III. Financial Statements and Notes - FSLIC Resolution Fund (FRF)
FSLIC Resolution Fund Balance Sheets at December 31 |
Dollars in Thousands |
|
2003 |
2002 |
Assets |
Cash and cash equivalents |
$3,278,532 |
$3,618,330 |
Receivables from thrift resolutions and other assets, net (Note 3) |
198,432 |
251,929 |
Total Assets |
$3,476,964 |
$3,870,259 |
Liabilities |
Accounts payable and other liabilities |
$19,381 |
$14,408 |
Contingent liabilities for litigation losses and other (Note 4) |
1,169 |
546 |
Total Liabilities |
20,550 |
14,954 |
Resolution Equity (Note 6) |
Contributed capital |
126,377,851 |
126,827,821 |
Accumulated deficit |
(122,962,936) |
(123,015,273) |
Unrealized gain on available-for-sale securities, net (Note 3) |
41,499 |
42,757 |
Accumulated deficit, net |
(122,921,437) |
(122,972,516) |
Total Resolution Equity |
3,456,414 |
3,855,305 |
Total Liabilities and Resolution Equity |
$3,476,964 |
$3,870,259 |
The accompanying notes are an integral part of these financial statements. |
FSLIC Resolution Fund Statements of Income and Accumulated Deficit for the Years Ended December 31 |
Dollars in Thousands |
|
2003 |
2002 |
Revenue |
Interest on U.S. Treasury obligations |
$32,902 |
$46,835 |
Realized gain on investment in securitization-related assets acquired from receiverships (Note 3) |
756 |
352,486 |
Other revenue |
16,849 |
33,756 |
Total Revenue |
50,507 |
433,077 |
Expenses and Losses |
Operating expenses |
27,828 |
45,684 |
Provision for losses (Note 5) |
(57,832) |
(149,359) |
Expenses for goodwill settlements and litigation (Note 4) |
15,324 |
40,351 |
Other expenses |
12,850 |
5,856 |
Total Expenses and Losses |
(1,830) |
(57,468) |
Net Income |
52,337 |
490,545 |
Unrealized loss on available-for-sale securities, net (Note 3) |
(1,258) |
(263,590) |
Comprehensive Income |
51,079 |
226,955 |
Accumulated Deficit - Beginning |
(122,972,516) |
(123,199,471) |
Accumulated Deficit - Ending |
$(122,921,437) |
$(122,972,516) |
The accompanying notes are an integral part of these financial statements.
|
FSLIC Resolution Fund Statements of Cash Flows for the Years Ended December 31 |
Dollars in Thousands |
|
2003 |
2002 |
Operating Activities |
Provided by: |
Interest on U.S. Treasury obligations |
$32,902 |
$46,835 |
Recoveries from thrift resolutions |
115,437 |
316,439 |
Miscellaneous receipts |
39,079 |
32,607 |
Used by:
|
Operating expenses |
(31,643) |
(44,421) |
Disbursements for thrift resolutions |
(11,842) |
(30,373) |
Disbursements for goodwill settlements and judgments |
(30) |
(21,459) |
Disbursements for goodwill litigation expenses |
(35,274) |
(18,892) |
Miscellaneous disbursements |
(4,286) |
(9,119) |
Net Cash Provided by Operating Activities (Note 8) |
104,343 |
271,617 |
Investing Activities |
Investment in securitization-related assets acquired from receiverships |
5,829 |
1,101,525 |
Net Cash Provided by Investing Activities |
5,829 |
1,101,525 |
Financing Activities |
Provided by: |
U.S.Treasury payments for goodwill settlements |
30 |
21,459 |
Used by: |
Payments to Resolution Funding Corporation (Note 6) |
(450,000) |
(1,266,667) |
Net Cash Used by Financing Activities |
(449,970) |
(1,245,208) |
Net (Decrease)/Increase in Cash and Cash Equivalents |
(339,798) |
127,934 |
Cash and Cash Equivalents - Beginning |
3,618,330 |
3,490,396 |
Cash and Cash Equivalents - Ending |
$3,278,532 |
$3,618,330 |
The accompanying notes are an integral part of these financial statements. |
Notes to the Financial Statements December 31, 2003 and 2002
1. Legislative History and Operations/Dissolution of the FSLIC Resolution Fund
Legislative History
The Federal Deposit Insurance Corporation (FDIC) is the independent deposit
insurance agency created by Congress in 1933 to maintain stability and public
confidence in the nations banking system. Provisions that govern the operations
of the FDIC are generally found in the Federal Deposit Insurance (FDI) Act, as
amended, (12 U.S.C. 1811, et seq). In carrying out the purposes of the FDI Act,
as amended, the FDIC insures the deposits of banks and savings associations,
and in cooperation with other federal and state agencies promotes the safety
and soundness of insured depository institutions by identifying, monitoring and
addressing risks to the deposit insurance funds established in the FDI Act,
as amended. In addition, FDIC is charged with responsibility for the sale
of remaining assets and satisfaction of liabilities associated with the former
Federal Savings and Loan Insurance Corporation (FSLIC) and the Resolution
Trust Corporation (RTC).
