10 Ways Banks Can Grow in 2012

water-grass.jpgIt’s old news that banks are operating with fewer avenues for growth than in years past,  and it’s no surprise that bankers are scrambling for new ways to make up for this lost growth. In doing so, however, bankers need a smart and focused strategy to make the most out of the opportunities available. In a recent report,  “Top 10 Ways Banks Can Grow in 2012,” Grant Thornton LLP comes up with a priority list for growth in the current financial environment.

1. Focus Strategic Plan on Growth

Strategic plans should not be viewed as simply a regulatory requirement, but as a valuable instrument in the assessment, and often continual reassessment, of goals. Grant Thornton writes, “Now that many companies are shifting from survival mode to seizing opportunities in an improving economy, banks should develop and modify their 2012 strategic plans with a renewed focus on growth objectives.” This includes examining whether you are properly incentivizing your growth goals with employees, taking a new look at where you should and shouldn’t be cutting expenditures in your marketing, and rethinking previous decisions about which products are most relevant to today’s market.

2. Examine an Acquisition

While there are many current roadblocks to a successful M&A transaction, ranging from new regulations to uncertainty about future pricing, M&A is still considered a popular avenue for growth. Before incorporating an acquisition into the growth plan, however, banks need to consider post-acquisition issues.

 Aside from preparing for the complex accounting and financial aspects of an acquisition, directors need to be prepared for potential cultural conflicts. “Communication and leadership are probably the most important prerequisites for a successful integration. It’s critical that there be transparent communication between the acquirer and the acquired entity, so that important cultural issues, such the composition of the combined institution’s senior leadership team, are handled in a timely manner,” says Grant Thornton.

3. Implement Smart Tax Strategies and Structures

Banks need to ensure their tax strategies are taking advantage of all new federal benefits, as well as being up-to-date with state and local rules that cover their operating area. “Incentive credits that apply to banks should be implemented in all applicable jurisdictions. Federal benefits from credits (e.g. new market tax credits, energy credits, low-income housing tax credits) and bonus depreciation should be analyzed,” says Grant Thornton.

4. Develop New Service Offerings

Banks should consider adding new services to their existing line-up, as well as maximizing the potential of the services they already have. In terms of maximizing current potential, bankers should increase cross-selling to their established clients and determine which services need a renewed focus after being pushed aside during the downturn. 

For new areas of growth, bankers should consider teaming up with other entities that can help them expand services such as brokerage and financial planning. At the same time, they should consider participating in quality loans that are recently becoming available through other institutions trying to increase capital ratios.

5. Make Technology Work for You and Your Customers

Putting money into new technology expenditures may be hard to stomach for banks during a downturn, but it also may be necessary if their competitors are making those same investments. Grant Thornton suggests supplying tablets or iPads to your field staff which can be used to personalize customer marketing materials and complete loan applications remotely.  Grant Thornton also recommends considering a switch to cloud computing services—after first evaluating the inherent risks—if you haven’t already. “Cloud computing offers a number of distinct advantages over its predecessors, including a more efficient and cost effective use of internal resources, greater speed to deployment, lower operating and capital costs, and higher performance,” says the report. 

6. Send the Right Message with Social Media

Larger financial institutions, and even many smaller ones, are interacting with their customers in new and creative ways across a wide spectrum of social media platforms. Whether it is to bolster public image or to spread information about new products and services, social media offers an inexpensive way to communicate directly with clients.

“Social media provides the opportunity for banks to demonstrate their commitment to corporate social responsibility and help regain confidence from their customers and the public after being largely maligned during the recession,” says Grant Thornton. 

Banks should be cautious, however, as such open communication is a two-way street, and it can be difficult to control negative feedback. In addition, social media provides an avenue for both fraud and privacy breaches, and this risk should be examined as part of any social media plan. 

7. Ready Your Bank for Risk

All banks prepare for risk, but banks should take the extra step of incorporating an enterprise risk management (ERM) approach that fits each organization’s individual needs and objectives. “(ERM) is an approach to assessing and addressing the full risk profile of the bank, including strategic risks such as operational, financial, regulatory, credit and market risks. The assessment process allows all parties to fully understand the impact of major new initiatives across the bank, and enables clear, strategic decision-making,” says Grant Thornton.

