Notes to Financial Statements
FSLC Resolution Fund December 31, 1996 and 1995
The U.S. Congress created the Federal Savings and Loan Insurance Corporation (FSLIC)
through the enactment of the National Housing Act of 1934.
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) abolished the
insolvent FSLIC, created the FSLIC Resolution Fund (FRF), and transferred the assets and
liabilities of the FSLIC to the FRF (except those assets and liabilities transferred to
the RTC), effective August 9, 1989. The FRF is responsible for winding up the affairs of
the former FSLIC.
FIRREA was enacted to
reform, recapitalize and consolidate the federal deposit insurance system. In addition to
the FRF, FIRREA created the Resolution Trust Corporation (RTC), the Bank Insurance Fund
(BIF), and the Savings Association Insurance Fund (SAIF). FIRREA also designated the
Federal Deposit Insurance Corporation (FDIC) as the administrator of the FRF, BIF, and
SAIF. All three funds are maintained separately to carry out their respective mandates.
The RTC was created to
manage and resolve all thrifts previously insured by the FSLIC for which a conservator or
receiver was appointed during the period January 1, 1989, through August 8, 1992. In order
to provide funds to the RTC for use in thrift resolutions, FIRREA established the
Resolution Funding Corporation (REFCORP).
responsibility was extended through subsequent legislation from the original termination
date of August 8, 1992. Resolution responsibility transferred from the RTC to the SAIF on
July 1, 1995.
The RTC Completion Act
of 1993 (1993 RTC Act) terminated the RTC as of December 31, 1995. All remaining assets
and liabilities of the RTC were transferred to the FRF on January 1, 1996. The FDIC must
transfer to the REFCORP the net proceeds from the FRFs sale of RTC assets, once all
liabilities of the RTC have been paid. Any such funds transferred to the REFCORP pay the
interest on the REFCORP bonds issued to fund the early RTC resolutions. Any such payments
benefit the Treasury, which would otherwise be obligated to pay the interest on the bonds.
of the FRF
The FRF will continue until all of its assets are sold or otherwise liquidated and all of
its liabilities are satisfied. Upon the dissolution of the FRF, any funds remaining (after
payments to REFCORP, if any) will be paid to the U.S. Treasury.
The FRF has been
primarily funded from the following sources: 1) U.S. Treasury appropriations; 2) amounts
borrowed by the RTC from the Federal Financing Bank (FFB); 3) funds received from the
management and disposition of assets of the FRF; 4) the FRFs portion of liquidating
dividends paid by FRF receiverships; and 5) interest earned on one-day U.S. Treasury
investments purchased with proceeds of 3) and 4). If these sources are insufficient to
satisfy the liabilities of the FRF, payments will be made from the U.S. Treasury in
amounts necessary, as are appropriated by Congress, to carry out the objectives of the
To facilitate efforts
to wind up the resolution activity of the FRF, Public Law 103-327 provides $827 million in
funding to be available until expended. The FRF received $165 million under this
appropriation on November 2, 1995. In addition, Public Law 104-208 authorized the use by
the Department of Justice of $26.1 million of the original $827 million in funding, thus
reducing the amount available to be expended to $635.9 million.
FIRREA established an
Inspector General for the RTC and authorized appropriations necessary for the operation of
the Office of the Inspector General (OIG). These appropriated funds are used to offset the
operating expenses incurred by the OIG, which totalled $1.6 million during 1996. The
appropriation authority expired as of September 30, 1996. The OIG received $152.3 million
of appropriated funds from the U.S. Treasury since it was established.
These financial statements pertain to the financial position, results of operations and
cash flows of the FRF and are presented in accordance with generally accepted accounting
principles (GAAP). These statements do not include reporting for assets and liabilities of
closed insured thrift institutions for which the FRF acts as receiver or liquidating
agent. Periodic and final accountability reports of the FRFs activities as receiver
or liquidating agent are furnished to courts, supervisory authorities and others as
statutorily-mandated merger of the RTC into the FRF as of January 1, 1996 resulted in a
significant, one-time transfer of assets and liabilities. For this reason, providing
comparative information would be impractical on a fully consistent basis of accounting.
Accordingly, we have presented FRF financial statements for 1996 only.