The U.S. Congress created the FSLIC through the enactment of the National
Housing Act of 1934. The Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 (FIRREA) abolished the insolvent FSLIC, created the FSLIC
Resolution Fund (FRF), and transferred the assets and liabilities of the FSLIC
to the FRFexcept those assets and liabilities transferred to the RTCeffective
on August 9, 1989.
The FIRREA was enacted to reform, recapitalize, and consolidate the federal
deposit insurance system. In addition to the FRF, FIRREA created the Bank
Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). It
also designated the FDIC as the administrator of these funds. All three funds
are maintained separately to carry out their respective mandates.
The FIRREA created the RTC 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. Resolution responsibility
was subsequently extended and ultimately transferred from the RTC to
the SAIF on July 1, 1995. The FIRREA established the Resolution Funding
Corporation (REFCORP) to provide part of the initial funds used by the RTC
for thrift resolutions.
The RTC Completion Act of 1993 (RTC Completion Act) terminated the RTC
as of December 31, 1995. All remaining assets and liabilities of the RTC were
transferred to the FRF on January 1,1996. Today, the FRF consists of two
distinct pools of assets and liabilities: one composed of the assets and liabilities
of the FSLIC transferred to the FRF upon the dissolution of the FSLIC (FRF-FSLIC),
and the other composed of the RTC assets and liabilities (FRF-RTC). The assets
of one pool are not available to satisfy obligations of the other.
Operations/Dissolution of the FRF
The FRF will continue operations until all of its assets are sold or otherwise
liquidated and all of its liabilities are satisfied. Any funds remaining in the FRFFSLIC
will be paid to the U.S. Treasury. Any remaining funds of the FRF-RTC
will be distributed to the REFCORP to pay the interest on the REFCORP bonds.
In addition, the FRF-FSLIC has available until expended $602.2 million in appropriations
to facilitate, if required, efforts to wind up the resolution activity of
the FRF-FSLIC.
The FDIC has conducted an extensive review and cataloging of FRFs remaining
assets and liabilities and is continuing to explore approaches for concluding
FRFs activities. An executive-level Steering Committee was established in 2003
to facilitate the FRF dissolution. Some of the issues and items that remain open
in FRF are: 1) criminal restitution orders (generally have from 5 to 10 years
remaining); 2) litigation claims and judgments obtained against officers and directors
and other professionals responsible for causing thrift losses (judgments generally
vary from 5 to 10 years); 3) numerous assistance agreements entered into by
the former FSLIC (FRF could continue to receive tax sharing benefits through
year 2020); 4) goodwill and Guarini litigation (no final date for resolution has been
established; see Note 4); and 5) environmentally impaired owned real estate
assets. FDIC is considering whether enabling legislation or other measures may
be needed to accelerate liquidation of the remaining FRF assets and liabilities.
The FRF could realize substantial recoveries from item 3 ranging from $235 million
to $760 million; however, any associated recoveries are not reflected in FRFs
financial statements given the significant uncertainties surrounding the ultimate
outcome.
