable. Although changes in the SAIFs
disclosures for postretirement benefits have been made, the impact is not material.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
The FDIC adopted SFAS No. 130 effective on January 1, 1997. Comprehensive income includes
net income as well as certain types of unrealized gain or loss. The only component of SFAS
No. 130 that impacts the SAIF is unrealized gain or loss on securities classified as
available-for-sale, which is presented in the SAIFs Statements of Financial Position
and the Statements of Income and Fund Balance.
Other recent pronouncements are not applicable to the financial statements.
The nature of related parties and a description of related party transactions are
disclosed throughout the financial statements and footnotes.
Reclassifications have been made in the 1997 financial statements to conform to the
presentation used in 1998.
3. Cash and Other Assets: Restricted for SAIF-Member Exit Fees
The SAIF receives entrance and exit fees for conversion transactions when an insured
depository institution converts from the BIF to the SAIF (resulting in an entrance fee) or
from the SAIF to the BIF (resulting in an exit fee). Regulations approved by the
FDICs Board of Directors (Board) and published in the Federal Register on
March 21, 1990, directed that exit fees paid to the SAIF be held in escrow.
The FDIC and the Secretary of the Treasury will determine when it is no longer
necessary to escrow such funds for the payment of interest on obligations previously
issued by the FICO. These escrowed exit fees are invested in U.S. Treasury securities
pending determination of ownership. The interest earned is also held in escrow. There were
no conversion transactions during 1998 and 1997 that resulted in an exit fee to the SAIF.
In 1998, the unamortized premium, net of unamortized discount, was $3.4 million. In
1997, the unamortized premium, net of the unamortized discount, was $390 thousand.
4. Investment in U.S. Treasury Obligations, Net
Cash received by the SAIF is invested in U.S. Treasury obligations with maturities
exceeding three months unless cash is needed to meet the liquidity needs of the fund. The
SAIFs 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 1998, the unamortized premium, net of unamortized discount, was $152.5 million. In
1997, the unamortized premium, net of the unamortized discount, was $116.4 million.
5. Receivables From Thrift Resolutions, Net
The thrift resolution process takes different forms depending on the unique facts and
circumstances surrounding each failing or failed institution. Payments for institutions
that fail are made to cover obligations to insured depositors and represent claims by the
SAIF against the receiverships assets. There were no thrift failures in 1998, or in
As of December 31, 1998 and 1997, the FDIC, in its receivership capacity for
SAIF-insured institutions, held assets with a book value of $46.1 million and $56.6
million, respectively (including cash and miscellaneous receivables of $45.7 million and
$40 million at December 31, 1998 and 1997, respectively). These assets represent a
significant source of repayment of the SAIFs 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
SAIFs and other claimants actual recoveries to vary from the level currently
6. Estimated Liabilities for:
Anticipated Failure of Insured Institutions
The SAIF records an estimated liability and a loss provision for thrifts (including
Oakar and Sasser financial institutions) that are likely to fail, absent some favorable
event such as obtaining additional capital or merging, when the liability becomes probable
and reasonably estimable.
The estimated liabilities for anticipated failure of insured institutions as of
December 31, 1998 and 1997, were $31 million and zero, respectively. The estimated
liability is derived in part from estimates of recoveries from the management and
disposition of the assets of these probable thrift failures. Therefore, they are subject
to the same uncertainties as those affecting the SAIFs receivables from thrift
resolutions (see Note 5). This could affect the ultimate costs to the SAIF from probable
There are other thrifts where the risk of failure is less certain, but still considered
reasonably possible. Should these thrifts fail, the SAIF could incur additional estimated
losses of about $77 million.
The accuracy of these estimates will largely depend on future economic conditions. The
Board has the statutory authority to consider the estimated liability from anticipated
failures of insured institutions when setting assessment rates.
Year 2000 Anticipated Failures
The SAIF is also subject to a potential loss from thrifts that may fail if they are
unable to become Year 2000 compliant in a timely manner. In May 1997, the federal
financial institution regulatory agencies developed a program to conduct uniform reviews
of all FDIC- insured institutions Year 2000 readiness. The program assesses the five
key phases of an institutions Year 2000 conversion efforts: 1) awareness, 2)
assessment, 3) renovation, 4) validation, and 5) implementation. The reviews classify each
institution as Satisfactory, Needs Improvement, or Unsatisfactory.