8. Understand Regulations

Keeping up and complying with new regulations can be a difficult task given the recent influx of rules stemming from the Dodd-Frank Act and the formation of the Consumer Financial Protection Bureau, but no bank wants to find themselves in noncompliance. Fortunately, as long as the bank’s overall risk management approach is sound and the most potentially costly regulations are given special attention (i.e. the Fair Lending Act, the Unfair or Deceptive Acts or Practices program, and the Bank Secrecy Act) then banks can still see growth while staying compliant. 

9. Plan for the Worst-Case Scenario: Stress Testing

While recently made mandatory for some of the nation’s top banks, stress testing can be a valuable tool to any bank wanting to fully understand potential risks and prepare its growth plans accordingly. “Continual stress testing should be relevant to the bank’s specific portfolios, balance sheet and customer base. Stress testing should cover: asset concentration and credit quality; contagion risk, such as exposure to European debt; and capital structure and availability,” says Grant Thornton. By understanding possible future risks and building contingency plans, banks can more confidently and strategically take advantage of growth opportunities.  

10. Build a Stronger Foundation for Mortgage Lending

Despite potential roadblocks stemming from recent mortgage reform, banks should still consider growing mortgage banking efforts in areas where there is still a large or expanding market. 

“The recent improvement in housing starts and sales of existing homes indicate that there is still a large market for home mortgages.  If properly managed, a new or expanded mortgage banking effort could be very profitable,” says the report.  

Aside from home mortgages, banks should also take a look at new growth sectors in commercial real estate such as apartments, which look promising due to a high number of rental customers and a relatively low number of new apartments being built in the past few years. 

The full article can be accessed on Grant Thornton’s web site.

Which Fee Income Camp Are You In?

fee-income-squeeze.pngThere’s no debate: Every bank needs more fee income, as do a lot of credit unions. The only debate is how a financial institution is going about meeting this need.

In StrategyCorps’ interactions with hundreds of banks and credit unions, we’ve identified three distinct camps in the need-more-fee-income challenge.

The Do-Nothing Camp. This group of financial institutions seems to be waiting for a sign that this recent decline in fee income will eventually pass. We’re not sure if that means they believe overdrafts are going to make a comeback or the Dodd-Frank Act will be repealed, or are simply in a state of denial over the fee income body blows the industry has been dealt. This camp nearly always seems to have fee income replacement on the to-do list, just not at or near the top, and oftentimes it is easily displaced by other things that are not as hard to deal with.

The “Fee-ectomy” Camp. A fee-ectomy is simply charging a fee for the same thing(s) that have been given away for free for a long time and with no corresponding additional value. As the name implies, the extraction of more fee income from customers on this unfair exchange of value basis is seemingly an easy and convenient way to generate more fee income. That is, until it starts causing significant heartburn for customers, provides negative headlines in the media and prompts the politicians to start politikin’. (Think $5 debit card fee.) This camp is comprised primarily of the larger banks that must feel the industry is basically an oligopoly, given their acceptance and commitment level to this fee income pricing strategy. Unfortunately, the by-product of the fee-ectomy strategy is an increased, or at least an ongoing, level of distrust for all banks that eventually breeds things like “bank transfer day” and unflattering customer reviews on Facebook.

The Back-to-Basics Camp. For years the industry talked about relationship banking, but never got around to doing much about it as the lucrativeness of overdrafts from free checking drowned out such discussion. Now smart financial institutions are genuinely trying to figure out what this means as a way to restore fee income by charging new fees for added value and also trying to cure the thousands of unprofitable accounts rather than firing them with arbitrary and value-less fees. This back to basics camp is approaching the fee income challenge by designing products with new features customers gladly pay for (for example, cell phone protection), marketing in a purposeful way that customers actually notice, creating better connections with customers through customized e-communication and reinforcing product education and sales training to frontline branch staff.

It’s pretty obvious which of the three camps will be the winner here (hint, it’s not the first two). But as those institutions that have adopted a back-to-basic strategy will attest, it’s not the passive way or the easy way. However, with clearly superior financial results and much happier customers, it is proving to be the right strategy for banks and credit unions that genuinely commit prioritized time and resources to addressing this issue.

The Perfect Storm

Timing is everything. In his short video, Joe Evans, Chairman and CEO of State Bank Financial Corp, shares how he predicted the recession and how his board was ready with a plan.

