the number of fdic problem institutions is at its highest ...€¢ zero deposit premium ......
TRANSCRIPT
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With almost 800 banks still on the FDIC’s problem institution list, the raft of failed banks is certain to continue. For healthy institutions, this spells opportunity, and not just for the acquirers of the failed banks. Both banks and credit unions can capitalize on failed banks, if not through outright purchases, then through targeted marketing and employee recruiting campaigns and purchases of surplus branches.
This briefing will explore the tactics required to capitalize on FDIC bank seizures:
• The landscape for bank failures over the next 18 months• Forecasting which institutions will be seized and when• Factors to consider in submitting bids to the FDIC• Network alignment: deciding which branches to keep versus close• Integration and communications issues• Not the successful bidder? Marketing tips to capture failed bank customers• Opportunity for all: purchase of turned-back branches
INTRODUCTION
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• The number of FDIC problem institutions is at its highest level since the early savings and loan crisis of the 1990s, and it now approaches 800. In 1990-91, almost 1,500 institutions were on the FDIC’s problem list
• The FDIC closed 140 banks in 2009, the highest level since 1992
• Nearly 10% of all FDIC institutions are now considered troubled, matching the rates of the early 1990s
• If historic patterns hold, 20% - 25% of problem institutions will fail, indicating 160 – 200 failures over the next year
PROBLEM INSTITUTION TRENDS
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PROBLEM INSTITUTION TRENDS
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Problem institutionsNumber of failures Problem as % of all institutionsFailed as % of problem
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PROBLEM INSTITUTION TRENDS
• Since the current industry crisis started in 2008, the FDIC has seized 247 institutions in 40 states or territories. However, four states account for more than half of all closures, and 12 states account for 80% of closures.
• Closures are concentrated in the southeast (Georgia, Florida); the far west (California, Washington, Nevada, Arizona); and the midwest (Illinois, Minnesota); but few banks have closed in the northeast, mid-Atlantic or mid-South states.
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ACQUISITION COSTS INCREASING
• 2008 transactions• Zero deposit premium• 90%+ loss sharing
• Recent transactions• 2%+ deposit premium• 50% loss sharing
• Primary causes• Increased bidder pool, including foreign-owned banks and non-bank private equity
consortia• Increased FDIC experience facilitates better negotiating• Bankers better able to predict failures well in advance, allowing more detailed
consideration of targets
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ACQUISITION COSTS INCREASING
• Primary consequences:
• With the cost of FDIC-assisted transactions increasing, fewer banks will wait for the “great deals” from seizures, and the market for traditional open-bank mergers will revive
• However, these factors will also place upward pressure on open-bank merger prices, as demand increases for those transactions
• Unanticipated new competitors may enter your institution’s markets, including well-financed private equity firms and banks from far away geographic regions
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• The FDIC does not release the names of institutions on its problem bank list, as this would likely cause consumer fears that would in turn accelerate a bank’s failure. However, certain measures are extremely accurate predictors of FDIC takeovers.
• Visit the FDIC’s Statistics on Depository Institutions page on its website at: http://www2.fdic.gov/sdi/main.asp
• Look for institutions in the bottom decile on measures including:• Equity to assets ratio (7.5%)• Tier 1 risk-based capital ratio (10%)• Non-current loans to loans (6.75%)• Non-current assets plus other real estate owned to assets (7.5%)• Net charge offs to loans (2%)
IDENTIFYING LIKELY FDIC SEIZURES
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• Keep in mind that personnel from the acquired institution are unlikely to share your institution’s sales culture.
• Many failed banks suffered from high funding costs, relying on top-of-market CD rates as a means of maintaining liquidity. Branch staff in such institutions often serve purely as “order takers” for high rate instruments, with little training in needs assessment or cross-sell.
• Similarly, all failed banks suffered from poor loan quality, suggesting that the lenders at seized institutions may lack the skills to deduce credit quality or sell based on non-price attributes.
• Thus, while seized banks may offer access to desirable new markets, the ability to capture the potential in those markets will likely require significant investments in sales training and employee development.
CRITICAL FACTORS TO CONSIDER BEFORE YOU BID
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• Alignment with target demographic segments: unlike a traditional open-bank merger, there is no ability for on site due diligence in advance of an FDIC-assisted transaction, so bankers must speculate about what an integrated product offering might include.
