A Lesson For NCUA From The S&L Days

At its Nov. 17 board meeting, NCUA approved the creation of a Loss Share Pilot Program as another strategy for resolving insolvent credit unions. This decision came in the midst of NCUA's aggressive campaign to sell $50 billion in assets through the sale of corporate credit union bailout bonds to reduce the volume of assets in receivership.

Loss Share Agreements, in use by the FDIC, were extensively used by the Federal Savings and Loan Insurance Corporation (FSLIC) to transfer deposits and assets of failed S&Ls to acquiring institutions with reimbursement for capital losses and legal indemnification. Senior officials with the FDIC's Division of Resolutions and Receivership were former FSLIC employees experienced with the agreements when introduced by the FDIC in 1991.

Similar to the current market conditions facing credit unions, losses within the S&L industry grew with the shift from fixed-rate to adjustable-rate mortgages and the exercise of new authority to underwrite commercial real estate loans.

The following illustrates how loss share agreements can be used by credit unions to complete acquisition plans while limiting capital cost.

• McLean Savings and Loan Association, McLean, Va. At the time of acquisition by NVRyan, Inc., McLean S&LA had a $37-million portfolio of 455 foreclosed residential properties located across seven states with depressed real estate markets-Texas, Oklahoma, Tennessee, Florida, Louisiana, and Arizona-and an automobile loan portfolio with delinquent leases. Within seven months, NYRyan closed on the sale of 113 properties, with net proceeds averaging 77.75% of book value, which, excluding Oklahoma, averaged 84.76%.

• United Bank of San Francisco. Hibernia Bancshares Corp. acquired United Bank, a $603-million savings bank with 27 branches. Problem assets included residential and commercial real estate owned, construction loans in progress, and underperforming small business loans. Hibernia Bancshares was able to stabilize 11 major loans valued at $10.76 million and another 21 assets, with a combined book value of $40 million, which were paid off in full. Within two years, 90% of the portfolio was resolved, with losses below the $50-million estimate, with approval for early termination of the five year agreement.

Keys to Managing A Loss Share Agreement

• Market Due Diligence: understanding the market and asset portfolio is important to a decision about expansion plans. Royal CU's acquisition of Anchor Bank is a good example of growth via acquisition, with Royal acquiring the branches of the troubled bank. Royal, no doubt, understood the market prior to the acquisition. Six months later comes news of an increase in new members, deposits, and loans of the 41 branch network in Wisconsin and Minnesota. By illustration, Great American First Savings Bank, an $8.2-billion San Diego thrift, acquired two insolvent thrifts in California, a condition for approval of a merger in Arizona. To assist with the acquisitions, the then-FSLIC provided 50% capital loss coverage and indemnified it against undisclosed liabilities. Covered assets were principally located in northern California, a market with signs of economic recovery, reflected in gains on the sale of land and single-family properties, approximating $550,000. FSLIC shared 50% of the gain. Great American was able to dispose of problem assets within the two-year term of the agreement and submitted a $2,287,419 check to the FSLIC for tax benefits, resulting in a $0 cost resolution.

While Great American was able to maximize recoveries on assets in its home state, it faced insurmountable losses with the downturn in the Arizona real estate market. A financially strong savings bank at the beginning of the S&L crisis sold its 130-office branch network to Wells Fargo and was later liquidated.

Workout Team of Experienced Real Estate Professionals

To resolve the asset portfolio of McLean S&LA, NVRyan hired a real estate professional to liquidate the residential assets and retained the services of a professional to repossess and liquidate the auto loan portfolio. Great American and Hibernia hired a team of real estate professionals with specialized experience in line with acquired assets. United's Real Estate Projects Group also effectively utilized legal counsel in developing strategies to gain control of problem assets with multiple legal/liability issues.

The management of a $36-million, multi-family participation loan that involved 13 thrifts, many of them at various stages of regulatory oversight, exemplifies a successful resolution of a problem asset during a period when there were numerous failed attempts by lead lenders to resolve a nonperforming participation loan. REPG was able to build out, market and sell the project with concurrence of its partners, to receive a price 50% higher than projected.

Administration Of Agreement

Developing an automated accounting and case management system to track and report progress in liquidating assets and to submit claims (certificates) for reimbursement will be critical. NCUA might establish pre-approvals for sale prices of covered assets based on estimated net proceeds, allowing an acquiring credit union to accept all offers that fall within the pre-established ranges to help expedite liquidation.

A Look To The Future

In approving the creation of a Loss Share Pilot Program, NCUA's board noted "the potential for resolving large, complex problem credit unions at the lowest cost to the National Credit Union Share Insurance Fund." Experience has proven that an agreement to cover losses beyond what an acquirer is willing to incur can be an important incentive in marketing a troubled financial institution.

William Seidman, FDIC chairman during the S&L crisis, believed that assets from insolvent financial institutions should be moved to private sector ownership as soon as possible; assets in government control lose approximately 25% of their value. NCUA can view the Loss Share Agreement as a method for transferring nonperforming assets to private partners that assume responsibility for loss mitigation, foreclosure and liquidation.

Engaging an experienced team will further advance NCUA goals for minimizing losses to the share insurance fund.

Muriel Watkins is a credit union board member and former senior manager of Loss Share Agreements at the FSLIC and Senior Executive with the Resolution Trust Corporation.