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What You Need to Know About Bidding on Failed Banks. ABA Community Bank Investor Conference March 2, 2011 Presented By: Barry Taff, Silver, Freedman & Taff, L.L.P (202) 295-4500 – btaff@sftlaw.com Condensed Version of Materials Prepared by:

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what you need to know about bidding on failed banks

What You Need to Know About Bidding on Failed Banks

ABA Community Bank Investor Conference

March 2, 2011

Presented By:

Barry Taff, Silver, Freedman & Taff, L.L.P (202) 295-4500 – btaff@sftlaw.com

Condensed Version of Materials Prepared by:

Barry Taff, Silver, Freedman & Taff, L.L.P. (202) 295-4500 – btaff@sftlaw.com

Jeanne McBride, Regional Manager, San Francisco, FDIC Division of Resolutions and Receivership – (415) 808-8050 – jemcbride@fdic.gov

Gregory K. Watson, Regional Manager, Chicago, FDIC Division of Resolutions and Receivership – (312) 382-7594 – gwatson@fdic.gov

Current Pace of Transactions

How do I get on the Bid List?

What is the Marketing Process?

Whole Bank and WB with Loss Share Transaction


current pace of transactions
Current Pace of Transactions
  • 2011 FDIC transactions on pace with 2010. March and April 2010 were large volume months for deal activity.
  • 23 Failed Bank transactions during January and February 2011, of which 2 failed banks did not have an acquirer
  • 22 Failed Bank transactions during January and February 2010, of which 1 failed bank did not have an acquirer
  • 42 Failed Bank transactions during March and April 2010, of which 4 failed banks did not have an acquirer.
interested in bidding
Interested in Bidding?
  • Banks can use FDICconnect to provide M&A contact information for invitations to bid occurs
    • Banks may complete a survey to record their areas of geographic interest
    • Submitting geographic preferences does not imply that a bank will be notified or all potential failing institutions in that state.
  • Banks may also send an email to provide contact information to institutionsales@fdic.gov
bid list criteria
Bid List Criteria
  • Supervisory Criteria
    • Healthy, well capitalized Institutions
    • No Compliance, CRA, BSA or Anti-Money Laundering Issues
  • Total Asset Size & Geographic Criteria
    • Total asset size threshold established for invitation is roughly double core deposits of failing bank when bidder is in geographic proximity to failing bank
    • Larger total asset size requirements when bidder is located in other states
    • Bidders may express preferences for invitation by state
bid list criteria example
Bid List Criteria Example
  • Failing bank located in “X” State with $100 million in Total Deposits, $20 million in Brokered Deposits
  • Bid List Criteria Used:
    • Insured financial institutions in “X” State with at least $160 million in total assets (roughly double core deposits of failing bank)
    • Insured financial institutions in contiguous states with at least $300 million in total assets (roughly double criteria used above for bidders located farther away from failing bank)
    • Insured institutions nationwide with at least $400 million in total assets that have expressed an interest in acquiring institutions in “X” state.
  • Criteria used will vary from project to project based on characteristics of potentially failing bank, time available for marketing, and other factors.
marketing via intralinks
Marketing via IntraLinks
  • Marketing Process starts with email to Prospective Bidders inviting them to IntraLinks for a specific resolution project
  • After executing electronic Confidentiality Agreement, bidders may read an Executive Summary & Transaction Recap
  • If interested, may request access to Project’s data room for information about failing bank & transaction terms
      • Deposit & Loan Downloads (Customer identifiable information redacted)
      • Premises, IT and Other Operational Information
      • Legal Documents (bid forms, instructions, P&A documents, etc.)
      • Regulatory Contact information
      • Key dates, Bid Instructions
on site due diligence
On-Site Due Diligence
  • Opportunities for On-Site Due Diligence is not always available, depends upon Resolution Timeline.
  • Due Diligence scheduled “First Come, First Serve”.
    • Time allowed averages one to two days
    • Team sizes average three to five
    • Affords the review of more detailed information
  • Structured Program with FDIC hosting bidder access.
bid submission
Bid Submission
  • FDIC establishes deadline for bid package
  • Bid Packages include:
    • Bid (on bid form provided)
    • Purchaser Eligibility Certificate
    • Board Resolution
    • Reaffirmation of Confidentiality Agreement
  • FDIC selects winning Bid using “Least Cost Test” (proprietary). Additionally, FDIC is required by FDICIA to complete the Least Costly Resolution.
  • Once winning bidder is selected you will be notified by the Marketing Specialist and Receiver in Charge/Closing Manager
marketing transaction structures
Purchase and Assumption (P&A)

Whole Bank

Whole Bank with Loss Share

Modified Whole Bank with Loss Share

P&A with Optional Loan Pools

Clean P&A

Other Resolution Methods

Bridge Bank

Deposit Payout

Deposit Insurance National Bank (DINB)