• Visit the target bank’s branches and website and build a preliminary map of lead checking products into market segments.
• Does this institution appear to emphasize similar segments?
• Would your marketing collateral and current advertisements prove appealing to the target bank’s core segments?
• If not, the acquirer may risk significant attrition, negating the benefits of the purchase. Keep in mind that consumers, already uneasy over bad press portending the bank’s failure, may be spurred to leave by the smallest perceived inadequacy of the acquiring institution.
CRITICAL FACTORS TO CONSIDER BEFORE YOU BID
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• Efficiency improvement appears to be a step function, i.e., there are no significant gains from the $250M – $500M tier to the next asset tier; nor are there significant differences across the tiers from $5B – $100B. Thus, an acquisition based solely on the premise of scale economies may not meet expectations.
CRITICAL FACTORS TO CONSIDER BEFORE YOU BID
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• Approach acquisitions as a de novo branching exercise. If considering an acquisition, first build a “clean slate” branch plan for the markets under consideration. A clean slate plan maps an institution’s optimal network irrespective of current branches and then defines tactics to migrate from the current to the optimal network.
• Calculate the share of branches of the target institution that fill beneficial submarkets: target submarkets that would save the institution the need to build a de novo branch; or currently served submarkets where the institution could drive two revenue streams through one non-interest expense structure.
• Consider whether geographic continuity matters, and always remember The Greater Fool Theory.
EVALUATING NETWORK ALIGNMENT
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• The greatest difference between an open bank and a failed bank purchase is the lead time between announcement and legal merger:
• Open bank transaction – typically three to four months• FDIC transaction – NONE
• Your institution must be ready to assume operations the day of the merger
• Call center must be ready to address conversion calls immediately
• Other critical issues:
• Vendor contracts and operating systems• ATM operations and surcharge policies• Departmental audits for staff decisions• Pricing rationalization
OPERATIONAL INTEGRATION
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• The success of an acquisition can be greatly enhanced by successful retention efforts, since every dollar of acquired-bank attrition represents a premium paid for no long term value.
• Thus, it is imperative to enter the acquisition with an immediate-term communications strategy already in place:
• Assume that news of the bid may leak in advance of the FDIC takeover and be ready with statements for the press
• Immediately upon assumption, begin contacting acquired institution customers through both mass and direct media
• Provide training to all bank employees, front and back office, so they can address acquired-customer inquiries in formal (branch) and informal (grocery store, PTA meeting…) venues
• Communicate with your own customers to allay any fears of branch closures, wait-time increases, product changes or other disruptions
COMMUNICATIONS CONSIDERATIONS
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• Even if your institution was an unsuccessful bidder or non-bidder, you can still capitalize on FDIC bank takeovers. Because of the immediate nature of FDIC seizures, the customers of the acquired institution may be even more uncertain about their future than in open-bank mergers.
• Consider marketing tactics such as check intercepts and direct mail campaigns focused in the trade areas surrounding overlapping branches, since these are the branches most likely to close. Marketing messages can emphasize your institution’s own stability and the opportunity for customers to choose their banking provider rather than accepting the provider assigned by the FDIC.
• The employees of the acquired bank will also be vulnerable to defection or dismissal due to overlapping job roles; thus, an in-market merger can offer an opportunity to add staff (and client relationships), often at a favorable cost.
NON-ACQUIRERS: OPPORTUNISTIC MARKETING
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• FDIC-assisted transactions include a unique feature relative to acquired branches: the ability to “put” the actual branch facilities back to the FDIC within 90 days of the purchase. Unlike an open-bank merger, the acquirer can opt to decline facilities of poor quality, suboptimal locations, overlaps with current branches, adverse leases or “white elephant” book values.
• For acquirers, the removal of unwanted branch disposition costs offers a substantial advantage over open bank transactions. However, the 90-day window dictates that the acquirer develop its analytic measures in advance of the transaction, so that data analysis can begin immediately upon review. Keep in mind that any branch closure risks attrition, even if the affected bank customers are migrated to a nearby branch.
• For non-acquirers, it can be beneficial to monitor FDIC transactions as if your institution was the purchaser. As the FDIC seeks to quickly dispose of the put-back branches, you may find viable branches that the acquirer declined for reasons of overlap or cost available at favorable terms.
BRANCH PUT-BACKS