The preparation of the FRFs financial statements in conformity with GAAP requires
FDIC management to make 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.
and Cash Equivalents
The FRF considers cash equivalents to be short-term, highly liquid investments with
original maturities of three months or less.
Allowance for Losses on Receivables from Thrift Resolutions and Investment
in Corporate Owned Assets
The FRF records as a receivable the amounts advanced and/or obligations incurred for
resolving troubled and failed thrifts. The FRF also records as an asset the amounts
advanced for investment in corporate owned assets. Any related allowance for loss
represents the difference between the funds advanced and/or obligations incurred and the
expected repayment. The latter is based on estimates of discounted cash recoveries from
the assets of assisted or failed thrift institutions, net of all estimated liquidation
costs. Estimated cash recoveries also include dividends and gains on sales from equity
instruments acquired in resolution transactions.
Liabilities for Assistance Agreements
The FRF establishes an estimated liability for probable future assistance payable to
acquirers of troubled thrifts under its financial assistance agreements.
The FRF accrues, as a charge to current period operations, an estimate of probable losses
from litigation. The FDICs Legal Division recommends these estimates on a
case-by-case basis. The litigation loss estimates related to the FRF in its corporate
capacity are included in the Estimated liability for: Litigation losses. The
litigation loss estimates related to receiverships are included in the allowance for
losses for Receivables from thrift resolutions, net.
The FDIC is responsible for controlling and disposing of the assets of failed institutions
in an orderly and efficient manner. The assets, and the claims against them, are accounted
for separately to ensure that liquidation proceeds are distributed in accordance with
applicable laws and regulations. Also, the income and expenses attributable to
receiverships are accounted for as transactions of those receiverships. Liquidation
expenses incurred by the FRF on behalf of the receiverships are recovered from those
Allocations Among Funds
Certain operating expenses (including personnel, administrative and other indirect
expenses) not directly charged to each fund under the FDICs management are allocated
on the basis of the relative degree to which the operating expenses were incurred by the
The FDIC includes the
cost of buildings used in operations in the BIFs financial statements. The BIF
charges the FRF a rental fee representing an allocated share of its annual depreciation.
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 pro rata basis. The FRF
expenses its share of these allocated costs at the time of acquisition because of their
Benefits Other Than Pensions
The FDIC established an entity to provide the accounting and administration of
postretirement benefits on behalf of the FRF, the BIF, and the SAIF. The FRF funds its
liabilities for these benefits directly to the entity.
about Recent Financial Accounting Standards Board Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities in June 1996, effective for transactions occurring
after December 31, 1996. The FRF will generally be unaffected by its provisions since most
transactions subject to SFAS 125 occur at the receivership level and not at the fund
level. To the extent that the FRF may be affected, the FDICs current accounting
practices are consistent with the rules contained in SFAS 125. Other recent pronouncements
issued by the FASB have been adopted or are either not applicable or not material to the
The Federal Asset Disposition Association (FADA) is a wholly owned subsidiary of the FRF.
The FADA was placed in receivership on February 5, 1990. However, due to outstanding
litigation, a final liquidating dividend to the FRF will not be made until the FADAs
litigation is settled or dismissed. The investment in the FADA is accounted for using the
equity method and is included in Other assets, net (Note 6).
Parties National Judgements, Deficiencies, and Charge-offs Joint Venture Program. The
former RTC purchased assets from receiverships, conservatorships, and their subsidiaries
to facilitate the sale and/or transfer of selected assets to several Joint Ventures in
which the former RTC retained a financial interest.
Equity Interests. Former RTC receiverships were holders of limited partnership equity
interests as a result of various RTC sales programs which included the National Land Fund,
Multiple Investor Fund, N-Series and S-Series programs.
The nature of other
related parties and descriptions of other related party transactions are disclosed
throughout the financial statements and footnotes.
As of December 31 and January 1,
1996, the FRF, in its receivership capacity, held assets with a book value of $7.3 and
$20.5 billion, respectively. These assets represent a significant source of repayment of
receivables from thrift resolutions. The estimated cash recoveries from the management and
disposition of these assets (excluding cash and miscellaneous receivables of $2.9 billion
at December 31, 1996 and $12.6 billion at January 1, 1996) used to derive the allowance
for losses are based in part on a statistical sampling of receivership assets. The
potential sampling error is not material to the FRFs financial statements. These
estimated recoveries are regularly evaluated, but remain subject to uncertainties because
of changing economic conditions. These factors could affect the FRFs and other
claimants actual recoveries from the level currently estimated.
investment in corporate owned assets is comprised of amounts that: 1) the former FSLIC and
the former RTC paid to purchase assets from troubled or failed thrifts and 2) the FRF pays
to acquire receivership assets, terminate receiverships and purchase assets covered under
assistance agreements. The majority of these assets are real estate and mortgage loans.
