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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

Identifying Opportunity

Posted by Wendell Brock on Thu, Jun 18, 2009

Acquiring a bank with an eye on making an impact in underserved customer groups  

Bank investors and organizing groups know that to be successful in today’s environment, a different type of strategy is required. Acquiring a financial institution with an unhealthy balance sheet and anemic profit potential taps more than investors’ wallets; it can tap their creativity too. One challenge lies in developing a business strategy that can win, and keep, new customers.

Untapped potential

Lena Robinson, of the Federal Reserve Bank of San Francisco, identifies four areas of untapped customer potential for the banking industry: the unbanked, underserved, emerging and immigrant markets. Unbanked consumers are those who have no existing banking relationship. Underserved consumers maintain only a checking account. Emerging consumers who use minimal banking products, but could be ready for more sophisticated debt or investment services. And immigrant consumers are generally migrant workers who have historically been unresponsive to traditional bank marketing initiatives. All of these segments represent opportunity for a newly acquired bank to create value. (

Rewriting the rules

The FDIC’s survey on banks’ efforts to serve unbanked and underbanked consumers, published in February, indicates that addressing these segments efficiently has long been a problem for the banking industry. ( Unbanked consumers are hard to locate and not generally interested in traditional banking products and services. Underserved, emerging and immigrant consumers may be more open to the idea of banking, but they have often have little money and minimal interest in borrowing. Those two characteristics are problematic for the traditional banking business model, which emphasizes deposits and lending.

Because these untapped segments aren’t well addressed by traditional banking operations, efforts to court them must take a different approach. This approach should:  

•    Clearly identify the wants, needs and aspirations of customer being targeted
•    Involve the creation of specialized products and services that match those customer needs, and distribution channels to match those customers’ lifestyles
•    Incorporate innovative outreach programs to establish lines of communication with those target customers
•    Find a way to develop trust among consumers who may be leery of financial institutions in general
•    Consider the development of new ways to measure creditworthiness; consumers in untapped segments may not “pass” traditional credit tests
•    Address the profit challenge associated with serving customers who aren’t likely to produce large deposits or request large borrowing facilities

In the introduction to Untapped: Creating value in underserved markets, ( authors John Weiser, Michele Kahane, Steve Rochlin and Jessica Landis recommend businesses focus on creating win/win situations—where value is generated for the community and for the business. They also argue that it’s important for businesses to create strong partnerships with other organizations that can bring new insights and knowledge to the outreach effort.

As the banking industry continues to evolve through this period of change, new management teams and investors have the opportunity to create a new kind of value. To date, the banking industry has struggle to realize the potential in these segments—but if there ever was a time for change, it is now.  

Next week, we’ll discuss specific geographies where these underserved groups are likely to exist, as well as how you can use that information to target your bank acquisition search.

Topics: underserved communities, bank acquisition, banking opportunity, bank investors, buying a bank

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