20944845 Buying Failed Banks From the FDIC

8/9/2019 20944845 Buying Failed Banks From the FDIC

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Buying Failed Banks from the FDICBuying Failed Banks from the FDIC

FIG Partners CEO Forum

Chip MacDonald

FIG Partners CEO Forum

Chip MacDonald

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The Banking Industry TodayThe Banking Industry Today

Number Assets Deposits

(Billions)

Commercial Banks $6,995 $11,895.1 $8,077.2

Thrifts 1,200 1,406.4 943.4

$8,195 $13,301.5 $9,020.6

Aggregate net loss of $37 billion in Q2 2009

$66.9 billion in loan loss provisions

Increase in deposit insurance costs

Proposal to prepay 3 years of FDIC insurance premiums

. . Total assets declined $238.1 billion (1.8%) compared to a $303.2 billion decline in Q1 2009

Total deposits increased $66.7 billion (0.7%), mostly due to deposits in foreign offices

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The Banking Industry Today (contd)The Banking Industry Today (contd)

Problem institutions increased 36% from 305 to 416 during March 31, 2009 toJune 30, 2009.

The assets in problem institutions increased 36.3% from $220.0 billion to $299.8billion.

, ,largest amount of assets in problem institutions since December 31, 1993.

The industry had its second quarterly loss in 18 years of $3.7 billion, although this.

At June 30:

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400 or more banks with a Texas ratio over 100.

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The FDICs Deposit Insurance Fund ( DIF )The FDICs Deposit Insurance Fund ( DIF )

Regular and special deposit insurance assessments increased the DIF by$9.1 billion.

The DIF decreased by $20.6 billion (20.3%) during Q2 2009 to $10.4.

Bank failures cost DIF an estimated $11.6 billion. The DIF reserve ratio was 0.22%, down from 0.27% at March 31, 2009,

the lowest since March 31, 1993 when it was 0.06%.

. .

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The FDICs Deposit Insurance Fund ( DIF )

The FDICs Deposit Insurance Fund ( DIF )

24 banks with $26.4 billion in assets failed in Q2, the highest number of failures since Q4.

95 banks have failed in 2009 through September 2009.

50 banks failed in Q3.

$136 billion of transaction deposits have been guaranteed by the TLG.

82% of TLG-guaranteed debt was issued by holding companies and other non-bank affiliates.

- -.accounts.

The FDIC estimates it has $792.0 million of losses on TLG guaranteed non-interest bearingtransaction accounts (mostly Silverton Bank, N.A. and Alpha Bank).

$339 billion TLG-guaranteed debt was outstanding and had been issued by 97 institutions.

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Bank Failures & FDIC-AssistedBank Failures & FDIC-AssistedTransactionsTransactions

Failures were highest from 1985 1992

Failure Rates

1980 1984 2,912 Failures

1991 2008 371 Failures

2009 95 Failures (through September 2009)

Highest number of failures was 1988 with 279 failures.

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2009 Bank Failures2009 Bank Failures

Trend of Bank Failures

Through September 2009

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Opportunities from Failed Bank AcquisitionsOpportunities from Failed Bank Acquisitions

Interstate and geographic expansion

In market consolidation

area for one year after the failed bank closed Cheap source of deposits

-capital weightings

Immediate and substantial gains possible with loss-sharingower r s t an pr vate transact ons

Fewer integration and social issues than in a private transaction

Acquisitions rewarded in the capital markets

Dilution reduced or eliminated

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II. RESOLUTIONSAND

II. RESOLUTIONSAND

RESOLUTION METHODSRESOLUTION METHODS

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FDIC Resolution MethodsFDIC Resolution Methods

Open bank assistance 98 transactions in 1982 and 1988, including 59 with affiliates of First City

Bancorporation, Houston, Texas7 transact ons n 1989 1992

no open bank assistance since then Bridge banks Conservatorships o e an urc ase an ssumpt on & , w t or w t out oss s ar ng Various partial P&As

insured deposits

non-brokered depositsa epos ts

cash, cash equivalents, marketable securities loans, with and without loss sharing and put rights

Insured deposit payoffs, including Deposit Insured National Banks (DINBs)

o n s w sse uyers PPIP-type structured loan sales (Franklin)

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2009 FDIC Resolutions2009 FDIC Resolutions

*Through September 2009. We define Partial Bank P&As as theones where less than 50% of the failed banks assets werepurchased by the acquiring bank.

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2009 FDIC Resolutions (contd)2009 FDIC Resolutions (contd)

* Through September 2009. Partial Bank P&As where less than 50% of the failedbanks assets were urchased b the ac uirin bank in the P&A transaction.

