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. When an institution closes, its chartering authority—the state for state-chartered institutions and the OCC for national banks and federal savings associations—typically appoints the FDIC receiver, responsible for resolving the failed institution.
The FDIC employs a variety of strategies and business practices to resolve a failed institution. These strategies and practices are typically associated with either the resolution process or the receivership process. Depending on the characteristics of the institution, the FDIC may utilize 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 (if any) 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 efficiently 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. Typically, in a P&A transaction, a healthy institution purchases certain assets and assumes certain liabilities of the failed institution. However, a variety of P&A transactions can be used. Because each failing bank situation is different, P&A transactions provide flexibility to structure deals that result in obtaining the highest value for the failed institution. For each possible P&A transaction, the acquirer may acquire either all of the failing institution’s deposits 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 (e.g., five to 10 years). The economic rationale for these transactions is that keeping assets in the banking sector and resolving them over an extended period of time can produce a better net recovery than the FDIC’s immediate liquidation of these assets. However, in recent years, as the markets have improved and begun to function more normally with both capital and liquidity returning to the banking industry, acquirers have become more comfortable with bidding on failing bank franchises without the protection of loss share.
The FDIC continues to monitor compliance with shared-loss agreements by validating the appropriateness of loss-share claims; reviewing acquiring institutions’ efforts to maximize recoveries; ensuring consistent application of policies and procedures across both shared-loss and legacy portfolios; and confirming that the acquirers have sufficient internal controls, including adequate staff, reporting, and recordkeeping systems. At year-end 2016, there were 148 receiverships with active shared-loss agreements and $20.8 billion in total shared-loss covered assets remained.
Deposit payoffs are only executed if all bids received for a P&A transaction (if any) are more costly to the DIF than liquidation. In the instance where no acceptable bids are received, the FDIC in its corporate capacity, makes sure that the customers of the failed institution receive the full amount of their insured deposits “as soon as possible.”
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 uses a wide variety of strategies and tools to manage and sell retained assets. These include, but are not limited to, asset sales, securitizations, and structured transactions.
Financial Institution Failures
During 2016, there were five institution failures compared to eight failures in 2015.
In all five 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. 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 past three years.
FAILURE ACTIVITY 2014–2016
Dollars in Billions
|Total Assets of Failed Institutions*
|Total Deposits of Failed Institutions*
|Estimated Loss to the DIF
*Total assets and total deposits data are based on the last quarterly 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-in-liquidation as possible to an assuming institution. Assets that are retained by the receivership are promptly valued and liquidated in order to maximize the return to the receivership estate. For 95 percent of 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 banks that failed in 2016 totaled $28.0 million in book value.
As a result of the FDIC’s marketing and collection efforts, the book value of assets in inventory decreased by $1.5 billion (31 percent) in 2016.
The following chart shows the assets-in-liquidation inventory of these assets by asset type.
ASSETS-IN-LIQUIDATION INVENTORY BY ASSET TYPE
Dollars in Millions
|Real Estate Mortgages
|Net Investments in Subsidiaries
|Structured and Securitized Assets
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 its liabilities extinguished, the final distribution of any proceeds is made, and the FDIC terminates the receivership. In 2016, the number of receiverships under management decreased by 68 (15 percent) to 378. The significant increase in termination activity from 2015 was driven by the early termination of shared-loss agreements.
The following chart shows overall receivership activity for the FDIC in 2016.
|Active Receiverships as of 12/31/15
|Active Receiverships as of 12/31/16
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 receivership creditors, including depositors whose accounts exceeded the insurance limit. During 2016, the FDIC paid dividends of $1.0 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 insured depository institution. Once a claim is determined to be meritorious and is expected to be cost-effective, the FDIC pursues those claims against the appropriate parties.
During 2016, the FDIC recovered $463 million from professional liability claims and settlements. The FDIC also authorized lawsuits related to one failed institutions against six individuals for director and officer liability, and authorized another lawsuit for fidelity bond, liability insurance, attorney malpractice, appraiser malpractice, and securities law violations for residential mortgage-backed securities. As of December 31, 2016, the FDIC’s caseload included 28 professional liability lawsuits (down from 50 at year-end 2015), 42 residential mortgage malpractice and fraud lawsuits (down from 87), and 173 open investigations (down from 264). The FDIC seeks to complete professional liability investigations and make decisions expeditiously on whether to pursue potential professional liability claims. During 2016, it completed investigations and made decisions on 91 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 insured 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 $7.1 million from criminal restitution and forfeiture orders through December 31, 2016. Also as of that date, there were 3,991 active restitution and forfeiture orders (up from 3,831 at year-end 2015). This includes 111 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).