presents

FDIC-Assisted Asset SalesLeveraging Opportunities and Minimizing Risks in FDIC Loan Sales

presents

Leveraging Opportunities and Minimizing Risks in FDIC Loan Sales and Loss-Share Transactions

A Live 90-Minute Teleconference/Webinar with Interactive Q&A

Today's panel features:Mark C. Kanaly, Partner, Alston & Bird, Atlanta

C. Robert Monroe, Partner, Stinson Morrison Hecker, Kansas City, Mo.

A Live 90-Minute Teleconference/Webinar with Interactive Q&A

, , , y,Steve Stone, General Counsel, Community & Southern Bank, Carrollton, Georgia

Wednesday, June 30, 2010

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Failed Bank Bid ProcessFailed Bank Bid Process

Presenter

C. Robert Monroe, Chairman, Financial ServicesDivision, Stinson Morrison Hecker LLP

1201 Walnut, Kansas City, Missouri, y,

816.691.3351

bmonroe@stinson.com

5

Bid Process

• HistoryHistory• The resolution process

Failed bank deal structures• Failed bank deal structures• Legal issues• Linked Bids• Post-failure opportunitiesos a u e oppo u es

6

A Little Historyy

• Between 1930 & 1933, more thanBetween 1930 & 1933, more than 9,000 of the nation’s 24,000 banks failedfailed

• FDIC created in 193318 727 banks and thrifts in 1979• 18,727 banks and thrifts in 1979

• 2,912 banks and thrifts failed from 1980 19941980-1994

• 11,070 banks and thrifts in 1995

7

Total Failures(Banks and S&L’s) 1980 - 1994(Banks and S&L s) 1980 1994

600

400

500

sact

ions

200

300

mbe

r of T

rans

0

100

Nu

Totals 22 40 119 99 106 180 204 262 470 534 382 271 181 50 15

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Source: FDIC Failures and Assistance TransactionsSource: FDIC Failures and Assistance Transactions.

8

Total Failures(Banks and S&L’s) 2005 - 2009(Banks and S&L s) 2005 2009

150

120

actio

ns

60

90

mbe

r of T

rans

a

30

Num

0

Totals 0 0 3 25 140 84

2005 2006 2007 2008 2009 2010

il d i iSource: FDIC Failures and Assistance Transactions.

9

2009 Failures by Loan Mix

12/31/08 Loan Mixfor 2009 Failed Banks

12/31/08 Loan Mix for All Profitable Banks for the

25.0%

YTD 09/09 Period

5.1%10.1%

56.3%

18.7%

84.8%

Loan Mix information based on median loan mix data as of 12/31/2008.

C&D Loans = Construction & Development.O h C G id O O i d C l if il d C

C&D Loans Other CRE Guidance Loans All Other C&D Loans Other CRE Guidance Loans All Other

Other CRE Guidance Loans = Non-Owner Occupied CRE Loans + Multifamily + Unsecured CRE Loans.

10

Warning: Pay Attention to the “Texas” Ratio

E l i i l f b k f il i k Early warning signal for bank failure risk

Texas Ratio = NPA’s/Capital (tangible equity + ALLL)

Texas Ratio > 100% = elevated risk of failure

The 165 bank failures in 2008 and 2009 reporteddi T i f 51% f ia median Texas ratio of 51% four quarters prior

to failure

Source: SNL

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Texas Ratio Migration (Median Statistics)All 2008 & 2009 Bank FailuresAll 2008 & 2009 Bank Failures

271.4%300.0%

200.0%

250.0%

108.5%

168.1%

100 0%

150.0%

13.8% 19.8% 29.9%51.3%

71.6%

50.0%

100.0%

0.0%MRQ-7 MRQ-6 MRQ-5 MRQ-4 MRQ-3 MRQ-2 MRQ-1 MRQ

* i / ( ibl i )

MOST RECENT QUARTER PRIOR TO FAILURE

*Texas Ratio: NPAs+90Days PD / (Tangible Equity + LLR).

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Interested in Becoming a Bidder for a Failed BankFailed Bank

Register with FDIC (www2.fdicconnect.gov)

Establish your own failed bank team

Determine what you want (size, product mix and geography fora target, etc.)a target, etc.)

Meet with your primary regulators to determine if you areapprovable

Know supervisory criteria to become a bidder (e.g., CAMELS 1or 2, CAMELS 3 case-by-case, CRA rating, BSA rating, etc.)

Know total asset size and geographic criteria (e g you must Know total asset size and geographic criteria (e.g., you musthave double core deposits of failing bank or higher if not in yourmarket, etc.)