Receivership Operations
The FDIC is responsible for managing and disposing of the assets of failed
institutions in an orderly and efficient manner. The assets held by receivership
entities, and the claims against them, are accounted for separately from FRF
assets and liabilities to ensure that receivership proceeds are distributed in
accordance with applicable laws and regulations. Also, the income and expenses
attributable to receiverships are accounted for as transactions of those receiverships.
Receiverships are billed by the FDIC for services provided on their behalf.
2. Summary of Significant Accounting Policies
General
These financial statements pertain to the financial position, results of operations,
and cash flows of the FRF and are presented in conformity with U.S. generally
accepted accounting principles (GAAP). These statements do not include reporting
for assets and liabilities of closed thrift institutions for which the FDIC acts
as receiver. Periodic and final accountability reports of the FDICs activities as
receiver are furnished to courts, supervisory authorities, and others as required.
Use of Estimates
Management makes estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ
from these estimates. Where it is reasonably possible that changes in estimates
will cause a material change in the financial statements in the near term, the
nature and extent of such changes in estimates have been disclosed. The more
significant estimates include allowance for losses on receivables from thrift
resolutions and the estimated losses for litigation.
Fair Value of Financial Instruments
Cash equivalents, which consist of Special U.S. Treasury Certificates, are short-term,
highly liquid investments with original maturities of three months or less
and are shown at fair value. The carrying amount of short-term receivables and
accounts payable and other liabilities approximates their fair market value, due
to their short maturities.
The investment in securitization-related assets acquired from receiverships is
adjusted to fair value at each reporting date using a valuation model that estimates
the present value of estimated expected future cash flows discounted for market
and credit risks. Additionally, the credit enhancement reserves, which resulted
from swap transactions, are valued by applying a historical loss rate to estimate
loss amounts (see Note 3).
The net receivable from thrift resolutions is influenced by the underlying valuation
of receivership assets. This corporate receivable is unique and the estimate
presented is not indicative of the amount that could be realized in a sale to the
private sector. Such a sale would require indeterminate, but substantial, discounts
for an interested party to profit from these assets because of credit and other
risks. Consequently, it is not practicable to estimate its fair market value.
Cost Allocations Among Funds
Operating expenses not directly charged to the FRF, the BIF, and the SAIF
are allocated to all funds using workload-based allocation percentages. These
percentages are developed during the annual corporate planning process and
through supplemental functional analyses.
Related Parties
The nature of related parties and a description of related party transactions are
discussed in Note 1 and disclosed throughout the financial statements and
footnotes.
Reclassifications
Reclassifications have been made in the 2002 financial statements to conform
to the presentation used in 2003.
3. Receivables From Thrift Resolutions and Other Assets, Net
Receivables From Thrift Resolutions
The receivables from thrift resolutions include payments made by the FRF to
cover obligations to insured depositors, advances to receiverships for working
capital, and administrative expenses paid on behalf of receiverships. Any related
allowance for loss represents the difference between the funds advanced and/or
obligations incurred and the expected repayment. Assets held by the FDIC in its
receivership capacity for the former FSLIC and SAIF-insured institutions are a
significant source of repayment of the FRFs receivables from thrift resolutions.
As of December 31, 2003, 52 of the 850 FRF receiverships remain active primarily
due to unresolved litigation, including Goodwill and Guarini matters.
As of December 31, 2003 and 2002, FRF receiverships held assets with
a book value of $215 million and $290 million, respectively (including cash,
investments, and miscellaneous receivables of $114 million and $146 million
at December 31, 2003 and 2002, respectively). The estimated cash recoveries
from the management and disposition of these assets that are used to derive
the allowance for losses are based on a sampling of receivership assets. The
sampled assets are generally valued by estimating future cash recoveries, net
of applicable liquidation cost estimates, and then discounting these net cash
recoveries using current market-based risk factors based on a given assets type
and quality. Resultant recovery estimates are extrapolated to the non-sampled
assets in order to derive the allowance for loss on the receivable. These estimated
recoveries are regularly evaluated, but remain subject to uncertainties because
of potential changes in economic and market conditions. Such uncertainties could
cause the FRFs actual recoveries to vary from the level currently estimated.
