FDIC-Assisted Asset Sales Leveraging Opportunities and Minimizing - - PowerPoint PPT Presentation

presents

FDIC-Assisted Asset Sales

Leveraging Opportunities and Minimizing Risks in FDIC Loan Sales

presents

Leveraging Opportunities and Minimizing Risks in FDIC Loan Sales and Loss-Share Transactions

A Live 90-Minute Teleconference/Webinar with Interactive Q&A

Today's panel features: Mark C. Kanaly, Partner, Alston & Bird, Atlanta

• C. Robert Monroe, Partner, Stinson Morrison Hecker, Kansas City, Mo.

A Live 90-Minute Teleconference/Webinar with Interactive Q&A

, , , y, Steve Stone, General Counsel, Community & Southern Bank, Carrollton, Georgia

Wednesday, June 30, 2010 The conference begins at: The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific 10 am Pacific

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Failed Bank Bid Process Failed Bank Bid Process

Presenter

• C. Robert Monroe, Chairman, Financial Services

Division, Stinson Morrison Hecker LLP 1201 Walnut, Kansas City, Missouri , y, 816.691.3351 bmonroe@stinson.com

5

Bid Process

• History

History

• The resolution process

Failed bank deal structures

• Failed bank deal structures
• Legal issues
• Linked Bids
• Post-failure opportunities
• s

a u e oppo u es

6

A Little History

• Between 1930 & 1933, more than

Between 1930 & 1933, more than 9,000 of the nation’s 24,000 banks failed failed

• FDIC created in 1933

18 727 banks and thrifts in 1979

• 18,727 banks and thrifts in 1979
• 2,912 banks and thrifts failed from

1980 1994 1980-1994

• 11,070 banks and thrifts in 1995

7

Total Failures (Banks and S&L’s) 1980 - 1994 (Banks and S&L s) 1980 1994

600 400 500 sactions 200 300 mber of Trans 100 Nu

Totals 22 40 119 99 106 180 204 262 470 534 382 271 181 50 15 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Source: FDIC Failures and Assistance Transactions Source: FDIC Failures and Assistance Transactions.

8

Total Failures (Banks and S&L’s) 2005 - 2009 (Banks and S&L s) 2005 2009

150 120 actions 60 90 mber of Transa 30 Num

Totals 3 25 140 84 2005 2006 2007 2008 2009 2010 il d i i Source: FDIC Failures and Assistance Transactions.

9

2009 Failures by Loan Mix

12/31/08 Loan Mix for 2009 Failed Banks 12/31/08 Loan Mix for All Profitable Banks for the

25.0%

YTD 09/09 Period

5.1% 10.1% 56.3% 18.7% 84.8%

Loan Mix information based on median loan mix data as of 12/31/2008. C&D Loans = Construction & Development. O h C G id O O i d C l if il d C

C&D Loans Other CRE Guidance Loans All Other C&D Loans Other CRE Guidance Loans All Other

Other CRE Guidance Loans = Non-Owner Occupied CRE Loans + Multifamily + Unsecured CRE Loans. 10

Warning: Pay Attention to the “Texas” Ratio

• E l

i i l f b k f il i k

• Early warning signal for bank failure risk
• Texas Ratio = NPA’s/Capital (tangible equity + ALLL)
• Texas Ratio > 100% = elevated risk of failure
• The 165 bank failures in 2008 and 2009 reported

di T i f 51% f i a median Texas ratio of 51% four quarters prior to failure

Source: SNL

11

Texas Ratio Migration (Median Statistics) All 2008 & 2009 Bank Failures All 2008 & 2009 Bank Failures

271.4%

300.0% 200.0% 250.0%

108.5% 168.1%

100 0% 150.0%

13.8% 19.8% 29.9% 51.3% 71.6%

50.0% 100.0% 0.0%

MRQ-7 MRQ-6 MRQ-5 MRQ-4 MRQ-3 MRQ-2 MRQ-1 MRQ

* i / ( ibl i )

MOST RECENT QUARTER PRIOR TO FAILURE

*Texas Ratio: NPAs+90Days PD / (Tangible Equity + LLR).

