DD&F has developed a unique expertise in failed bank loss share agreements and, more importantly, in loss share buyouts. Using DD&F’s hands-on knowledge of the loss share termination process, in most cases we are able to significantly reduce the Bank’s True-Up liability and seamlessly guide our clients through the termination process.
If your Bank has one or more Shared Loss Agreements (“SLA’s”) and is ready to pursue an early termination, we can work with your loss share team to analyze your options with the FDIC. Our analysis reviews your historic loss share filings, the status of your indemnification asset and any related True-Up payments that may be due with the termination.
Although the FDIC has identified and contacted certain acquirers as candidates for early termination of their SLAs, not all banks are aware of the process. To be eligible to terminate your agreements, you should meet two criteria:
• The acquirers should have Single Family and/or Commercial Shared Loss Agreements that are less than $200 million each
• The estimated consideration for the termination of both Agreements will not exceed $20 million
The above criteria do not apply if you are making a payment to the FDIC. On the other hand, in recent months we have found the FDIC to be much more flexible if you are considering the buyout of combined multiple loss share agreements.
The Process for Your Bank
Once a buyout range is established, we work closely with your management to craft a letter to the FDIC expressing your interest in terminating the SLA and providing support for your position. Our letter provides the FDIC with an estimate of the consideration proposed by your Bank for the termination of the Agreements (the “Termination Amount”) which represents the amount the FDIC would pay to your Bank (or your Bank would pay to the FDIC) in satisfaction of all remaining and anticipated payment obligations between the FDIC and your Bank under the Agreements.
Upon receipt of your Bank’s proposed Termination Amount, the FDIC will conduct a reasonableness test to determine if the offer merits further consideration. If the FDIC determines that your Bank’s proposed Termination Amount is not reasonable, the FDIC will not move forward with the early termination process for your Bank’s Agreements and will continue to honor the existing Agreements. In recent months, the FDIC has expedited its initial review and is responding to us within five to seven days of submission.
The FDIC’s Process
If the proposed Termination Amount is determined to be reasonable, the FDIC will hire a valuation contractor (referred to by the FDIC as a Financial Advisor or “FA”) to complete an onsite asset valuation report (or “AVR” as it is called). When the valuation contractor is hired, the FDIC and the FA will contact your bank to make arrangements for the visitation, which would be scheduled as soon as possible depending on resource availability of both your Bank and the FA.
The FA will prepare an AVR that
• Estimates future losses over the remaining terms of the Agreements based on the current performance of the asset portfolio;
• Because the FA values active portfolios, losses or impairments are recognized in the loss rates determined by market conditions and loss assumptions based on the expected time for resolution;
• Losses include the costs of resolution such as legal costs, carrying costs, and sale and broker costs; and
• Future recoveries are based on the Bank’s records on charged-down or charged-off assets.
The aggregate amount of these analyses will be included in the FDIC’s termination evaluation analysis. If your Bank’s proposed Termination Amount is in line with (or at least reasonably close to) the AVR and their internal analysis, the FDIC will continue with the early termination process.
At no time will the FDIC disclose the results of its early termination analysis with your Bank, nor will the FDIC negotiate with the Bank towards a mutually acceptable Termination Amount. However, the FDIC may suggest areas your Bank might have overlooked or that you should address in the analysis. It is always up to your Bank as to whether or not you adjust your Termination Amount. The bottom line is that the initial offer and subsequent adjustments provided by your Bank must be acceptable to the FDIC.
Should your Bank’s offer be acceptable, the FDIC will request its Risk Sharing Asset Management (“RSAM”) group to complete a final loss share compliance review and ask your Bank to prepare pro-forma financial statements that indicate the financial effect of the SLA termination. The financials must reflect the exclusion of the indemnification asset and the True-Up and include a schedule reflecting the effect the termination will have on your Bank’s classified asset ratio.
The FDIC’s Risk Management Supervision (“RMS”) staff, as well as your primary state or federal regulator, will review the pro formas to assess the termination’s impact on your Bank’s financial condition. RMS and other regulatory approval is required for the termination to proceed.
Notwithstanding the agreement between the parties and the regulatory agreement, the FDIC RSAM group’s final compliance review on the covered asset portfolio must be satisfactorily completed and all findings, disputes and issues must be resolved before finalizing the termination.
Should there be no impediments to termination, the FDIC will provide a draft termination agreement for your Bank to review. Upon signature of the termination agreement as provided by the FDIC and the wiring of funds, the Agreements will be terminated.
Experience has shown that the full termination process from start to finish takes months, and may vary greatly depending on the number of issues that arise during the process.
In the Meantime
During the termination process, your Bank should continue to comply with all requirements of the Agreements, including the submission of any monthly or quarterly loss claim certificates. Once the valuation is completed and the proposed Termination Amount is determined to be acceptable, the FDIC legal team will provide you with the final termination agreement. From that point we estimate approximately 30 days to complete the process, including regulatory review and approval. However, it could take more or less time depending on the complexity of the termination and any issues that arise.
Please note that pursuing early termination is strictly voluntary, and your Bank is under no obligation to participate in an early termination effort. If participation is not elected, all rights and obligations under the Agreements will continue in full effect.
The Experience and Knowledge to Help
DD&F’s experience in failed bank acquisitions and their related shared loss agreements provides us with the expertise needed to guide you through the early termination process. DD&F:
• Assisted our clients with bidding on over 200 failed institutions, and successfully assisted with acquiring 48 failed institutions
• Completed one of the first loss share buyouts with the FDIC
• Subsequently agreed on buyouts on an additional 91 receiverships
• Uncovered True-Up savings that averaged $4.2 million or roughly 30% per receivership
• Is in the process of filing buyouts on an additional three receiverships
How Do I Move Forward?
If you would like to explore this opportunity further, give us a call. We look forward to your thoughts and questions about this timely opportunity for your Bank. We are happy to provide references and personally meet to help you understand your options and to provide you a no-cost, no-obligation estimate of how much we can save you on your True-Up liability.