Year 2000 efforts of financial institutions and independent data
centers are considered "Satisfactory" if they exhibit acceptable performance in
all key phases of the Year 2000 project management process as set forth in the May 5,
1997, Federal Financial Institutions Examination Council (FFIEC) Interagency Statement on
the Year 2000 and subsequent guidance documents. Performance is satisfactory when project
weaknesses are minor in nature and can be readily corrected within the existing project
management framework. The institutions remediation progress to date meets or nearly
meets expectations laid out in its Year 2000 project plan. Senior management and the board
recognize and understand Year 2000 risk, are active in overseeing institutional corrective
efforts, and have ensured that the necessary resources are available to address this risk
Year 2000 efforts of financial institutions and independent
data centers are evaluated as "Needs Improvement" if they exhibit less than
acceptable performance in all key phases of the Year 2000 project management process.
Project weaknesses are evident, even if deficiencies are correctable within the existing
project management framework. The institutions remediation progress to date is
behind the schedule laid out in its Year 2000 project plan. Senior management or the board
is not fully aware of the status of Year 2000 correction efforts, may not have committed
sufficient financial or human resources to address this risk, or may not fully understand
Year 2000 implications.
Year 2000 efforts of financial institutions and independent data
centers are considered "Unsatisfactory" if they exhibit poor performance in any
of the key phases of the Year 2000 project management process. Project weaknesses are
serious in nature and are not easily corrected within the existing project management
framework. The institutions remediation progress is seriously behind the schedule
laid out in its Year 2000 project plan. Senior management and the board do not understand
or recognize the impact that the Year 2000 will have on the institution. Management or the
board commitment is limited or their oversight activities are not evident.
Based on data updated through April 30, 1999, 10,159 institutions with $6.4 trillion in
assets have received a Satisfactory rating, 216 institutions with $80 billion in assets a
Needs Improvement rating, and 21 institutions with $1 billion in assets an Unsatisfactory
rating (data includes SAIF-and BIF-insured institutions). Although the initial results of
the uniform reviews are encouraging, the Year 2000 issue is unprecedented. Therefore, it
is difficult to determine which institutions, if any, will ultimately fail. Further,
estimates of the cost of resolving Year 2000 failures are complicated by the uncertain
nature of technological disruptions and the associated impact on the SAIF, if any.
Failures caused solely by liquidity problems would pose substantially less exposure to the
SAIF. Year 2000 failures could conceivably be such liquidity failures. The possibility that any such
failure would occur is quite speculative in view of actions taken by the Federal Reserve
Board to ensure sufficient liquidity and currency to meet the cash needs of insured thrifts.
Failures could occur because of the familiar capital insolvency (liabilities exceeding
assets) if a substantial number of thrift borrowers were unable to repay loans due to
their own lack of preparedness for the Year 2000. Insured thrifts are required to be aware
of the measures taken by key customers to protect themselves against adverse impact from
the advent of Year 2000, and compliance with such requirements is monitored via the
regulatory examination program. The extent to which insured institutions, if any,
ultimately experience this type of failure is not measurable.
Financial institutions are required to design a Year 2000 contingency plan to mitigate
the risks associated with the failure of systems at critical dates (Business Resumption
Contingency Planning). A business resumption contingency plan is designed to provide
assurance that core business functions will continue if one or more systems fail.
In order to assess exposure to the SAIF from Year 2000 potential failures, the FDIC
evaluated all information relevant to such an assessment, to include Year 2000 on-site
examination results, institution capital levels and supervisory examination composite
ratings, and other institution past and current financial characteristics. As a result of
this assessment, we conclude that, as of December 31, 1998, there are no probable losses
to the SAIF from Year 2000 failures. Further, any reasonably possible losses from Year
2000 failures were not estimable. During the remainder of 1999, the regulatory agencies
will continue their Year 2000 reviews and the FDIC will continue to assess this potential
The SAIF records an estimated loss for unresolved legal cases to the extent those
losses are considered probable and reasonably estimable. For 1998 and 1997, no legal cases
were deemed probable in occurrence. In 1998, no unresolved legal cases were identified as
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 members
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 SAIFs
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
The DIFA (see Note 1) provided, among other things, for the capitalization of the SAIF
to its DRR of 1.25 percent by means of a one-time special assessment on SAIF-insured
deposits. The SAIF achieved its required capitalization by means of a $4.5
billion special assessment effective October 1, 1996.
Prior to January 1, 1997, the FICO had priority over the SAIF for receiving and
utilizing SAIF assessments to ensure availability of funds for interest on the FICOs
debt obligations. Accordingly, the SAIF recognized as assessment revenue only that portion
of SAIF assessments not required by the FICO. Assessments on the SAIF-insured deposits
held by BIF-member Oakar or SAIF-member Sasser institutions prior to January 1, 1997, were
not subject to draws by the FICO and, thus, were retained in SAIF in their entirety.
