Forget a courting period. Those who want to buy the assets of a failed bank need to get to the altar fast to clinch their union.
The entire process — from the time the Federal Deposit Insurance Corp. (FDIC) releases information on a failed bank buying opportunity until the closing is finalized — is over in just four to five weeks. That is why potential buyers, mainly existing banks, must have their ducks in a row to carry out due diligence, submit a bid and seal the deal.
Buying opportunities have burgeoned as the volume of bank failures across the U.S. has risen. From early 2007 through Feb. 4 of this year, federal regulators shut down 332 financial institutions with combined assets of $647.4 billion. Many were banks toppled by delinquent residential and commercial real estate loans. And dozens more closings are projected for the remainder of 2011 and 2012.
Acquiring the assets of a failed bank isn’t easy, and buyers may need expert advice. In a recent webinar, the accounting and consulting firm McGladrey, which has assisted regulators and the FDIC in the closure of 57 financial institutions, offered advice to bank executives attempting to navigate the FDIC process. McGladrey hosted the webinar with New York-based Resolution Asset Management Co. (RAM), which supplies both non-dilutive capital and expertise to community and regional banks pursuing failed bank acquisitions.
Following are insights from the webinar.
Cash: You’ll need it
Typically, there is a change of cash during the first couple of days after a bank closes and the charter is transferred to the assuming institution. The acquiring entity has to give the FDIC a clear understanding of their cash requirements as the new operator of the bank.
“In the event that the assuming institution does not have that cash on hand, it could delay the acquisition or closing,” says Michael Sher, a managing director at McGladrey’s Real Estate Group in Chicago.
“You really need the human resources and capital today — or at least the contingent human resources and capital — if you are thinking about any acquisitions this year,” says Louis Dubin, president of Resolution Asset Management, a division of Cantor Fitzgerald in New York.
FDIC shares losses
It also is important to have a clear understanding of the loss share agreement. Under a loss share agreement, the FDIC agrees to absorb a significant portion of loss on a specified pool of assets. Typically, the FDIC assumes 80% of the losses, leaving the acquiring bank liable for the remaining portion of the loss.
“Our opinion is that in the more challenged markets like Florida, Georgia, Minnesota and the Pacific Northwest, you will continue to see some of the traditional 80-20 loss share structures,” says Dubin.
“In some of the hotter markets, including Chicagoland, where there is a lot of activity and competition, you will see fewer deals with loss share, but that remains to be seen,” he adds.
Buyers need to understand which loans fall under the loss share agreement. In some cases when a bank fails, it takes months to unravel which loans the assuming institution is acquiring, and which loans will be retained by the FDIC.
It is better to get an understanding of that ahead of time,” says Sher. Assets that are typically excluded from the transaction are FDIC and state pre-paid insurance premiums. Values on securities are marked to market at the date of closure, and the valuations are prepared by the FDIC. All accounts payable are retained by the FDIC.
Smoothing the transition
Another key step for the assuming institution is to be an active participant in the closing process. Although it is not mandatory, it is prudent for representatives of the acquiring bank to be present at the time of closing.
Bank closings are kept highly confidential until a team of regulators and representatives of the FDIC move in to close a bank, often late on a Friday afternoon. That type of move can be unnerving to customers and bank employees alike.
The government team has a carefully choreographed plan to close the bank and transfer the assets to the assuming bank so that it is business as usual come Monday. But having a representative from the acquiring bank on hand to speak to address questions and concerns from bank employees can help to ease that sudden transition.
New potential investments
As the economy struggles to recover, bank buyers face a pipeline offering a significant number of bank failures ahead. “We think there are 125 to 150 banks that will fail this year,” says Dubin says.
Failures are expected across many regions, including the Southeast, Midwest and Southwest in states such as Georgia, Florida, Texas and Arizona.
The FDIC announced four bank closings on Feb. 18, two in California and two in Georgia. One of the closed banks was San Luis Trust Bank, FSB in San Luis Obispo, Calif. The bank had $332.6 million in assets and $272.2 million in deposits.
First California Bank stepped in to purchase essentially all the assets, and will also assume the deposits of the failed bank. San Luis Trust Bank, FSB represents the 22nd FDIC-insured institution to fail this year.
Although potential buyers need to tread carefully, there are ample incentives for acquiring a failed bank in the current climate. “Many of the banks that we work with are looking to increase their geographic footprint and market presence,” says Dubin.
“It’s a great opportunity to gain some new, valuable customers, and often there is the ability to gain associated deposits at a much lower cost than what you could recreate those deposits for.”
