A Beginners Guide to The Early Termination of Loss Share

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1 Banking Brief November 2014 A Beginners Guide to The Early Termination of Loss Share As you may have heard, the FDIC has identified certain acquirers as candidates for early termination of their Shared - Loss Agreements ( SLAs ). Generally those contacted are lower balance loss share receiverships and must meet two eligibility criteria: The acquirers should have Single Family and/or Commercial Shared Loss Agreements that are less than $50 million each; and The estimated consideration for the termination of both Agreements will not exceed $10 million. The Process for your Bank. If the Shared Loss Agreements meet these criteria and your Bank is interested in pursuing early termination of your Agreements, we can work with your loss share team to prepare a letter to the FDIC expressing your interest in terminating the SLA.. Notwithstanding the size and payment parameters, if your Bank is going to have to pay the FDIC based on your analysis and true up, then the FDIC will also consider a buyback regardless of the size of the two portfolios. We are finding this to be more common as losses have been much lower than originally anticipated and most banks have fully accrued the true up provisions. Based on your Bank s internal analysis, we provide the FDIC with an estimate of the consideration proposed by the Bank for the termination of the Agreements (the "Termination Amount") which represents the amount FDIC would pay to the Bank (or the Bank would pay to the FDIC) in satisfaction of all remaining payment obligations between the FDIC and the Bank under the Agreements. Upon receipt of the Bank's proposed Termination Amount, the FDIC will conduct a reasonableness test to determine if the offer merits further consideration by the FDIC. If the FDIC determines that the Bank's proposed Termination Amount is not reasonable, the FDIC will not move forward with the early termination process for the Bank's Agreements and will continue to honor the existing agreements. 1

2 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 Financial Advisor or FA ) to complete an onsite visitation. When the valuation contractor is hired, the FDIC will contact you to make arrangements for the visitation, which would be scheduled as soon as possible depending on resource availability of both the Bank and the valuation contractor. The asset valuation review (AVR) will: Estimate projected cumulative losses over the remaining life of the Agreements; and Analyze the estimated future recoveries from charged down or charged-off assets. The aggregate amount of these analyses will be included in FDIC's termination evaluation analysis. See below for additional insight into the AVR process. If the Bank s proposed Termination Amount is in line with (or at least reasonably close to) the AVR and analysis (in general, that the Bank's offer is less than the FDIC's internal "take-out" price), the FDIC will continue with the early termination process. Please note that at no time will the FDIC disclose the results of its early termination analysis with the Bank, nor will the FDIC negotiate with the Bank towards a mutually acceptable Termination Amount. The initial offer provided by the Bank must be acceptable by the FDIC or it will discontinue the early termination process. In the Meantime During the termination process, the 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 to the FDIC, they will provide you with a draft of the standard termination agreement. From that point we estimate approximately 90 days to complete the process, including regulatory review and approval. However, it could take less or more time depending on the complexity of the termination and issues that arise. Please note that pursuing early termination is strictly voluntary, and the 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. How Do I Move Forward? As mentioned above, if you decide to proceed with the FDIC, then they need to be notified of your intent. The following specifically outlines the process: 1. Letter Form. The request should be in the form of a letter. No specific letter or bid form must be used. A letter signed by the president of the Bank addressed to your loss share representative at the FDIC is acceptable. The offer should reference: 2

3 a. The specific agreements to be terminated. For example, the Single Family Shared Loss Agreement and the Non-Single Asset Shared Loss Agreement held between YOUR BANK and FDIC as Receiver for FAILED COMMUNITY BANK. b. Indicate the dollar amount the assuming institution is willing to accept (or pay) to terminate the Agreements. c. The as of date of the offer based on a quarterly certificate date. 2. Timeframe of Offer. The offer is effective as of the date it is provided to the FDIC. a. The assuming institution can, at any time, discontinue the termination process right up until the termination document is executed. b. If either party decides not to move forward with the termination, the FDIC is comfortable continuing on under the terms of the Agreements for the remainder of their terms. We estimate approximately 90 days to complete the process once a Termination Amount is determined. c. The Bank (as the acquiring institution) may submit documentation and/or assumptions related to its offer, but such documentation isn t required. On the other hand, DD&F highly recommends providing information on local markets, your past certificate history and most importantly, your recovery history including the process you follow to collect previously charged off or charged down credits. 3. Asset Valuation Review. The FDIC derives an internal take-out price against which it will compare the acquirer s offer, as summarized below. a. Upon receipt of the Bank s interest in participating in the loss share buyout process, the FDIC will engage a third-party Financial Advisor (FA) to conduct an asset valuation review or AVR on the covered assets. The valuation, which will be provided to the FDIC, will include an estimate of the remaining cumulative loss in the portfolio. b. To conduct the valuation, the FA will select a representative asset sample from the active loan list and ORE list for both the single family and non-single family portfolios, and ask the acquirer to pull those assets and have them available for review during an onsite visitation, to be arranged at a time acceptable to both parties. The FA usually spends less than one week on site. c. Using the cumulative loss estimate and other input factors (including any estimated recovery from the True Up provision and any estimated recovery on charge-offs) the FDIC will develop a take-out price representing the amount FDIC is willing to pay (or accept from the AI) to terminate the Agreements; 4. Final FDIC Process. When the AVR is fully reviewed by the Dallas loss share office and the FDIC s Washington staff has completed the FDIC s evaluation process, the FDIC will consider the acquirer s offer based on the follow criteria. a. If the offer is equal to or less than the FDIC s take-out price, the FDIC will tentatively accept the offer. 3