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Loss-Sharing by Size of Failed Bank in 2009

Size of Failed Banks Number of LossSharing

Resolutions

Average ofEstimated Cost

Ratios (with Loss-Sharing)

Average of EstimatedCost Ratios (all

resolutions)%

$500 million and 1 billion and $2.5 billion and $5 billion 3 23.83 23.95

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2009 FDIC Resolutions (contd)2009 FDIC Resolutions (contd)

Through September 2009

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FDIC

FDIC

when the FDIC is appointed receiver or conservator, or when the FDICdetermines to provide assistance.

FDICs cost = (loss on all assets equity capital unsecured creditorsloss) x (insured deposits / total deposits).

The only exception is for emergency determinations by the TreasurySecretary upon recommendation of the FDICs Board and the FederalReserve Board, after consultation with the President, that a least cost

financial stability. FDI Act, Section 13(c)(4)(B).

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FDIC Loss-SharingFDIC Loss-Sharing

Part of the FDIC effort to achieve least cost resolutions.

e es ma es a n e oss-s ar ng agreemen s roug

August 2009, it placed $80 billion of assets under loss-sharing, withestimated savings of $11 billion over asset sales at current levels.

Through September 2009:

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39 Resolutions without loss-sharing, and total assets of $24.5 billion

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FDIC Loss-Sharing (contd)FDIC Loss-Sharing (contd)

Assets in a loss-sharing transaction are valued at the failed banksbook value plusa premium or minusa discount. A bid may be anAsset Premium Bid or a Discount Bid.

Loss-sharing starts after losses on loans have exhausted the First

Loss Tranche, determined by adding: the deposit premium or discount;

e pos ve or nega ve sse rem um or scoun ;and

the Equity Adjustment (the book value of assets acquired less,failed bank).

If a positive number, this amount is the amount of loss the bidderabsorbs on the purchase of assets and assumption of liabilities of

the failed bank before receiving FDIC loss share protection. If a negative number, this amount is the amount to be paid to the

winning bidder the first business day following the banks closing.

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The loss-sharing percentage assumed by the FDIC is80% up to the defined Threshold Amount and is 95%

.

Loss-sharing depends upon whether the assets aresingle family residential loans or non single familyloans. Single family loans are subject to the FDIC LoanModification Program.

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Single Family Loan Loss-Sharing

10 ear a reement

Credit loss coverage is provided for:

Loan modifications

Short sales

Sales of foreclosed real estate

Loans are sold at end of loss-sharing agreement in ali uidation (with FDIC concurrence)

Credit loss coverage is allowed for up to 3 months of accrued butunpaid interest.

Qualifying expenses to third parties and most loan modification

expenses are capitalized. Loss sharing rights may be transferred to an affiliate of the

purchaser.

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Requires loan modification pursuant to: FDIC loan modification program; The Home Affordable Modification Program (HAMP); or Acquirers may propose an alternative loan modification

proposed by an acquirer which is approved by the FDIC.

, FDIC encourages loss-share "partner institutions" to consider

temporarily reducing mortgage payments for unemployed or

underemployed borrowers. s or earance p an wou re uce mont y oan payments to

an "affordable level" for at least six months, and allow theborrower reasonable living expenses after payment ofmortgage-related expenses.

Forbearance losses are not covered by FDIC loss-sharing, butforeclosure losses will be.

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All Loans Other than Single Family Loans

Credit loss coverage provided when: Assets are written down according to examination criteria of

'

Assets are sold (bulk sales require prior FDIC approval)

When assets are initially written down, credit loss coverage isa owe or up to 3 mont s o accrue ut unpa nterest

Qualifying expenses to third parties are capitalized or treated as acovered loss

Loss sharing rights may be transferred to an affiliate with FDICconcurrence

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Benefits of FDIC Loss-Sharing

Immediate gain on purchase may be realized

Resulting capital can support the new assets

sse s ac e y oss-s ar ng rece ve a owerrisk-weighting for regulatory capital purposes

20% or 0% risk wei htin ?

Significant discounts on assets and low depositpremiums are common

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Burdens of FDIC Loss-Sharing

FDIC as a partner

FDIC inspections

epor ng

Collection on loss-sharing

Residential loan forbearance encouraged

Anal st views of risk asset levels

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Qualifications for BiddersQualifications for Bidders

Normal M&A Standards (FDI Act, Section 18(c))

No adverse, impermissible effects on competition, except forfailed bank transactions that revent failures

Capital adequacy Management

Disclosure to shareholders (non-failed bank transactions)

Convenience and need CRA record

AML / BSA Compliance Record

See FDIC Statement of Polic on Bank Mer ers.

