Distressed Bank Acquisition Strategies
As a result of the economic turmoil over the last few years, many financial institutions have become distressed and may be targets for strategic acquisitions. In the current climate, healthy banks are increasingly considering acquiring distressed banks for a potential low cost source of growth, new market penetration opportunities, an increased legal lending limit, enhanced liquidity and generally increasing institution value. It is currently a favorable climate for institutions looking to achieve such goals with the help of an FDIC-assisted transaction.
McGladrey and Resolution Asset Management (RAM), a subsidiary of Cantor Fitzgerald, recently hosted a Web seminar to introduce and analyze new opportunities for acquiring distressed banks. The webinar presented how the FDIC disposes of assets acquired from failed institutions, as well as how healthy banks can acquire failed financial institutions under a loss-share agreement with the FDIC.
Since the beginning of 2007, the FDIC has closed 332 financial institutions with an asset value of $647.4 billion (as of Feb. 4). The FDIC has acquired approximately $89.5 billion in assets that require disposition. Of those assets, approximately one-third have been sold through structured-sale transactions where the FDIC retains an ownership interest, auctions or securitizations. One securitization transaction has been completed, and the FDIC is in the process of bringing a commercial securitization to market.
There are certain parameters that are required in order for loans to be included in a securitized transaction. The loans have to be performing, cannot be more than 60 days delinquent and have a maturity date of one month after closing of the securitization transaction. The loans also must meet specific loan-to-value requirements at origination and/or modification. For example, a loan cannot exceed 120 percent loan-to-value. There are certain classes of assets that do not fit in the securitization model, such as loans secured by gas stations, churches or auto repair facilities.
Many institutions have considered a bank acquisition with loss-sharing directly from the FDIC, but do not have the infrastructure to incorporate the assets that are being brought over in an assisted transaction. Even the healthiest banks may have a tough time raising capital that is non-dilutive to ownership or earnings per share. In the transaction scenario presented by RAM (see the webinar link noted above), a healthy bank could work with an outside asset management company to infuse additional Tier-1 capital to help secure the acquisition.
If you are interested in acquiring the assets of a failed institution or are contacted by a third party about an acquisition, there are many factors to be aware of. An FDIC loss share agreement provides significant downside protection and reduces volatility of cash flows. More protection is provided in some of the more challenging markets, however where more competition for failed banks and assets exists, fewer loss share transaction opportunities are available.
If your institution has considered participating in an FDIC-assisted transaction, you must be prepared to act quickly. There is a four to five week closing process as to when a bank becomes available and the closing of occurs. This includes the process of receiving information, submitting a bid and closing on the transaction. You must plan for contingent capital and human resources as quickly as possible if you are considering an acquisition, because time is scarce once an assisted transaction process has begun.
There are many steps to the transaction process, and many variables to take into consideration. The following is a brief overview of how a transaction often progresses:
- Targeting a failing bank that fits your profile – The FDIC will run the bid process by reaching out to bank participants and establishing bid parameters. Banks must be approved by the FDIC to be able to bid on financial institutions.
- Due diligence and bidding process – Analyze the failing bank and define bid terms and balance sheet modeling with any asset managers or third-party advisors that you may be working with. After agreeing to proceed with a bid, the funds are posted to escrow.
- Closing and transfer of assets – The FDIC selects the winning bidder and transfers substantially all assets and liabilities to that institution. In certain instances, assets are carved out of retained by the FDIC, for one of several possible reasons. The winning bidder retains 100 percent of branches, if desired, and generally a significant majority of the deposits (brokered deposits may be carved out). Under the RAM structure, loans and REO from the failed bank are transferred to an operating subsidiary and the management executes preferred business plans for these assets.
If you choose to pursue a FDIC-assisted transaction, it is suggested that you consider working with third party advisors that are experienced in the process. Working with outside advisors allows management to conserve internal resources. Many community banks do not have the resources to manage the process effectively while also tending to important day-to-day operations.
For more information on the bank closing process and procedures regarding the purchase and transfer of assets in an FDIC-assisted transaction, contact Michael Sher at 312.634.4354. You can also view the full web Seminar recording at www.McGladrey.com.