The DIFA expanded the assessment base for payments of the interest on obligations
issued by the FICO to include all FDIC-insured institutions (including banks, thrifts, and
Oakar and Sasser financial institutions) and made the FICO assessment separate from
regular assessments, effective on January 1, 1997.
The FICO assessment has no financial impact on the SAIF. The FICO assessment is
separate from the regular assessments and is imposed on thrifts and banks, not on the
insurance funds. The FDIC, as administrator of the SAIF and the BIF, is acting solely as a
collection agent for the FICO. During 1998 and 1997, $446 million and $454 million
respectively, were collected from savings associations and remitted to the FICO.
The FDIC uses a risk-based assessment system that charges higher rates to those
institutions that pose greater risks to the SAIF. To arrive at a risk-based assessment for
a particular institution, the FDIC places each institution in one of nine risk categories,
using a two-step process based first on capital ratios and then on other relevant
information. The Board reviews premium rates semiannually. The assessment rate averaged
approximately 0.21 cents and 0.39 cents per $100 of assessable deposits for 1998 and 1997,
respectively. On October 27, 1998, the Board voted to retain the SAIF assessment schedule
of 0 to 27 cents per $100 of assessable deposits (annual rates) for the first semiannual
period of 1999.
8. Pension Benefits, Savings Plans, and Accrued Annual Leave
Eligible FDIC employees (all permanent and temporary employees with appointments
exceeding one year) are covered by either the Civil Service Retirement System (CSRS) or
the Federal Employee Retirement System (FERS). The CSRS is a defined benefit plan, which
is offset with the Social Security System in certain cases. Plan benefits are determined
on the basis of years of creditable service and compensation levels. The CSRS-covered
employees also can contribute to the tax-deferred Federal Thrift Savings Plan (TSP).
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 SAIFs operating expenses.
Although the SAIF contributes a portion of pension benefits for eligible employees, it
does not account for the assets of either retirement system. The SAIF also does not have
actuarial data for accumulated plan benefits or the unfunded liability relative to
eligible employees. These amounts are reported on and accounted for by the U.S. Office of
Personnel Management (OPM).
Eligible FDIC employees also may participate in a FDIC-sponsored tax-deferred savings
plan with matching contributions. The SAIF pays its share of the employers portion
of all related costs.
The SAIFs pro rata share of the Corporations liability to employees for
accrued annual leave is approximately $4.4 million and $3 million at December 31, 1998 and
9. Postretirement Benefits Other Than Pensions
On January 2, 1998, SAIFs obligation under SFAS No. 106, "Employers
Accounting for Postretirement Benefits Other Than Pensions," for postretirement
health benefits was reduced when over 6,500 employees enrolled in the Federal Employees
Health Benefits (FEHB) Program for their future health insurance coverage. The OPM assumed
the SAIFs obligation for postretirement health benefits for these employees at no
initial enrollment cost.
In addition, legislation was passed that allowed the remaining 2,600 retirees and
near-retirees (employees within five years of retirement) in the FDIC health plan to also
enroll in the FEHB Program for their future health insurance coverage, beginning January
1, 1999. The OPM assumed the SAIFs obligation for postretirement health benefits for
retirees and near-retirees for a fee of $3.7 million. The OPM is now responsible for
postretirement health benefits for all employees and covered retirees. The FDIC will
continue to be obligated for dental and life insurance coverage for as long as the
programs are offered and coverage is extended to retirees.
OPMs assumption of the health care obligation constitutes both a settlement and a
curtailment as defined by SFAS No. 106. This conversion resulted in a gain of $5.5 million
to the SAIF.
For measurement purposes, the per capita cost of covered health care benefits was
assumed to increase by an annual rate of 8.75 percent for 1998. Further, the rate was
assumed to decrease gradually each year to a rate of 7.75 percent for the year 2000 and remain at that level
10. Commitments and Off-Balance-Sheet Exposure
The SAIFs allocated share of the FDICs lease commitments totals $20.2
million for future years. The lease agreements contain escalation clauses resulting in
adjustments, usually on an annual basis. The allocation to the SAIF of the FDICs
future lease commitments is based upon current relationships of the workloads among the
SAIF, the BIF and the FRF. Changes in the relative workloads could cause the amounts
allocated to the SAIF in the future to vary from the amounts shown below. The SAIF
recognized leased space expense of $4.8 million and $3.3 million for the years ended
December 31, 1998 and 1997, respectively.
Other Off-Balance Sheet Risk
As of December 31, 1998, deposits insured by the SAIF totaled approximately $709
billion. This would be the accounting loss if all depository institutions were to fail and
the acquired assets provided no recoveries.
