Transcript Asset Premium/(Discount Bid - SILVER, FREEDMAN, TAFF

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 – [email protected]
Condensed Version of Materials Prepared by:
Barry Taff, Silver, Freedman & Taff, L.L.P. (202) 295-4500 – [email protected]
Jeanne McBride, Regional Manager, San Francisco, FDIC Division of Resolutions and
Receivership – (415) 808-8050 – [email protected]
Gregory K. Watson, Regional Manager, Chicago, FDIC Division of Resolutions and
Receivership – (312) 382-7594 – [email protected]
1
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
2
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.
3
Interested in Bidding?
 Banks can use FDICconnect to provide
M&A 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
[email protected]
4
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
5
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.
6
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 Project’s
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, P&A
documents, etc.)
Regulatory Contact information
Key dates, Bid Instructions
7
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.
8
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
9
Marketing: Transaction Structures
 Purchase and Assumption (P&A)





Whole Bank
Whole Bank with Loss Share
Modified Whole Bank with Loss Share
P&A with Optional Loan Pools
Clean P&A
 Other Resolution Methods
 Bridge Bank
 Deposit Payout
 Deposit Insurance National Bank (DINB)
 Straight Payout
10
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.
11
Typically Excluded Assets
 Bank Premises (offered under
Separate 90-Day Options)
 D&O Liability Claims
 Prepaid Regulatory Assessments
 Tax Receivables
 Loss Reserves (General and Specific)
 Private Label Asset Backed Securities
 Assets that may be involved in fraud
12
What is Loss Share (LS)?
 Receiver & Assuming Bank share in losses & recoveries on
Loss Share assets (80%/20%) unless Assuming Bank’s Bid
provides that Receiver’s share is less than 80% or it’s a
Large Loss Share Transaction (i.e., Receiver’s 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
13
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 Bank’s 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
14
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
Receiver’s Percentage on Bid Form (or in the case of
Large Loss Sharing Transactions (assets of $500
million or more), Receiver’s 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
Type of Loss Share Bids
 Aggressive
 Conservative
 Other
16
Loss Share Transaction Documents


Type of Documents
 P&A 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
17
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
18
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
19
Loss Share Bid Example – Cont.
 The calculation of the initial wire would be (in 000s):
Equity Adjustment
1,000
Franchise bid:
Franchise %
Core deposits
Total
Asset premium (discount) bid:
Total
1.0%
200,000
2,000
2,000
(11,000)
(11,000)
(8,000)
 Thus the FDIC would pay the Assuming Bank $8 million on
the first business day after bank closing
20
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.
21