THRIFT RESOLUTIONS Estimated Costs of FSLIC’s 1988 and 1989 Assistance Agreements Subject to Change Th illllllllll~l 142223 ll I II t .~ _.I 1”“” “_. .-1_- _. .“-... ..-. “._“. _ ...” ._^.II-- _-...-___ -“-.---.-- -...-- 1 I united states GAO General Accounting office Washington, D.C. 20648 Comptroller General of the United States B-2403 13 September 13,199O To the President of the Senate and the Speaker of the House of Representatives Section 501 (f) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) requires us to report to the Congress on the costs of assistance agreements entered into by the Federal Sav- ings and Loan Insurance Corporation (FSUC)from January 1,1988, through August 9, 1989.’ These agreements provided financial assis- tance to the acquirers or FsLIc-selected new management of insolvent thrifts. Since August 1989, the Federal Deposit Insurance Corporation (FDIC) has been responsible for monitoring and making payments on all FSLIC assistance agreements. This report presents the results of our review of R)IC’S March 3 1, 1990, and FSLIC’Sinitial estimates of total payments to be made under these agreements. As required by the act, we will be issuing follow-up reports on the costs of these agreements in 1991 and 1992. As of March 31, 1990, EDIC estimated that the 96 assistance agreements Results in Brief FSLIC entered into during 1988 and 1989 would ultimately require $67 billion in payments to acquirers or new management. Of this amount, $58 billion had yet to be paid as of March 31, 1990. FSUChad initially estimated these agreements would cost $61.9 billion. We did not develop our own estimate of agreement costs. Projecting assistance agreement payments requires forecasting condi- tions which cannot be predicted with certainty over the term of the agreement. For example, estimating losses to be paid when real estate related assets covered by the agreements are disposed of requires pro- jecting local real estate market conditions and their effect on the assets’ values. Estimating payments to be made prior to asset disposition requires projecting future interest rate levels and the assets’ financial performance prior to disposition. Estimating either type of payment requires predicting the effects FDIC’S asset disposition strategies will have on asset values. Actual payments after March 31, 1990, will be more than $58 billion if real estate markets are worse than FDIC pro- jected, interest rates are higher than the levels forecast by FDIC, and ‘FIRREA also requires us to examine and monitor all insolvent thrifts resolved during this time period. We have separately reported the results of these efforts in Failed Thrifts: FDIC Oversight of 1988 Deals Needs Improvement (GAO/GGD-90-93, July 19,1QQO). Page 1 GAO/AFMD-Ml Thrift Resolutions B-240313 > asset disposition strategies are not as successful in maximizing values as FDICanticipates. Finally, costs other than assistance payments are being incurred as a result of these agreements-most significantly, decreased federal tax revenues. FSLIC estimated in early 1989 that the tax implications of the agreements will provide $8.5 billion in tax benefits. FSLIC estimated, however, that under tax-sharing provisions contained in many agree- ments, about $4.3 billion of the $8.5 billion would be used to reduce assistance payments. Agency legal expenses and various monitoring and oversight costs are also being incurred. Until August 1989, when it was abolished by FIRREA, FSLIC insured the Background deposits of its member savings associations. FSLIC, as insurer, was responsible for resolving insolvent institutions when its operating head, the Federal Home Loan Bank Board, or another chartering authority declared them insolvent. During 1988, when faced with a backlog of institutions with deficit capital positions, FSLIC and the Bank Board increased their reliance on providing long-term financial assistance to acquirers of insolvent thrifts. In 1988 and 1989, FSLIC resolved 199 insol- vent institution@ with 96 assistance agreements. Due to the costs of these and other resolution actions, and its liability for insolvent but still operating savings associations, FSLIC ended operations with an $87 bil- lion deficit. FSLIC'S losses and the continuing problems in the savings and loan industry contributed to FIRREA'S enactment on August 9, 1989. The act abolished FSI,IC and the Bank Board and established the FSLIC Resolution Fund, which FDIC administers, and the Resolution Trust Corporation (RTC). All of FSLIC'S assets and liabilities, except those assumed by RTC, transferred to the Fund. If the Fund is unable to pay its obligations, including those under the agreements, from the sources provided by the legislation, the act authorizes the Secretary of Treasury to fund the shortfall through appropriations. RW is responsible for resolving all thrifts placed into conservatorship or receivership from January 1, 1989, through August 9, 1992. FIRREA also requires RTC to review all means by which it can reduce the costs of the assistance agreements. RTC 20f these 199 insolvent institutions, 18 did not have an acquirer. Rather, FSLIC combined them into 6 new thrifts, brought in new management, and agreed to provide financial assistance to stabilize their operations until permanent acquirers could be found. The costs of these interim actions are included in this report because they are part of total resolution costs for these 18 institutions. Page 2 GAO/AFMD-90.31 Thrift Resolutions expects to send the results of its review to the RTC Oversight Board by mid-September. The assistance agreements generally committed FSLIC (now FDIC) to fund the acquired institutions’ reported negative net worth, provide capital loss coverage on certain assets (referred to as “covered assets”), and ensure that the acquirer receives a guaranteed yield on those assets until they are disposed. According to FSLIC'S initial estimates, these three types of assistance account for more than 90 percent of the agreements’ total costs. The larger agreements typically had terms of either 5 or 10 years. Appendixes I, II, and III provide background information on the assis- tance agreements. Appendix I describes each major assistance compo- nent in additional detail and discusses other significant assistance agreement provisions. Appendix II lists the 96 assistance agreements, FSLIC'S initial total cost estimate for each agreement, the insolvent insti- tutions resolved by each agreement, and the total assets, in aggregate, of the insolvent institutions covered by each agreement. Appendix III presents FSLIC'S initial cost estimates for the major provisions of the 20 assistance agreements that were selected for detailed review. To meet the legislative requirement to report on the costs of FSLIC’S1988 Objectives, Scope,and and 1989 assistance agreements, we (1) determined how FSLIC and FDIC Methodology estimated the costs of the agreements, (2) identified factors that could cause the estimates to significantly change, and (3) determined whether costs other than assistance payments were being incurred. To gain an understanding of how FDICand FSLIC estimated the costs of the agreements, we interviewed FDIC officials and obtained summaries of FSLIC'S initial and FDIC'S most recent cost estimates. Cost estimates pre- pared by both FSLIC and FDIC only considered assistance payments under agreement provisions. To identify factors impacting projected payments, we reviewed the projections and determined, primarily based on addi- tional interviews with FDIC officials, what would cause actual payments to significantly change. Finally, we identified and quantified, based on discussions with FDIC and our understanding of the agreements, any other costs related to the agreements that were being incurred. Our anal- ysis of costs other than assistance payments was generally limited to actual amounts incurred through December 3 1,1989, and amounts pro- jected for 1990. Page 3 GAO/AJ?MD-90-31 Thrift Resolutions B-240313 , We judgmentally selected 20 of the highest cost assistance agreements, based on initial estimates, for detailed review. These 20 agreements represent approximately 87 percent of FSLIC'S initial cost estimates for all 96 agreements. For this sample, we reviewed assistance agreement documentation and detailed assistance payment projections in order to gain an understanding of significant agreement provisions and associ- ated costs. We did not attempt to independently estimate the costs of the assistance agreements. Instead, we reviewed the type of assistance provided acquirers and the processes and information FSLIC and FDIC used to esti- mate total assistance payments. We also did not review any payments made through March 31,1990, to determine if such payments complied with the terms of the agreements. We conducted our review at FDIC locations