Resolution Deal Shows ShoreBank Was Savvy to the End

Even in failure, ShoreBank adroitly maneuvered the political waters.

The $2.16 billion-asset Chicago institution, the nation's first community development bank, was seized by regulators Friday after months of trying to stay afloat. Its deposits and nearly all its assets were sold to Urban Partnership Bank in Chicago, a new entity backed by the same investment fund that had been working to rescue ShoreBank.

At Urban Partnership's helm is David J. Vitale, who was brought in as ShoreBank's chief executive in March to save the ailing institution. The Federal Deposit Insurance Corp. said the group's bid was the only one it received for ShoreBank.

The structure allowed the group to sidestep a politically sensitive subject: open-bank assistance. Though used during the savings and loan debacle, it has not been in recent years. A regulatory overhaul in the 1990s made it all but impossible to attempt such assistance except in certain cases.

Kip Weissman, a partner with Luse Gorman in Washington, said that even though the resolution of ShoreBank was not an open-bank deal, it had elements of one.

"It got federal help and the new management team was able to stay in place. That is tantamount to open-bank assistance," he said. "They were able to obtain the benefits of OBA without the political firestorm."

Despite that perception, most agree that the stakeholders put into place a structure that will likely turn out to be advantageous for the main parties involved — Urban Partnership's investors, the low- to moderate-income neighborhoods ShoreBank served and the FDIC's Deposit Insurance Fund.

"They carefully navigated the treacherous shores of receivership," Weissman said.

The FDIC said it is aware some will perceive the deal as having threads of open-bank assistance.

That is not the case, a spokesman said Monday.

"There is a perception that somehow there was assistance," the spokesman said. "The old bank was closed, it failed, it was resolved, it was bid out, the old management is gone, new management is present. It was identical to any other instance where a de novo applicant was the successful bidder in a whole-bank acquisition with loss-share transaction."

And some said the failed-bank structure of the deal was likely more attractive to the bidder than if it had received open assistance.

Lawrence Kaplan, an attorney at Paul, Hastings, Janofsky & Walker LLP, said the deal reminded him of the one JPMorgan Chase & Co. struck for Washington Mutual in 2008.

In that case, the acquirer obtained more benefits from the large thrift's failing, as shareholders and debtholders were wiped out, while the FDIC had the benefit of an acquirer willing to take over the entire institution at a much lower cost to the government.

"This is … akin to the Wamu action; the FDIC had one acquirer and they needed to run it through this vehicle in order to do the deal," Kaplan said.

Meanwhile, some observers said there is precedent for executives who had been hired as a last-ditch effort to save a failing bank staying on after the FDIC takeover. "This is the kind of situation where that management had come in just recently," said Ron Glancz, a partner at Venable.

The fact that ShoreBank's owners were wiped out puts the resolution in the category of failure instead of open-bank assistance.

"Open-bank assistance throws good money after bad. That is not the case here. It's new money," said Karen Shaw Petrou, managing partner at Federal Financial Analytics Inc. "In a [purchase and assumption] the old shareholders and the old debtholders and everybody else are toast. They aren't toast in an open-bank deal."

Urban Partnership paid a 0.50% premium to assume ShoreBank's $1.54 billion of deposits and signed a loss-sharing agreement with the FDIC on $1.41 billion of its assets. The failure is expected to cost the FDIC $367.7 million. Had the bank been liquidated, the cost would have been $250 million to $334 million higher, the FDIC estimated.

The nation's largest community development bank, ShoreBank had political roots. Its inception was tied to Martin Luther King Jr.'s movement and the bank later become a darling of the Clinton administration. In its last months its political ties were called into question as a group of the nation's largest institutions — including Bank of America Corp. and Citigroup Inc. — joined with foundations to raise $140 million to keep it in business.

The FDIC said it solicited bids for ShoreBank in two rounds. In March it solicited 72 banks to consider taking on ShoreBank, but as the recapitalization gained steam, it opted to give ShoreBank more time. As that effort languished, the FDIC in July cast its net again, soliciting 174 banks to take over the bank, offering several types of transactions.

ShoreBank Corp., the holding company of ShoreBank, announced Sunday that it was selling the ShoreBank Pacific bank unit to OneCalifornia Bank; the amount was not disclosed. It is unclear whether the FDIC will claim the holding company owes the agency a cross-guaranty liability from the proceeds of that deal.

Ellen Seidman, executive vice president of ShoreBank Corp., said ShoreBank's failure will not interrupt operations at the company's nonprofits. "The nonprofits are not directly affected by the Midwest bank closure," she said. "They are just going on and moving ahead with total continuity."