12

Interested in Becoming a Bidder for a Failed Bank Failed Bank

• Register with FDIC (www2.fdicconnect.gov)
• Establish your own failed bank team
• Determine what you want (size, product mix and geography for

a target, etc.) a target, etc.)

• Meet with your primary regulators to determine if you are

approvable

• Know supervisory criteria to become a bidder (e.g., CAMELS 1
• r 2, CAMELS 3 case-by-case, CRA rating, BSA rating, etc.)
• Know total asset size and geographic criteria (e g you must
• Know total asset size and geographic criteria (e.g., you must

have double core deposits of failing bank or higher if not in your market, etc.)

• B

d d bl t t i kl

• Be ready and able to react quickly

13

Private Equity Acquirers

• Goal to attract non-traditional investors, with appropriate

f d safeguards

• Regulations require adequate capital, stability in

management, prudent lending and business strategies

• Capital support – 10% leverage ratio first three years
• Cross guarantees – apply if 80% owned by common investors
• Transactions with affiliates – new extension of credit prohibited for

p 10%+ investor

• Continuity of investment – three-year holding period requirement

14

Failed Bank Acquisition Opportunities

Recommendations

• Your Failed Bank Team Needs to Be Prepared

― Due diligence (credit)

I i ( h l k i d PR h ― Integration (technology; marketing and PR; human resources) ― Legal g ― Financial advisory ― Accounting

• Identify Target Banks

― Texas ratio

― Tangible common equity/Tier 1 leverage ratio g b e co

• equ y/

e eve ge

• ― NPAs/Assets

― Pre-provision net revenue/average assets

15

Resolutions Timeline (1-2 Months)

Action Timing

1. Interested acquirers register with FDIC Before process 2. Primary regulator sends FDIC a failing notice Day 1 3. FDIC assembles information/transaction structure 1-2 weeks 4. FDIC e-mails potential bidders (interested acquirers sign confidentiality agreement) 1-2 weeks 5. Due diligence (learn how to use IntraLinks) team allowed 2-3 days 2-8 weeks 6. Bidder Board must adopt resolutions When bid is submitted 7. File regulatory application With bid 8 Bids due Monday/Tuesday 8. Bids due Monday/Tuesday 9. Winning bidder signs documents Wednesday/Thursday

• 10. Closing date

Friday

16

The Resolution Process

• FDIC has “virtually complete responsibility for resolving

failed federally insured depository institutions” with “expansive powers to ensure the efficiency of the process”

• Least cost test
• Least cost test
• We won – now what?
• Assemble your team (public relations component of team
• Assemble your team (public relations component of team

very important now)

• Employment Agency

p y g y

• Sign P&A Agreement (know excluded assets because you
• wn the rest)
• Be ready to assemble your team on site for Black Friday

17

FDIC Action on “Black Friday”

• A

t l f i d l d

• Assumes control of premises, records, loans and
• ther assets
• Posts notices
• Posts notices
• Changes locks
• C

h h

• Counts the cash
• Resolution team may number 50-100 people for a

“typical” community bank “typical” community bank

18

Priority of Payment

1st Ad i i t ti f FDIC 1st Administrative expenses of FDIC 2nd Insured Depositors 3rd Other general/senior liabilities 4th Subordinated obligations 5th Shareholders are last in line and nothing is left

19

Legal Issues

• Anti-Injunction 12 USC 1821(j)
• S

f di 12 USC 1821( )(13)(C)(i)

• Stay of remedies 12 USC 1821(e)(13)(C)(i)
• Side agreements 12 USC 1823(e)
• Contract repudiation/enforcement 12 USC 1821(e)(1)
• Contract repudiation/enforcement 12 USC 1821(e)(1)
• Removal 12 USC 1819(b)(2)(B)
• Exemptions 12 USC 1821(b)

p ( )

