Financial Services Client Advisory Group
January, 2011
Acquisition of a Failed Bank’s Assets; The Law and Team Approach For The Commercial Loss Share Agreement
By: Harriet B. Alexson (714.384.6578)
halexson@bmkalaw.com
©2010. All Rights Reserved.
The purchase of a failed bank’s assets is a complicated regulatory matter requiring legal expertise. The structures for a purchase can be a whole bank purchase without loss sharing and a whole bank transaction with loss sharing. In a whole bank transaction without loss sharing, the buyer accepts all the asset risk inherent in the purchase. In this type of transaction the bidder can avoid the quarterly and monthly reporting which requires new technology, legal and accounting expenses. Of course, transactions will occur bank to bank, but FDIC approval will be required based upon “Change of Control” issues.
If the winning bid involves a loss share component, the agreement could include two separate loss share agreements: a single-family shared loss agreement (“SF Loss Share Agreement”) and a commercial shared loss agreement (the “Agreement”). The SF Loss Share Agreement applies to single-family residential mortgage loans and second-lien loans when the failed bank also held the underlying single-family mortgage. The Commercial Loss Share Agreement applies to all other loans, including commercial loans, commercial real estate loans, and other real estate loans. A discussion of the SF Loss Share Agreement will be addressed in another Business Law Alert.
In the Commercial Loss Share Agreement, purchased assets include, commercial loans, commercial real estate loans, and other real estate (“OREO”). Assets of the failed bank that are labeled by the FDIC as “other assets” are generally not covered by the loss sharing arrangement. Reimbursement payments by the FDIC under the Agreement are based on charge-offs of shared loss assets, as defined by the Agreement, and include the aggregate amount of loans or portions of loans classified as a “loss” under applicable examination criteria. Loss on the sale of OREO may be included in the definition of a charge-off. The agreements to date vary, so it is important for an acquiring financial institution (or one considering such an acquisition) to consult legal counsel.
The Agreement currently has an eight-year term, which is split between a five-year shared loss period and a three-year recovery period. During the shared loss period, the FDIC reimburses the assuming bank for 80% of net charge-offs (charge-offs minus recoveries) of shared loss assets, plus 80% of reimbursable expenses based on the applicable loss tranche. During the recovery period, the assuming bank pays the receiver the applicable percentage of recoveries, less recovery expenses.
Under the Agreement, reimbursable expenses are defined as out-of-pocket expenses paid during the shared loss period to third parties to affect recoveries and to manage, operate, and maintain OREO. Therefore, the legal expenses and portfolio servicing costs are reimbursable so long as such expenses are third party expenses.
An assuming bank, however, ordinarily may not obtain reimbursement for expenses payments to affiliates. Expenses that are not reimbursable include salaries and related benefits of employees, furniture, equipment, and overhead related to occupancy, or general and administrative expenses. The Agreement