Straight Payout

Marketing: Transaction Structures
whole bank with loss share
Whole Bank with Loss Share
  • “Whole Bank” is a misnomer
  • Transfers assets (including loans, ORE, securities) to Assuming Bank unless items are specifically excluded
  • Transfers related, bank-owned, businesses (Credit Cards, Safe Deposit Box, Trust, Acquired Subsidiaries, etc.)
  • Franchise acquisitions can be for All Deposits or Insured Deposits Only
  • FDIC offers up to 80% credit loss coverage in transactions with Loss Sharing, except in transactions where the assets of the Failed Banks are $500 million or more (“Large Loss Sharing Transactions”). In Large Loss Sharing Transactions there are three loss tranches. The 1st and 3rd tranches provide up to 80% credit loss coverage but the 2nd tranche is normally a fixed percentage ranging from 0 to 30% in credit loss coverage.
typically excluded assets
Typically Excluded Assets
  • Bank Premises (offered under Separate 90-Day Options)
  • D&O Liability Claims
  • Prepaid Regulatory Assessments
  • Tax Receivables
  • Loss Reserves (General and Specific)
  • Private Label Asset Backed Securities
  • Assets that may be involved in fraud
what is loss share ls
What is Loss Share (LS)?
  • Receiver & Assuming Bank share in losses & recoveries on Loss Share assets (80%/20%) unless Assuming Bank’s Bid provides that Receiver’s share is less than 80% or it’s a Large Loss Share Transaction (i.e., Receiver’s credit loss is fixed at a lower percentage on the 2nd loss tranche)
  • Generally 50/50 split between the Receiver and Assuming Bank on recoveries of fully charged off assets of the Failed Bank
  • Applies to loans, ORE & (infrequently) certain securities
  • Single Family LS – 10 year term
  • Commercial LS – 5 year term + 3 years for recoveries only
  • Cannot (currently) obtain loss share without a deposit franchise
what is loss share cont
What is Loss Share? – Cont.
  • Permits Assuming Bank to formulate bid to recover all or portions of at least the following (subject to competitive conditions):
    • credit losses (Assuming Bank’s percentage of loss share, generally 20%)
    • Future income statement vulnerabilities from acquisition of impaired ORE/Loans
    • Asset management expenses not otherwise reimbursable under the Loss Share
    • Other
wbwls bid format
WBwLS – Bid Format

Type of Deposits Assumed (all/insured)

Deposit Premium Bid (stated as a % of core deposits - All brokered, CDARS and listing service deposits excluded from calculation).

Asset Premium/(Discount Bid (stated as a positive or negative dollar amount).

Loss Share Percentage – 80% Receiver and 20% Assuming Bank unless Assuming Bank decreases Receiver’s Percentage on Bid Form (or in the case of Large Loss Sharing Transactions (assets of $500 million or more), Receiver’s loss share percentage is up to 80% on bid tranches 1 and 3 and generally fixed between 0 and 30% on tranche 2)

Value Appreciation Instrument (optional)


type of loss share bids
Type of Loss Share Bids
  • Aggressive
  • Conservative
  • Other
loss share transaction documents
Loss Share Transaction Documents
  • Type of Documents
    • P&A Agreement
    • Single Family Loss Share Agreement
    • Commercial (Non-Single Family) Loss Share Agreement
  • Certain Key Provisions in Transaction Documents
    • FDIC as Receiver (not in its corporate capacity) is the party to the Agreements. FDIC corporate only guarantees indemnification obligations of the Receiver.
    • Consumer Loans not covered by loss share
    • Neither investment in nor loans to or assets of an acquired subsidiary are covered by loss share
    • If Assuming Bank or its holding company is sold (including by asset sale or otherwise), or Assuming Bank or its holding company experiences a more than 1/3 change in ownership in a merger or consolidation or a change in control by sale of shares by shareholders, the Receiver must consent to the transaction to preserve loss sharing.
    • Mistake in complying with Permitted Advance and/or Permitted Amendment Provisions of Commercial Loss Share Agreement results in forfeiture of FDIC loss coverage with respect to the affected loan.
    • True - Up Payment to FDIC
closing process when bidding under the whole bank with loss share
Closing Process when Bidding under the Whole Bank with Loss Share
  • At Closing, FDIC Pro Forma –
    • Prepares balance sheet of acquired assets and assumed liabilities at book value after reversal of loan reserves with selected investments valued at fair market value
    • Net of same is “Equity Adjustment (EA)”
    • Then nets EA with asset premium/discount bid and deposit premium bid
      • If result is positive, Assuming Bank will wire the FDIC that amount on first business day following bank closing
      • If result is negative, FDIC wires the Assuming Bank amount on first business day following bank closing
loss share bid example
Loss Share Bid Example
  • Bid
    • All Deposits
    • Deposit Premium of 1% (core deposits)
    • Asset Discount of $11 million
  • Assumptions
    • Acquired assets minus assumed liabilities $1 million
    • Core Deposits $200 million
loss share bid example cont
Loss Share Bid Example – Cont.
  • The calculation of the initial wire would be (in 000s):
  • Thus the FDIC would pay the Assuming Bank $8 million on

the first business day after bank closing

Equity Adjustment 1,000

Franchise bid:

Franchise % 1.0%

Core deposits 200,000

Total 2,000 2,000

Asset premium (discount) bid: (11,000) (11,000)

Total (8,000)

closing procedures
Closing Procedures
  • Prior to bank closing, the FDIC and the Assuming Bank will execute the transaction documents.
  • At bank closing, the Chartering Authority will close the Failed Bank and appoint the FDIC, Receiver.
  • FDIC will have personnel available to cover the branches and they will coordinate coverage with the Assuming Bank.
  • Assuming Bank personnel will be needed over the weekend and FDIC will work with the Assuming Bank on who and when needed.