Who says the Federal Deposit Insurance Corp. holds a grudge? The agency certainly doesn't when it is looking for the least costly way to resolve a failed bank.
On Friday, Republic Bank and Trust Co. in Louisville, Ky. agreed to buy the deposits and some of the assets of Tennessee Commerce Bank in Franklin from the FDIC. The deal was a bit jarring because Republic and the FDIC spent most of 2011 locked in an ugly battle over the bank's right to front taxpayers their income tax refunds. The two settled in December, with Republic agreeing to end the service after this tax season and the FDIC revoking a consent order against the bank.
With that settlement, it appears bygones will be bygones.
"From our perspective, resolving those issues enabled us to better focus on matters like this," said Steve Trager, the president and chief executive of Republic Bancorp Inc., in an interview Sunday. "From the FDIC's perspective, I think they see us as among the best capitalized, highest performing and most community-minded banks in the country."
The FDIC does not comment on individual institutions, but the acquisition is a clear indication that the FDIC thinks highly enough of Republic to allow it to bid.
Republic Bank is one of the better capitalized banks in the country. According to FDIC data, the bank had a total risk-based capital ratio of 23.44% at Sept. 30, compared to a national average for all banks of 15.52%. That much capital makes them a likely acquirer for banks, both failed and open alike.
"It appears that the FDIC just wasn't happy with the [refund anticipation loan] business," says Daniel Cardenas, an analyst at Raymond James & Associates in Chicago. "Absent that, they are a solid institution: stout capital, no significant credit quality issues and a good management team."
Lori Buerger, a lawyer at Schiff Hardin LP in Chicago, said the FDIC and the industry overall have a vested interest in getting as many qualified bidders involved in failed-bank resolutions as possible.
"Having more qualified buyers helps every player in the process," Buerger said. "For the FDIC, the more rigorous and robust the bidding process is, the smaller the loss to the Deposit Insurance Fund."
Minimizing losses is in the interest of banks, too, since their premiums support the fund, she said.
The tangle with the FDIC, however, left Republic hamstrung when it came to deals.
"It was a short track from settlement to acquisition. I know they've been chomping at the bit," Cardenas says. "Now they can finally put some of the excess capital to work."
The deal even caused some industry observers to wonder if the failed-bank acquisition was discussed as part of the settlement, as Republic is set to lose a business that made it $24.5 million last year.
"No, absolutely not," Trager said. The FDIC said it received a total of four bids from two bidders for Tennessee Commerce.
Republic's bid called for the bank to assume $1 billion in deposits without paying a premium and buy $122 million of the failed bank's assets for $65 million, a 47% discount. The FDIC has retained most of Tennessee Commerce's assets, including a large pool of equipment loans and two large stakes in other Tennessee community banks, for further disposition. The failure is expected to cost the Deposit Insurance Fund $416 million.
Though Republic and the FDIC's relationship appears patched, Trager said he was not interested in getting involved in a loss-share arrangement with the regulator.
"We are independent in our thinking when it comes to turning around a situation," Trager said. "We'd rather take the risk and accept all of the reward without being bound by an obligation."
The acquisition marks Republic's entrance into Nashville, which Trager described as a natural progression for his company. Although it picked up $1 billion in deposits, Tennessee Commerce only had once office.
"It is geographically convenient and just a great opportunity," Trager said. "We need to spend some time making good contacts and taking care of the depositors. That's the first order of business. Once that is settled, we will aggressively look to expand our physical presence."
The deal won't fill the income gap, but Trager said he is not looking to do so with one transaction. Cardenas says he expects the company to continue to bid on failed banks in states such as Florida, where it has operations.
"We've never been good at hitting home runs," Trager said. "We like being good at hitting singles and that is where we are as we look for opportunities. There can be too much risk in the home runs."