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Other CriteriaOther Criteria

FDIC Rules of Thumb for Qualifying Bidders

Well-capitalized

CAMELS com osite ratin of 1 or 2

CAMELS Management component rating of 1 or 2

Compliance rating of 1 or 2

Federal Reserve Bank Holdin Com an RFI/C ratin of 1or 2

CRA rating of at least Satisfactory

Total assets at least double the core de osits of failing bankwhen the bidder is located in the same state

Total assets at least four times the core deposits of the failingbank when the bidder is located in a contiguous state

Total assets at least five times the core deposits of the failingbank when the bidder is located in noncontiguous states

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Other Criteria (contd)Other Criteria (contd)

OCC

Resultin bank should have 8% Tier 1 ca ital and12% total risk-based capital

Shelf Charters

OTS

Similar to FDIC

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FDIC Policy on Qualifications for Failed BankFDIC Policy on Qualifications for Failed Bank

,,

Applies to Investors who are:

Private investors in a company, including anycompany acquired to facilitate bidding on failed,

indirectly, (including through a shelf charter)

assume deposit liabilities, or such liabilities andassets, rom t e reso ut on o a a e nsuredepository institution; and

charters issued in connection with the resolution offailed insured depository institutions (hereinafter

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FDIC Policy on Qualifications for Failed Bank


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Does Not Apply to:

Persons making investments in partnerships or similar

ventures with bank or thrift holding companies or in suchholding companies (excluding shell holding companies) wheret e o ng company as:

(i) a strong majority interest in the resulting bank or thrift, and

(ii) an established record for successful operation of insuredan s or r s. uc par ners ps are s rong y

encouraged; or

Persons with 5% or less of the total voting power of an

acqu re epos ory ns u on or s an or r o ngcompany, provided there is no evidence of concerted actionby these Investors.

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,, Capital commitment

10% Tier 1 common equity for at least 3 years after acquisition

If falls below that, become undercapitalized for Prompt Corrective

Action purposes Undercapitalized banks:

,

Cannot make capital distributions or redemptions of shares to theirshareholders, including bank holding company parents, without prior

regulatory approval No management fees can be paid to any controlling person.

Acquisitions and expansion activities are limited.

A ca ital restoration lan (Ca ital Plan) must be submitted to and a roved b

the regulators, and any bank holding company controlling the bank mustguarantee that the bank will comply with the Capital Plan until the bankbecomes adequately capitalized on average during each of 4 consecutivecalendar quarters, other wise provides appropriate assurances of performance.

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Cross Support

If one or more investors own 80% or more of 2 ormore insured institutions, the stock in these

losses that may be incurred upon the failure of any

of them. This will limit the ability of an Investor to finance its

investment.

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,, Transactions with Affiliates

All extensions of credit to Investors, their investment funds if any,and any "affiliates" of either, by an acquired bank after acquisition,are prohibited.

Unlike Federal Reserve Reg. W, where affiliates include 25% orgreater owners, an "affiliate" is any company in which the Investor

owns, directly or indirectly, at least 10 percent of the equity of such

Investor(s) are to provide regular reports to the insured depositoryinstitution identifying all "affiliates" of such Investor(s).

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,, Secrecy Law Jurisdictions

nves ors u z ng en es a are om c e n an secrecy ur s c onswould not be eligible to own a direct or indirect interest in an insureddepository institution, unless the Investors are subsidiaries of companiesthat are subject to comprehensive consolidated supervision (CCS) asreco nized b the Federal Reserve Board and the execute a reementson the provision of information to the primary federal regulator about thenon-domestic Investors operations and activities;

maintain their business books and records (or a duplicate) in the U.S.;

consent to the disclosure of information that might be covered bycon ent a ty or pr vacy aws an agree to cooperate w t t e ,necessary, in obtaining information maintained by foreign governmententities;

consent to jurisdiction and designation of an agent for service of process;

the appropriate U.S. federal banking agencies.

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,, Continuity of Ownership

Investors, except open-end mutual funds, cannot sell or transfer their

securities for 3 years following the acquisition without prior FDICapproval.

Transfers to affiliates will be permitted where the affiliate agrees to bebound by the FDIC Policy Statement.

Prohibited Structures

Silo funds; and

beneficial ownership is difficult to ascertain with certainty, the personsresponsible for making decisions are not clearly identified, andownership and control are separated, are not considered appropriate forapproval for ownership of insured depository institutions.

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,, Special Owner Bid Limitations

bank or thrift in receivership will not under any circumstances be

considered eligible to bid to become an investor in the deposit liabilities,or both such liabilities and assets, of that failed depository institution.

Disclosure Investors subject to this policy statement would be expected to submit to

the FDIC information about the Investors and all entities in the ownership

chain, including such information as the size of the capital fund or funds,, , ,management team and the business model.

