2017 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. 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 as 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 improved and functioned more normally with both capital and liquidity returning to the banking industry, acquirers become more comfortable with bidding on failing bank franchises without the loss-sharing protection.
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 2017, there were 104 receiverships with active shared-loss agreements and $13.9 billion in total shared-loss covered assets.
Financial Institution Failures
During 2017, there were eight institution failures, compared to five failures in 2016.
In all eight 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.
|Total Assets of Failed Institutions*||$5.1||$0.3||$6.7|
|Total Deposits of Failed Institutions*||$4.7||$0.3||$4.9|
|Estimated Loss to the DIF||$1.1||$0.05||$0.9|
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 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 2017 totaled $1.8 billion in book value.
As a result of the FDIC’s marketing and collection efforts, the book value of assets in inventory decreased by $1.0 billion (32 percent) in 2017.
The following chart shows the assets-in-liquidation inventory of these assets by asset type.
|Real Estate Mortgages||139||85||173|
|Other Assets/ Judgments||260||268||398|
|Net Investments in Subsidiaries||157||100||122|
|Structured and Securitized Assets||1,449||2,614||3,524|
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 2017, the number of receiverships under management decreased by 40 (11 percent) to 338.
The following chart shows overall receivership activity for the FDIC in 2017.
|Active Receiverships as of 12/31/16||378|
|Active Receiverships as of 12/31/17||338|
Protecting Insured DepositorsThe 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 2017, receiverships paid dividends of $953 thousand to depositors whose accounts exceeded the insurance limit.
Professional Liability and Financial Crimes Recoveries
The FDIC investigates bank failures 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 insured depository institutions. The FDIC will pursue meritorious claims that are expected to be cost-effective.
During 2017, the FDIC recovered $105 million from professional liability claims and settlements. The FDIC also authorized lawsuits related to one failed institution against three individuals for director and officer liability, and authorized another three lawsuits for fidelity bond accounting malpractice, and other claims. As of December 31, 2017, the FDIC’s caseload included 24 professional liability lawsuits (down from 28 at year-end 2016), 21 residential mortgage malpractice and fraud lawsuits (down from 42), and 164 open investigations (down from 173). The FDIC seeks to complete professional liability investigations and make decisions expeditiously on whether to pursue potential professional liability claims. During 2017, it completed investigations and made decisions on 96 percent of the investigations related to failures that reached the 18-month point after the institution’s failure date, thereby 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, in connection with criminal restitution and forfeiture orders issued by federal courts and independently in connection with restitution orders issued by the state courts, collected $9.6 million in 2017. As of December 31, 2017, there were 4,163 active restitution and forfeiture orders (increased from 3,991 at year-end 2016). This includes 119 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).