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Federal Deposit
Insurance Corporation

Each depositor insured to at least $250,000 per insured bank

2013 Annual Report

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Notes to the Financial Statements

FSLIC Resolution Fund
December 31, 2013 and 2012

1.Operations/Dissolution of the FSLIC Resolution Fund

Overview

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 nation's 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, the FDIC, as administrator of the Deposit Insurance Fund (DIF), insures the deposits of banks and savings associations (insured depository institutions). In cooperation with other federal and state agencies, the FDIC promotes the safety and soundness of insured depository institutions by identifying, monitoring and addressing risks to the DIF. Commercial banks, savings banks and savings associations (known as "thrifts") are supervised by either the FDIC, the Office of the Comptroller of the Currency, or the Federal Reserve Board. In addition, the FDIC, through administration of the FSLIC Resolution Fund (FRF), is responsible for the sale of remaining assets and satisfaction of liabilities associated with the former Federal Savings and Loan Insurance Corporation (FSLIC) and the former Resolution Trust Corporation (RTC). The DIF and the FRF are maintained separately by the FDIC to support their respective functions.

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 FRF, and transferred the assets and liabilities of the FSLIC to the FRF—except those assets and liabilities transferred to the newly created RTC—effective on August 9, 1989. Further, 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 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 FRF-FSLIC 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 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 FRF's remaining assets and liabilities. Some of the issues and items that remain open in FRF are 1) criminal restitution orders (generally have from 1 to 17 years remaining to enforce); 2) collections of settlements and judgments obtained against officers and directors and other professionals responsible for causing or contributing to thrift losses (generally have up to 7 years remaining to enforce, unless the judgments are renewed or are covered by the Federal Debt Collections Procedures Act, which will result in significantly longer periods for collection for some judgments); 3) a few assistance agreements entered into by the former FSLIC (FRF could continue to receive or refund overpayments of tax benefits sharing in future years); 4) goodwill litigation (no final date for resolution has been established; see Note 4); and 5) affordable housing program monitoring (requirements can exceed 25 years). The FRF could potentially realize recoveries from tax benefits sharing, criminal restitution orders, and professional liability claims; however, any associated recoveries are not reflected in FRF's financial statements given the significant uncertainties surrounding the ultimate outcome.

After evaluating FRF's remaining assets and liabilities in 2013, the FDIC returned $2.6 billion to the U.S. Treasury on behalf of FRF-FSLIC and paid $125 million to REFCORP on behalf of FRF-RTC (see Note 5). More transfers are expected to continue as remaining assets wind down and liabilities are satisfied.

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 accordance with U.S. generally accepted accounting principles (GAAP). As permitted by the Federal Accounting Standards Advisory Board's Statement of Federal Financial Accounting Standards 34, The Hierarchy of Generally Accepted Accounting Principles, Including the Application of Standards Issued by the Financial Accounting Standards Board, the FDIC prepares financial statements in accordance with standards promulgated by the Financial Accounting Standards Board (FASB). These statements do not include reporting for assets and liabilities of receivership entities because these entities are legally separate and distinct, and the FRF does not have any ownership or beneficial interests in them. Periodic and final accounting reports of receivership entities are furnished to courts, supervisory authorities, and others upon request.

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 the valuation of other assets and the estimated losses for litigation.

Cash Equivalents

Cash equivalents are short-term, highly liquid investments consisting primarily of U.S. Treasury Overnight Certificates.

Provision for Losses

The provision for losses represents the change in the estimation of the allowance for losses related to the receivables from thrift resolutions and other assets.

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.

Presentation of Statement of Cash Flows

To enhance cash flow information for operating activities of the FRF, in 2013, the FDIC changed the method of presenting the FRF's Statement of Cash Flows from the indirect method to the direct method, which is preferable and is encouraged by the Financial Accounting Standards Board. Accordingly, the FRF's 2012 Statement of Cash Flows has been conformed to this method of presentation for comparative purposes. For 2013 and 2012, the reconciliation of net income to net cash from operating activities is presented in Note 7.