The methodology used to
derive the allowance for losses for corporate owned assets is the same as that for
receivables from thrift resolutions.
The FRF recognizes
income and expenses on these assets. Income consists primarily of the portion of
collections on performing mortgages related to interest earned. Expenses are recognized
for administering the management and liquidation of these assets.
The FSLIC issued promissory notes
and entered into assistance agreements to prevent the default and subsequent liquidation
of certain insured thrift institutions. These notes and agreements required the FSLIC to
provide financial assistance over time. Under the FIRREA, the FRF assumed these
obligations. Notes payable and obligations for assistance agreement payments incurred but
not yet paid are in Liabilities incurred from thrift resolutions. Estimated
future assistance payments are included in Estimated liabilities for: Assistance
agreements (see Note 8).
December 31, 1996
January 1, 1996
$ ...... 725
$ ...... 725
Other liabilities to
Working capital was made available
to the RTC under an agreement with the Federal Financing Bank (FFB) to fund the resolution
of thrifts and for use in the RTCs high-cost funds replacement and emergency
liquidity programs. The outstanding note matures on January 1, 2010; however, all or any
portion of the outstanding principal amount may be repaid anytime as excess funds become
available. The note payable carries a floating rate of interest which is adjusted
quarterly. FFB establishes the interest rate which ranged between 5.5% and 5.18% during
1996. As of December 31 and January 1, 1996, there were $4.6 billion and $10.5 billion,
respectively, in borrowings and accrued interest outstanding from the FFB. As of December
31, 1995, the RTCs authority to receive additional borrowings from the FFB ceased.
The Estimated liabilities for: Assistance agreements represents, on a
discounted basis, an estimate of future assistance payments to acquirers of troubled
thrift institutions. The dollar amount before discounting was $18 million and $91 million,
as of December 31 and January 1, 1996, respectively. The discount rates applied as of
December 31 and January 1, 1996 were 5.6 percent and 5.5 percent, respectively, based on
U.S. money rates for federal funds.
The number of
assistance agreements outstanding as of December 31 and January 1, 1996 were 36 and 47,
respectively. The last agreement is scheduled to expire in July 2000.
The FRF records an estimated loss for unresolved legal cases to the extent those losses
are considered to be probable in occurrence and reasonably estimable in amount. In
addition, the FDICs Legal Division has determined that losses from unresolved legal
cases totaling $265 million are reasonably possible. This includes $12 million in losses
for the FRF in its corporate capacity and $253 million in losses for the FRF related to
receiverships (see Note 2).
There exists an
additional category of contingencies with respect to FRF that arises from supervisory
goodwill and other capital forbearances granted to the acquirers of troubled thrifts by
the Federal Home Loan Bank Board in the 1980s. Subsequently, FIRREA imposed minimum
capital requirements on thrifts and limited the use of supervisory goodwill and other
forbearances to meet these capital requirements. There are currently approximately 120
cases pending which result from the elimination of supervisory goodwill and forbearances.
To date, one of these
cases litigated in the district court has resulted in a final judgment of $6 million
against FDIC, which FDIC paid from FRF in accordance with the courts order. There is
a second district court case to which FDIC is a party defendant where a judgment of $26.9
million (plus post judgment interest) has been entered and for which a reserve has been
established (the judgment is on appeal to the court of appeals). The remainder of these
cases are pending in the Court of Federal Claims with the United States as the named
defendant. FDIC believes that judgments in such cases are properly paid from the Judgment
Fund, a permanent, indefinite appropriation established by 31 U.S.C. 1304. However,
whether and the extent to which FRF will be the source for paying other judgments in such
cases is uncertain.