B d d bl t t i kl Be ready and able to react quickly

13

Private Equity Acquirers

Goal to attract non-traditional investors, with appropriate f dsafeguards

Regulations require adequate capital, stability in management, prudent lending and business strategies• Capital support – 10% leverage ratio first three years• Cross guarantees – apply if 80% owned by common investors• Transactions with affiliates – new extension of credit prohibited for p

10%+ investor• Continuity of investment – three-year holding period requirement

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Failed Bank Acquisition Opportunities

Recommendations

Your Failed Bank Team Needs to Be Prepared― Due diligence (credit)

I i ( h l k i d PR h― Integration (technology; marketing and PR; human resources)― Legalg― Financial advisory―Accounting

Identify Target Banks― Texas ratio― Tangible common equity/Tier 1 leverage ratiog b e co o equ y/ e eve ge o― NPAs/Assets― Pre-provision net revenue/average assets

15

Resolutions Timeline (1-2 Months)

Action Timing

1. Interested acquirers register with FDIC Before process2. Primary regulator sends FDIC a failing notice Day 13. FDIC assembles information/transaction structure 1-2 weeks4. FDIC e-mails potential bidders (interested acquirers

sign confidentiality agreement) 1-2 weeks5. Due diligence (learn how to use IntraLinks)

team allowed 2-3 days 2-8 weeks6. Bidder Board must adopt resolutions When bid is submitted7. File regulatory application With bid8 Bids due Monday/Tuesday8. Bids due Monday/Tuesday9. Winning bidder signs documents Wednesday/Thursday10. Closing date Friday

16

The Resolution Process

FDIC has “virtually complete responsibility for resolvingfailed federally insured depository institutions” with“expansive powers to ensure the efficiency of the process”

Least cost test Least cost test

We won – now what?

Assemble your team (public relations component of team Assemble your team (public relations component of teamvery important now)

Employment Agencyp y g y

Sign P&A Agreement (know excluded assets because youown the rest)

Be ready to assemble your team on site for Black Friday

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FDIC Action on “Black Friday”

A t l f i d l d Assumes control of premises, records, loans andother assets

Posts notices Posts notices

Changes locks

C h h Counts the cash

Resolution team may number 50-100 people for a“typical” community bank“typical” community bank

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Priority of Payment

1st Ad i i t ti f FDIC1st Administrative expenses of FDIC

2nd Insured Depositors

3rd Other general/senior liabilities

4th Subordinated obligations

5th Shareholders are last in line and nothing is left

19

Legal Issues

Anti-Injunction 12 USC 1821(j) S f di 12 USC 1821( )(13)(C)(i) Stay of remedies 12 USC 1821(e)(13)(C)(i) Side agreements 12 USC 1823(e) Contract repudiation/enforcement 12 USC 1821(e)(1) Contract repudiation/enforcement 12 USC 1821(e)(1) Removal 12 USC 1819(b)(2)(B) Exemptions 12 USC 1821(b)p ( )

• State and local taxes levy, garnishment, attachmentor foreclosure

• Penalties or fines

Improperly documented agreements unenforceable12 USC 1821(e)

20

Failed Bank Deal Structures

P&A (P h f A t d A ti f Li biliti ) P&A (Purchase of Assets and Assumption of Liabilities)

Deposit Payoff

Open Bank Assistance (“OBA”)

2009 Failed Bank Structures• P&A All Deposits with Loss Share 90• P&A All Deposits without Loss Share 36• P&A Insured Deposits Only without Loss Share 2

D it P t 11• Deposit Payout 11• Insured Deposit Transfer 1

21

Failed Bank Deal Structures

Linked Bids• Linked Bids

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Failed Bank Deal Structures

Deposit payoff• No bidders or• No bidders, or• Discount on assets is so great that a payoff is the “least cost

alternative”• FDIC pays off depositors directlyp y p y

Open bank assistance• Technically still available, but not used anymore

FDI A t f 1993 hibit d FDIC f i i t• FDI Act of 1993 prohibited FDIC from using insurance money to benefit any shareholder of an institution that had failed or was in danger of failing

Bridge bank• Temporary bank created by FDIC to facilitate a resolution

23

Failed Bank Deal Structures

P ti ll ki th 2 b i t t t iPractically speaking . . . there are 2 basic structures to acquire a failed bank…

and both are P&A transactions…and both are P&A transactions Straight P&A with no loss sharing

• 36% of 2009 bank failures

P&A with loss sharing• 64% of 2009 bank failures

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Straight P&A

A d it ( ll i d d it l ) Assume deposits (all or insured deposits only) Purchase assets (optional loan pools) Bid Amount: Bid Amount:

• Deposit Premium• Discount Bid for Loans/Assets• Depending on deal structure bid form may ask for a combined BidDepending on deal structure, bid form may ask for a combined Bid

Amount

Reconcile cash at closing Option to purchase banking premises at “fair market

value”

25

Settlement Statement

Deposits assumed $100,000Loans/Assets purchased ($40,000)

Deposit premium ($1,000)

Loan/Asset discount $5,000

Cash due to purchaser $64,000

Option to purchase premises at “fair market value” is a post-closing transaction

26

P&A Transaction - The Legal Document

P&A A t P&A Agreement

Generally not negotiable

Key legal terms

Key legal risks

27

P&A with Loss Sharing Agreement

Loss Sharing Framework

“First Loss Tranche” – typically zero

“St t d Th h ld” ifi d d ll t b “Stated Threshold” – a specified dollar amount byFDIC (has tended to equal about 25% of loanspurchased) Mostly not in play now.

