NCNB Tactic Seeks Sweeter U.S. Contract
NCNB Texas National Bank has severed its contract to manage $2.7 billion of troubled loans for the Federal Deposit Insurance Corp. because it is dissatisfied with the terms.
As a result, the FDIC put a new contract out for competitive bidding on Tuesday.
NCNB Texas plans to make a bid and is confident it will win the management pact at better terms than its existing arrangement, chairman Timothy P. Hartman said in an interview on Wednesday.
Fees for Workouts
Under such deals, the FDIC pays banks for working out troubled assets it inherits from failed institutions. In addition to having its expenses reimbursed, the manager is paid an incentive fee based on how much of the loans are paid back. The FDIC has paid NCNB Texas $77.2 million to date under the contract, the bank said.
The bank also manages about $13 billion in assets from failed savings and loans for the Resolution Trust Corp.
The Dallas-based bank told the FDIC last Friday that it would exercise an option in its 1988 contract to quit servicing the assets after three years. The agency was stuck with the troubled assets after it sold First RepublicBank Corp. to NCNB in July 1988.
As part of that deal, the FDIC and NCNB Texas separately pooled $6.2 billion of the most troubled assets from the failed bank.
The pool, which is carried on the books of NCNB Texas as an asset, eventually grew to $7.8 billion when NCNB Texas "put back" to the FDIC $1.6 billion more in troubled assets gleaned from the $21 billion portfolio it received when it purchased the failed institution.
NCNB Texas subsequently disposed of $5.1 billion of those distressed assets for the FDIC, leaving $2.7 billion outstanding.
Conference Scheduled
NCNB Texas will stop managing the assets on Nov. 22. New bids are due Sept. 26. The FDIC has scheduled a conference in Dallas on Sept. 13 to explain the job.
Companies submitting the best offers will be permitted to conduct due diligence on the assets during October. The agency hopes to award a new two-year contract by Nov. 1.
While the RTC has often done it, this marks the first time the FDIC will seek bids for the management of a failed institution's assets.
"The servicing was always tied to the acquisition," said one FDIC official. "This is going to be the first time that the corporation has gone out for bid on a portfolio of assets of this size."
Assets Kept on the Books
NCNB's arrangement is unusual because it actually keeps the troubled assets on its books, requiring it to provide funding for the assets. Under subsequent bailouts, that has not occurred.
Mr. Hartman said that in any new deal, NCNB Texas will no longer provide its own funding, because it's too expensive.
"We have forgone $75 million to $100 million in interest income that we could have earned on the deposits" from new loans with higher rates, Mr. Hartman said. Under the original deal, the FDIC reimbursed NCNB Texas for funding the troubled assets with its deposits at the average rate paid on its interest-bearing accounts.
"Our agreement was negotiated in early '88, before the concept of . . . awarding an asset manager any spread on the funding," he said. NCNB Texas lost money on that setup because it could have been lending out those deposits at a higher rate, Mr. Hartman said.
The remaining $2.7 billion in assets are not any harder to work out than the $5 billion NCNB Texas has already sold or collected, Mr. Hartman said.
Mr. Hartman was confident that NCNB Texas would win the bidding.
"If the FDIC awards us the bid, they save the transition cost," he said. "We're optimistic that we'll be awarded the bid."
