2014 Annual Report

I. Management’s Discussion and Analysis

The Year in Review

RECEIVERSHIP MANAGEMENT

The FDIC has the unique mission of protecting depositors of insured banks and savings associations. No depositor has ever experienced a loss on the insured amount of his or her deposits in an FDIC-insured institution due to a failure. Upon closure of an institution, typically by its chartering authority—the state for state-chartered institutions and the OCC for national banks and federal savings associations—the FDIC is appointed receiver and is responsible for resolving the failed institution.

The FDIC uses a variety of business practices to resolve a failed institution. These practices are typically associated with either the resolution process or the receivership process. Depending on the characteristics of the institution, the FDIC may recommend several of these methods to ensure the prompt and smooth payment of deposit insurance to insured depositors, to minimize the impact on the DIF, and to speed dividend payments to uninsured depositors and other creditors of the failed institution.

The resolution process involves evaluating and marketing a failing institution, soliciting and accepting bids for the sale of the institution, determining which bid is least costly to the DIF, and working with the acquiring institution through the closing process.

To minimize disruption to the local community, the resolution process must be performed as quickly and smoothly as possible. The FDIC uses two basic resolution methods: purchase and assumption transactions and deposit payoffs.

The purchase and assumption (P&A) transaction is the most commonly used resolution method.  In a P&A transaction, a healthy institution purchases certain assets and assumes certain liabilities of the failed institution. A variety of P&A transactions can be used. Since each failing bank situation is different, P&A transactions provide flexibility to structure deals that result in the highest value for the failed institution. For each possible P&A transaction, the acquirer may either acquire all or only the insured portion of the deposits. Loss sharing may be offered by the FDIC in connection with a P&A transaction. In a loss-share transaction, the FDIC as receiver agrees to share losses on certain assets with the acquirer, absorbing a significant portion (for example, 80 percent) of future losses on assets that have been designated as “shared-loss assets” for a specific period of time (for example, five to ten years). The economic rationale for these transactions is that keeping assets in the banking sector can produce a better net recovery than the FDIC’s immediate liquidation of these assets.

The FDIC monitors compliance with shared-loss agreements by validating the appropriateness of loss-share claims; reviewing efforts to maximize recoveries; ensuring consistent application of policies and procedures across both shared-loss and legacy portfolios; and confirming that the acquirer has sufficient internal controls, including adequate staff, reporting, and recordkeeping systems. At year-end 2014, there were 281 shared-loss agreements with $54.6 billion in total covered assets.

Deposit payoffs are only executed if all bids received for a P&A transaction are more costly to the DIF than liquidation or if no bids are received, in which case the FDIC, in its corporate capacity, makes sure that the customers of the failed institution receive the full amount of their insured deposits. A variation of the deposit payoff is the establishment of a New Depository Institution (NDI), as authorized by the FDI Act. An NDI is a new national bank or federal savings association with limited life and powers that assumes the insured deposits of a failed bank or savings association, allowing customers of the failed bank or savings association a brief period of time to move their deposit account(s) to other insured institutions. Though infrequently used, an NDI allows for a failed bank or savings association to be liquidated in an orderly fashion, minimizing disruption to local communities and financial markets.

The receivership process involves performing the closing functions at the failed institution; liquidating any remaining failed institution assets; and distributing any proceeds of the liquidation to the FDIC, uninsured depositors, and other creditors of the receivership. In its role as receiver, the FDIC has used a wide variety of strategies and tools to manage and sell retained assets. These include, but are not limited to, asset sale and/or management agreements, and structured transactions.

Financial Institution Failures

During 2014, there were 18 institution failures, compared to 24 failures in 2013. For the institutions that failed, the FDIC successfully contacted all known qualified and interested bidders to market these institutions. The FDIC also made insured funds available to all depositors within one business day of the failure. There were no losses on insured deposits, and no appropriated funds were required to pay insured deposits.

The following chart provides a comparison of failure activity over the last three years.

FAILURE ACTIVITY 2012–2014
Dollars In Billions

	2014	2013	2012
Total Institutions	18	24	51
Total Assets of Failed Institutions1	$2.9	$6.0	$11.6
Total Deposits of Failed Institutions1	$2.7	$5.1	$11.0
Estimated Loss to the DIF	$0.4	$1.3	$2.7

¹ Total assets and total deposits data are based on the last Call Report or Thrift Financial Report (TFR) filed by the institution prior to failure.

Asset Management and Sales

As part of its resolution process, the FDIC tries to sell as many assets as possible to an assuming institution. Assets that are retained by the receivership are evaluated. For 95 percent of the failed institutions, at least 90 percent of the book value of marketable assets is marketed for sale within 90 days of an institution’s failure for cash sales and within 120 days for structured sales.

Cash sales of assets for the year totaled $772 million in book value. In addition to structured and cash sales, the FDIC also uses securitizations to dispose of bank assets.

As a result of the FDIC’s marketing and collection efforts, the book value of assets in inventory decreased by $3.6 billion (32 percent) in 2014. The following chart shows the beginning and ending balances of these assets by asset type.

Receivership Management Activities

The FDIC, as receiver, manages failed banks and their subsidiaries with the goal of expeditiously winding up their affairs. The oversight and prompt termination of receiverships help to preserve value for the uninsured depositors and other creditors by reducing overhead and other holding costs. Once the assets of a failed institution have been sold and the final distribution of any proceeds is made, the FDIC terminates the receivership. In 2014, the number of receiverships under management increased by .2 percent, as a result of new failures. The following chart shows overall receivership activity for the FDIC in 2014.

Protecting Insured Depositors

The FDIC’s ability to attract healthy institutions to assume deposits and purchase assets of failed banks and savings associations at the time of failure minimizes the disruption to customers and allows assets to be returned to the private sector immediately. Assets remaining after resolution are liquidated by the FDIC in an orderly manner, and the proceeds are used to pay creditors, including depositors whose accounts exceeded the insurance limit. During 2014, the FDIC paid dividends of $6 million to depositors whose accounts exceeded the insurance limit.

Professional Liability and Financial Crimes Recoveries

The FDIC staff works to identify potential claims against directors, officers, fidelity bond insurance carriers, appraisers, attorneys, accountants, mortgage loan brokers, title insurance companies, securities underwriters, securities issuers, and other professionals who may have contributed to the failure of an IDI. Once a claim is determined to be meritorious and is expected to be cost-effective to pursue, the FDIC initiates legal action against the appropriate parties. During 2014, the FDIC recovered more than $1.1 billion from professional liability claims and settlements. The FDIC also authorized lawsuits related to 17 failed institutions against 123 individuals for director and officer liability, and authorized five other lawsuits for fidelity bond, liability insurance, attorney malpractice, appraiser malpractice, and securities law violations for residential mortgage-backed securities. As of the end of 2014, 75 residential mortgage malpractice and fraud lawsuits were pending. Also, the FDIC’s caseload included 102 professional liability lawsuits (down from 119 at year-end 2013) and 511 open investigations (down from 796 at year-end 2013).

As part of the sentencing process for those convicted of criminal wrongdoing against institutions that later failed, a court may order a defendant to pay restitution or to forfeit funds or property to the receivership. The FDIC, working with the DOJ, collected $6.4 million from criminal restitution and forfeiture orders through the end of 2014. At that time, there were 3,954 active restitution and forfeiture orders (down from 4,073 at year-end 2013). This includes 130 orders held by the Federal Savings and Loan Insurance Corporation (FSLIC) Resolution Fund, (i.e., orders arising out of failed financial institutions that were in receivership or conservatorship by the FSLIC or the Resolution Trust Corporation).