March 2010
JONES DAY
COMMENTARY
FDIC Changes Loss-Sharing on Failed Bank P&As
The FDIC is changing the terms of its whole bank
• The deposit premium or discount;
purchase and assumption (“P&A”) with loss-sharing
• The positive or negative asset premium bid or dis-
transactions. The following is a summary of changes
count bid; and
we are seeing as the FDIC seeks to reduce the cost
• The equity adjustment (the book value of assets
to its Deposit Insurance Fund (“DIF”) of loss-sharing.
acquired less the book value of liabilities assumed,
These are based in part on the FDIC’s experience
as of the closing of the failed bank).
with the pricing realized on structured loan sales
using PPIP-type financing, which has encouraged
If this sum is a positive number, the amount rep-
the FDIC to seek better pricing on whole bank, loss-
resents the amount of loss the bidder is willing to
sharing P&As.
absorb on the purchase of assets and assumption
of liabilities of the failed bank before receiving FDIC
loss share protection. If it is a negative number, the
Current Loss-Sharing
Assets in a loss-sharing transaction are valued at the
amount represents the amount of money to be paid
to the winning bidder at the end of the first business
day following the bank’s closing.
failed bank’s book value plus a premium or minus a
discount offered by bidders. Therefore, a bid may be
an asset premium bid or an asset discount bid.
Threshold Amount. The loss-sharing percentage
determined by the FDIC is 80 percent up to the
defined “threshold amount” and has been 95 per-
First Loss Tranche. Loss-sharing starts after losses
cent thereafter.
on loans have exhausted the “first loss tranche.” The
first loss tranche for loss-sharing transactions has
been determined by adding:
© 2010 Jones Day. All rights reserved. Printed in the U.S.A.
D i f ferences Among Loan Types . Loss - sharing
depends upon whether the assets are single-family
residential loans or other loans. Single-family loans are sub-
New Loss-Sharing Terms. The FDIC’s new loss-sharing con-
ject to the FDIC Loan Modification Program or HAMP, as
tains the following terms:
selected by the bidder in its bid. Bidders theoretically can
also propose a different loan modification program, pro-
The stated threshold is being eliminated. Loss-sharing will
vided the FDIC agrees.
be 80 percent/20 percent for the life of the loss-sharing
agreement, with no provision for a step-up to 95 percent
Single-Family Loan Loss-Sharing. The characteristics of
loss absorption by the FDIC.
single-family loan loss-sharing are as follows:
The asset premium or discount bid was formerly a fixed dol-
• Ten-year agreement;
lar bid, and in the future, it will be expressed as a percent-
• Credit loss coverage is provided for loan modifications,
age of the book value of the failed bank’s assets. The asset
short sales, sales of foreclosed real estate, loans that are
premium or discount bid may be stated as a positive or neg-
sold at the end of a loss-sharing agreement in a liquida-
ative percentage of the book value of assets of the failed
tion (subject to FDIC concurrence), and bulk loan sales
bank. Book value is calculated as of the date of failure.
(subject to FDIC concurrence);
• Credit loss coverage is allowed for up to three months of
On the first loss tranche losses, the buyer will absorb prior
accrued but unpaid interest;
to the commencement of loss-sharing. Bidders will now
• Qualifying expenses included in the loss calculation are
determine and submit their own custom first loss tranche as
limited to amounts paid to third parties. Acquirer’s internal
part of their respective bids. First loss tranche bids cannot
costs of all types are excluded from the loss calculation;
be less than zero, and the first loss tranche bid will now be
and
expressed as a percentage of the book value of assets covered by the loss-sharing agreement.
• Loss-sharing rights may be transferred to an affiliate of
the purchaser.
The initial payment due to or from the FDIC on the closing
of the P&A agreement with the FDIC is the sum of the equity
All Other Loans. The characteristics of all other loans are as
adjustment (assets less liabilities), deposit premium bid in
follows:
dollars, and the asset premium (discount) bid, in dollars.
• Five-year agreement;
• Credit loss coverage provided when assets are written
If the result is a negative amount, the FDIC will wire funds
down according to examination criteria of the purchaser’s
to the buyer at closing. If the result is a positive amount, the
primary regulator and when assets are sold (bulk sales
acquirer will wire funds to the FDIC at closing.
require prior FDIC approval);
Under this new method, a successful bidder is more likely to
• When assets are initially written down, credit loss cov-
make a payment to the FDIC at closing, especially when the
erage is allowed for up to three months of accrued but
amount of acquired assets exceeds the amount of assumed
unpaid interest;
deposit liabilities.
• Qualifying expenses to third parties are capitalized or
treated as covered losses; and
• Loss-sharing rights may be transferred to an affiliate with
FDIC concurrence.
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Conclusions
Lawyer Contacts
The new loss-sharing agreements will require more and bet-
For further information, please contact your principal Firm
ter asset diligence and analyses of the failed bank by bid-
representative or one of the lawyers listed below. General
ders to determine an acceptable first loss tranche. The first
email messages may be sent using our “Contact Us” form,
loss tranche will now be set competitively by each bidder,
which can be found at www.jonesday.com.
which should reduce the amount of assets that the FDIC will
have to cover with loss-sharing. These terms are expected
Chip MacDonald
to reduce the receivable from the FDIC recognized by the
+1.404.581.8622
winning bidder and the gain recognized from failed bank
[email protected]
acquisitions, assuming a number of interested, FDIC-qualified bidders. The FDIC hopes to reduce resolution costs,
Brett P. Barragate
which averaged 27.7 percent of failed bank assets in 2009
+1.212.326.3446
and 25.9 percent in the current year through March 26, 2010.
[email protected]
As a result of the expected reduced benefits of loss-shar-
Ronald S. Gross
ing, bidders may not be as interested in failed bank deals
+1.212.326.8331
and may increase the discount bid on failed bank assets
[email protected]
to reflect the additional risks of loss. Since the benefits of
loss-sharing are expected to be less with more uncertainty
Ning Zhang
around competitors’ bid terms on the first loss tranche,
+1.404.581.8379
some bidders may opt for whole bank transactions without
[email protected]
loss-sharing to avoid the systems, reporting, loan modification requirements, and FDIC examinations inherent in
loss-sharing.
Whole bank transactions without loss-sharing may be more
successful because they may cost the FDIC less than losssharing and may produce favorable financial results for the
buyer. Buyers in whole bank P&As will take on more risk than
in loss-sharing transactions and will not have the benefit of
a 20 percent risk-weighting for risk-based capital purposes
that loss-sharing provides, however. Acquisition models
should be revised for the new loss-sharing and run on transactions with and without loss-sharing.
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