Over his 30 year career, Joe Evans has run some of Georgia’s beset community banks. In December 2006, Joe Evans sold Atlanta-based Flag Financial Corp. to the U.S. arm of Royal Bank of Canada for $456 million. Since starting State Bank, Evans and his team have acquired several failed banks in the Metro Atlanta area.

In 2011, State Bank was named the top performing bank in the United States by Bank Director magazine in our 2011 Bank Performance Scorecard, a ranking of the 120 largest U.S. publicly traded banks and thrifts.

Watch the below video filmed during Bank Director and NASDAQOMX’s inaugural Boardroom Forum on Lending held last December in New York City.

Has Lending Turned a Corner?

One of the more depressing aspects of this long-running post-recession malaise has been the continued shrinkage of bank loan portfolios. Consumers and business aren’t asking for many loans, and many of the people who do ask aren’t getting any. That impacts the economy’s ability to grow, if businesses aren’t investing and consumers aren’t spending.

But loan growth seemed to turn a corner in the second quarter, and interestingly, small and mid-sized banks are leading the way, according to an analysis by investment bank Keefe, Bruyette & Woods, Inc.

Total loans and leases increased 0.9 percent in the second quarter, or by $64.4 billion, according to the Federal Deposit Insurance Corp. (FDIC), the first actual growth in three years. The government’s statistics include all FDIC-insured institutions, both public and private. Commercial and industrial loans (C&I) increased for the fourth consecutive quarter, by 2.8 percent, while auto loans rose 3.4 percent, the FDIC said. Credit card balances rose by 0.8 percent and first lien residential mortgages rose by 0.2 percent.  Loans for construction fell for the 13th consecutive quarter, this time by 7 percent.

A deeper look from KBW of publicly traded banks shows that mid-cap banks had the largest growth in loan portfolios. Large-cap banks saw total loan balances decline by 0.2 percent during the second quarter, while mid-cap and small-cap banks grew their total loans by 5.9 percent and 0.7 percent, respectively.

The investment bank and research firm reported:

  • Among the loan categories at mid-cap banks, C&I loans posted the largest quartertoquarter increase, gaining 13.9 percent.
  • Large-cap banks posted quarter-to-quarter loan shrinkage across all loan categories except C&I, which increased 2.0 percent.
  • Only Puerto Rico and the Southwest saw aggregate quarter-to-quarter loan shrinkage. Total loans fell 4.9 percent sequentially for Puerto Rico, and 1.6 percent for the Southwest.
  • The Midwestern and Southeastern regions posted the strongest quarter-to-quarter loan growth as total loans increased 9.5 percent for the Midwest and 6.1 percent for the Southeast.
  • Loan portfolios still are down from a year ago. On a year-over-year basis, total loans (excluding consumer loans) have declined annually for seven consecutive quarters, most recently falling 0.5 percent in the second quarter, according to KBW.
  • The commercial and industrial loan category, which accounts for 18 percent of total loans, is the only loan category to post both quarteroverquarter and yearoveryear loan growth of 2.7 percent and 4.6 percent, respectively.

Commercial and industrial loans to businesses clearly remain a source of strength, even as real estate is soft. The growth in loan portfolios among small and mid-sized banks is a welcome sign, even though large-cap banks account for 90 percent of aggregate loans, according to KBW. Banks have been giving investors something to be happy about: Higher profits, better loan credit quality and even some loan growth during the second quarter. But with the wild swings in the market and plummeting bank stocks lately, it may be that investors still are too worried about the economy to care.

What is Rick Fairbank’s Endgame?

credit-cards.jpgCapital One Corp. CEO Rich Fairbank is a smart guy, but I think he needs to work on his timing. I mean really, who announces a major credit card portfolio acquisition on the same day that the Dow Jones Industrial Average drops 519.83 point – or 4.62 percent – for an 11-month low, particularly when big banks like Citigroup, Bank of America Corp. and J.P. Morgan Chase & Co. led the way down?

On August 10, Capital One announced that it was acquiring the U.S. credit card business of HSBC Holdings PLC for approximately $2.6 billion, just as global equity markets were panicking over the combination of Standard & Poor’s historic downgrading of the United States’ credit rating, deep concerns about the wobbly financial state of major European countries like Italy and France, and the distinct possibility that the U.S. economy might be slipping back into another recession.  This followed a deal announced in June, when Capital One acquired ING Direct, the U.S.-based online banking subsidiary of Dutch giant ING Groep, for $9 billion.