in Washington, D.C., from October 1989 to August 1990 in accordance with generally accepted government auditing standards. We discussed a draft of this report with FDIC officials and have incorporated their views where appropriate. initially estimated that the 96 assistance agreements would cost FSLIC’s Initial Cost FSLIC $6 1.9 billion-$5.1 billion less than FDIC'S March 3 1, 1990, estimate of Estimates were Lower total cash payments to be made. However, FSLIC'S initial cost estimate Than FDIC’s for one large agreement, the New West/American Savings Bank agree- ment, was not a projection of total payments over the term of the agree- ment. Rather, FSLIC'S initial $1.7 billion estimate for this agreement equaled the estimated cost to liquidate the insolvent institution less acquirer concessions. FDIC believes that if total cash payments had been initially estimated by FSLIC for this agreement, that estimate would have been $4 billion. Accordingly, $2.3 billion of the total overall difference results from the different methods FSLIC and FDIC used to determine the cost of the New West/American agreement. FSLIC'S initial estimates were developed when it and the Bank Board were considering whether to approve individual assistance agreement proposals. The final amount of the initial estimate was usually prepared shortly after the individual agreement was approved. Lacking extensive knowledge on the condition and quality of assets covered by the agree- ments, FSLIC'S cost estimates assumed covered asset disposition dates and prices based on FSLIC'S projections of regional real estate market conditions. F-SLIC also projected future interest rate levels as part of its Page 4 GAO/-99-81 Thrift Resolutions . II B-240313 cost estimation processes. Changes to these factors have also caused FDIC’Sestimates to differ from FSLIC’S. estimated that as of March 31, 1990, total cash payments, including FDIC’s Latest Estimate FDIC principal and interest payments on negative net worth and other notes Subject to Further issued in connection with the agreements, would be $67 billion. Modifications Appendix IV provides actual and projected cash payments as of March 31, 1990, for each of the agreements selected for detailed review and provides the same information, in aggregate, for the other 76 agree- ments. As indicated in the appendix, $9 billion in payments had been made through March 31, 1990, leaving an estimated $58 billion of pay- ments yet to be made. FDIC estimates that payments to be made after March 31, 1990, when computed on a present value basis, represent a current cost of $39.1 billion, However, three related uncertainties will significantly affect the actual payments to be made after March 31, 1990. First, regional real estate markets will determine the value of most covered assets, directly impacting actual capital losses. Second, future interest rate levels will determine the amount of interest payments and guaranteed yield levels. Finally, the success of FDIC’S covered asset management and disposition strategies in maximizing values, and thereby minimizing costs, will also significantly affect actual payments. Real Estate and Interest FDIC estimates that the guaranteed value of all covered assets was Level ChangesCould approximately $35.2 billion at March 3 1, 1990. Insolvent institutions in the southwest and certain areas of California held the majority of these Significantly Affect Future assets. FDIC projected it would pay $10.8 billion in capital losses on these Payments assets after March 31, 1990. The value of real estate related covered assets3 will primarily be determined by regional real estate market con- ditions. FDIC officials estimate that over 80 percent of all covered assets at March 31, 1990, are real estate related. The value of these covered assets directly impacts actual capital losses to be paid. Future real estate values are difficult to accurately predict. Should actual covered asset disposition values change by even 1 percent from FDIC’S March 31, 1990, projections, capital loss payments would increase or decrease by about $240 million. 3Real estate related covered assets includes (1) loans and investments secured by primarily commer- cial properties, (2) foreclosed commercial or residential properties, and (3) subsidiaries which hold these types of assets, when the acquired institutions’ investment in the subsidiary became a covered asset. This definition considers undeveloped land to be commercial property. Page 8 GAO/AFMD-90-81 Thrift Resolutions B-240313 Estimating guaranteed yield and note interest costs requires projecting future levels of the indexes on which these payments are based. Common indexes include regional cost of funds rates for savings institu- tions and Treasury borrowing rates. These indexes generally parallel changes to prevailing interest rate levels. FDIC projected that $13.1 bil- lion in yield maintenance payments and $14.1 billion in note interest payments would be made after March 31, 1990. Such projections involve subjectivity and uncertainty, particularly when projecting payments beyond 1 year. Accordingly, such costs will continue to be revised over the term of the agreements. If, for instance, the actual cost of funds to thrifts for any year changes by 100 basis points (1 percent), note interest payments for that year would increase or decrease by $164 million. Covered Asset Disposition The manner in which FDIC allows the assisted institutions to manage and Strategies Will Also Affect dispose of covered assets will also significantly affect payments related to covered assets. Asset management plans detailing management’s Total Payments intended disposition strategies are required for all covered assets with relatively high guaranteed values or large projected losses. These plans document how the asset will be managed until disposition and provide estimated disposition dates and values. The assistance agreements require acquirers or new management to prepare such plans for FDIC review and approval. FDIC intends to ensure the assets are being pru- dently managed in a manner which minimizes overall agreement costs during the review and approval process. Most plans were in the process of being approved when FDIC made its March 31, 1990, estimate. The asset management plans will generally be updated annually. Changing market conditions could cause changes to covered asset disposition strategies, Management’s primary disposition options for real estate related cov- ered assets are (1) pursuing collections from the borrowers under cur- rent or modified loan terms, (2) foreclosing on covered loans and selling the collateral, and (3) selling covered loans and investments. FDIC can also require management to write down assets under most agreement terms or can purchase covered assets at guaranteed values under agree- ment call options.4 FDIC’S assessment of current regional real estate market conditions and future trends will determine its approval deci- sions on real estate related covered assets. For example, if FDIC does not expect the value of an asset to improve significantly, a write-down, 4Call provisions are described in more detail in appendix I. Page 6 GAO/AFMD-O-81 Thrift Resolutions . 4 E240318 which triggers an immediate capital loss payment, could minimize total costs by reducing yield maintenance payments. Should values be expected to increase, the most cost-effective disposition strategy could be to pursue collection from current borrowers or foreclose on covered loans and sell the collateral. If FDIC purchases covered assets, which would terminate yield maintenance payments, the cost implications associated with government management of the assets would have to be considered. The outcome of the options FDIC ultimately decides on for individual assets will significantly impact total payments. Other Factors Will Affect Six other factors or uncertainties could also impact total payments: Future Payments (1) the actual yield on covered assets, (2) negative net worth amounts which have not yet been finalized, (3) whether notes are paid prior to maturity, (4) unforeseen lawsuits which could arise from indemnifica- tions contained in the agreements, (6) tax benefits actually realized by acquirers or new management, and (6) the effects of certain FIRREA provisions. To project future yield maintenance payments, FDIC must estimate the actual future yield of covered assets. Actual yields will be affected by asset disposition strategies and real estate market conditions, among other things. Differences between actual and projected yield amounts would directly impact yield maintenance payments. Negative net worth notes had not been finalized on many agreements as of March 31, 1990. In most cases, the note amount is subject to FDIC review and approval of limited scope inventory audits of the insolvent