Investment in Securitization-Related Assets Acquired from Receiverships
This investment is classified as available-for-sale with unrealized gains and losses
included in Resolution Equity. Realized gains and losses are recorded based
upon the difference between the proceeds at termination of the deal and the
book value of the investment and are included as components of Net Income.
As of December 31, 2003, this investment includes credit enhancement
reserves valued at $69 million and residual certificates valued at $21 million.
The last securitization deal, valued at $60 million (including $39 million in credit
enhancement reserves and $21 million in residual certificates), is expected to
terminate in 2004. The remaining $30 million in credit enhancement reserves
resulted from swap transactions where the former RTC received mortgage-backed
securities in exchange for single-family mortgage loans. The former RTC supplied
credit enhancement reserves for the mortgage loans in the form of cash collateral
to cover future credit losses over the remaining life of the loans. These reserves
may cover future credit losses through 2018.
Receivables From Thrift Resolutions and Other Assets, Net at December 31 |
Dollars in Thousands |
|
2003 |
2002 |
Receivables from closed thrifts |
$22,940,793 |
$27,636,213 |
Allowance for losses |
(22,846,309) |
(27,504,909) |
Receivables from Thrift Resolutions, Net |
94,484 |
131,304 |
Investment in securitization-related assets acquired from receiverships |
$90,272 |
$98,114 |
Other assets |
13,676 |
22,511 |
Total |
$198,432 |
$251,929 |
Gross receivables from thrift resolutions and the investment in securitization-related
assets subject the FRF to credit risk. An allowance for loss of $22.8 billion,
or 99.6% of the gross receivable, was recorded as of December 31, 2003. Of
the remaining 0.4% of the gross receivable, over three-fourths of the receivable
is expected to be repaid from receivership cash, investments, and pledged cash
reserves. The credit risk related to the pledged cash reserves is limited since the
majority of these assets are evaluated annually and have experienced minimal
losses.
The value of the investment in securitization-related assets is influenced by
the economy of the area relating to the underlying loans. Of this investment,
$42.4 million of the underlying mortgages are located in California and
$27.2 million of loans are located in New Jersey. No other state accounted
for a material portion of the investment.
4. Contingent Liabilities for:
Litigation Losses
The FRF records an estimated loss for unresolved legal cases to the extent
those losses are considered probable and reasonably estimable. In addition to
the amount recorded as probable, the FDIC has determined that losses from
unresolved legal cases totaling $39 million are reasonably possible.
Additional Contingency
Goodwill Litigation
In United States v. Winstar Corp., 518 U.S. 839 (1996), the Supreme Court held
that when it became impossible following the enactment of FIRREA in 1989
for the federal government to perform certain agreements to count goodwill
toward regulatory capital, the plaintiffs were entitled to recover damages
from the United States. Approximately 61 cases are pending against the
United States based on alleged breaches of these agreements.
On July 22, 1998, the Department of Justices (DOJs) Office of Legal Counsel
(OLC) concluded that the FRF is legally available to satisfy all judgments and
settlements in the Goodwill Litigation involving supervisory action or assistance
agreements. OLC determined that nonperformance of these agreements was
a contingent liability that was transferred to the FRF on August 9, 1989, upon
the dissolution of the FSLIC. Under the analysis set forth in the OLC opinion,
as liabilities transferred on August 9, 1989, these contingent liabilities for future
nonperformance of prior agreements with respect to supervisory goodwill were
transferred to the FRF-FSLIC, which is that portion of the FRF encompassing
the obligations of the former FSLIC. The FRF-RTC, which encompasses the
obligations of the former RTC and was created upon the termination of the RTC
on December 31, 1995, is not available to pay any settlements or judgments
arising out of the Goodwill Litigation. On July 23, 1998, the U.S.Treasury
determined, based on OLCs opinion, that the FRF is the appropriate source
of funds for payments of any such judgments and settlements.
