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Loss-sharing Arrangements Keep Failed Bank Assets in Private Sector

Posted by Wendell Brock on Fri, Jul 31, 2009

The FDIC first began using loss-sharing arrangements in 1991, as the agency managed its way through the S&L crisis. Community banks benefited from these arrangements. These arrangements are associated with purchase and assumption agreements that transfer a failed bank's assets from the FDIC to a healthy bank. In the aftermath of the 2008 financial crisis, the loss-sharing arrangement has made a dramatic return to the forefront.

Under a simple loss-sharing deal, the FDIC might agree to absorb 80 percent of the losses associated with a specific pool of non-performing loans that the healthy bank acquires in the transaction. The healthy bank would absorb the first 20 percent of losses arising from that loan book. The FDIC's liability to share in these losses would last for a stated time period, such as three, five or seven years. There would be additional terms governing the deal-including maximum aggregate losses incurred by the healthy bank, FDIC reimbursement of net charge-offs of  shared loss assets, etc.

A proven strategy

Between September of 1991 and January of 1993, the FDIC made loss-sharing arrangements in connection with 24 bank failures. The aggregate value of assets covered by those arrangements was approximately $18.5 billion. After the fact, the FDIC compared the costs of purchase agreements made with and without loss-share arrangements. The agency concluded that loss-share transactions were less expensive than the conventional purchase and assumption agreements, for both large and small banks.

Besides reduced resolution costs, there are other advantages associated with loss sharing, including:

Greater incentive for the healthy bank to acquire more than just the failed bank's deposits

  • Fewer disruptions for loan customers
  • Fewer assets being absorbed and subsequently managed/liquidated by the FDIC 
  • Fewer assets being removed from the private sector

FDIC loss-share arrangements have been called a win/win, but they are not without risks. The problem assets may be a distraction to the new management team, even if the potential for financial losses is limited. Where there is no loss-share agreement, the healthy bank takes only the deposits, thus beginning operations with a clean slate.

Today's crisis

In the first seven months of 2009, the FDIC has used loss share in at least 36 out of 64 bank failures. The aggregate value of assets covered by these arrangements is roughly $20 billion. Among the largest 2009 transactions are:

BankUnited FSB, $10.7 billion covered by loss-sharing

  • Security Bank of Jones, $1.6 billion covered by loss-sharing
  • Vineyard Bank, $1.5 billion covered by loss-sharing
  • Temecula Valley Bank, $1.5 billion covered by loss-sharing

A complete list of 2009 bank failures, along with links to the associated Purchase and Assumption agreements is available here:

Topics: FDIC, Bank Failure, Risk Management, Bank Sales, community banks, Loss

FDIC Reports Aggregate Quarterly Loss for Banking Industry

Posted by Wendell Brock on Mon, Mar 02, 2009

The FDIC’s most recent Quarterly Banking Profile (QBP) confirms the continuation of problems for the banking industry, as several key metrics showed further deterioration in the fourth quarter. These are some highlights:

•    Quarterly earnings declined, swinging industry profitability to a net loss.
•    Loan loss provisions, net charge-offs, defaults and noncurrent loan balances increased.
•    Aggregate outstanding loans and leases decreased.
•    Total deposits increased.
•    Average net interest margin generally improved for larger institutions, but declined for community banks that fund most of their assets with interest-bearing deposits.

Degradation of earnings performance

For the first time since the fourth quarter of 1990, insured commercial banks and savings institutions reported a net quarterly loss. The aggregate loss, which exceeded $26 million, was fueled by a combination of loan loss provisions, trading losses and asset write-downs. Roughly half of the aggregate loss was driven by results at only four banks. But, 32 percent of all insured institutions reported a net loss. The industry’s quarterly return on assets (ROA) was a negative 0.77 percent, the worst quarterly ROA performance since 1987.  

Full-year 2008 net income was slightly more than $16 billion, vs. $100 billion in the year earlier. The full-year ROA was a meager 0.12 percent. These figures were somewhat inflated due to the accounting entries related to failures and mergers; excluding those impacts, the industry would’ve reported a loss for the year.

Loan loss provisions, charge-offs and defaults

Credit quality continued to be problematic. The industry’s loan loss provisions for the quarter were in excess of $69 billion, or more than half of aggregate net operating revenue. Net loan and lease charge-offs were nearly $38 billion, which is more than double the amount recorded in the year-earlier period. Charge-offs for real estate loans, both construction and development loans and residential mortgages, increased more than $10 billion on a combined basis.

At year-end, the industry was strapped with $230.7 billion in noncurrent loans. This compares to $186.6 billion at the end of the third quarter. The sharp increase does not bode well for a near-term lending or housing recovery, particularly since nearly 70 percent of that increase was related to mortgage loans—residential mortgages, C&I loans, home equity loans and other loans secured by real estate.

Trading losses, asset write-downs, declining equity capital

Trading losses in the fourth quarter were large at $9.2 billion, but down from last year’s level of $11.2 billion. Charges associated with goodwill impairments and factors jumped more than $4 billion from last year, to $15.8 billion.

The disappearance of $39.4 billion in goodwill, along with a reduction in other comprehensive income, led to another consecutive reduction in total equity capital.

Total regulatory capital, however, notched an increase of 2.2 percent. At year-end, 97.6 percent of insured banks matched or beat the highest regulator capital standards.

Restructuring reduces loans outstanding

Net loans and leases outstanding slipped by 1.7 percent. The decline was largely attributable to portfolio restructuring by several large institutions.

Mergers and failures shrink the industry

During the fourth quarter, the number of insured institutions shrank by 79. There were 12 failures in the quarter and 15 new charters. The rest of the decline was related to merger activity and FDIC assistance transactions. For the year, 25 banks failed and 98 institutions were chartered.  

As of December 31, the FDIC’s bad bank list contained 252 insured institutions, representing total assets of $159 billion. 

Topics: FDIC, Banking industry, Bank Mergers, Quarterly Banking Profile, equity capital, charge-offs, Loss, earning performance, mergers

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BankNotes© is published by De Novo Strategy as a service to clients and other friends. The information contained in this publication should not be construed as legal, accounting, or investment advice. Should further analysis or explanation of the subject matter be required, please contact De Novo Strategy at