Of course, Capital One had been working on the HSBC deal for months – so the exact timing of the August 10 announcement wasn’t something that Fairbank had much control over. But if you know anything about Rich Fairbank you know he’s a fearless strategist who won’t hesitate to pull the trigger on an acquisition if he believes it’s the smart thing to do.

I wrote a story about Capital One in the second quarter 2006 issue of Bank Director that was based on extensive interviews with Fairbank and W. Ronald Dietz, a long-time director who currently serves as chairman of the bank’s audit and risk committee. Back then, Capital One was in the early stages of transforming itself from a consumer finance company whose principal product was credit cards to something that was more along the lines of a traditional commercial bank. It had recently acquired two regional banks, New Orleans-based Hibernia Corp. and Long Island-based North Fork Bancorp., and Fairbank spent a lot of time during the interview explaining why he did that. And in the process, Fairbank also revealed a lot about the way he thinks when he thinks about strategy, and it’s interesting to look at the ING and HSBC deals in the context of what he said about strategy five years ago.

Fairbank made these points in that 2006 interview:

  • He foresaw the emergence of a bifurcated banking market in the United States where many consumer loan categories like credit cards, auto loans, home mortgages and student loans were being consolidated by large national players (think J.P. Morgan Chase in mortgages or Capital One in credit cards) that used their size and economies of scale to squeeze out community and regional banks — but where the deposit market remained under the control of those same community and regional players, which used their local connections to great competitive advantage. Fairbank concluded that Capital One had to be a factor in both markets, and so he embarked on an unusual national/local strategy that led to the Hibernia deal in 2005, the North Fork deal in 2006 and the acquisition of Chevy Chase Bank in 2008.
  • He wanted to diversify both sides of the balance sheet, but especially the liability side. In the early 2000s, Fairbank might have been more fixated on funding than anything else. Prior to its regional bank acquisitions, Capital One funded itself primarily by raising money from institutional investors in the capital markets. But the Russian bond default in 1998 had roiled the global capital markets to such an extent that finance companies like Capital One were deeply concerned about whether they would still be able to fund their operations at any cost. I got the sense that the Russian debt crisis was a seminal event for Fairbank, and he concluded that Capital One needed access to retail banking deposits – which are inherently more stable than capital markets funding – if Capital One was to survive as an independent company.
  • When he thinks about strategy, Fairbank always thinks about where the industry will be five years from now – not where it will be next year. Here’s what he had to say five years ago: “A strategy must begin with identifying where the market is going. What’s the end game and how is the company going to win? Typically companies work forward from where they are. And they think it is a bold move to change 10 percent from where they are. But when one starts from ‘This is the market, this is the end game, this is where the market is heading and this is the timing of when the market is likely to get there,’ you are faced with a very different kind of reality. It creates a much greater sense of urgency and allows the company to make bold moves from a position of strength.”

So, what observations can we make about Capital One’s most recent acquisitions in light of that 2006 interview? First, the HSBC deal would seem to signal the continued consolidation of the credit card market, and affirms Capital One as one of that industry’s major players. It might seem counter-intuitive (or, just plain dumb) to acquire another company’s credit card portfolio when we might be heading down the second leg of a double-dip recession, but Capital One is probably the most analytical company I’ve ever come across — they analyze everything! – so I assume they have factored in all of the likely economic scenarios, including a spike in loan losses if the economy does tank.

The upside? Capital One squeezes enough juice from the HSBC portfolio through cost saves and revenue enhancements that the deal is accretive to earnings in 2013, which is the company’s current projection. The answer to whether investors will support this transaction will probably come later this year or in early 2012, when the company plans on raising some $1.25 billion in fresh capital to maintain its Tier One capital level in the mid-9 percent range.