11. Disclosures About the Fair Value of Financial Instruments
Cash equivalents are short-term, highly liquid investments and are shown at current
value. The fair market value of the investment in U.S. Treasury obligations is disclosed
in Notes 3 and 4 and is based on current market prices. The carrying amount of interest
receivable on investments, short-term receivables, and accounts payable and other
liabilities approximates their fair market value. This is due to their short maturities or
comparisons with current interest rates. As explained in Note 3, entrance and exit fees
receivable are net of discounts calculated using an interest rate comparable to U.S. Treasury Bill or
Government bond/note rates at the time the receivables are accrued.
The net receivables from thrift resolutions primarily include the SAIFs
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 SAIFs allowance for loss against the
net receivables from thrift resolutions. Therefore, the corporate subrogated claim indirectly includes the effect
of discounting 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 Flows
13. Year 2000 Issues
State of Readiness
The FDIC, as administrator for the SAIF, is conducting a corporate-wide effort to
ensure that all FDIC information systems are Year 2000 compliant. This means the systems
must accurately process date and time data in calculations, comparisons, and sequences
after December 31, 1999, and be able to correctly deal with leap-year calculations in
2000. The Year 2000 Oversight Committee is comprised of FDIC division management that
oversees the Year 2000 effort.
The FDICs Division of Information Resources Management (DIRM) leads the internal
Year 2000 effort, under the direction of the Oversight Committee. DIRM used a five-phase
approach for ensuring that all FDIC systems and software are Year 2000 compliant. The five
The first phase of compliance focuses on defining the Year 2000 problem and gaining
executive-level support and sponsorship for the effort.
The second phase of compliance focuses on assessing the Year 2000 impact on the
Corporation as a whole.
The third phase of compliance focuses on converting, replacing or eliminating selected
platforms, applications, databases, and utilities, while modifying interfaces as
Platform is a broad term that encompasses computer hardware (including mainframe
computers, servers, and personal computers) and software (including computer languages and
operating systems). Utility programs, or "utilities," provide file management
capabilities, such as sorting, copying, comparing, listing and searching, as well as
diagnostic and measurement routines that check the health and performance of the system.
The fourth phase of compliance focuses on testing, verifying and validating converted
or replaced platforms, applications, databases, and utilities.
The fifth phase of compliance focuses on implementing converted or replaced platforms,
applications, databases, utilities, and interfaces.
The Awareness, Assessment, and Renovation phases are complete. The Validation phase is
scheduled to be completed during January 1999 when all production applications will be
validated for Year 2000 readiness. Implementation of the majority of production
applications in Year 2000 ready status will be completed by March 31, 1999. Validation and
implementation of new systems and modifications to existing systems will continue throughout 1999.
Year 2000 Estimated Costs
Year 2000 compliance expenses for the SAIF are estimated at $4.4 million and $191
thousand at December 31, 1998 and 1997, respectively. These expenses are reflected in the
"Operating expenses" line item of the SAIFs Statements of Income and Fund
Balance. Future expenses are estimated to be $6.2 million. Year 2000 estimated future
costs are included in the FDICs budget.
Risks of Year 2000 Issues
The OTS has an ongoing aggressive initiative to assess the SAIFs insured
financial institutions for Year 2000 compliance. The SAIF is subject to a potential loss
from financial institutions that may fail as a result of Year 2000 related issues. Refer
to "Estimated Liabilities for: Anticipated Failure of Insured Institutions - Year
2000 Anticipated Failures" (Note 6) for additional information.
No potential loss with internal system failure has been estimated due to the extensive
planning and validation that has occurred.
DIRM is currently developing a disaster recovery plan and contingency plans specific to
each mission-critical application.
Other divisions within the FDIC are working together to develop contingency plans to be
prepared if any FDIC-insured financial institution fails as a result of lack of Year 2000
14. Subsequent Events
SAIF Special Reserve
DIFA requires the establishment of a Special Reserve of the SAIF if, on January 1,
1999, the reserve ratio exceeds the DRR of 1.25 percent. The reserve ratio exceeded the
DRR by approximately 0.14 percent on January 1, 1999. As a result, $978 million was placed
in a Special Reserve of the SAIF and is being administered by the FDIC.
The Corporation may, in its sole discretion, transfer amounts from the Special Reserve
to the SAIF for an "emergency use." An emergency use is authorized only if the
reserve ratio of the SAIF is less than 50 percent of the DRR and is expected to remain at
less than 50 percent for each of the next four calendar quarters. The Special Reserve must
be excluded when calculating the reserve ratio of the SAIF.