2015 Annual Report
I. Management’s Discussion and Analysis
The Year in Review
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. From 2008 through 2013, loss sharing was offered by the FDIC in connection with P&A transactions. In a loss-share transaction, the FDIC as receiver agrees to share losses on certain assets with the acquirer, absorbing a significant portion (typically 80 percent) of future losses on assets that have been designated as “shared-loss assets” for a specific period of time (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. As the markets improve and function more normally with capital and liquidity returning, acquirers become more comfortable with bidding without the loss sharing protection.
The FDIC continues to monitor 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 2015, there were 215 receiverships with active shared-loss agreements with $31.5 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.
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 asset sale and/or management agreements and structured transactions.
Financial Institution Failures
During 2015, eight institutions failed, including one large institution (greater than $5 billion in total assets), compared to 18 failures in 2014. The large failure in 2015 was unique because the majority of the institution’s assets and liabilities were sold to multiple buyers through an alliance partnership arrangement. The FDIC executed one P&A agreement with a lead buyer who then simultaneously sold portions of what they acquired to their alliance members. Asset buyers were also given an opportunity to bid on the institution’s assets prior to the institution failing.
In all FDIC transactions, the FDIC successfully contacted all known qualified and interested bidders to market these institutions and also made insured funds available to all depositors within one business day of the failure. No losses were incurred on insured deposits, and no appropriated funds were required to pay insured deposits.
The following chart provides a comparison of failure activity over the past three years.
|Total Assets of Failed Institutions*||$6.7||$2.9||$6.0|
|Total Deposits of Failed Institutions*||$4.9||$2.7||$5.1|
|Estimated Loss to the DIF||$0.8||$0.4||$1.3|
* 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 $1.7 billion 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 $2.9 billion (37.4 percent) in 2015. The following chart shows the beginning and ending balances of these assets by asset type.
|Real Estate Mortgages||173||697|
|Net Investments in Subsidiaries||122||123|
|Structured and Securitized Assets||3,524||5,150|
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 2015, the number of receiverships under management decreased by 7.3 percent, due to receiverships being terminated. The following chart shows overall receivership activity for the FDIC
|Active Receiverships as of 12/31/14||481|
|Active Receiverships as of 12/31/15||446|
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 2015, the FDIC paid dividends of $5.7 million to depositors whose accounts exceeded the insurance limit.
Professional Liability and Financial Crimes Recoveries
The FDIC works to identify potential claims against directors, officers, securities underwriters and issuers, fidelity bond insurance carriers, appraisers, attorneys, accountants, mortgage loan brokers, title insurance companies, and other professionals who may have caused losses to 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 2015, the FDIC recovered $450.3 million from professional liability claims and settlements. The FDIC also authorized lawsuits related to two failed institutions against 26 individuals for director and officer liability, and authorized nine other lawsuits for fidelity bond, liability insurance, attorney malpractice, appraiser malpractice, and securities law violations for residential mortgage-backed securities. As of December 31, 2015, the FDIC’s caseload included 50 professional liability lawsuits (down from 102 at year-end 2014), 87 residential mortgage malpractice and fraud lawsuits (up from 75), and 264 open investigations (down from 511). The FDIC seeks to complete professional liability investigations and make decisions expeditiously on whether to pursue potential professional liability claims. During 2015, it completed investigations and made decisions on over 80 percent of the investigations related to failures that reached the 18-month point after the institution’s failure date, exceeding its annual performance target.
As part of the sentencing process for those convicted of criminal wrongdoing against an institution 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 U.S. Department of Justice, collected $7.8 million from criminal restitution and forfeiture orders through the end of December 31, 2015. Also as of that same date, there were 3,831 active restitution and forfeiture orders (down from 3,954 at year-end 2014). This includes 126 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).