4 b. If the offer is more than the FDIC s take-out price, the termination process may or may not be discontinued, depending upon how close the take-out price is to the Bank s price. Under no circumstances will the FDIC negotiate the price. The take-out price calculated by the FDIC and the acquirer s offer must be equal to or less than the take-out price or the termination process will not proceed. If the FDIC Accepts. Should your Bank s offer be acceptable, the FDIC will request its RSAM Group to complete a final loss share compliance review and ask the Bank to prepare pro forma financial statements that reflect the termination. The statements must reflect the exclusion of the indemnification asset and the true up. The financials should also include a schedule reflecting the effect the termination will have on the Bank s classified asset ratio. The FDIC supervisory (RMS) staff, as well as the acquirer s primary federal regulator, will review the pro formas to assess the termination s impact on the acquirer s financial condition. Supervisory 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 to the acquirer for its review. Upon signature of the termination agreement as provided by the FDIC, 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. The Experience and Expertise to Help. DD&F s experience in failed bank acquisitions and their related shared loss agreements provides you with the expertise you need to guide you through the early termination process: Assisted our clients with bidding on over 200 failed institutions Successfully assisted with acquiring 44 failed institutions Negotiated and completed the first FDIC Loss Share buyout Please contact Randy Dennis at or rdennis@ddfconsulting.com if you have questions or would like to explore this opportunity further for your Bank. 4

5 About Us. DD&F has over 30 years of experience serving the financial services industry. Founded in 1993, DD&F Consulting Group is a full-service consulting company for the financial services industry at the state, regional and national levels, offering a wide range of services in the areas of Mergers & Acquisitions, Strategic & Regulatory Services, Risk Management and Bank Performance. Our mission is to make our clients successful and to that end, DD&F is anchored by a team of seasoned bank consultants providing clientfocused expertise you can trust. DD&F was ranked in the Top 20 nationally by SNL Financial in M&A deals for SNL recently released its rankings for M&A deals in 2013, with DD&F Consulting ranked as 20th in deal value and 16th in number of deals closed. In spite of the slowing of FDIC Assisted Acquisitions from previous years, DD&F closed M&A deals totaling $317.3 million in 2013 with one of its major deals being the largest in state merger in Arkansas banking history of Liberty Bank and Centennial Bank, owned by Home Bancshares. DD&F ranked in the Top 10 nationally by SNL Financial in Branch Acquisitions over the past 5 years. DD&F ranked as the #10 financial adviser in branch transactions over the past 5 years, closing 39 branches with total deposits transferred of $976 million. DD&F ranked in the Top 10 nationally by SNL Financial in Government Assisted Deals over the past 5 years. DD&F closed 37 government assisted deals totaling $11.1 billion in deposits since 2009, achieving the rank of 2nd in the nation by number of deals and 6th in the nation by total deposits. DD&F received the Achievement Award from the Arkansas Institute for Performance Excellence in Having progressively implemented principles of performance excellence in the delivery of our services to our clients over the past four years, DD&F was awarded the Achievement Award in 2014 by the Arkansas Institute for Performance Excellence. The Arkansas Institute for Performance Excellence administers the Governors Quality Award for the State of Arkansas. Based on the nationally recognized Baldridge Criteria for Performance Excellence, the Achievement Award is awarded to those organizations that have demonstrated significant progress in building sound and notable processes through their commitment and practice of quality principles to achieve performance excellence. In 2013, there were only three organizations in the State of Arkansas that were awarded the Achievement Award. DD&F was awarded the Arkansas Business of the Year for small businesses in 2006 by Arkansas Business magazine. 5