To me, the ING Direct acquisition was actually more interesting. Capital One says it will use ING’s consumer deposits to fund the HSBC credit card portfolio on an ongoing basis, and some commentators have tended to see the two deals as being linked, i.e. Capital One wouldn’t have bought ING Direct if it also wasn’t planning on acquiring the HSBC portfolio. But to me, HSBC was tactical while ING Direct was strategic. Not only did the ING Direct acquisition provide funding for the HSBC portfolio, it also diversified Capital One’s funding base into the online consumer space – and Fairbank has pursued the goal of greater funding diversification for a long time. Just as importantly, ING Direct gives Fairbank a platform that he can use to build a national online consumer bank, which is a completely different animal than a regional branch bank, and is a natural fit with Capital One’s credit card business. I think Fairbank’s endgame is to build a national consumer bank. My guess is that he has looked five years into the future and seen further consolidation of the consumer deposit market. He can try to build a national deposit franchise through additional brick-and-mortar acquisitions, but that is an expensive and time-consuming approach.  The ING Direct deal gives him another strategic option that might be faster and cheaper – and more fitting with Fairbank’s sense of urgency. 

Growing through Relationships

Our annual M&A conference, Acquire or Be Acquired was off to a good start this past Sunday in sunny Scottsdale Arizona with close to 700 attendees representing 265 financial institutions from around the country. After an early morning round of interactive workshops, several hundred banking professionals and industry experts gathered in the large Arizona ballroom to hear from two bank CEOs who have had success growing their institutions despite the challenging economy and it’s impact on the financial services industry.

As DeVan Ard, President and CEO of Reliant Bank a $400-million asset institution out of Nashville Tennessee, and Andrew Samuel, Chairman and CEO of Tower Bancorp Inc., a $2.7-billion asset holding company out of Enola, Pennsylvania described their markets, cultures and growth strategies, a pattern began to emerge between the two institutions despite the differences in their location, size and business lines.


Both focused on their strengths
During Ard’s presentation, he encouraged the audience to stay focused on building value to the franchise through bank relationships, rather than becoming solely credit driven. He attributed the success of Reliant Bank on its ability to remain focused on what made it profitable.

Tower Bancorp’s approach was quite similar in that Samuel recommended that his fellow bankers recognize what they do well, know their markets inside and out, and resist the temptation to look at other opportunities that don’t fit your core business model.

Both embraced relationship banking
It was clear that both institutions valued the relationships that they had built with their customers, employees, shareholders and other strategic partners. Reliant Bank was able to grow their post-recession deposits by 5-6 percent by leveraging existing relationships with customers and asking for referrals.

By knowing their market, Tower Bancorp was able to design fee-based products specifically for local not-for-profit groups whose boards were filled with the who’s who of their community, thus providing an intangible value to the bank. As a result, the bank created an advisory board to focus solely on this niche market.

Both overly communicate with everyone, including their regulators
It was certainly a common discussion throughout this year’s conference whether the regulatory challenges would take away from the ability to focus strategically on growth. Ard and Samuel both recognized that this was indeed a challenge, however by being proactive and keeping the lines of communication open with the regulators, they have little chance to be surprised.

In addition, Ard felt it was equally important to over communicate with employees, shareholders, media, and the community. By sharing with the employees the financial position of the institution, Reliant Bank was able to get the employees to buy into the plan to slow down growth as they weathered the economic downturn.

Both always look for acquisitions opportunities
Reliant Bank and Tower Bancorp are always on the lookout for potential acquisition opportunities with each having acquired branches and/or other banks within the past few years, however they never lost sight of growing organically. With over 800 banks still on the troubled list and many bankers simply suffering from fatigue, acquisitions are still a viable growth option for both institutions.

At Tower Bancorp, the acquisition strategy is simple, Samuel is responsible for creating strategic partnerships with larger banks in the area as well as actively calling on banks in the surrounding markets to negotiate potential acquisition deals. By building relationships with these potential future sellers, those banks are more open to working with Tower Bancorp, once their board makes the decision to sell.

Samuel still believes that Tower Bancorp can achieve a loan growth figure in the double-digits this year but remains steadfastly focused on organic growth. His acquisition process ensures that not every executive member of institution is involved throughout the entire process. By sharing the responsibilities across the board and senior management, the team has less opportunities to neglect their first priority of organic growth.


Both work diligently with their board
Involving the board throughout the entire process is key to both institutions success. At Reliant Bank, their three year strategic planning started with management, who then shared and received feedback from the board which was ultimately executed by the senior management team. Each quarter they meet to review the tactical plan to make sure it’s in alignment with the overall strategy.

Samuel indicated that Tower Bancorp followed a similar approach with a three-year strategic plan that is reviewed nine times a year. The board is always aware and proactively engaged with the executive team.