• State and local taxes levy, garnishment, attachment
• r foreclosure
• Penalties or fines
• Improperly documented agreements unenforceable

12 USC 1821(e)

20

Failed Bank Deal Structures

• P&A (P

h f A t d A ti f Li biliti )

• P&A (Purchase of Assets and Assumption of Liabilities)
• Deposit Payoff
• Open Bank Assistance (“OBA”)
• 2009 Failed Bank Structures
• P&A All Deposits with Loss Share

90

• P&A All Deposits without Loss Share

36

• P&A Insured Deposits Only without Loss Share

2 D it P t 11

• Deposit Payout

11

• Insured Deposit Transfer

1

21

Failed Bank Deal Structures

Linked Bids

• Linked Bids

22

Failed Bank Deal Structures

• Deposit payoff
• No bidders or
• No bidders, or
• Discount on assets is so great that a payoff is the “least cost

alternative”

• FDIC pays off depositors directly

p y p y

• Open bank assistance
• Technically still available, but not used anymore

FDI A t f 1993 hibit d FDIC f i i t

• FDI Act of 1993 prohibited FDIC from using insurance money to

benefit any shareholder of an institution that had failed or was in danger of failing

• Bridge bank
• Temporary bank created by FDIC to facilitate a resolution

23

Failed Bank Deal Structures

P ti ll ki th 2 b i t t t i Practically speaking . . . there are 2 basic structures to acquire a failed bank… and both are P&A transactions …and both are P&A transactions

• Straight P&A with no loss sharing
• 36% of 2009 bank failures
• P&A with loss sharing
• 64% of 2009 bank failures

24

Straight P&A

• A

d it ( ll i d d it l )

• Assume deposits (all or insured deposits only)
• Purchase assets (optional loan pools)
• Bid Amount:
• Bid Amount:
• Deposit Premium
• Discount Bid for Loans/Assets
• Depending on deal structure bid form may ask for a combined Bid

Depending on deal structure, bid form may ask for a combined Bid Amount

• Reconcile cash at closing
• Option to purchase banking premises at “fair market

value”

25

Settlement Statement

Deposits assumed $100,000 Loans/Assets purchased ($40,000) Deposit premium ($1,000) Loan/Asset discount $5,000 Cash due to purchaser $64,000 Option to purchase premises at “fair market value” is a post-closing transaction

26

P&A Transaction - The Legal Document

• P&AA

t

• P&A Agreement
• Generally not negotiable
• Key legal terms
• Key legal risks

27

P&A with Loss Sharing Agreement

Loss Sharing Framework

• “First Loss Tranche” – typically zero
• “St t d Th

h ld” ifi d d ll t b

• “Stated Threshold” – a specified dollar amount by

FDIC (has tended to equal about 25% of loans purchased) Mostly not in play now.

• 80% of losses covered up to the assets minus expected loss
• Loss share typically extends for 5 years on non-single
• Loss share typically extends for 5 years on non single

family loans and 10 years on single family loans

28

Loss Share Rationale

• Regulator Benefits
• Less costly than assuming a failed bank’s assets and liquidating

them over time

• Keeps troubled assets in private sector

p p

• Accelerates resolution
• Acquirer Benefits

C di l i li i d

• Credit loss exposure is limited
• Infrastructure already in place to service & manage assets
• Projected IRR at very high levels
• Potential increase in capital through creation of negative goodwill

29

Accounting Considerations

• Statement of Financial Accounting Standards No 141R
• Statement of Financial Accounting Standards No. 141R,

Business Combinations (SFAS 141R)

• Acquisition date and post-acquisition date issues

q p q

• Acquirer must record purchased loans, other assets and

liabilities at “fair value” or the amount that would be received upon sale in a market transaction

• Fair value of loss share indemnification accounted for

separatel separately

• Interagency Guidance issued June 7, 2010

30

Post Failure Opportunities

• Purchase loans/REO directly from FDIC
• Purchase branch real property
• Acquire subsidiary of failed bank
• Acquire subsidiary of failed bank
• Hire key employees of failed bank (consider

restrictions in confidentiality agreement) y g )