The lawsuits comprising the Goodwill Litigation are against the United States
and as such are defended by the DOJ. On December 1, 2003, the DOJ again
informed the FDIC that it is unable at this time to provide a reasonable estimate
of the likely aggregate contingent liability resulting from the Winstar-related
cases. This uncertainty arises, in part, from the existence of significant
unresolved issues pending at the appellate or trial court level, as well as the
unique circumstances of each case.
The FDIC believes that it is probable that additional amounts, possibly substantial,
may be paid from the FRF-FSLIC as a result of judgments and settlements in
the Goodwill Litigation. Based on the response from the DOJ, the FDIC is
unable to estimate a range of loss to the FRF-FSLIC from the Goodwill Litigation.
However, the FRF can draw from an appropriation provided by Section 110
of the Department of Justice Appropriations Act, 2000 (Public Law 106-113, Appendix A, Title I, 113 Stat. 1501A-3, 1501A-20) such sums as may be necessary
for the payment of judgments and compromise settlements in the Goodwill
Litigation. This appropriation is to remain available until expended. Because an
appropriation is available to pay such judgments and settlements, any liabilities
for the Goodwill Litigation should have no impact on the financial condition
of the FRF-FSLIC.
In addition, the FRF-FSLIC pays the goodwill litigation expenses incurred by
DOJ based on a Memorandum of Understanding (MOU) dated October 2, 1998,
between the FDIC and DOJ. Under the terms of the MOU, the FRF-FSLIC paid
$33.3 million and $17.5 million to DOJ for fiscal years 2004 and 2003, respectively.
DOJ returns any unused fiscal year funding to the FRF unless special
circumstances warrant these funds be carried over and applied against current
fiscal year charges. In April 2003, DOJ returned $20 million of unused fiscal
year funds. At September 30, 2003, DOJ had $19.9 million in unused funds
that were applied against FY 2004 charges of $53.2 million.
Guarini Litigation
Paralleling the goodwill cases are eight similar cases alleging that the government
breached agreements regarding tax benefits associated with certain FSLIC-assisted
acquisitions. These agreements allegedly contained the promise of tax
deductions for losses incurred on the sale of certain thrift assets purchased by
plaintiffs, from the FSLIC, even though the FSLIC provided the plaintiffs with
tax-exempt reimbursement. A provision in the Omnibus Budget Reconciliation
Act of 1993 (popularly referred to as the Guarini legislation) eliminated the
tax deductions for these losses.
To date, there have been liability determinations in six of the eight Guarini cases. The United States Court of Federal Claims has entered an award for
the plaintiffs in three of these cases and appeals have been filed by DOJ.
A decision on liability has not been made in the seventh case, and the eighth
case was settled during 2002 for $20 thousand.
The FDIC believes that it is possible that substantial amounts may be paid from
the FRF-FSLIC as a result of the judgments and settlements from the Guarini
litigation. However, because the litigation of damages computation is still
ongoing, the amount of the damages is not estimable at this time.
Representations and Warranties
As part of the RTCs efforts to maximize the return from the sale of assets from
thrift resolutions, representations and warranties, and guarantees were offered
on certain loan sales. The majority of loans subject to these agreements have
most likely been paid off or refinanced due to the current interest rate climate
or the period for filing claims has expired. However, there is no reporting
mechanism to determine the aggregate amount of remaining loans. Therefore,
the FDIC is unable to provide an estimate of maximum exposure to the FRF.
Based on the above and our history of claims processed, the FDIC believes that
any future representation and warranty liability to the FRF would be minimal.
5. Provision for Losses
The provision for losses was a negative $58 million and a negative $149 million
for 2003 and 2002, respectively. In 2003, the negative provision was primarily
due to lower estimated losses for assets in liquidation and recoveries of net tax
benefits sharing from assistance agreements. The negative provision in 2002
was primarily due to the recoveries of net tax benefits sharing from assistance
agreements.
6. Resolution Equity
As stated in the Legislative History section of Note 1, the FRF is comprised
of two distinct pools: the FRF-FSLIC and the FRF-RTC. The FRF-FSLIC consists
of the assets and liabilities of the former FSLIC. The FRF-RTC consists of the
assets and liabilities of the former RTC. Pursuant to legal restrictions, the two
pools are maintained separately and the assets of one pool are not available
to satisfy obligations of the other.