Two stories of success from two types of banks — one privately-held, one publicly-traded — one in the south, one located in the north, yet both remained focused on what they were good at while leveraging key relationships to ensure the growth of their organizations during the financial crisis.

Do Strategic Plans Still Make Sense?

chess.jpgIn his 1980 song “Beautiful Boy (Darling Boy),” the late John Lennon wrote a line that captures the challenge common to strategic planners (and the rest of the human race) everywhere: “Life is what happens to you while you’re busy making other plans.”

It was relatively easy for community bank CEOs and their boards to make a strategic plan five years ago when the economy was booming and it wasn’t hard for lenders to put their institution’s money to work. Then “life happened” in 2008 when the U.S. economy tanked and the fuel that drove bank earnings through the middle part of the previous decade – commercial real estate – became too dangerous and unstable for banks to use.

While the U.S. economy has posted five consecutive quarters of GDP growth through the third quarter of 2010, it seems that many business borrowers lack faith in the recovery because loan demand remains slack. The commercial real estate market is still pretty toxic, and bank regulators have been putting pressure on a lot of banks to downsize their CRE portfolios anyway.

So what’s the plan when no one wants your biggest product?

One could argue that the regulators have been driving the planning process at many banks. “They have told banks to reduce [their] CRE [exposure] by ‘X’ percent,” says Michelle Gula, president and CEO at mrae associates inc., a consulting firm that works exclusively with community banks. “They’ll come down on you if you’re not in the zone where they want you to be.”

Gula makes the fair point that for many troubled institutions today, the “strategic plan” ends up focusing on an immediate problem that has come under regulatory scrutiny and must be fixed. “Now the strategic plan needs to be very targeted,” says Gula.  “You have to identify exactly how you’re going to get it done.”

And yet banks still must find a way to grow, and if they have been too reliant on CRE lending, that could require a change in their business model. How should they do that?

Back in the late 1980s I left magazine journalism to work as a speech writer at insurance broker Marsh & McLennan Inc. One of my duties was to write the annual business plan. (It sounds more impressive than it actually was. I was just the writer. Others were the thinkers.) Marsh’s strategic plan came together in what I would describe as a bottom-up process.  Every significant Marsh business unit throughout the country had to submit its own plan for the coming year and present it to senior management. Eventually this deliberate process yielded a company-wide plan that was a distillation of the best opportunities – and best ideas – from throughout the firm. In other words, Marsh’s local markets and individual business units drove its strategy. There were top-down initiatives as well. But Marsh never strayed too far away from its markets and the people who knew them best.

In this context, the only difference between Marsh and a community bank is that Marsh had many markets and a local bank just one. But this is exactly where Geri Forehand, the national director of strategic services at Sheshunoff Consulting + Solutions, says banks should be looking for new growth ideas.

As they moved away from CRE, several of Forehand’s bank clients have developed new industry or business niches based on opportunities in their markets. One bank has concentrated on property management companies, another has zeroed in on local governments and non-profit organizations, while others have placed more emphasis on trust and investment management as their customers shift from spending to saving. Often, it’s necessary for the bank to hire experienced lenders and relationship managers who understand the new business sector, although Forehand says this is a good time to hire talented people from other banks.

“You have to evaluate the market and what it’s going to give you,” says Forehand. “And you have to evaluate people and determine whether you have the right ones. Managing the human capital side is as important as anything right now.”

I would argue that given the many challenges banks face today, including the decline of the CRE market, strategic planning is more important than ever. Find a niche or specialty in your market that is underserved, develop a strategy for attacking that market, hire the necessary talent and go for it.

Life happens, but that’s no reason to stop making plans.

Opportunity is Knocking in Bank M&A

If there was one compelling theme at Bank Director’s “FDIC-Assisted Bank Deals: Opportunity Knocks” one-day seminar, which took place on Oct. 22 at the Four Seasons Hotel in Las Vegas, it’s that acquiring a failed bank from the Federal Deposit Insurance Corp. is one of the best growth options available to banks and thrifts today.
Although the actual structure may vary from one transaction to another, the typical FDIC-assisted deal involves a loss sharing arrangement where the agency agrees to reimburse up to 80% of losses incurred by the acquirer on “covered assets” up to a certain amount. The bank acquirer would be responsible for 20% of the losses up to the agreed upon ceiling – and 100% of the losses thereafter.