Disclosure about Recent Relevant Accounting Pronouncements

Accounting Standards Update No. 2013-07, Presentation of Financial Statements - Liquidation Basis of Accounting, modifies Accounting Standards Codification Topic 205, Presentation of Financial Statements, to require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. The amendments are effective during annual reporting periods beginning after December 15, 2013. As the remaining issues of the FRF continue to wind down (see Note 1), the FDIC will evaluate the applicability of this standard to the FRF. At this time, the FDIC has no approved liquidation plan for the final dissolution of the FRF.

Other recent accounting pronouncements have been deemed not applicable or material to the financial statements as presented.

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 RTC are a significant source of repayment of the FRF's receivables from thrift resolutions. As of December 31, 2013, only one of the 850 FRF receiverships remains active and is expected to terminate in 2014.

The FRF receiverships held assets with a book value of $2 million and $13 million as of December 31, 2013 and 2012, respectively (which primarily consist of cash held for non-FRF, third party creditors).

Other Assets

Other assets primarily consist of assets that were acquired from terminated receiverships.

Receivables from Thrift Resolutions and Other Assets,
Net at December 31
Dollars in Thousands
  2013 2012
Receivables from closed thrifts
$35
$869,917
Allowance for losses
0
(867,208)
Receivables from Thrift Resolutions, Net
35
2,709
Other assets, net
1,148
2,747
Total
$1,183
$5,456

4. Contingent Liabilities for:

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.

On July 22, 1998, the Department of Justice's (DOJ's) 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. On July 23, 1998, the U.S. Treasury determined, based on OLC's opinion, that the FRF is the appropriate source of funds for payments of any such judgments and settlements. The FDIC General Counsel concluded that, 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 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 estimated liability for goodwill litigation should have a corresponding receivable from the U.S. Treasury and therefore have no net impact on the financial condition of the FRF.

The FRF paid $500 thousand and $181 million to the plaintiffs in one goodwill case in 2013 and 2012, respectively. The $500 thousand represents a reimbursement for a tax liability of the plaintiffs as a result of the $181 million settlement received in 2012. The FRF received appropriations from the U.S. Treasury to fund these payments.

As of December 31, 2013, one case is active and pending against the United States based on alleged breaches of the agreements stated above. For this case, a contingent liability and an offsetting receivable of $356 million was recorded as of December 31, 2013 and 2012. This case is currently before the lower court pending remand following appeal. It is reasonably possible that for this case the FRF could incur additional estimated losses of $63 million, representing additional damages contended by the plaintiff. For a case that was fully adjudicated, an estimated loss of $8 million, which represents estimated tax liabilities, is also reasonably possible.

For the second of the two cases active at year-end 2012, the United States' Motion for Costs was denied by the trial court and the United States did not seek further review of this denial. This case is now concluded.

In addition, the FRF-FSLIC pays the goodwill litigation expenses incurred by the DOJ, the entity that defends these lawsuits against the United States, based on a Memorandum of Understanding (MOU) dated October 2, 1998, between the FDIC and the DOJ. FRF-FSLIC pays in advance the estimated goodwill litigation expenses. Any unused funds are carried over and applied toward the next fiscal year (FY) charges. In 2013, FRF-FSLIC did not provide any additional funding to the DOJ because the unused funds from prior fiscal years were sufficient to cover estimated FY 2014 expenses.

Guarini Litigation

Paralleling the goodwill cases were 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.

All eight of the original Guarini cases have been settled. However, a case settled in 2006 further obligates the FRF-FSLIC as a guarantor for all tax liabilities in the event the settlement amount is determined by tax authorities to be taxable. The maximum potential exposure under this guarantee is approximately $81 million. However, the FDIC believes that it is very unlikely the settlement will be subject to taxation. The Internal Revenue Service concluded an examination of the affected entity's 2006 return without an assertion of taxation for an issue covered by the guarantee. The 2006 return was subsequently amended, and the amended return is under further administrative review. As of December 31, 2013, no liability has been recorded. The FRF does not expect to fund any payment under this guarantee.

Guarantees

On May 21, 2012, the FDIC, in its capacity as manager of the FRF, entered into an agreement with Fannie Mae for the release of $13 million of credit enhancement reserves to the FRF in exchange for indemnifying Fannie Mae for all future losses incurred on 76 multi-family mortgage loans. The former RTC supplied Fannie Mae with the credit enhancement reserves in the form of cash collateral to cover future losses on these mortgage loans through 2020. The maximum exposure on this indemnification is the current unpaid principal balance of the remaining 60 multi-family loans totaling $7 million. Based on a contingent liability assessment of this portfolio, the majority of the loans are at least 65% amortized, and all are scheduled to mature within two to seven years. Since all of the loans are currently in performing status and no losses have occurred since 2001, future payments on this indemnification are not expected. As a result, the FRF has not recorded a contingent liability for this indemnification as of December 31, 2013.