institutions. These audits determine the amounts by which the insolvent institutions’ liabilities exceeded the recorded values of their tangible assets as of the agreement dates. Based on either preliminary or final results of audits relating to 23 agreements, FDIC’S March 31, 1990, cost estimate included $1.9 billion for additional negative net worth note principal above FSLIC'S initial estimates. Additional adjustments to the negative net worth notes will likely occur as more audits are completed, FDIC expects to have final note amounts determined on all but 6 agree- ments by the end of August. FDIC is currently considering paying off negative net worth and other notes issued in connection with the agreements prior to maturity. FDIC'S March 31, 1990, estimate assumed all notes would be paid at maturity. Page7 GAO/AB’MD&Ml Thrift Resolutions 5240313 Prepaying these notes would significantly reduce total assistance pay- ments because additional interest payments would not be made. How- ever, such action would require Treasury funding. Therefore, Treasury’s borrowing costs would have to be considered when determining the actual amount of savings to be realized. Indemnifications contained in the agreements expose FDIC to potential litigation costs not included in its March 31, 1990, estimate. The amount included in FDIC’S estimate is, for the most part, based on information supplied by the institutions receiving assistance. However, currently unforeseen lawsuits related to the indemnifications could arise. For instance, seven assistance agreements covering 18 insolvent institutions contain provisions which indemnify acquirers against any expenses attributable to toxic waste or hazardous conditions on real estate assets. FDIC could incur significant legal fees and liabilities in defending against unforeseen litigation arising from these indemnification provisions. Payments after March 31, 1990, will also be affected by the amount of tax benefits actually realized by acquirers or new management. FDIC did not estimate tax-sharing benefits on all agreements containing such pro- visions. Accordingly, FDIC could receive more benefits than anticipated in its March 31, 1990, estimate. Total payments under these agreements could also be affected by FIRREA’S strengthened capital requirements, The Office of Thrift Super- vision (ars) determined that 27 assisted thrifts did not meet the new capital standards as of December 31, 1989. FIRREA requires any institu- tion not meeting the new capital standards to submit to the ors a plan outlining how it intends to comply with those standards. Twenty-one of the assisted institutions submitted such plans to CYEin January 1990. FIRREA grants ors broad enforcement powers over such institutions, including the authority to impose a receivership or conservatorship if it finds the institution to have “substantially insufficient capital.” Receiv- ership or conservatorship actions on assisted institutions could increase6 because ors has taken the position that FIRREA eliminated the capital for- bearances@provided most assisted institutions in connection with the assistance agreements. Under these capital forbearances, the Bank Board agreed not to take regulatory or supervisory enforcement actions “Four assisted institutions have been placed into conservatorship through July 31, 1990. “Capital forbearances are described in more detail in appendix I. Page 9 GAO/AFMD-90431 Thrift Resolutions if, under certain conditions, assisted institutions did not meet capital requirements. FDIC is considering, but has not adopted, a formal policy on whether assistance payments terminate when 0~s appoints RTC as conservator or receiver for any assisted institution. Agency officials indicate that pay- ments have continued to the four assisted thrifts placed into conserva- torship through July 31, 1990. Terminating assistance payments to assisted institutions in conservatorship or receivership would reduce total payments under these agreements. However, losses that would have been funded with the assistance payments remain and would be part of the cost of resolving the failed institutions. FIRREA also requires RTC to review these agreements and exercise all legal rights to modify, renegotiate, or restructure them where savings would be realized by such actions. RTC began awarding contracts pri- marily to public accounting and law firms in April 1990 to review FSLIC'S 1988 and 1989 assistance agreements. Modification or renegotiation of any agreement by RTC should reduce its ultimate cost. Additional Costs Are Being In addition to assistance payments, other costs have been incurred Incurred under these agreements. Reduced federal tax revenues are the most sig- nificant of these costs. Fees for contracts to monitor the assistance agreements, inventory and compliance audits performed by accounting firms, and agency legal services are also being incurred. Total federal tax revenues will be reduced as a result of the tax benefits associated with the agreements. The level of tax benefits retained by acquirers was an integral component of agreement negotiations. These tax benefits primarily arise from three factors. First, assistance pay- ments made under these agreements are excluded from taxable income. Second, the full value of assets to the acquired institution carries over to the new thrift. Because these values are generally higher than actual market values, tax losses will be created when the assets are sold. These tax losses will offset any other taxable income of the thrift or, in certain situations, the taxable income of the thrift’s holding company. Finally, the net operating losses accumulated by the insolvent institutions can generally be used to offset future taxable income of the assisted institu- tions. A FSLIC study completed in February 1989 estimated that total tax revenue reductions over the term of the agreements would be $8.5 bil- lion. Tax-sharing provisions in the agreements require some tax savings to be passed on to FDIC in the form of reduced payments. FSLIC estimated Page 9 GAO/AFML%99-81 Thrift Resolutions . B240318 > that $4.3 billion in assistance payment reductions would be realized over the term of the agreements. FSLIC (now FDIC) has contracted out certain oversight and monitoring tasks. More than $20 million in costs for the services of asset manage- ment and auditing firms were incurred through December 31, 1989. FSLIC contracted with asset management firms primarily to review asset man- agement plans and quarterly assistance payment requests. The audit fees are for the audits used to determine negative net worth note amounts. Once all audits on any individual agreement are completed, FDICanticipates hiring public accounting firms to audit assistance payments. These oversight and monitoring costs continue to be incurred, although FDIC expects some reduction in the later years of the agreements. FDIC estimates that about $21 million in similar costs will be incurred during 1990. Oversight and monitoring costs, whether contracted out or performed by FDIC staff, would have been incurred with any other resolution action. We did not attempt to determine if using assistance agreements resulted in more oversight and monitoring costs than other resolution actions. As with other resolution actions, a significant level of agency legal ser- vices are being performed in support of these agreements. FDIC estimates that approximately $143 million in agency legal services and expenses has been incurred from the time negotiations on individual agreements began through December 31, 1989. These costs are in addition to indem- nification costs included in FDIC'S March 31, 1990, estimate. FDIC esti- mates that $100 million in agency legal expenses will be incurred during 1990. Agency legal costs will continue to be incurred, although FDIC anticipates they will diminish after 1990-barring any large, currently unforeseen lawsuits. FDIC believes agency legal costs for these agree- ments are not significantly different from the agency legal costs that would have been incurred in any other resolution action. We are sending copies of this report to the Chairmen of the Senate Com- mittee on Banking, Housing and Urban Affairs and the House Committee on Banking, Finance and Urban Affairs; the Secretary of the Treasury; the Chairman of the Federal Deposit Insurance Corporation; the Execu- tive Director of the Resolution Trust Corporation; and the President of the Resolution Trust Corporation Oversight Board. Page 10 GAO/AFMD-90-31 ThrifX Resolutions . * ES-240313 This report was prepared under the direction of Robert W. Gramling, Director, Corporate Financial Audits, who can be reached on (202) 276-9406. Other major contributors are listed in appendix V. Charles A. Bowsher% Comptroller General of the United States Page 11 GAWAFMD-f)O-81 Thrift Resolutions Contents Letter Appendix1 Structure andTerms of Assistance Agreements Appendix II Assistance Agreements FSLIC Entered Into January1,1988, Through August9,1989 Appendix III 27 Major Provisions of FSLIC’s1988and1989 Assistance Agreements AppendixIV 32 Actual and Projected CashPaymentsasof March 31,lQQO AppendixV Major Contributors to ThisReport Page 12 GAO/AF’MD-90431 Thrift Resolutiom Cmtente Tables Table III. 1: FSLIC’s Initial Estimates of Negative Net 28 Worth Note Principal and Interest Costs Table 111.2:FSLIC’s Initial Estimates of Covered Asset 29 Pool Size and Costs Table 111.3:1988 and 1989 Assistance Agreements 30 Providing FSLIC (Now FDIC) With Equity Rights Table 111.4:Forbearances Granted to Selected Acquiring 31 Institutions Receiving Assistance Abbreviations FDIC Federal Deposit Insurance Corporation FIKKEA Financial Institutions Reform, Recovery, and Enforcement Act of 1989 FSLIC Federal Savings and Loan Insurance Corporation GAO General Accounting Office HTC Resolution Trust Corporation cm Office of Thrift Supervision Page 13 GAO/AFMD-90.81 Thrift Resolutions Appendix I Structure and Temnsof AssistanceAgreement& Appendix II provides information on the 96 assistance agreements I%IC entered into during 1988 and 1989.’ While each assistance agreement was structured to address the characteristics of the specific insolvent institution(s) being resolved, most contained similar terms. In general, acquirers agreed to take over the insolvent institutions, invested new capital, and in return received assistance and guarantees. Acquirers’ capital contributions were generally made in cash but occa- sionally in real estate or other assets. Acquirers typically received common stock for their contributions, but occasionally received pre- ferred stock or subordinated debt. Preferred stock and subordinated debt are included in regulatory capital but are generally excluded from capital as determined by generally accepted accounting principles. Pre- ferred stock and subordinated debt holders have less risk than common stock holders. Acquirers generally received some combination of the following kinds of assistance and guarantees. usually compensated acquirers for the negative tangible net worth Negative Net Worth FSLIC reported by the insolvent institutions2 being acquired. This was com- Assistance monly called negative net worth assistance and was generally equal to the amount by which the insolvent institution’s liabilities exceeded the recorded value of its tangible assets. Subject to the negotiated terms of each agreement, FSLIC issued an interest-bearing note for the amount of the institution’s negative tangible net worth. Occasionally, FSLIC paid negative net worth assistance in cash. FSLIC considered all initial cash payments it made to acquirers as negative net worth assistance. For most agreements, the negative net worth note amount was subject to an inventory audit contracted and paid for by FSLIC (now FDIC). The inventory audit determines negative tangible net worth by assuming that all problem assets will recover historical cost. In some cases, the note was based on the historical cost of the assets less any loss allowances recorded prior to the agreement’s date. In other cases, the ‘FSLIC actually approved more than 96 assistance agreements during this time period. However, several of the agreements were superseded by later agreements that FSLIC approved. The original agreements are not included in the count of 96 but their costs are considered as part of the agree- ments that superseded them. 2The capital deficit reported by the insolvent institution typically was less than its actual deficit because many losses on poor quality assets generally had not been recognized. These unrecognized losses were addressed by capital loss coverage. Page 14 GAO/Al%lIMMl Thrift Redutlons Appendix I Structure and Terms of Assietance Agreements note was based on gross asset values. The note amount was higher when based on net asset values and lower when based on gross asset values. However, estimated costs for yield maintenance and capital loss cov- erage, described below, are higher when the negative net worth note was based on gross asset values and lower when based on net asset values, The negative net worth note carries a variable interest rate typically based on the average cost of funds for all savings and loans in the same region. The actual note rate is determined by adding a specific margin, measured in basis points, to the average cost of funds. Agreements for thrifts located in the southwest typically had margins ranging from 40 to 60 basis points, while margins on other agreements had a much wider spread, ranging anywhere from 25 to 200 basis points. The notes gener- ally mature at the end of the assistance agreement term, typically 3,5, or 10 years, However, many notes can be paid prior to stated maturity at FDIC’S option. Table III.1 of appendix III provides the note terms, note interest rate factors, and FSLIC’S initial estimates of the note principal and interest payments for 19 of the 20 agreements selected for detailed review. One agreement selected for detailed review did not include a negative net worth note. The poor quality assets of the insolvent institutions being acquired, gen- Yield Maintenance and erally real estate, nonperforming loans, performing loans considered to Capital hss coverage h ave a high risk of default, and some interest rate sensitive assets, pri- marily mortgage backed securities that cost more than their current value, were put into covered asset pools. Assets in covered asset pools are subject to yield maintenance and capital loss provisions. Yield maintenance guarantees acquirers that the covered asset pool will collectively yield a specified variable rate for the term of the agreement. The yield maintenance rate is typically determined by adding a set number of basis points, as negotiated and documented in the assistance agreements, to the average cost of funds for all savings institutions in the same general geographical area. The amount of the spread over the average cost of funds typically declines over the term of the assistance agreements. Under capital loss coverage, acquirers are compensated when the guaranteed value of any covered asset, generally its historical cost, exceeds its disposition price. Page 15 GAO/AF’MD-90-81 Thrift Resolutions Appendix I Structure and Terms of Assistance Agreements Table III.2 of appendix III lists the indexes used to determine guaran- teed yield levels and provides FSLIC’Sinitial estimates of the guaranteed value of the covered asset pools, yield maintenance payments, and cap- ital loss payments for 19 of the 20 agreements selected for detailed review. One of the agreements only included negative net worth assistance. Many of the larger assistance agreements gave the acquirer up to 1 year Put and Call to “put” loans that become delinquent or other assets that exhibit poor Provisions quality characteristics into the covered asset pool, The size of the cov- ered asset pool and generally the amount of estimated yield mainte- nance and capital loss payments increased when acquirers exercised these rights. Many of the 20 agreements selected for detailed review allow FDIC to “call,” or purchase, covered assets at their guaranteed value during the assistance agreement term. Generally, exercising call provisions requires FDIC to immediately fund, with a note or cash, the difference between the asset’s current and guaranteed values. If the purchase is funded with cash, FDIC will not have to make additional yield maintenance pay- ments for that asset-reducing total assistance payments.3 On the other hand, if FDIC uses a note to fund the call, it will pay interest costs that could be as much as the yield maintenance payments it would otherwise have paid. As an incentive for assisted institutions to maximize the value of cov- Gain-Sharing ered assets, FSLIC included gain-sharing provisions in many assistance agreements. These provisions allow the acquirer to share sale proceeds exceeding a predetermined percentage of historical cost. The assistance agreements also indemnified acquirers from certain other Indemnifications costs. The most common was indemnification from legal costs and liabili- ties due to the actions of prior management or resulting from any chal- lenges by prior management, creditors, stockholders and others to FSLIC'S receivership actions. In addition, new management is not liable under the agreements for any regulatory violations committed by pre- ceding management. Some agreements also explicitly indemnify “FDIC would need Treasury to provide the cash. Therefore, Treasury’s borrowing costs would have to be considered when determining the actual amount of savings to be realized. Page 16 GAO/AFMJMO-81 Thrift Resolutions . * Appendix I Struchwe and Terms