Non-Traditional Growth Opportunity

While FDIC-assisted deals offer tremendous opportunities for growth in a banking market where traditional M&A volume is at historically low levels, and where organic growth has been limited by a lackluster economy, they are a demanding and extremely complex undertaking. Interested banks are not told how many competitors are bidding for the failed institution, due diligence is limited and all deals are final – which places tremendous pressure on participants not only to submit competitive bids, but also to avoid missing something that could have serious financial ramifications later on. These are high stakes deals that place considerable pressure on the bidding institutions and their financial and legal advisors.

Not just any bank or thrift can bid on a failed bank, either. Qualified bidders must have at least a CAMEL I or II rating for capital adequacy and management. (So-called CAMEL ratings are used by federal banking regulators to assess the condition of a financial institution, with I being the highest.) And according to experts at the seminar, it also helps if the bidder has a proven track record at acquiring and integrating banks.

Future of Bank Earnings

John Duffy, CEO of investment bank Keefe Bruyette & Woods Inc. in New York, kicked off the seminar with an extensive overview of the banking industry. According to Duffy, the industry’s profitability (defined as earnings prior to taxes and loss reserve provisions) bottomed out in the second quarter of 2009, but any growth since then has been modest at best. One important bright spot is that the three-year rise in non-performing assets finally peaked in the second quarter of this year, which holds out hope that a somewhat stronger rebound in bank earnings may be in the offing.

Jeff Brand, a KBW principal who has worked on several FDIC deals in the past year, pointed out that as of Oct. 22 there were 829 banks on the FDIC’s trouble bank list. And with the agency expected to spend an estimated $60 billion over the next four years to clean up after failed banks, the market for FDIC-assisted deals should remain strong for the foreseeable future.
The regions of the country with the most failures (and therefore the greatest opportunities), according to Brand, are the Southeast, upper Midwest and West.

Tips on Making a Bid

Jim McAlpin Jr., a partner at the law firm Bryan Cave in Atlanta, advised the directors in attendance to contact the senior FDIC officials in their region even before making a bid on a failed bank. Although the FDIC is required by law to seek the lowest cost resolution when a failed bank has been placed under its control through receivership, it’s still beneficial for the agency to have had personal contact with the management team at an institution prior to the submission of a bid.

Surprisingly, McAlpin also advised that prospective bidders should attempt to talk with trouble banks in their region before they fail and are placed in receivership. The FDIC’s own watch list, as well as other easily obtained analyses that are based on public data, can help identify troubled banks that are in danger of failing. Because FDIC restrictions make it next to impossible to perform a thorough due diligence prior to submitting a bid, any insight that the bidder can glean by talking to the management team of the troubled bank beforehand can prove to be invaluable.

The bidding process is quite complex, and Rick Bennett, managing partner and leader of the bank integration practice at the New York-based consulting firm PricewaterhouseCoopers, said that bidders will need to build a sophisticated data model that will enable them to consider a variety of economic and deal structure scenarios when developing their bid. And because all FDIC-assisted deals are final, it’s crucial that potential acquirers base their bids on solid analytics.

As the old saying goes, caveat emptor!

The King + Queen in Today’s Financial Environment

kqcards.pngIf I’ve learned only one thing since re-joining Bank Director last month, its that capital is king, and liquidity, queen. Whether in Dallas, Chicago, New York or D.C., the messages I’ve heard from bankers, attorneys and CEOs are telling: if you’re in a leadership position, these are some of the most challenging times the U.S. banking industry has ever faced.

What buoys my confidence?  A collective optimism that opportunities for growth and new client relationships do exist.

So rather than taking a stance on asset quality issues, the absence of earnings or speculate about when lending will start again, my plan is to post something interesting I’ve recently learned that relates to growth.  Every Monday, I’ll use this blog to share what I’ve learned in my travels, provide an opinion or two, and generally contribute to our regular dialog around driving bottom line performance and enhancing shareholder value.

Whereas our editor’s writing will trend towards the director community — and VP of Digital’s will highlight our many great conferences — I’m intentionally focusing my writing efforts around the interests of the key officers running financial institutions.  As we build upon Bank Director’s 20 years of excellence in this industry, I expect this to be a fun journey and welcome ideas and suggestions for emerging areas of interest.