FDIC, banks working to cut loss-share ties

Financial crisis long gone, liability grows for both sides

As an incentive to get healthy banks to take over the banks that failed after the financial crisis, the Federal Deposit Insurance Corp. offered to handle bad loans by entering into loss-share agreements with purchasing banks.

Now, several years after the crisis, the banks across the country that purchased failing banks — and consequently many bad loans — are in the process of negotiating settlements to end the loss-share agreements with the FDIC.

In most instances, the FDIC agreed to accept 80 percent of loan losses from the failed banks, and the acquiring banks were responsible for only 20 percent of the losses. Recoveries from bad loans are also shared, with the FDIC getting 80 percent.

But banks have a reason to end the loss-share agreements. Bank officials say they have allocated many employees to handle the accounting, and that’s costing them too much money. Ending loss-share agreements also allows banks to sell the bad loans.

DD&F Consulting Group, a bank consulting firm in Little Rock, has worked with 19 banks to finalize loss-share buyouts on 27 agreements and is working with banks and the FDIC on another 35, said Randy Dennis, DD&F’s president.

DD&F has assisted two banks based in Arkansas — Bank of the Ozarks of Little Rock and Simmons First National Bank of Pine Bluff — in reaching settlements of loss-share agreements with the FDIC, Dennis said.

Four Arkansas banks — Bank of the Ozarks, Simmons, Arvest Bank of Fayetteville and Centennial Bank in Conway — took over almost 20 failed banks from 2009 to 2012.

More than 500 U.S. banks failed from 2008 to 2015.

After settlements of loss-share agreements are reached, sometimes the FDIC owes the bank money and sometimes the bank owes the FDIC money, said Matt Olney, a banking analyst in Little Rock with Stephens Inc.

Bank of the Ozarks earned $8 million after ending its loss-share deal with the FDIC in the fourth quarter last year, George Gleason, the bank’s chief executive officer, said in its January conference call.

While Simmons took a $7.5 million charge for the early termination of its lossshare agreements, it expects earnings to increase by $7.5 million over the next twelve months, Dennis said.

There are more than 300 loss-share agreements still in effect, Dennis estimates.

He likens the relationship between the acquiring bank and the FDIC to an unhappy marriage.

“It all started great,” Dennis said. “But now that it’s gone on for five years, everybody’s wearing thin. Plus the amount of loans out there are so small, to jump through all the hoops that the FDIC has, it’s just too expensive.”

Both sides have an interest in resolving the lossshare agreement and moving on, Dennis said.

“It’s a liability to the FDIC and can be a liability to the banks,” Dennis said. “That’s why they want to settle it. It’s the money.”

DD& F got deeply involved in settling loss-share agreements in 2013 when it was asked to help one of its clients, MidFirst Bank, an Oklahoma City bank with $12 billion in assets. MidFirst wanted DD&F to help it because DD&F was familiar in dealing with the FDIC.

That deal opened to door to more work with the FDIC,

Dennis said.

“We’ve been fairly successful working with the FDIC in getting [the deals] done,” Dennis said.

The FDIC doesn’t want to take possession of a failed bank’s assets, Olney said.

“They want the banks to keep possession of them,” Olney said. “The FDIC only has so much personnel it wants to use for loss-share deals.”

The harder an acquiring bank works to continue to service a bad loan, the better it is for the FDIC, Olney said.

“At this point, there is less risk on those loans,” Olney said. “It’s known now which loans are good loans [ and which loans are] bad loans. And there is a lot of paperwork involved [in the lossshare agreements]. So at this point it’s good for all sides that it’s settled.”

The FDIC also had restrictions on the bad loans, Olney said. One of the restrictions prevented the purchasing banks from making bulk sales of the bad loans, Olney said.

“Now with the loss-share gone, that allows the banks to get more aggressive in selling some of these loans off their balance sheets,” Olney said. “And it allows the banks to clean up their balance sheets a lot faster.”