of Assistance Agreements acquirers against expenses for toxic waste or other hazardous condi- tions found on acquired properties. Some agreements also included provisions that could reduce FDIC’S costs. Provisions Reducing Equity rights and tax-sharing are two such provisions. Cost of Agreements Equity Rights Under some agreements, FDIC has received rights to purchase equity instruments (typically common or preferred stock) in the assisted insti- tutions, or its parent/holding company, at a future date. If the value of the equity instruments exceeds the price at which they can be bought, FDIC'S total costs will be reduced. Table III.3 in appendix III identifies all 1988 and 1989 agreements which provide FDIC with equity rights, the period during which FDIC has the option to purchase the equity instru- ments, and the percentage ownership FDIC would hold if all rights are exercised. Tax-Sharing In many agreements, new management must return to FnIc some or all of the tax benefits realized from the agreements, FDIC'S portion of the tax benefits generally reduces its payments under other assistance agree- ment provisions. The tax-sharing provisions vary by agreement. The actual percentage of tax benefits to be provided to FDIC was negotiated and is as high as 100 percent of all benefits realized. Under some agree- ments, FDIC is guaranteed to receive a specific amount of tax-sharing benefits. -1 Typically negotiated in connection with the agreements were provisions Forbearances that the Bank Board would not take certain regulatory or supervisory enforcement actions under certain conditions. Unlike the standard agreement provisions described in this appendix, these provisions, com- monly called forbearances, do not involve financial costs or savings to FDIC. Rather, they provide acquirers with protection from specific regu- latory or supervisory enforcement actions to which other institutions are subject. The forbearances were documented in separate letters rather than in the actual assistance agreements. The Office of Thrift Supervision (errs) has been studying the impact of FIRREAon these forbearances. Eight of the more common forbearances Page17 GAO/AF’MD-@O-S1 Thrift Resolutions Appendix I Structure and Terms of Assistance Agreements are described below. As indicated in the following section, urs announced a position on capital and accounting forbearances in January 1990. ors advised us that all other forbearances remain in effect until their study is completed. However, urs also advised us that capital plans, required for any institution not meeting FIRREA’S more stringent capital standards, will not be accepted if the plans are dependent on the continuation of forbearances granted in connection with the agreements. Table III.4 of appendix III indicates which of the eight forbearances described below were granted in connection with 18 of the 20 agree- ments selected for detailed review. Office of Thrift Supervision staff were unable to provide copies of executed forbearance letters for two of the agreements. Capital Forbearance Under this forbearance, the Bank Board agreed not to take regulatory or supervisory enforcement action if, under certain conditions, the assisted institution did not meet minimum regulatory capital requirements. This forbearance only applied when (1) the regulatory capital deficiency was due to the assets, liabilities, or negative net worth acquired from the insolvent institution, and (2) the acquirer had maintained the specific capital levels required by the forbearance letter. In January 1990, ors took the position that FIRREA eliminated capital for- bearances granted to assisted institutions. Since announcing its position, urs has been, and continues to be, involved in a series of court challenges to the new capital standards and its position on the capital forbearances. For example, in one case,4a federal district court ruled that a forbear- ance letter granting a capital forbearance was not a contract because it contained an escape clause which allowed the Bank Board to rescind the forbearance under certain conditions. In another case,6a federal district court ruled that ars, as successor to the Bank Board, was bound by the contractual terms of an agreement containing a capital forbearance and that FIRREA did not abrogate the agreement. Liquidity Forbearance Federal liquidity regulations establish the minimum amount of liquid assets, generally cash and securities that can be quickly converted to 4Flagship Federal Savings Bank v. Director, Office of Thrift Supervision, No. 90-0079 GT (S.D. Cal Feb. 14, 1990). ‘jFar West Federal Bank v. Director, Office of Thrift Supervision, No. 90-103-PA (D.C.Ore. May 14, 199Q). Page 18 GAO/AFMD-90-81 Thrift Resolutions t Appendix I Structure and Terms of Adstance Agreements cash, a savings institution must have and empowers um to levy mone- tary penalties if those levels are not maintained. The liquidity forbear- ances reduced required liquidity levels, typically for 1 to 3 years depending on the agreement, by the sum of the acquired institution’s liquidity deficiency plus net withdrawals from branch offices of the acquired institution(s). Equity Risk Forbearance This forbearance provided certain exemptions from regulatory limits on the level of equity risk investments that savings institutions can have. Equity risk regulations limit the amount of certain equity securities an institution can hold. Assisted institutions were generally given a specific period of time to dispose of any excess equity risk investments resulting from the acquisition. Service Corporation This forbearance provided a specific period of time to allow acquirers to Forbearance dispose of service corporations, or subsidiaries, which cause the institu- tion to exceed regulatory limits on the amount that can be invested in subsidiaries or whose operations are not permitted by the institutions’ charters. Qualified Thrift Lender Under the qualified thrift lender forbearance, typically granted in agree- Forbearance ments covering insolvent institutions in the southwest, the Bank Board considers the assisted institution to be a qualified thrift lender, as defined in the National Housing Act of 1934, if the institution no longer complied with the definition because of acquired assets. To be a quali- fied thrift lender, an institution must maintain investments in housing related assets exceeding a specific percentage of its total tangible assets. Qualified thrift lenders can receive, within certain restrictions, Federal Home Loan Bank advances with appropriate collateral. Savings institu- tions failing to comply with the qualified thrift lender definition have more limited access to Federal Home Loan Bank advances. Loans to One Borrower Various regulations limit the amount institutions can lend to one bor- Forbearance rower. The Bank Board agreed that it would not take regulatory action on loans to one borrower violations provided the loans causing the viola- tion were from the acquired institution. However, no additional loans to Y the borrower could be made. Page 19 GAO/AFMD=90-81 Thrift Resolutions Appendix I Structure and Terms of Assistance Agreements Accounting Forbearance Numerous accounting forbearances were granted in connection with the agreements. These forbearances allowed the assisted institution to include, for regulatory capital purposes, certain items that would not be considered capital under generally accepted accounting principles. Some of these provisions also allow acquirers to consider assistance agree- ment payments and guarantees to be fully collectible when determining regulatory capital, even if accounting standard-setting bodies in th.e pri- vate sector decide that such amounts should not be considered fully collectible. Asset Classification This forbearance addresses the poor quality, or classified, assets Forbearance acquired from the insolvent institution(s). Acquirers were granted a spe- cific period of time to work out or dispose of such assets. During that period, they would not be denied the ability to engage in certain other- wise allowable activities even though the level of classified assets would normally preclude such activities. Page 20 GAO/APMD-90-81 Thrift Resolutions 1 Appcn&x II Assbtice AgreementsFSLIC Entered Into January 1,1988, Through August 9,1989 Dollars in millions __- __---_ .---- .-- Initial estimate of Assets of Acquirer/institution receiving Effective date of total cash merged/acquired a8sistancea Acquired institution(s)b agreement_I__- payments institutionP Agreements With Acquirers --____-._.-. -__ Home FSLA (Rockford) First FSLA-----(Freeport) 01/27/88-- $14.7 $30.4 -___ Atlantic Financial Federald/ Traders FSLA 02/l O/88 72.2 706.8 Atlantic Financial Federal- Magnet Bank, FSB WVA, FSB Mountain State FSLA ~_.-...--~.---_-._~-__ PrF;&eInvestor/Great West SB, First FSLA 0311o/a8 3.1 30.1 -..