80% of losses covered up to the assets minus expected loss

Loss share typically extends for 5 years on non-single Loss share typically extends for 5 years on non single family loans and 10 years on single family loans

28

Loss Share Rationale

Regulator Benefits• Less costly than assuming a failed bank’s assets and liquidating

them over time• Keeps troubled assets in private sectorp p• Accelerates resolution

Acquirer BenefitsC di l i li i d• Credit loss exposure is limited

• Infrastructure already in place to service & manage assets• Projected IRR at very high levels• Potential increase in capital through creation of negative goodwill

29

Accounting Considerations

Statement of Financial Accounting Standards No 141R Statement of Financial Accounting Standards No. 141R, Business Combinations (SFAS 141R)

Acquisition date and post-acquisition date issuesq p q

Acquirer must record purchased loans, other assets and liabilities at “fair value” or the amount that would be received upon sale in a market transaction

Fair value of loss share indemnification accounted for separatelseparately

Interagency Guidance issued June 7, 2010

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Post Failure Opportunities

Purchase loans/REO directly from FDIC

Purchase branch real property

Acquire subsidiary of failed bank Acquire subsidiary of failed bank

Hire key employees of failed bank (considerrestrictions in confidentiality agreement) y g )

Pursue loan and deposit customers of failed bank(consider restrictions in confidentiality agreement)

31

Evolving Issues for Acquirers of Failed Banks

June 30 2010June 30, 2010

Mark Kanaly Steve StoneAlston & Bird LLP

(404) 881-7975mark.kanaly@alston.com

Community & Southern Banksstone@thecsbank.com

Overview

I. Loss-Share AgreementsII. Evolving Strategies of Acquiring BanksIII Evolving FDIC Resolution ProcessIII. Evolving FDIC Resolution ProcessIV. Conclusions

33

Loss-Share Agreements

Typical Terms Shared-Loss Arrangements Administration of Assets

i i i i i i ifi i Limitations on Negotiability and Indemnification Standard terms, very limited negotiation Indemnification

Fi t L T h First Loss Tranche Asset premium (discount) / Deposit premium Originally used to determine amount of losses to be incurred before loss-sharing

Th h ld A t ( bid t ) Threshold Amounts (new bid parameters) Intrinsic loss estimates Influence on bidding process and strategy

34

Loss-Share Agreements

Difference Among Loan Types Single Family Residential Commercial and Other Assets

Monthly Reporting Requirements Certificates Data reports

Audit Requirements Annual reports (independent public accountant) Potential regulatory auditg y

Loan Modification Loan modification program LimitationsLimitations

35

Evolving Strategies of Acquiring Banks

Possibility of Third-party Outsourcing of Loan Administration Available under loss-share agreements? Regulatory approval

LLC Subsidiary Structures Transfer “bad assets” to subsidiaryy Goals: (i) Limit certain liabilities (ii) Improve marketing/sales of real estate

(iii) Improve public perception

Limitations on Transfers of Economic Interest No increases in shares outstanding by more than 9%

Includes shares of subsidiaries holding loss-sharing assets (prevents alternative structures) No sales by any shareholder (or group acting in concert) of more than 9%

FDIC l i d FDIC approval required

36

Evolving Strategies of Acquiring Banks

Other General Observations / Common Issues Appraisals – fair value measurement / carrying costs Comprehensive loan and OREO diligence in light of new bid structure and

increasing competition for desirable targets Multiple bids by potential acquirers Special Asset / Credit Administration process post-failure not to be under-

estimated

37

Evolving FDIC Resolution Process

More Fluid / Flexible Resolution Process Trends in Bidding and Deal Structure

Increased flexibility and creativity with bidsIncreased flexibility and creativity with bids Linked bids, modified bids, etc.

Impact on Investors Less predictability on timingLess predictability on timing Less certainty around available assets More difficult to value potential returns

Change in Terms of Loss-share AgreementsChange in Terms of Loss-share Agreements Threshold percentages for loss-sharing Available loss-share assets

38

Evolving FDIC Resolution Process

Future Changes in Strategies of Acquiring Banks Economic/Accounting Considerations Going Forward

Eff t f Fi i l R f L i l ti A i i B k Effect of Financial Reform Legislation on Acquiring Banks

39

Conclusions

Current window of opportunity is closing Competition for desirable targets continues to increase

Many large franchises are already gone but lots of small banks left Many large franchises are already gone, but lots of small banks left

Diligence process and bid parameters allow bidders to refine their analysis and submit more precise bids

Have a well defined plan for closing weekend First 90 days and first 180 days (HR, IT, Systems Conversions, etc.)

Terrific opportunity for existing banks but must be prepared Terrific opportunity for existing banks, but must be prepared. Unclear what the future will hold

40