When Pacific Premier Bancorp Inc. put together a bid for the failed Canyon National Bank, executives were torn over whether to seek a partnership with the Federal Deposit Insurance Corp.
The Costa Mesa, Calif., company ultimately decided to submit two bids: one that called for the $1 billion-asset Pacific Premier to buy the Palm Springs bank outright and another that included loss-sharing with the FDIC.
"For the loss-share, we added in the … cost of the people, the cost of a lost opportunity for having these assets sit on our books for longer, the cost of all the additional work we would have to do," said Steven R. Gardner, Pacific Premier's chief executive and president.
The outright purchase won. Pacific Premier bought the $210 million-asset Canyon in February, taking all the risk of the loan portfolio, but also all the upside.
Data on failed banks sold in the first 10 weeks of the year hints at a broader shift toward buyers going it alone. About 56% of deals made this year have included the government safety net. By comparison, for all of last year 82% of the 157 agreements for failed banks included a loss-share agreement with the FDIC.
The FDIC offers loss-sharing as a way of keeping assets in the private sector, while protecting the buyers from unexpected losses. From the FDIC's perspective, there are no hard feelings if an acquiring bank opts against a loss-sharing arrangement.
"I do think more banks are getting to a comfort level and don't need the backstop against unforeseen losses as the economy continues to improve," Pamela Farwig, the deputy director of the FDIC's division of resolutions and receiverships, said last week. "It's clear that all things being equal the private sector would prefer to manage on their own rather than enter into a long-term agreement with any government agency."
Several of the banks that entered into loss sharing in the last two years said they don't regret collaborating with the FDIC, but they said the process has been intense.
Depending on the agreement, acquirers must submit certificates for payment to the FDIC either monthly or quarterly to get paid for losses. Most, if not all, buyers have dedicated entire teams to the task.
"It is a long process and it takes a long time to understand the procedures and what the FDIC expected. Having done three deals, it is a much easier process," said David Provost, the CEO of First Michigan Bank in Troy. "It is not something for the faint of heart. We spent seven figures on getting the systems right."
Additionally, there is accounting that goes along with the integration. Bank executives said that process appears to be more difficult if it involves a bank with a loss-sharing agreement.
"The loss-sharing accounting is just a mess. That is something that surprised us," said Daryl Byrd, the CEO of Iberiabank Corp. in Lafayette, La., which has struck five failed-bank deals since May 2008. "The difficulty in getting a model to work has been a real pain in the neck."
Though Byrd and Provost said they have mostly smoothed out the process, Randy Dennis, the president of DD&F Consulting in Little Rock, Ark., said that a number of acquisitive banks might not have fully thought out what they were doing when they struck such agreements.
"There are some horror stories out there," Dennis said. "I think there were some smaller banks that went into the process and didn't commit the resources to it. It is a fairly complicated process and so I think they were caught by surprise."
With such stories spreading around the banking industry and an improving economy, today's would-be buyers said that purchases without government assistance just seem easier to handle.
"We decided to bid the assets at a discount rather than a loss-share deal because frankly it seemed way less complicated," said Russell Colombo, the president and CEO of Bank of Marin Bancorp in Novato, Calif., which bought Charter Oak Bank in nearby Napa in mid-February.
"So long as you can get your arms around the bank, it is pretty clean,"
Gardner at Pacific Premier said that the potential for unforeseen losses has subsided. "We were a little bit more comfortable with the credit quality because there is better clarity on the overall commercial real estate markets," he said.
"Let's not forget that failed banks at this point in the cycle have been through examinations two or three times," Gardner added. "The credit issues have all been marked down. There are not a lot of surprises left."
Beyond not having to deal with the reporting and accounting aspects, whole-bank deals allow for greater flexibility, Gardner said. "We are pretty active buyer and seller of loans, so we can sell loans if the opportunity arises. You can't really do that with loss-sharing agreements," he said.
Lori Buerger, an attorney with Schiff Hardin LP in Chicago, said that the trend toward whole-bank transactions without loss-sharing can also be tied to the declining asset size of the current inventory of failure candidates.
Bank bidders usually have a very short amount of time, usually just a couple of days, to complete due diligence on takeover targets. With larger institutions, the loss-share agreement not only served as a safety net for unexpected losses, but also served as a buffer against fast loan reviews where potential problems may have been glossed over.
"With the banks today, buyers can be more effective in that accelerated window and come away with a real understanding of the portfolio," Buerger said. "More bankers are likely to feel like a non-loss-share route is a real option. They think, 'We can do this on our own.' "
The process of loss-sharing has also evolved. Deals that were initially struck in 2009 and 2010 were large and gave the buyer a noticeable advantage over the FDIC. As the economy improved and the process became more competitive, the structures began to shift to give the FDIC more upside.
"I would agree that the process is arduous. We are picking up 80% of the losses, we want to make sure that the buying banks are appropriately recognizing the losses," the FDIC's Farwig said. "It is a burdensome process, but we have an oversight responsibility."
Ray Davis, the president and chief executive of Umpqua Holdings Corp., in Portland, Ore., said his company has not run into any serious issues, but he attributed that to being proactive with anticipating problems and arming Umpqua with more staff as it integrates the four failures it has acquired.
"I don't think there have been any giant surprises. Going into this, we said we would keep our eyes wide open," Davis said. "I mean, these failed banks are a mess, of course it is going to be difficult. We hired a team of 45 people that does nothing but deal with this. I did not want to dilute my people's hard work."