-~ . --. -_--.---_-- The Statesman Group/ First FSB 03/l 1/a0 167.8 560.6 Sgzsman Bank for Savings, Perpetual SLA 0 Peoples FSLA First Federated SB Sterling SA Tri-Cities SLA 04/11/88 17.3 53.8 Lemont SA Citizens SLA 0411 i 188 6.5 38.6 Home FSLA of Upper East Valley FSLA _______ 04/l 2100 7.1 88.1 Tennessee .~~ -.. -___-.--~ --- . ~~..--. ----..-___ ________ _I____-- ..-.---.---- Coastal Bane SA Colorado County FSLA 05/i 3188 237.2 456.3 Security SLA Cameron County SLA Alliance SLA Southwest SAC Lamar SA 05/i 8188 3,727.3 4,094.o Briercroft SA City SLA Stockton SA .-.-____.--~~ Rantan Valley SLA/ Hansen SB, First FSLA (Hammonton) 05/25/E@ 71.5 244.8 SLA _. --.-..-- -..~~- _~ _._~. First Savings of Brenham/ Frrst Bluebonnet SA 05/26/88 9.9 24.3 FSB of Hempstead _____ America First Financial Eureka FSLA 05/27jaa 269.6 1,762.5 Corporatron/Eureka FSLA I_.. -__ Local Investor Group/ Muskegon FSLA 06/02/88 4.0 211.8 Amenbank, FSB 06/06/aa ._____--._ .-.-- --.__ ._.._ Bailey Mortgage Co./ Savetrust Frontier FSB 9.6 46.4 FSB --.-~~__--__-. .- Merabank FSBd/ Merabank First Financial SA (El Paso) 06/22/88 162.5 354.9 Texas, FSB’ Brownfield FSLA ___. ____ America First/Eureka FSLA.-‘. Stanford SA _I____06/24/88 -__ 8.1-_.__-~ 76.0 ~ ~..-~~ ~~~~ Golden West Financial Group/ Lynwood SLA 06/24/88 5.4 24.0 World SLA of America FSLA ..-~ - ..___- .__... ...__. ..~_____. __- --..-.--- - Pr;;teal~;egStors/River Valley Galva FSLA 07/28/88 34.5 170.3 Home FSLA (Peoria) Mutual .___ SLA --- .~-.--__- .“._ __---__- River Valley SB, a FSB _..-. -. ~--.._-. ..._.....- Republic Savings FSLA -- .----.. -. 07/28/88 17.8 ___--._--.__.-. 36.5 Private Investors/First FSB First FSLA (Longview) 00/02/0a 9.4 80.3 Northwest (continued) Page 21 GAO/AFMD90431 Thrift Resolutions Appendix II Awi~tanee Agreementa FBLIC Entered Into January 1,1999, Through Ayluet 9,1989 Initial estimate of Assets of Acquirer/institution receiving Effective date of total cash merged/acquired aasiatance. Acauired institutionWb agreement payments institution@ United Savings of America ---___-.-~- First FSLA (Taylorville) 08/l O/88 2.7 36.1 Standard FSLA (Chicago) Capitol Federal Savings of 08/l l/88 12.7 2556 America First FSLA of Lincoln-Iowa First FB, FSB 08/l l/88 12.2 47.0 Western FSLA Gi;r;:gup, Inc./ American Gladewater FSLA 08/l 8188 2,399.2 2,168.6 Commerce FSLA Irving SA Majestic SA Richardson SLA Mercury SA Longview SLA Ben Milam SLA Paris SLA American Bane SA Southland SA .-.. .--.._. ~- Skvline , SA -- Merabank FSiY/ Merabank State FSLA (Lubbock) 08/26/88 1,466.4 454.3 Texas, FSB’ ___-.- Metrpolitan FSB/ Metropolitan Washington FSB 08/26/88 626.4 1,085.8 Pioneer FSLA First FSLA (Brainerd) First FSLA (Hibbing) First FSLA (Grand Rapids) Peoples SLA _.--~__. Washington 2.4 26.5 _ - ..-. .FSLA -_-~--~-~- Northwest FSLA 08/26/88 Old Stone Bank of California, a Homestate SLA 08/26/88 40.1 182.2 FSB Security Trust FSLA Commerce FSB 08/26/88 17.2 40.2 First FSB & Trust __.--.- ____I- Citizens FSLA 09;01;88 (0.5) 59.3 Secor S8I ---- -..- -____-- Coosa FSLA 09/06/88 13.0 76.6 KW Bankshares Inc./First FSB First FSB 09/07/88 I 25.4 122.4 -. ._of Rogers ’ .._._____- ..I _ ._.._l__.._ United Savrngs of America Fidelity FSLA 09/08/88 3.6 __.. 40.1 -.~ Puke Diversified Co., Inc./ Bay City FSLA 09/09/88 1,029.7 642.5 Heights of Texas, FSB Gulf Coast SLA Heights SA Allen Park FSLA Washington Home FSLA iSLAofRockford--.---- _____- Freedom FSLA 09/l 6188 60.9 307.0 Western .~SLA- --.- -_----.-.-- Loves ParkFSB 09/21/88 5.0 41.5 Bell FSLA 09/23/88 695.8 -931.9 .._._..... -. ... . . - _----- Pulte Diversified Co., Inc./First Champion SA 09 /23/88 978.3 661.7 Heights, FSA Union Holding Company/ Union Arsenal SA 09123188 36.39 1616 FSB of Indianapolis - _---.._-_ -- Union Holding Company/ Union Frankton PSLA 09/23/88 9 30.7 FSB of Frankton ” Downey SLA/Butterfield SLA Butterfield SLA 09/29/88 386.3 517.2 .-.. ___.._._. -...-__-..- ._------ -.- -___ (continued) Page 22 GAO/AFMD-90-91 Thrift Resolutions I Appendix II Anahtauce Agreementa EBUC Entered Into January 1,1999, Through Auguat 0,1989 Initial estimate of Assets of Acquber/institutlon receiving Effective date of total cash merged/acquired assistance’ Acquired lnstltution(s)b agreement payments institutionsC Americana _^_ SB, ‘~s~~“~~~-~~---‘~-~~--~- ._ _. Citizens FSLA (New Castle) 09/30/88 5.4 52.4 Club Corp. International/ Great West SB 09J3OJ88 1,872.2 1,210.B l$rrklin Federal Bancorp, a Creditbanc SA . ..~ .~.-- ---__--_ Franklin SA First FB, a FSB United SA of Central Indiana FA 09/30/88 9.3 60.4 Tracy SLA,. FA Adobe SB 09 J3OJ88 3.0 46.4 Temple.lnland/ Guaranty FSB First FSLA (Austin) 09/30/88 3,325.0 3,051.4 Delta Savin s of Texas Maco Bancorp,FirsiFSB.~~- -....-- -.... Guaranty F .YLA 1st FSB of Indiana 1O/02/88 28.8 340.3 Indiana Capital FSLA Republic SB, FSB First FSLA (Mayfield) 10/12/88 25.2 51.5 Adam C&p. GroupjAm-~~~tSA------- Olney SA 10/14/88 2,625.2 3,677.3 Security FSLA First FSLA (Amarillo) San Angelo SA Odessa SA Southwest SLA Bane Home SA Southern SLA Heart O’Texas SA Shamrock FSB Petroplex SA F&ttzancorporation/ Peoples Peoples FSB 1O/25 J88 34.9 368.6 _____l--- Crossland Savings, FSB .-. .._.-__- ~-.---___ Reliance SLA 11JO2188 11.8 62.0 First -. . Nationwrde Bank - - ---. .~...._-.._~_I_ Lincoln FSLA 11/04/88 186.6 1,242.6 Private Investors/Flagship FSB Flagship FSLA 11JlBJ88 23.6 97.8 “. ” ., Amencrty FSB Tesoro SLA 1l/19/88 281.7 251.1 Liberty Capital, Inc./ Southside The South Side SLA 11J3OJ88 10.4 57.3 SB, FSB Private Investor Group/ MidAmerica SB 12/l 2188 14.0 256.5 MidAmerica SB, FSB Frrst Western SA Eastern Washington SLA 12/14/88 2.0 50.2 Pacific First FSLA/ Pacific First American Home Savings FSB 12/15/88 224.6 788.7 FSB Community First FSLA Frrst FSLA of Lincoln Rooks County SLA 12Jl5J88 19.5 25.5 Rocky Mountain Financial Rocky Mountain FSLA 12/16/88 211.1 505.7 Corp./Rocky First Mountain Nat,onwide-FSB FSB ..-. .._. - .-- ..._.---..- United SB of Wyoming First Dearborn, FA 12/l 6108 256.3 869.5 Bloomfield SLA, FA Go&West Financial CorpJ Ohio Valley SLA 12/l 7J88 83.7 312.0 World SLA of Ohio First Border SB -____- (continued) Page 23 GAO/AFMD-90-31 Thrift Resolutions Appendix II Aaeietance Agreements WLIC Entered Into January 1,1988, Through August 9,198B Initial estimate of Assets of Acquirer/institution receiving Effective date of total cash merged/acquired assistance’ Acquired institution(s)b agreement payments institutionsC CT; (F&p., Inc./ Bluebonnet ;;;~;lW;IIs SLA 12,22,88 3,377.7 1,803.a Mesquite SLA First Western SLA Commodore SA First FSLA Sentry SA Vista SA Lamesa FSLA Interwest SA Southern Federal Bane, SLA Reliance SA NorthPark SA Metroplex FSA Hi-Plains SLA, FSA Crtrcorp Mortgage, Inc./ Citicorp Glen Ellyn FSLA 12,22,88 21.7 69.1 Savrnas of Illinois. a FSLA MNC Fi;anc,al ,nc,, V,rginia-~ss....-.--------~irginia-FSLA 12,23,88 13.5 685.2 Barne’tt Banks’lnc./Barnett Bank ~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 12127188 4.9 254.6 of SW Georgia McAndrews and Forbes/ First Gibraltar SA i 2,27,88 8,890.7 11,404.8 Gibraltar Bank, FSB First Texas SA Killeen SLA Home SA Montfort SA ___-- Coast to Coast Financial Corp./ -~--~-.----.----Lyor-rsSavings FSLA 12,28,88 538.1 1,485.O Suoenor Bank. FSB Metropolitan. FB First FSB . ..__.---_ _--.. ..-..-...---.-- 12,28,88 124.4 262.4 NVRyan LP/NVR SB, FSB McLean SLA FSLA 12,28,88 77.2 287.1 Robert M. Bass Group/New American Savings, a FSLA 12,28,88 1,699.0h 30,142.l West FSLA & American SE. FA Cttrzens FB, a FSB American SB 12,29,88 203.3 ._-_---..-...- 891.8 Pacific USA Holdings/ Pacific First FSLA i 2,29,88 1,282.4 832.8 Southwest Bank, FSB Yoakum FSLA Seguin SA Charter SLA Union SA IndependenceSLA Keystone SLA Bayview FSLA Centex Corporation/ Texas Peoples SLA i 2,29,88 657.3 318.0 Trust SB, FSB Burnet SLA Lee SA Ranchers ---.-.- _.. SA- Local FSLA/ Local Amencan First Oklahoma SB 12,29,88 126.0 541.9 Bank of Tulsa FSB Mid America FSLA Jackson County, FSLA Jackson County FSLA - 12,30,88 77.4 275.5 Northwest FSB * Northwest FSLA (Spencer) I 2,30,88 109.9 170.1 Home FSLA (Spencer) (continued) Page 24 GAO/AFhID-90-81 Thrift Resolutions Appendix II AssWance Agreements FWX Entered Into January 1.1988, Through August 9,198B Initial estimate of Assets of Acquirer/institution receiving Effective date of total cash merged/acquired assi8tanctP _“”_ .I“... _ .--..-.--__I_ Acquired institution(s)b agreement payments institutionsc First Nationwide FSB’ Cardinal FSB 1Z/30,08 2,802.7 7,943.5 Columbia a FSLA Pathway Financial FA ._ Mile High FSLAr Western .._ FSB _-. of _Montana --________ -- Great Fails FSLA 12,30,88 11.5 129.0 Home FSLA Columbus SLA FSLA 12,30,88 356.4 557.7 Cal America SLA FSLA First Security FSLA Southeast Banking Corp., South Florida FSLA 12,30,88 29.0 1,342.3 So&theast Bank for Savrngs, a .-_---.