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FDIC Taps Open-Bank Deal to Replenish Deposit Insurance Fund

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The Federal Deposit Insurance Corp. has found another way to partially replenish the Deposit Insurance Fund by turning to an open bank deal to add to the coffer.

The FDIC late last month disclosed details of an agreement it made with Union Bank in Kansas City, Mo., that called for the agency to receive 85% of the proceeds of the $456 million-asset bank's sale to Arvest Bank in Fayetteville, Ark.

The agreement was designed to satisfy a cross-guarantee liability claim against Union Bank for the 2011 failure of First National Bank of Olathe in Kansas.

First National's holding company was also the majority owner of Union Bank's holding company. According to the cross-guaranty agreement, that relationship was close enough that the FDIC could hold Union Bank liable for the $120 million that First National's failure cost the Deposit Insurance Fund.

The case is interesting, but not surprising, lawyers say. Congress empowered the FDIC through the Financial Institutions, Reform, Recovery and Enforcement Act of 1989 to recoup losses by going after affiliated institutions.

Though the relationship between First National and Union Bank was simple, lawyers say that the case is a reminder that banks and their large shareholders should be aware of similar exposures.

"In the situation where we are trying to determine control, it is important to know if you have less than a majority stake and you need to confirm that with the Federal Reserve," says James J. McAlpin Jr., a partner at Bryan Cave in Atlanta.

"There are ways to get out of a controlling position, but you have to take those steps in advance," McAlpin says.

There are other instances where the FDIC has invoked the cross-guarantee liability, including the 2009 failure of FBOP in Chicago. In that situation, the FDIC seized all of FBOP's nine banks even though several were not undercapitalized.

Late last year, ICB Financial in Ontario, Calif., agreed to pay the FDIC $500,000 for the failure of a Florida bank because an investment company owned large stakes in the banks.

The FDIC Board has also given the agency permission to file 68 lawsuits against 576 bank executives and directors to recoup losses to the Fund. As of July, the FDIC has filed 32 cases.

In the case of Union Bank, it is unclear how much the FDIC recouped on the deal. The order didn't specify an amount, and the FDIC declined to comment beyond the terms of disclosure. The banks involved did not disclose the deal terms when it was announced in January.

The $13.6 billion-asset Arvest completed the acquisition in June. Mark Larrabee, Arvest's CEO, was unavailable for comment.

The amount The FDIC's deal brought in was likely a small fraction of the projected $120 million loss, says Michael Iannaccone, the president of MDI Investments in Chicago. According to data from the FDIC, Union Bank was undercapitalized at March 31 and more than 14% of its assets were nonperforming.

"Even during great times, a bank that size would only fetch $80 [million] to $90 million," Iannaccone says. Considering its size, capital and credit involved, "maybe they paid $10 million or so just to get the deposits."

The notion of the FDIC getting an estimated $8.5 million, or seven cents on the dollar, is not exactly a bad deal, though, industry observers say.

"I don't think things would have gotten any better for the bank," Iannaccone says. "So the FDIC is getting $8 million today versus zero and the Arkansas bank is taking over."

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