In the following charts, transfers
primarily include reclassifications from Estimated liabilities for: Assistance
agreements to Liabilities incurred from thrift resolutions for notes
payable and related accrued assistance agreement costs. Terminations represent final
adjustments to the estimated cost figures for those thrift resolutions that were
Beginning Balance 01/01/96
Provision for Losses
Net Cash Payments
Adjustments/ Transfers/ Terminations
Ending Balance 12/31/96
Allowance for Losses:
Open thrift assistance
Corporate owned assets
Investment in FADA
Securitization Credit Reserve
Total Allowance for Losses
Estimated Liabilities for:
Total Estimated Liabilities
Purchase Discount Valuation
Provision for Losses
$ ............. 0
$ ... 4,206,866
During 1993, in order to achieve a
least cost resolution, the FRF secured a limited partnership interest in two partnerships,
Mountain AMD and Brazos Partners. The FRF has collected its entire original investment in
the partnerships. However, funds in excess of the original investment continue to be
collected by the FRF. As of December 31, 1996, Limited Partnership Revenue is $54.6
employees (i.e., 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.
Eligible FDIC employees
also may participate in an FDIC-sponsored tax-deferred savings plan with matching
contributions. The FRF pays its share of the employers portion of all related costs.
Although the FRF
contributes a portion of pension benefits for eligible employees, it does not account for
the assets of either retirement system. The FRF also does not have actuarial data for
accumulated plan benefits or the unfunded liability relative to eligible employees. These
amounts are reported and accounted for by the U.S. Office of Personnel Management. The
liability to employees for accrued annual leave is approximately $13.7 million and $26.1
million at December 31 and January 1, 1996, respectively.
For the Year Ended December 31, 1996
$ . 2,534
Retirement System (Basic Benefit)
FDIC Savings Plan
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 from Aetna Life Insurance
Company 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 FRF expensed $3.1
million for net periodic postretirement benefit costs for the year ended December 31,
1996. For measurement purposes, 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 1996 of 10.75 percent (inclusive of general inflation of 3.00
percent), decreasing to an ultimate rate in the year 2000 of 7.75 percent; and 4) an
increase in dental costs in 1996 and thereafter of 4.00 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, 1996, would have increased by 20.4 percent. The effect of this change on the
aggregate of service and interest cost for 1996 would be an increase of 26.2 percent.
For the Year Ended December 31, 1996
(benefits attributed to employee service during the year)
Interest cost on
accumulated postretirement benefit obligation
Net total of other
Return on plan
As stated in Note
2, the FDIC established an entity to provide accounting and administration on behalf
of the FRF, the BIF, and the SAIF. The FRF funds its liability and these funds are being
managed as plan assets.
active plan participants
Less: Plan assets at
fair value (a)
Benefit Liability Recognized in the Statements of Financial Position
(a) Invested in U.S.
Securitization Reserve Fund
In order to maximize the return from the sale or disposition of assets and to minimize the
realized loss, RTC engaged in numerous securitization transactions. Through 1996, the RTC
sold through its mortgage-backed securities program $42.4 billion of receivership,
conservatorship and Corporate loans to various trusts which issued regular pass-through
To increase the
likelihood of full and timely distributions of interest and principal to the holders of
the regular pass-through certificates, and thus the marketability of such certificates, a
portion of the proceeds from the sale of the certificates was placed in credit enhancement
reserve funds (reserve funds) to cover future credit losses with respect to the loans
underlying the certificates. The reserve funds structure limits the receivership
exposure from credit losses on loans sold through the FRF securitization program to the
balance of the reserve funds. The initial balances of the reserve funds are reduced for
claims paid and recovered reserves.
In October 1996, the
reserve funds and related allowance to cover future estimated losses on the reserve were
transferred from the receiverships to FRF in its corporate capacity. The $5.4 billion
transferred to FRF was exactly offset by amounts owed by the receiverships to FRF; thus,
there was no change in FRFs net assets as a result of this transaction.
Through December 1996,
the amount of claims paid was approximately 14% of the initial reserve funds. At December
31 and January 1, 1996, reserve funds related to the RTC securitization program totalled
$6.3 billion and $6.8 billion, respectively. At December 31 and January 1, 1996, the
allowance for estimated future losses which would be paid from the securitization fund
totalled $.5 billion and $1.1 billion, respectively.
The RTC provided guarantees, representations and warranties on approximately $114 billion
in unpaid principal balance of loans sold and approximately $157 billion in unpaid
principal balance of loans under servicing right contracts which had been sold.
