What You Need to Know About Bidding on Failed Banks

1
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_at_sftlaw.com
• Condensed Version of Materials Prepared by
• Barry Taff, Silver, Freedman Taff, L.L.P. (202)
  295-4500 btaff_at_sftlaw.com
• Jeanne McBride, Regional Manager, San Francisco,
  FDIC Division of Resolutions and Receivership
  [phone] jemcbride_at_fdic.gov
• Gregory K. Watson, Regional Manager, Chicago,
  FDIC Division of Resolutions and Receivership
  [phone] gwatson_at_fdic.gov

2
AGENDA

• 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
• Questions

3
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.

4
Interested in Bidding?

• Banks can use FDICconnect to provide MA 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_at_fdic.gov

5
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

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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.

7
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 Projects
  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, PA
  documents, etc.)
• Regulatory Contact information
• Key dates, Bid Instructions

8
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.

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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

10
Marketing Transaction Structures

• Purchase and Assumption (PA)
• Whole Bank
• Whole Bank with Loss Share
• Modified Whole Bank with Loss Share
• PA with Optional Loan Pools
• Clean PA
• Other Resolution Methods
• Bridge Bank
• Deposit Payout
• Deposit Insurance National Bank (DINB)
• Straight Payout

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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.

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Typically Excluded Assets

• Bank Premises (offered under Separate 90-Day
  Options)
• DO Liability Claims
• Prepaid Regulatory Assessments
• Tax Receivables
• Loss Reserves (General and Specific)
• Private Label Asset Backed Securities
• Assets that may be involved in fraud

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What is Loss Share (LS)?

• Receiver Assuming Bank share in losses
  recoveries on Loss Share assets (80/20) unless
  Assuming Banks Bid provides that Receivers
  share is less than 80 or its a Large Loss
  Share Transaction (i.e., Receivers 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

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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 Banks 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

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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
  Receivers Percentage on Bid Form (or in the case
  of Large Loss Sharing Transactions (assets of
  500 million or more), Receivers 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)

15
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Type of Loss Share Bids

• Aggressive
• Conservative
• Other

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Loss Share Transaction Documents

• Type of Documents
• PA 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

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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

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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

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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)
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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.