5. Resolution Equity

As stated in the Overview 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, 2013
Dollars in Thousands
  FRF-FSLIC FRF-RTC FRF Consolidated
Contributed capital - beginning
$46,307,319
$81,749,337
$128,056,656
Less: Payment to REFCORP
0
(125,000)
(125,000)
Less: Return of U.S. Treasury funds
(2,600,000)
0
(2,600,000)
Add: U.S. Treasury payment for goodwill litigation
500
0
500
Contributed capital - ending
43,707,819
81,624,337
125,332,156
Accumulated deficit
(42,879,951)
(81,580,200)
(124,460,151)
Total
$827,868
$44,137
$872,005

Resolution Equity at December 31, 2012
Dollars in Thousands
  FRF-FSLIC FRF-RTC FRF Consolidated
Contributed capital - beginning
$46,126,319
$81,749,337
$127,875,656
Add: U.S. Treasury payment for goodwill litigation
181,000
0
181,000
Contributed capital - ending
46,307,319
81,749,337
128,056,656
Accumulated deficit
(42,882,341)
(81,577,294)
(124,459,635)
Total
$3,424,978
$172,043
$3,597,021

Contributed Capital

The FRF-FSLIC and the former RTC received $43.5 billion and $60.1 billion from the U.S. Treasury, respectively, to fund losses from thrift resolutions prior to July 1, 1995. Additionally, the FRF-FSLIC issued $670 million in capital certificates to the Financing Corporation (a mixed-ownership government corporation established to function solely as a financing vehicle for the FSLIC) 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.

FRF-FSLIC received $500 thousand and $181 million in U.S. Treasury payments for goodwill litigation in 2013 and 2012, respectively. Furthermore, $356 million was accrued for as receivables as of December 31, 2013 and 2012, respectively. Through December 31, 2013, the FRF has received or established a receivable for a total of $2.2 billion of goodwill appropriations, the effect of which increases contributed capital.

Through December 31, 2013, the FRF-RTC has returned $4.6 billion to the U.S. Treasury and made payments of $5.1 billion to the REFCORP. The most recent payment to the REFCORP was in July of 2013 for $125 million. In addition, the FDIC returned $2.6 billion to the U.S. Treasury on behalf of the FRF-FSLIC in 2013. These actions serve to reduce contributed capital.

Accumulated Deficit

The accumulated deficit represents the cumulative excess of expenses and losses 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 $13.1 billion, whereas the FRF-RTC accumulated deficit has decreased by $6.3 billion, since their dissolution dates.

6. Disclosures about the Fair Value of Financial Instruments

At December 31, 2013 and 2012, the FRF's financial assets measured at fair value on a recurring basis are cash equivalents of $826 million and $3.4 billion, respectively. Cash equivalents are Special U.S. Treasury Certificates with overnight maturities valued at prevailing interest rates established by the Bureau of the Fiscal Service. The valuation is considered a Level 1 measurement in the fair value hierarchy, representing quoted prices in active markets for identical assets.

Some of the FRF's financial assets and liabilities are not recognized at fair value but are recorded at amounts that approximate fair value due to their short maturities and/or comparability with current interest rates. Such items include other short-term receivables and accounts payable and other liabilities.

7. Information Relating to the Statement of Cash Flows

Reconciliation of Net Loss to Net Cash from Operating Activities for the Years Ended December 31
Dollars in Thousands
Operating Activities 2013 2012
Net Loss:
$(516)
$(179,008)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Provision for insurance losses
(1,255)
(1,408)
Change in Assets and Liabilities:
Decrease in receivables from resolutions and other assets
5,528
61,115
(Decrease) in accounts payable and other liabilities
(1,652)
(1,102)
Net Cash Provided (Used) by Operating Activities
$2,105
$(120,403)

8. Subsequent Events

Subsequent events have been evaluated through March 6, 2014, the date the financial statements are available to be issued, and management determined that there are no items to disclose.

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