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Building Stronger Communities through Bank Acquisitions

Posted by Wendell Brock on Thu, Aug 13, 2009

The decision to acquire a bank in an underserved community is ultimately based on the investment value of the target bank. But determining that investment value is a tricky proposition; a low-income neighborhood may not offer much appeal currently, but infuse that low-income neighborhood with capital, and the situation might look quite different.

Residents of underbanked communities typically have their financial needs fulfilled by payday loan stores, check cashing establishments, and even unlicensed predatory lenders. The expense associated with these services creates inefficiencies in the cycling of cash within the community. In other words, predatory lenders can drain more money out of the community—through high finance and service charges—than they put into it.

A banking institution, however, can have the opposite effect. When a bank reaches out to underbanked consumers and educates them on the advantages of keeping a deposit account, that bank is also compiling assets that will be returned to the community in the form of loans. Those lend-able funds are the building blocks of home ownership and local business development.

Financial education creates financial efficiencies

Studies have repeatedly shown that financial education is a huge component of attracting and retaining underbanked consumers. A bank that operates effectively in a previously underserved community isn’t limited to showing consumers how to reduce their finance charges, however. The bank can also initiate programs to help consumers develop more efficient budgeting, spending, savings and even tax planning habits. Over time, those cumulative household savings can also be directed back into the community, through discretionary spending.

With a creative vision and effective outreach and education programs, then, a newly acquired bank can anchor a turnaround within an underserved community.

Overcoming the failures of previous banks

The challenges in initiating such a turnaround are large, but not insurmountable. If the target bank is already located within the underserved community, the bank organizers need to understand why that institution wasn’t previously effective. The product and service set, the brand image and the marketing programs (to name a few) need to be overhauled to address the needs and wants of local consumers.

If the target bank is to be relocated to the underserved area, the bank organizers must try to gain some insight from the history of banking in that community. Did previous banks or branches fail? If so, why?

Underserved communities and unbanked consumers obviously aren’t the low-hanging fruit of the banking industry. However, initiating real and positive change within a community is an endeavor that can be both rewarding and profitable. And, because there are many underserved locales in the U.S., the group of bank organizers that defines a workable model for one community has ample opportunity to roll out variations of that model to other areas.

Next week, we’ll discuss marketing strategies for attracting and retaining underbanked consumers.

Topics: bank buy out, Bank Opportunities, Community Bank, failed banks, Buy a bank, mergers and Aquisistions, underserved communities, bank acquisition, Bank Buyers, bank aquisition, underserved areas

FDIC Proposed Policy Statement Regarding Failed Bank Acquisitions

Posted by Wendell Brock on Thu, Jul 16, 2009

Given the large number of bank failures over the last 18 months, the FDIC is seeing increased interest from would-be investors interested in purchasing depository assets of the failed institutions. Concern has risen at the regulatory level about whether these new bank owners and investors have the qualifications necessary to keep the acquired assets from returning to the failed assets pool. That concern has led the FDIC to issue a proposed policy statement that would, if adopted, establish a new set of qualifications for investment groups intending to purchase failed bank assets. 

The proposed standards address the following topics:

  • Ownership structure
  • Capital levels
  • Cross guarantees
  • Affiliate transactions
  • Continuity of ownership
  • Secrecy law jurisdictions
  • Limitations on the existing owners of the failed institution
  • Disclosure requirements

Key measures of the proposal

  1. Silo structures will not be deemed eligible for bidding.
  2. A Tier 1 leverage ratio of 15 percent is required and must be maintained for three years. After that, the institution must remain "well capitalized."
  3. The holding company must agree to sell stock or engage in capital qualifying borrowing to support the depository institution.
  4. Investors with interests in more than one FDIC-insured institution have to pledge to the FDIC their proportionate interests in each institution.
  5. Loans to investors or investors' affiliates would be prohibited.
  6. Investors would have to retain ownership in the institution for at least three years. The FDIC can approve exceptions.
  7. Ownership structures involving entities domiciled in bank secrecy jurisdictions will not be eligible bidders.
  8. Investors owning 10 percent or more of the failed institution will not be eligible bidders.
  9. Investors will have to disclose to the FDIC information pertaining to the size and composition of capital funds, the business plan, the management team, etc.

