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Sunwest Benefits From Bank Failure

Source: The Orange County Register
Publication date: July 14, 2009

By Mathew Padilla, The Orange County Register, Calif.

Jul. 14--Glenn Gray discovered a way for his bank to grow amid the deepest recession in decades. The chief executive of Sunwest Bank in Tustin decided to expand his company by buying the operations of a failed rival.

Gray, 55, explains how the Federal Deposit Insurance Corporation selected his business bank to buy most of the $73 million in deposits and $80 million in assets of Irvine-based MetroPacific Bank, which failed on June 26.

Q: How did you learn a bank was going to fail and its assets be sold?

A: It first starts with us, or any bank, that wants to be a bidder letting the FDIC know that. The FDIC goes through a process; I can assume they review our financials. They examine banks, so they likely look at the last examination schedule, and then they either put you on an approved bidders list or they don't. We did that several months ago, when we anticipated that, unfortunately, bank failures were going to be an ongoing occurrence.

Then we turn the clock back to about four weeks ago. The FDIC notified us of a potential failed bank situation. They spoke in very general terms, describing a business bank with about $80 million in assets in Orange County with a single branch. They asked, 'Are you interested?' Well, yes, that fits our profile: community banks in Orange County or north San Diego.

Next they say here's your password, go to a secure Web site and find more information. Once we visit the site we understand which bank it is; the bank is identified but not the identity of employees. The site has portfolio level statistics; you don't get a breakdown of every single loan.

The data are macro level. But there is enough information for you to start to form an opinion, and you don't have to put in a bid yet.

Next they told us we would have two days of due diligence. We came on site, visiting the bank in an area segregated from the rest of the employees.

Most employees didn't know we were on site. There was an FDIC representative there. Now we start to get into more micro-level detail. You have to cover whatever you want to cover in those two days, looking at loans, deposits, financials, etc.

Once the on-site review was done, we got a couple of days to form a bid. We finished up on a Thursday and had to provide a bid the following Tuesday.

The next day (Wed., June 24) they asked for some clarification and a little negotiation. Thursday (June 25) they notified us that our bid was accepted.

Friday morning (June 26) we met with a larger group of FDIC employees and they did a walk-through of what was going to happen. Then it happened that Friday at 4 p.m. They went in and took over the bank and we followed them. Q: I saw something like that on "60 Minutes." But on that show and in your case a buyer (your bank) was lined up in advance of a bank being seized. I hear a takeover is messier if the FDIC can't find a buyer.

A: Yes, it must be messier without a buyer. That's what I hear also. In this case it worked out. We worked through a weekend, and we opened the following Monday morning: "Here's Sunwest Bank."

Q: Where did MetroPacific go wrong?

A: I think you can put that down to a combination of three things. They didn't hit sufficient size or critical mass soon enough. This bank was a little over 4 years old with about 22 employees. They needed to reach a certain mass to cover fixed costs. The second problem: They had too many loans go bad, which was partially due to some choices they made in underwriting, but also largely the affects of the economy.

Third, their deposit base. What you pay for deposits is part of your cost structure, and their deposit base was expensive relative to many banks.

Their deposit base was predominantly CDs. You pay more for CDs than checking accounts.

Q: Why did you buy most of MetroPacific's deposits and assets?

A: We want to expand. In this particular economy organic growth is slower; loan demand is sluggish. There are going to be opportunities like this; it's a very efficient way for us to grow, to pick up customers and employees. And there aren't as many healthy banks like us, so the competition is less.

Q: What did you pay for MetroPacific's assets/deposits?

A: In this style of transaction we assumed all the loans and all the liabilities. In this case the liabilities are the deposits. If you think about the balance sheet of a bank, we owe those people that money. We are taking responsibility for the depositors; if they want their money back we will give it to them. We also assumed responsibly for the loans. To take those risks the FDIC has provided us some protection.

(Note: The FDIC said it expects the deal to cost its insurance fund $29 million. That suggests the agency took a first loss position on that much worth of MetroPacific's loans and other assets. In a sense, the FDIC is paying Sunwest Bank to assume the risks tied to MetroPacific. However, the FDIC also kept $6 million in MetroPacific's deposits that came from brokers. It plans to separately pay those depositors.)

Q: Before the acquisition, how big was your bank?

A: We have 85 employees and $320 million in deposits.

Q: How is your bank holding up amid the recession and credit crisis?

A: Very well. We attribute that to a lot of smart decisions: what types of business we wanted to do, and didn't want to do. We made a conscious decision not to get involved in certain types of lending over the last three to four years that too many banks got involved in, and we have a diversified deposit base.

Q: What did you avoid?

A: We didn't touch subprime. We exited speculative construction lending at the end of 2005. And we were very selective about everything, but in particular commercial real estate lending.

Q: I understand commercial lending had its own form of stated income lending?

A: We didn't do any of that, but yes you are right. That's doing so much on "pro forma," or projected future revenue (i.e. estimated rent from a property). We underwrote on historical, factual income, not hope. Hope is not a strategy.

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Copyright (c) 2009, The Orange County Register, Calif