-. Golden West Financial/ Beach Beach FSLA 12,30,88 1,906.O 1,156.7 FSLA, SB, _. FSB.._.__- .- ._.____..- -- Hy e$;sn ;;sners/lJnited SA of United SA of Texas 12,30,88 2,201.g 4,412.B f , Northwest FSLA Capital FSB 12,30,88 141.9 315.4 First Network So’- _.... . ---.-.-- Mutual FSLA (Oklahoma City) River Val,ey. sB.~ss -.-.-. ~--.-- Tahoe SLA FSLA 1213l/88 57.3 46.8 Peoria SLA 12,31,88 31.2 176.4 ca$$nia FSLA/California FB, a Broward FSLA 12,31,88 252.4 549.7 i$i/h;gan Natjonal‘Corp./.-----‘-.---‘-~r~-~~~A 12/31,88 1,769.6 1,190.l .- _Beverly .- . Hills__FSB ._-,--.-__-_---- Home . FSLA of._- Sioux-_ Falls ._.... .-.. .._____- ___ United Federal SLA 12/31/88 8.0 93.4 Private Investor/First Cook Bank Cook County FSLA 02,03,89 147.9 227.3 for Savings, a FSA First American SLA First Tropical SB FSB/ First Tropical FSLA 04/l 3189 12.1 55.0 -,..Florida ..-_SB, “_. FSB ..-_---.--.---.-_____ Total for 1989 and 1999 $48,854.3 $97,977.8 agreements with acquirers Stabilizationsk Sunbelt Savings, FSB Federated SLA 08/l 9,88 11,421 .O 9,387.2 Multibanc SA Sunbelt SA Summit SA Texana SLA First City SA Western FSLA independent American SA Cimarron FSLA Home SLA 08/31,88 709.5 967.5 Phoenix FSLA ._....__..._--- Cimarron FSLA Red River FSLA First FSLA Elk City) 08/31,88 258.9 514.4 Peoples FSI A (Ardmore) Home SB, FA Heritage SLA (Elk City) ” (continued) Page 26 GAO/AFMD-BO-81 Thrift Resolution Appendix II heiatance Agreement33 FSLIC Entered Into January 1,1@88, Through August B, 1989 Initial estimate of Assets of Acquirer/lncltltutlon receiving Effective date of total cash merged/acquired a88latance* _.-.- ___._ -.--___.--__ Acquired institution(s)b agreement payments institutior@ Chisholm FSLA Kin fisher FSLA OS/31 188 105.2 195.0 .._....- .__.__.... --- -... - Sun % elt Savings FSLA Heartland .- -___ .-_-..- FSLA-.--- Frontier FSLA OS/31 100 503.9 1,147.5 Total for 1988 and 1989 $12,998.5 $12,211.6 ._.stabilization --- -...-- agreements Total for All 1988 and 1989 $61,852.8 $110,188.2 Aweements Legend FA - Federal Association FB - Federal Bank FSA = Federal Savings Association FSB - Federal Savings Bank FSLA = Federal Savings and Loan Association SA - Savings Association SB = Savings Bank SLA = Savings and Loan Association aWhere two entities are shown, the first is the acquirer and the second is the institution owned by the acquiring entity that is receiving assistance payments. If only one entity is shown, it is both the acquirer and the assisted institution. bCity names have been added in parentheses to distinguish between some similarly named institutions. CRepresents total assets as reported on the last Thrift Financial Report prior to the effective date of the assistance agreement. The agreements generally provided assistance on some portion of these assets. The amount of assets covered by assistance provisions is shown on table III.2 of appendix III. dThese acquirers, which are savings and loans, were in conservatorship as of July 31, 1990 eThese institutions receiving assistance were in conservatorship as of July 31, 1990 ‘Merabank Texas was the assisted institution under two different assistance agreements. In appendixes Ill and IV, Merabank Texas, FSB includes both assistance agreements. QUnion Holding Company acquired Arsenal SA and Frankton FSLA on the same day. Although each acquisition is a separate assistance agreement, FSLIC prepared one initial estimate of total cash pay- ments covering both agreements. hFSLIC did not estimate total cash payments for this agreement; instead, this amount is FSLIC’s esti- mated liquidation costs for American Savings less acquirer concessions. ‘Institutions currently receiving assistance under this assistance agreement are Columbia, a FSLA; Pathway Financial, a FA; and Cardinal FSB. Mile High FSLA was merged into Columbia, a FSLA. Two of these institutions will subsequently be merged into First Nationwide FSB; the other, Columbia, a FSLA, will remain a separate institution. iMile High FSLA was created by FSLIC on December 9, 1989, to acquire the insured deposits and a portion of the assets of Silverado Banking, SLA. kThese five agreements had no acquirer. Rather, FSLIC brought in new management and agreed to provide financial assistance to stabilize their operations until acquirers could be found. Source: FDIC records Page 26 GAO/APMD-90-81 Thrift Resolutions *p*endix’*11 Maor provisions of ISLE’s 1988 ayld 1989 Assistawe Agreements l The following tables present, for informational purposes only, FSLIC'S initial cost estimates and other information related to the major provi- sions of the 1988 and 1989 assistance agreements. Tables 111.1,111.2,and III.4 include details on the provisions of our judgmentally selected sample of 20 assistance agreements. Table 111.3includes all 1988 and 1989 assistance agreements which provided FSLIC (now FDIC) with equity rights. The following abbreviations are used in the tables for this appendix: Legend FA = Federal Association FB = Federal Bank FSA= Federal Savings Association FSB = Federal Savings Bank I?%A = Federal Savings and Loan Association SA = Savings Association SB= Savings Bank SLA = Savings and Loan Association Page 27 GAO/AFMD-90431 Thrift Resolutions Appmdix III Major Pmvlsiona of FSLIc’s 191 and 1888 AseletanceAgreements Table 111.1:FSLIC’a lnltlal Estimates of Negatlve Net Worth Note Principal and Interest Costs Dollars “-l.l-,l in..-_I_~ millions Estimated Estimated Term Interest principal interest lnrtltutlon I--_-_ ._------receiving arbirtance Wars) rate0 balance payments American Federal Bank, FSB ...-._I__-..._-_-_ 10 TXCOF+40 $535.7 $472.6 AmWest, __..______. SA -_-..- IO TXCOF+GO 303.4 297.2 Beach ._.-- --- FSLA, ~_ SB, FSB 5 1 lDCOF+l75 1,002.4 -~ 903.6 Beverly Hills FSB .____ ___..,...__ ------ 10 ’ ‘DcoF+2Y 793.9 810.1 Bluebonnet -..--_.- .-.- --. SB FSB 10 TXCOF+45 836.7 807.1 First Gibraltar - -__ -_- Bank, FSB 10 TXCOF+SO 865.6 804.9 First Nationwide -_--_.--- FSBb 10 TBill+25 1,199.g 947.9 Franklin -I_------ Federal Bancorp, a FSB 10 TXCOF+GO 264.4 259.0 Guaranty FSB _-__-.-. ..-.-~.. 10 TXCOF+40 710.1 681.5 Heights of Texas, FSB -_.-...--- 10 TXCOF+40 311.8 326.9 Merabank -~Texas, FSB ~..__ 10 TXCOF 187.6 158.2 New ----- West FSLA 10 7 percent 250.0 175.0 Pacific ..-.- .-Southwest Bank, FSB 10 TXCOFt50 161.7 150.4 Southwest _.-.-_._-- SA 10 TXCOF+40 569.7 510.2 Sunbelt .-__--_.--- Savings, FSBc 10 TXCOF+50 2,459.8 2,260.8 Superior Bank FSB 10 7DCOFtl40 205.0 106.0 Texas ---- Trust SB, FSB 10 TXCOF+50 221.2 205.7 .-._...._. SA United 0-m --.-_- 10 TXCOFt50 261 .O 242.7 Western FSLA 5 TBillt175 492.5 136.2 Total selected agreements $11,632.4 $10,256.0 01 her 1988 and 1989 aareements 2.442.3 18732.7 Total 1966 and 1969 Agreements $14,074.7 $11,988.7 Legend TXCOF = Texas cost of funds: Average cost of deposits and borrowings for savings institutions in Texas as determined by the Federal Home Loan Bank of Dallas. DCOF = District cost of funds: Average cost of deposits and borrowings for savings institutions as determined by the Federal Home Loan Bank Districts. The number preceding the DCOF represents the district, with 7 representing Chicago and 11, San Francisco. TBill = Treasury Bill rate: Published Treasury borrowing rate as specified by the assistance agreement. Vrterest rates are enerally comprised of a base factor plus a spread, measured in basis points-l basis point is l/10 8 th of a percent. When basis point spread is represented in the form x/y, x is the initial spread and y is the ending spread. blnstitutions currently receivin assistance under this assistance agreement are Columbia a FSLA; Pathway Financial, a FA; and e ardrnal FSB. CSunbelt Savings, FSB, was in conservatorship at July 31, 1990. Source: FDIC records Page 28 GAO/~-!Wf31 Thrift Resolutions . . Appendix Ill Major Provisions of FsLIC’s 1988 aud 1989 Aselstance Agreements Table 111.2:FSLIC’a Initial Estimate8 of Covered ASbet Pool Size and Costs EZiars in milllons Estimated Covered guaranteed Estimated as8et pool Guaranteed yield yield capital loss Institution receiving assistance __-.--_-.-- book value levela payments payments American Federal Bank, FSB - --. $1,889 TXCOFt275/160 $617.3 --___ $752.2 AmWest SA 2,144 TXCOF+250/120 726.3 996.8 Beverly 11DCOF+250/150 96.1 --181.4 HIIIs FSB 765 . “. .._ -. Bluebonnet SE%FSB --- --- ___- 1,648 TXCOF+235/173 762.2 946.4 Eureka FSLA ~. -.- 150 1 IDCOF+12 17.9 __-.- 9.5 l&t Gibraltar B&k, F$8-‘-- _-~---~ 4,115 TXCOF-t225/150 2,007.8 2,819.7 First NationwIde FSBb 4,760 11DCOFt250 453.4-------- 482.3 FrankIln Federal .~ancolpla-~~~--------~---- _--.-__ 914 TXCOFS250/185 496.0 471.9 Guaranty ofFSB He,ghts Texasl Fss --...-. .._- ____ -_ - 1,617 TXCOF+240/170 523.8 578.8 - 946 TXCOF+250/155 164.6 218.4 Merabank New West Texas, FSLA . FSB ..~ ..- - _...._.--..- ~-~ ..-- 344 TXCOF+250/160 163.2 279.0 c c c c . Pacific Southwest Bank, FSB -____.~- 564 TXCOFt260/185 254.6 388.7 Southwest SA ____-.