Failed-bank buyers are ready to remove the safety net, and in many cases the Federal Deposit Insurance Corp. is happy to do it.
In the years following the economic collapse of 2008, the FDIC, as the receiver of failed banks, agreed to share in potential losses with strong banks willing to step up and absorb the failed ones. The agency thought it would be better to have the private sector try to work out the assets, but the buyers didn't want to be burned by others' mistakes.
The program is widely considered a success, but the oversight demands on the acquirers have been burdensome. The agreements call for banks to be able to submit claims for up to five years for commercial assets. As a result the earliest loss-share deals are nearing expiration.
Plenty of time remains on other agreements, but some banks would rather settle up early with the FDIC for remaining losses and move on. EverBank Financial (EVER) in Jacksonville, Fla., appears to be one of them.
The $17.6 billion-asset company reached an agreement this week with the FDIC to terminate loss-sharing related to its May 2010 acquisition of Bank of Florida. That move is a likely harbinger of further wind-downs in the next few years, followers of the program say.
"I'm reading this as a sign of things to come and a sign that the FDIC might be open to bigger terminations," says Pat Jackson, CEO of Sabal Financial, an advisory firm in Newport Beach, Calif.
EverBank's situation is unique in some ways. Its total loss-share agreements covered $1.2 billion in assets, but it never submitted any claims. In fact, EverBank is paying the FDIC $48 million to terminate the agreement.
The payout is for what's called the "true-up," a structure the FDIC first used when BB&T (BBT) acquired the failed Colonial Bank in 2009. Essentially, failed-bank bidders estimate the value and future performance of the loans at the time of acquisition, and the FDIC covers the difference. The true-up kicks in if the loans perform better than expected.
EverBank officials declined to comment for this story.
Since EverBank was not submitting any claims but still having to commit resources to oversee the program, it made sense to terminate it, says Jefferson Harralson, an analyst at Keefe, Bruyette & Woods. Harralson, who covers several failed-bank acquirers in the Southeast, says others might be curious about a wind-down but their experiences with the process will vary.
"It is probably a lot harder negotiation when the FDIC is writing the check, versus the bank," Harralson says.
In many cases, the FDIC seeks the settlement. The oversight of loss-sharing programs is intense and time-consuming for both sides, so as the amount in any particular portfolio decreases it makes sense for the bank and the FDIC to look for a way to wrap up their relationship, says Pamela Farwig, the FDIC's deputy director for the division of resolutions and receiverships.
The number of banks looking to wind down their loss-share agreements is increasing, Farwig says, but the push is driven by a waning amount of covered assets not the approaching claims deadlines.
The FDIC has an early-termination program for acquiring banks with less than $50 million of outstanding covered loans, and where the FDIC's share of future losses is no more than $10 million. Typically acquiring banks have two agreements one for commercial assets and one for residential, and each agreement is settled individually based on those criteria.
The FDIC says there are currently 82 banks eligible for early termination, and it has approached 67 banks. So far, 33 agreements have been terminated.
"Everyone we approach is not going to agree," Farwig says. "If everyone agreed, it would probably mean we are offering way too much money."
Even if the FDIC approaches a bank, it's still the bank's responsibility to make the FDIC an offer. The FDIC works with third-party advisors to consider the embedded losses, checks with its supervisory counterparts to make sure this is in the bank's best interest and weighs the decision against its potential for future recoveries. (Banks have five years to submit commercial claims and the FDIC has eight years to collect on commercial recoveries. For residential assets, there is a 10-year window for claims and recoveries.)
"To the extent that the number is greater than expected future losses or gains, we will take the deal," Farwig says.
Of the $216 billion in assets covered by loss-share at inception, there was $85 billion left as of Sept. 30. That decline represents $26 billion in claims for losses and the natural runoff of loans.
The reasons why a bank might want to end the protection are varied. In parts of the country where the economic improvement has been strongest, banks might no longer see the need for it. Others want the ability to be more creative in the ways to work out the loans. In this cost-cutting environment, others might see the overhead involved as ripe for trimming.
Some banks may be torn over their options, says Jackson. On one hand, wrapping up a loss-share agreement frees them to focus on other priorities, but letting go of their backstop can be a jarring experience.
"I think some are thinking, 'we don't know what we are dealing with.' We need to get clarity on what we currently have and what the losses are going to be," Jackson says.