The following table shows the contributed capital, accumulated deficit, and
resulting resolution equity for each pool.
Resolution Equity at December 31, 2003 |
Dollars in Thousands |
|
FRF-FSLIC |
FRF-RTC |
FRF Consolidated |
Contributed capital - beginning |
$44,178,484 |
$82,649,337 |
$126,827,821 |
Add: U.S. Treasury payments for goodwill settlement |
30 |
0 |
30 |
Less: REFCORP payments |
0 |
(450,000) |
(450,000) |
Contributed capital - ending |
44,178,514 |
82,199,337 |
126,377,851 |
Accumulated deficit |
(41,241,633) |
(81,721,303) |
(122,962,936) |
Less: Unrealized gain on available-for-sale securities |
0 |
41,499 |
41,499 |
Accumulated deficit, net |
(41,241,633) |
(81,679,804) |
(122,921,437) |
Total |
$2,936,881 |
$519,533 |
$3,456,414 |
Contributed Capital
To date, the FRF-FSLIC and the former RTC received $43.5 billion and $60.1 billion
from the U.S. Treasury, respectively. These payments were used to fund losses
from thrift resolutions prior to July 1, 1995. Additionally, the FRF-FSLIC issued
$670 million in capital certificates to the FICO and the RTC issued $31.3 billion
of these instruments to the REFCORP. FIRREA prohibited the payment of
dividends on any of these capital certificates. Through December 31, 2003, the
FRF-RTC has returned $4.556 billion to the U.S. Treasury and made payments
of $4.572 billion to the REFCORP. These actions serve to reduce contributed
capital.
Accumulated Deficit
The accumulated deficit represents the cumulative excess of expenses over
revenue for activity related to the FRF-FSLIC and the FRF-RTC. Approximately
$29.8 billion and $87.9 billion were brought forward from the former FSLIC
and the former RTC on August 9, 1989, and January 1, 1996, respectively.
The FRF-FSLIC accumulated deficit has increased by $11.4 billion, whereas
the FRF-RTC accumulated deficit has decreased by $6.3 billion, since their
dissolution dates.
7. Employee Benefits
Pension Benefits
Eligible FDIC employees (permanent and term employees with appointments
exceeding one year) are covered by the federal government retirement plans,
either the Civil Service Retirement System (CSRS) or the Federal Employees
Retirement System (FERS). Although the FRF contributes a portion of pension
benefits for eligible employees, it does not account for the assets of either
retirement system.
The FRF also does not have actuarial data for accumulated plan benefits or
the unfunded liability relative to eligible employees. These amounts are reported
on and accounted for by the U.S. Office of Personnel Management.
The FRFs
pro rata share of pension-related expenses was $2.2 million and $4.6 million,
as of December 31, 2003 and 2002, respectively.
Postretirement Benefits Other Than Pensions
Beginning in 2003, the FRF no longer records a liability for the postretirement
benefits of life and dental insurance as a result of FDICs change in funding
policy for these benefits and elimination of the separate entity. In implementing
this change, management decided not to allocate either the plan assets or the
revised net accumulated postretirement benefit obligation (a long-term liability)
to FRF due to the expected dissolution of the Fund in the short-term. However,
FRF does continue to pay its proportionate share of the yearly claim expenses
associated with these benefits.
8. Supplementary Information Relating to the
Statements of Cash Flows
Reconciliation of Net Income to Net Cash Provided by Operating Activities for the Years Ended December 31 |
Dollars in Thousands |
|
2003 |
2002 |
Net Income |
$52,337 |
$490,545 |
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities |
Change in Assets and Liabilities: |
Decrease (Increase) in receivables from thrift resolutions and other assets |
46,410 |
(213,791) |
Increase (Decrease) in accounts payable and other liabilities |
4,973 |
(379) |
Increase (Decrease) in contingent liabilities for litigation losses and other |
623 |
(4,758) |
Net Cash Provided by Operating Activities |
$ 104,343 |
$271,617 |
|