___________^ 2,944 TXCOF+275/200 826.8 1,820.6 Sunbelt Savings, FSBe _I_____-_- -..__- -. 5,231 TXCOF+220/135 2,423.g ..____ 4,067.3 - .- Superior BankFiB ..- _ . - --.--_-~- 504 7DCOF+275 168.5 19.3 Texas Tr”st se.,~FSB ___.-- .__....-___.___- 329 TXCOFt250050 110 .o -----rGii United SA of T&as. F$E- .-_...._ ---‘--~-- _-- ._.___--______ -__ 1,598 TXCOFt220/180 684.3 921.6 Western FSLA .-- -_- 375 TBill+250/150 ___-I_80.2 35.9 .--__.-. Total selected agreemented $30,837 $10,578.9 $15,130.4 Other 1988 and 1989 agreements ____- ___.-_.. 3,629 1,040.i 1,263.0 Total 1988 and 1989 Aweementsd $34,468 $11,617.0 $16,393.4 Legend TXCOF = Texas cost of funds: Average cost of deposits and borrowings for savings institutions in Texas as determined by the Federal Home Loan Bank of Dallas. DCOF = District cost of funds: Average cost of deposits and borrowings for savings institutions as determined by the Federal Home Loan Bank districts. The number preceding the DCOF represents the district, with 7 representing Chicago and 11, San Francisco. TBill = Treasury Bill rate: Published Treasury borrowing rate as specified by the assistance agreement *The guaranteed yield level is usually comprised of a base factor plus a spread, measured In basis points. The basis point spread usually declines in even increments over the term of the assistance agreement. Some agreements provide a guaranteed yield level for each specific category of covered assets. In this table, when basis pornt spread is represented by x/y, x is the highest initial spread and y is the lowest ending spread. The primary base factors used to determine guaranteed yield are described in table 11.1 (contrnued) Page 29 GAO/AFMD-90-81 Thrift Resolutions Appendix III l lb@jor Provisione of FSLIC’e 1988 and 1989 Aasietance Agreements blnstitutions currently receiving assistance under this assistance agreement are Columbia a FSLA; Pathway Financial, a FA; and Cardinal FSB. ‘New West’s assistance agreement funds all losses on its assets. FSLIC did not initially estimate capital losses or yield maintenance costs. Therefore, New West’s $22.1 billion in covered assets is not included in this table. FDIC later estimated these amounts to be $2.0 billion and $1.6 billion respectively. dNot including New West. See c above. %unbelt Savings, FSB, was in conservatorship at July 31, 1990 Source: FDIC records Table 111.3:1988 and 1989 Assistance Agreement8 Providing FSLIC (Now FDIC) Ownership With Equity Rights Institution0 Exercise periodb (percent) American SB. FA i 2/28/98--c 30 Americity FSB 11/18/03-11/18/13 20 AmWest SA lO/l4/98-lO/l4/03 20 Bluebonnet SB, FSB 12/22/94- 12/22/04 20 Coastal Bane SA 05/l 3/93-05/l 3103 15 First Gibraltar Bank, FSB 12/28/88- 12/28/03 20 Franklin Federal Bancorp, a FSB 09/30/98-09/30/03 20 Guarantv FSB 09/30/98-09/30/03 20 Heiahts of Texas, FSB 09/09/98-09/09/03 20 Local American Bank of Tulsa, FSB 12/29/93-d IO Merabank Texas, FSB 06;22;98-06/22/03 20 MidAmerica SB. FSB 12/12/88-12/12/94 e Pacific Southwest Bank, FSB 12/29/88-12129103 20 Southwest SA 05131i98-05i31103 -_I__ 50 Texas Trust SB, FSB 12;29;93- 12;29;03 20 United SA of Texas. FSB 12/30/88-12129104 15 aAll agreements which provided FSLIC (now FDIC) with equity rights are included, even if not in our judgmentally selected sample of 20 agreements, FDIC would own equity in the institution listed or a parent/holding company of that institution. bPeriod during which FDIC can exercise its option to purchase stock or other equity investment at a set price. CExercise period restricted to 10th anniversary date or December 28, 2003, if extended for 5 years dExercise period terminates at time of first exercise or surrender of warrants. BFifty percent ownership if warrants exercised during first 18 months; 20 percent thereafter Source: FDIC records Page 30 GAO/AFMD-!M-81 Thrift Resolutions . Appe*m lb&jor Provido~ of FBLIC’s 1088 and 1989 Aseletanee Agreements Table 111.4:Forbearances Granted to Selected Acquiring Institutions Receiving Assistance Type of forbearance granted0 Loans to Institution receiving Equi Service Thrift one Asset assistanceb ..-I”.-....- _... _-...--_l____ Capital Liquidity rls2 corporation lender borrower Accounting classification Arn$r;an Federal Bank, - -..._..*-_.-._~- .---. X X X X X X X AmWest . SA.._ _.... _-~ X X X X X X X Beach _._ FSLA, SB, FSB .--- X Beverly t-Ii& FSB X X X X X X X Bluebonnet ,_I _.. _SE, FSB ___.-_.--- X X X X X X Eureka FSLA X X X First ,,_ Gibraltar _ _.. Bank, _- FSB X X X X X X X FrF;;;Federal Bancorp, -- _ -. . .._..--.._ -_-_ X X X X X X Heights .-...__ - of Texas, . - . FSB X X X X X X X Merabank -. . _ Texas, FSB ._.- --_--- X X X X X X X X New West FSLA/ Amencan _ . ..~SB, FA . ..._. X X X X X X X Pacific Southwest Bank, FSB southwest SA.- ..---_--_-_-__ xX X X X X X X X X X X Sunbelt Savings, suDerior FSBc Bank.Fse-- X X X X X X X X Texas Trust SB, FSB X X X X X X X X ~- UnIted SA of ~~x~s~l%%-- X X X X X X _ ?&stern .F$LA X X X X X %ee appendix I for further explanation of these forbearances. Other forbearances may have been granted to the institutions in connection with the assistance agreements. This summary only indicates if any of these eight forbearances were included. bAuthoritative documentation of forbearances for two assistance agreements was not available; there. fore, only 18 of the 20 agreements in our judgmental sample are included in this table. CSunbelt Savings, FSB, was in conservatorship at July 31, 1990. Source: Office of Thrift Supervision documents Page 31 GAO/AFMD9O-81 Thrift Resolutions PW izlkl and ProjectedCashPaymentsas of l March 31,199O Dollars In millions -- Projected FSLIC’s Pay YE% cash FIX’s initial total throu 1 h payments revised tcoJt; cost March 1, a ter March Institution receiving_-_.-..-_ assistance _.-.--. estimates 1990 31,199o -- estimates’ American Federal Bank, FSB $2,399.2 $489.9 $2553.0 $3,042.9 --___ AmWest SA 2,625.2 294.3 2,426.7 -___________..... 2,721 .O -__- Beach FSLA, SB, FSB 1,906.O 108.7 1,492.6 ~~~-.. 1,601.3 Beverly Hills FSB 1,769.6 156.9 1507.8 1,664.7 Bluebonnet SB, FSB 3.377.7 221.6 3,072.g ___.- 3,294.; Eureka FSLA- 269.6 401.6 69.9 471.5 Frrsl Gibraltar Bank, FSB 8,890.7 924.7 8,583.3 9,508.O Frrst Natronwrde FSBb ..___- 2,802.7 160.2 2,082.7 -____-- -. 2,242.g Franklin Federal Bankcorp, a FSB ...___ 1,872.2 206.8 - 1,510.g 1,717.7 --- Guaranty FSB 3,325.0 364.1 3,006.l 3,370.2 Heights of Texas, FSB -.- ~-.___-- ____- 1,029.7 90.4 668.0 --___- 758.4 Merabank Texas, FSB 1,628.g 150.6 1,406.8 ---- 1,557.4 New West FSLA/AmericanSB, FA ~~-.. --. 1,699.O 273.7 4,978.8 5,252.5 _- Paciftc Southwest Bank, FSB ~~- -~-- 1.282.4 127.8 1a303.6 1,431.4 Southwest SA 31727.3 711.3 53350.0__-- 6,061.3 Sunbelt Savings, FSBC 11,421 .O 1,167.l 9,062.8 10,229.g Superior Bank FSB .-._____ 538.1 110.7 533.8 _-___- 644.5 Texas Trust SB, FSB 657.3 94.0 628.2 722.2 United SA of Texas, FSB --___ 2,201.g 417.2 1.866.5 2,283.7 . ...--____ Western FSLA 695.8 192.4 -. 647.5 ..____ 839.9 Total selected agreements $54,119.3 $6,664.0 $52,751.9 959,415.g Other 1988 and 1989 agreements __--_--___---.. 7,733.4 2,345.8 5,276.8 7,622.5 Total for All 1966 and 1969 Agreements $61,652.7 $9,009.6 $56,026.7 $67,036.4 Legend FA = Federal Association FB = Federal Bank FSA = Federal Savings Association FSB = Federal Savings Bank FSLA = Federal Savings and Loan Association SA f Savings Association SB = Savings Bank SLA = Savings and Loan Association aAs of March 31, 1990. %stitutions currently receiving assistance under this assistance agreement are Columbia, a FSLA; Pathway Financial, a FA; and Cardinal FSB. ‘Sunbelt Savings, FSB, was in conservatorship at July 31, 1990 Source: FDIC records Page 32 GAO/AFMD-90-81 Thrift Resolutions Apponddx V Major Contributors to This Report WI David Grindstaff, Assistant Director Accounting and Thomas K. Bradshaw, Audit Manager Financial Management vera M. Seekins, Accountant-in-Charge Division, Washington, Barbara E. Billingsley, Staff Accountant Kristin R. Wilson, Staff Accountant D.C. Christina L. Quattrociocchi, Staff Accountant (917487) Page 33 GAO/AFM.D-SO-31 Thrift Resolutions i . -- Orctt~ring Inforruat.ion The first five copies of each GAO repor are free, Additional copit*s are $2 each. Orders should he sent to the following address, ~CCOIII- pauicd by a check or rnon~y order made out t,o the Superirrt~rldeI~t of Documents, when necessary. Orders for 100 or more copies to be mailed t.0 a single address are discounted 25 pf3cent.. I:.S. Gent~ral Accounting Office I’.(). 130x 6015 (;ait.hc~rsburg, MI) 20877 Ortit*rs nliky also he pla~<l by calling (202) 2756241.
Thrift Resolutions: Estimated Costs of FSLIC's 1988 and 1989 Assistance Agreements Subject to Change
Published by the Government Accountability Office on 1990-09-13.
Below is a raw (and likely hideous) rendition of the original report. (PDF)