When officials at First Federal and First Bank consider the troubled assets on their balance sheets, they can hear the clock ticking.

In 2009, those two banks purchased the assets of failed Cape Fear Bank and Cooperative Bank, respectively. As part of the acquisitions, they entered into time-limited shared loss agreements (SLA) with the FDIC. Although the SLA obligates the FDIC to shoulder the majority of any losses within defined timeframes, it also holds the acquiring bank to very high fiduciary standards.

While the shared-loss period for residential, single-family assets is 10 years, the period for commercial assets is considerably shorter. Within the first five years, the FDIC assumes the majority – usually 80 percent – of a loss; the assuming bank takes the rest of the hit. 

After five years, the FDIC will no longer share the loss, but the bank must continue to reimburse the FDIC for any assets sold for the remainder of the eight-year period. If an asset is sold at a profit, 80 percent of the revenue goes to the FDIC and the bank keeps the balance.

This means that First Federal and First Bank have about a year remaining to take advantage of that FDIC partnership for the commercial properties they absorbed in the takeovers.

In mid-2014, they’re on their own in terms of absorbing losses, and they’ll still owe the FDIC a big chunk of any dispositions they make.

Because of the sensitivity of the process, officials at both banks would not comment on their progress in disposing of those troubled commercial assets.

But Kellee McGahey, First Federal’s executive vice president of marketing, indicated that her institution was working on resolving the issue.

“The acquisition of Cape Fear Bank was the first FDIC loss-share transaction for First Federal,” McGahey said in an email. “Since spring of 2009, we’ve been working with our customers, in good faith, under the requirements of the FDIC loss-share agreement to resolve the Cape Fear Bank’s problem loans.”

While many institutions are encumbered by bad loans, none in the local market has as great an incentive to dispose of them as do First Federal and First Bank. Being selected by the FDIC to purchase the assets of a failed bank is not a gift without strings. After all, the FDIC wants to get the best possible return on its investment, since it is using taxpayer money to stabilize the banking landscape.

During the SLA period, an acquiring bank must file very specific reports, detailing charge-offs, recoveries and reimbursable expenses, FDIC spokeswoman Lajuan Williams-Young said in an email.

“The acquiring bank is required to manage, administer and collect shared loss assets consistent with usual and prudent business and banking practices and in a manner consistent with internal practices, procedures and written policies,” Williams-Young said. 

“It must use its best efforts to maximize collections and use its best business judgment in effecting charge-offs.”

At the mention of commercial property, many people think of retail strips or office complexes. In the Wilmington region’s market, however, much of the commercial property in the “troubled assets” column consists of so-called “zombie subdivisions” abandoned by developers partway through development. 

Given the attractive prices of the properties, some brokers are reporting that much of First Federal and First Bank portfolios are being absorbed quickly, quelling fears of further leasing rate declines, a repeat glut of office space or lingering ghost subdivision developments. 

“Much of the inventory has been gobbled up, with little bits left,” Grayson Powell, managing partner and broker with Wilmington-based Coldwell Banker Commercial Sun Coast Partners said of remaining inventory acquired by First Bank and First Federal. 

Those zombie subdivisions, which were nearly impossible for the market to absorb during the past few years of tight money and low demand, are starting to be purchased by other developers or by Real Estate Investment Trusts, said Tom Gale, a Realtor with Coldwell Banker Sea Coast Realty. But those purchases are mostly cash.

“Builders in this market can’t get loans for property, because banks are gun-shy,” Gale said. “If [an applicant] were starting a new business, the bank could give them a loan for equipment or whatever. But builders, even if they have an established relationship with the bank, can’t get a loan.”

Hansen Matthews, managing partner and broker with Wilmington-based Maus, Warwick, Matthews & Company, said banks do not care about the buyer’s identity or intent for the property as long as the buyer has sufficient capital.

“The typical REO [real estate owned property] department does not put the ‘type’ of buyer under a microscope, as long as the buyer has the ability and willingness to close the deal promptly,” Matthews said. “Whether or not a buyer is a local investor or an out-of-state capital investment group usually won’t play into a bank’s decision to sell.” 

He said bank REO departments have been disposing of a record number of properties for the past four years throughout the greater Wilmington market. The decisions as to how aggressively to price the assets will vary from bank to bank, although, Matthews said, many of them price properties below market in order to sell them quickly. 

But some brokers believe as more outside investors flock to the region to snap up developable bank-owned parcels, it could become a problem.

Powell said prior to the recession, brokers and developers had a cohesive relationship – often partnering on future transactions for development. 

That’s changing, Powell said, as more outside investors from places like Los Angles, Chicago and Texas are purchasing local property.

“No one knows who these people are,” Powell said. “It’s a positive that these larger companies are coming in and taking an interest in the market, but what are their intentions with the property? …. My hope is that they reinvest in the area, and the property doesn’t just sit or change hands.”