Bidders subject to proposed rules

Under the current proposal, these rules would only be applicable to certain types of bank acquirers, namely:

  • Private capital investors attempting to take ownership of deposit liabilities that are currently in receivership
  • De novo institutions applying for FDIC insurance in association with "the resolution of failed insurance depository institutions" 

Balancing capital needs with prudence

While the FDIC is conscious of the need to qualify bidders, regulators are also concerned about placing too many limitations on the inflow of new capital into the banking system. The banking system needs private investor capital. Are these proposed rules going to inhibit the flow of that new capital? Or will the new standards deliver the right amount of prudence? Feel free to sound off!

Read the full FDIC statement here: The proposal policy statement is open for public comments until early-August.

Topics: FDIC, failed banks, Buy a bank, Bank Buyers, Bank Regulators, bank investors, Bank Sales

Distressed, Underserved Communities Represent Opportunity for Prospective Bank Buyers

Posted by Wendell Brock on Thu, Jul 02, 2009

In June, the Federal Financial Institutions Examination Council (FFIEC) released its 2009 list of middle-income, non-metropolitan community tracts that are distressed or underserved by the banking community. Banks that serve these communities can receive community development loan credits under the Community Reinvestment Act (CRA).

Prospective bank buyers could use the FFIEC list to identify geographic areas where competition is limited. The industry considers moderate-income and underserved communities to be one of the richest areas of opportunity, but has long struggled to reach those potential customers effectively. A comprehensive community development plan in the right geography could be one method of tapping that potential. Under the right circumstances, the bank has the opportunity to team with community leaders to spearhead economic development that will benefit local residents, businesses and the bank itself.

A strategy to acquire a bank with the intention of serving distressed or underserved markets could involve relocating the acquired institution to the targeted area. In the current regulatory environment, this process could be simpler than attempting to open a new bank. Another option would be to target acquisitions that could be expanded into the distressed/underserved areas with new branches.

Composition of the distressed/underserved list

The 2009 list contains about 4400 community tracts spread out across the U.S., including Puerto Rico, U.S. Virgin Islands, Guam, American Samoa and Northern Mariana Islands. The factors influencing the distressed and/or underserved designation include employment trends, poverty, population loss and distance from nearest urban area.

The chart included shows that these tracts are not evenly distributed throughout the country. In fact the state of Texas has more than its relative share, with distressed or underserved tracts located in 126 different counties. Georgia follows, with distressed or underserved tracts in 70 different counties. Mississippi and Kansas have more than 50, while Kentucky, Michigan and Nebraska each have 45 or more.

With the exception of Georgia, these top 12 are concentrated in the central U.S.—which begs some interesting strategic questions. Are these areas currently underserved because existing banks haven’t found a way to serve these communities profitably? Could a forward-thinking organization group create a viable plan to develop a new bank acquisition into a profitable, regional network of branches, with the products and services that would appeal to consumers in these areas? Are these communities underserved because the local economies have been particularly hard hit by the recession, or have they long been overlooked by banking institutions?

Top 12 states with the most underserved or distressed counties

Texas               126    
Georgia             70    
Mississippi         56    
Kansas              55    
Kentucky           49    
Michigan            48    
Nebraska           45    
Missouri             44    
Arkansas           41    
South Dakota    41    
Oklahoma          41    
Montana            41   

Topics: Bank Buyers, bank aquisition, banking opportunity, underserved tracts, distressed counties

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BankNotes© is published by De Novo Strategy as a service to clients and other friends. The information contained in this publication should not be construed as legal, accounting, or investment advice. Should further analysis or explanation of the subject matter be required, please contact De Novo Strategy at