In 1996, the FRF
estimated Corporate losses related to the representations and warranties claims as part of
the FRFs allowances for losses. The allowance for these losses was $494 and $810
million as of December 31, 1996 and January 1, 1996, respectively. Future losses on
representations and warranties could significantly increase or decrease over the remaining
life of the loans that were sold, which could be as long as 20 years.
The RTC had adopted special policies for outstanding conservatorship and receivership
collateralized letters of credit. These policies enabled the RTC to minimize the impact of
its actions on capital markets. In most cases, these letters of credit were used to
guarantee tax exempt bonds issued by state and local housing authorities or other public
agencies to finance housing projects for low and moderate income individuals or families.
As of December 31, 1996, there were pledged securities as collateral of $130 million to
honor these letters of credit. The corporation established an estimated liability against
this pledged collateral of $25 million.
The FRFs allocated share of FDICs lease commitments totals $61.9 million for
future years. The lease agreements contain escalation clauses resulting in adjustments,
usually on an annual basis. The allocation to the FRF of FDICs future lease
commitments is based upon current relationships of the workloads among FRF, BIF and SAIF.
Changes in the relative workloads among the three funds in future years could change the
amount of FDICs lease payments which will be allocated to FRF. The FRF recognized
leased space expense of $32.8 million for the year ended December 31, 1996.
As of December 31,
1996, the FRF had $81.3 and $3.6 billion in gross receivables from thrift resolutions and
investment in corporate owned assets, respectively. An allowance for loss of $76.9 and
$3.4 billion, respectively, has been recorded against these receivables. Of the total
receivables, $29 billion was attributable to institutions in Texas, $11.4 billion was
attributable to institutions located in California, $5.7 billion was attributable to
institutions located in Florida and $5.1 billion was attributable to institutions located
in Arizona. The liquidating entities ability to make repayments to FRF is largely
influenced by the economy of the area in which they are located.
Additionally, the FRF
had $13 million in assistance agreement covered assets, net of estimated capital loss.
are short-term, highly liquid investments and are shown at current value. The carrying
amount of short-term receivables, accounts payable, liabilities incurred from thrift
resolutions and the estimated liabilities for assistance agreements approximates their
fair market value. This is due to their short maturities or comparisons with current
The net receivable from
thrift resolutions primarily involves the FRFs subrogated claim arising from
payments to insured depositors. The receivership assets which will ultimately be used to
pay the corporate subrogated claim are valued using discount rates which include
consideration of market risk. These discounts ultimately affect the FRFs 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 FRF 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.
Like the corporate
subrogated claim, the securitization credit reserves involve an asset which is unique, not
intended for sale to the private sector, and has no established market. There, it is not
practicable to estimate the fair market value of the securitization credit reserves. These
reserves are carried at their net realizable value which is the book value of the reserves
less the related allowance for loss (see Note 14).
The majority of the net
investment in corporate owned assets (except real estate) is comprised of various types of
financial instruments (investments, loans, accounts receivable, etc.) acquired from failed
thrifts. Like receivership assets, corporate owned assets are valued using discount rates
which include consideration of market risk. However, corporate owned assets do not involve
the unique aspects of the corporate subrogated claim, and therefore the discounting can be
viewed as producing a reasonable estimate of fair market value.
For the Year Ended
December 31, 1996
to Reconcile Net Income to Net Cash (Used by) Provided by Operating Activities
Increase in accrued
interest on notes payable
Provision for losses
Assets and Liabilities:
receivables from thrift resolutions
securitization reserve fund
investment in corporate owned assets
(Increase) in other
accounts payable and other liabilities
liabilities incurred from thrift resolutions
estimated liabilities for assistance agreements
(Used by) Provided by Operating Activities
In the first
quarter of 1997, management negotiated with the National Treasury Employees Union (NTEU) a
change in employee health benefits. This change involves a conversion from the FDIC health
plan to the Federal Employees Health Benefits (FEHB) plan. This conversion will involve
all employees with five or more years until retirement eligibility.
legislation is also passed, the conversion will also affect all retirees and employees
within five years of retirement. Management does not expect the conversion, which will
become effective on January 1,1998, to result in an accounting loss to the FRF.