• Pursue loan and deposit customers of failed bank

(consider restrictions in confidentiality agreement)

31

Evolving Issues for Acquirers of Failed Banks

June 30 2010 June 30, 2010

Mark Kanaly Steve Stone Alston & Bird LLP (404) 881-7975 mark.kanaly@alston.com Community & Southern Bank sstone@thecsbank.com

Overview

I. Loss-Share Agreements II. Evolving Strategies of Acquiring Banks III Evolving FDIC Resolution Process

• III. Evolving FDIC Resolution Process
• IV. Conclusions

33

Loss-Share Agreements

• Typical Terms
• Shared-Loss Arrangements
• Administration of Assets

i i i i i i ifi i

• Limitations on Negotiability and Indemnification
• Standard terms, very limited negotiation
• Indemnification

Fi t L T h

• First Loss Tranche
• Asset premium (discount) / Deposit premium
• Originally used to determine amount of losses to be incurred before loss-sharing

Th h ld A t ( bid t )

• Threshold Amounts (new bid parameters)
• Intrinsic loss estimates
• Influence on bidding process and strategy

34

Loss-Share Agreements

• Difference Among Loan Types
• Single Family Residential
• Commercial and Other Assets
• Monthly Reporting Requirements
• Certificates
• Data reports
• Audit Requirements
• Annual reports (independent public accountant)
• Potential regulatory audit

g y

• Loan Modification
• Loan modification program
• Limitations

Limitations

35

Evolving Strategies of Acquiring Banks

• Possibility of Third-party Outsourcing of Loan

Administration

• Available under loss-share agreements?
• Regulatory approval
• LLC Subsidiary Structures
• Transfer “bad assets” to subsidiary
• Goals: (i) Limit certain liabilities (ii) Improve marketing/sales of real estate

(iii) Improve public perception

• Limitations on Transfers of Economic Interest
• No increases in shares outstanding by more than 9%
• Includes shares of subsidiaries holding loss-sharing assets (prevents alternative structures)
• No sales by any shareholder (or group acting in concert) of more than 9%

FDIC l i d

• FDIC approval required

36

Evolving Strategies of Acquiring Banks

• Other General Observations / Common Issues
• Appraisals – fair value measurement / carrying costs
• Comprehensive loan and OREO diligence in light of new bid structure and

increasing competition for desirable targets

• Multiple bids by potential acquirers
• Special Asset / Credit Administration process post-failure not to be under-

estimated

37

Evolving FDIC Resolution Process

• More Fluid / Flexible Resolution Process
• Trends in Bidding and Deal Structure
• Increased flexibility and creativity with bids

Increased flexibility and creativity with bids

• Linked bids, modified bids, etc.
• Impact on Investors
• Less predictability on timing

Less predictability on timing

• Less certainty around available assets
• More difficult to value potential returns
• Change in Terms of Loss-share Agreements

Change in Terms of Loss-share Agreements

• Threshold percentages for loss-sharing
• Available loss-share assets

38

Evolving FDIC Resolution Process

• Future Changes in Strategies of Acquiring Banks
• Economic/Accounting Considerations Going Forward

Eff t f Fi i l R f L i l ti A i i B k

• Effect of Financial Reform Legislation on Acquiring Banks

39

Conclusions

• Current window of opportunity is closing
• Competition for desirable targets continues to increase
• Many large franchises are already gone but lots of small banks left
• Many large franchises are already gone, but lots of small banks left
• Diligence process and bid parameters allow bidders to

refine their analysis and submit more precise bids

• Have a well defined plan for closing weekend
• First 90 days and first 180 days (HR, IT, Systems Conversions, etc.)
• Terrific opportunity for existing banks but must be prepared
• Terrific opportunity for existing banks, but must be prepared.
• Unclear what the future will hold

40