In addition, Investors and all entities in the ownership chain will berequired to provide to the FDIC such other information as is determinedto be necessar to assure com liance with this olic statement.

Confidential business information submitted by Investors to the FDICshall be treated as confidential business information and shall not bedisclosed, except in accordance with law.

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,, Other

Nothing in this policy statement is intended to replace or substitute for any

determination required:

federal bank or thrift holding company regulator under any applicableregulation or statute, including, in particular, bank or thrift holdingcompany statutes, or

With respect to determinations made and requirements that may beimposed in connection with the general character, fitness and expertiseof the management being proposed by the Investors, the need for athorough and reasonable business plan that addresses business lines

elements, satisfactory corporate governance structure andrepresentation, and any other supervisory matter.

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New FDIC De Novo RulesNew FDIC De Novo Rules

FIL-50-2009 -Institutions (August 28, 2009)

Special supervision and capital for de novo extended from 3 to 7 years

Capital for de novos must be at least 8% Tier 1 for 7 years

This will affect any FDIC-supervised banks

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Powers of the FDIC, as ReceiverPowers of the FDIC, as Receiver

Succeeds to all rights, titles, powers and privileges of thefailed bank and of an shareholder memberaccountholder, depositor, officer or director with respect tothe bank and its assets, and takes title to all books, records

. ct, ect on 11 2 .

May organize a new bridge bank or thrift. FDI Act, Section 11(n).

including those related to the trust business. FDI Act, Section11(d)(2)(G).

. ,Sections 8(m) and 11(d)(2)(l) and 11(d)(3).

Pay valid obligations. FDI Act, Section 11(d)(2)(H).

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Powers of the FDIC, as ReceiverPowers of the FDIC, as Receiver

which the FDIC determines is in the best interests ofthe bank or its depositors, or the FDIC. FDI Act, Section 11(d)(2)(J).

equest a stay o up to 90 ays o any courtproceeding to which the bank is or becomes a party. FDI

Act, Section 11(d)(12).

Avoidance of fraudulent transfers or liabilities incurred.FDI Act, Section 11(d)(17).

Repudiation of contracts to which the bank is a party. FDIAct, Section 11(e)(1).

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FDIC Sale of LoansFDIC Sale of Loans

A loan sale is a commonly used term for the sale of loans or loan pools. Loans acquiredby the FDIC from failed financial institutions are generally sold in pools through sealed bid

. , . . . The loan portfolios of failed financial institutions usually contain a variety of performing and

non-performing loan products including mortgage, commercial, consumer loans, etc. ) Purchasers need to be qualified to purchase loans from the FDIC*:

Not FDIC em lo ees or related to FDIC em lo ees No delinquent obligations to the FDIC unless the bid price is lower than $250,000; Not a contractor that has performed services within the past three years relating to any assets the

purchaser may buy; has been an officer or director of the failed institution; or has been removedfrom, or prohibited from participating in the failed institution;

Neither the urchaser nor an of its associated erson s has borrowed mone or uaranteedloans in more than one transaction with the intent to cause a loss or with reckless disregard forwhether such transactions would cause a loss; or has committed certain crimes affecting the failedinstitution;

If FDIC financing is used, the purchaser may not have defaulted to the FDIC or a failed institutionthat, in the aggregate, exceed $1,000,000; or made any fraudulent misrepresentation in connectionw any o ese e s or u es; an

The transaction may not be structured to benefit people who are otherwise ineligible topurchase assets.

_______________*FDI Act, Section 11(p)(1) and FDIC Regs., Section 340.4

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Public Private Investment Pro ram PPIPPublic Private Investment Pro ram PPIP

The Treasury, the FDIC and the Federal Reserve have proposed PPIPto toxic and other assets from financial institutions balance sheets.

- -public financing to leverage private capital on an initial scale of up to

$500 billion, with the potential to expand up to $1 trillion.

Two Programs: The Legacy Loans Program uses FDIC-guaranteed debt along

with private equity to purchase troubled loans from banks. Legacy Securities Program is designed to use funds from the

government and private investors to reignite the market for legacy-.securities, asset-backed securities and other securitized assetsthat the government deems to be eligible for the program.

PPIP was amended by the Helping Families Save Their Homes Act of2009, which included the Public-Private Investment Program

.

Commentary The Helping Families Save Their Homes Act of 2009Significantly Changes the TARP, PPIP and TALF Programs and FDICInsurance.

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Chip MacDonaldT: 404-581-8622

[email protected]

Jones Day

1420 Peachtree Street

u e

Atlanta, Georgia 30309

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20944845 Buying Failed Banks From the FDIC