One of the biggest impacts of COVID-19 has been on the banking sector, as indicated by the increased level of provisions for loan losses recorded in the first two quarters of 2020. Bank executives that were successful acquirers during the Global Financial Crisis of 2007-2008 and those looking to build franchise value are beginning to prepare for the potential to become active acquirers once again.
While the extent and specific timing are not clear, it seems that the combination of recorded loan loss provisions by banks and the continuing economic uncertainty may lead to increased bank failures, and ultimately, acquisitions of these failed banks. As the outlook for the impact of COVID-19 on the economy shifts from a short-term to potential long-term impact, acquirers are beginning to prepare and are forming strategic teams of professionals that are ready to assist at a moment’s notice, should a key FDIC assisted acquisition present itself.
The FDIC bid process is highly confidential and typically operates within a short window prior to the FDIC announcing the closing of a bank and declaring a successful acquirer. Here are some key considerations to remember:
- An important part of the FDIC bid process, due diligence, is conducted using virtual data rooms to share key data, including loan portfolio tapes and other critical data information. On-site diligence opportunities are typically not available. Bidders need to digest this information rapidly and make informed decisions. To be a successful bidder of failed banks, acquirers need to be organized and be able to digest significant amounts of data quickly to structure informed value decisions. The largest and most complex data revolves around the targeted loan portfolio. As such, it is of significant importance to have access to a large data platform with business analytics capabilities to break down and analyze the loan data and a team of credit and valuation professionals to make value decisions based on the underlying data.
- Another key area that requires the acquirer’s focus prior to bid submission revolves around the to-be-acquired deposit base. What are the core deposits and what is the core deposit intangible value? What is the level of insured deposits versus uninsured deposits? What is the mix of deposits and rate structure? How much deposit runoff is to be expected?
Given the diversity and complexity of analytics on both sides of the balance sheet, acquisitive financial institutions typically engage outside experts to assist in the analysis process as the window is short and internal teams also have their normal day to day functions in running the bank. In forming decisions on the appropriate external experts to utilize, bankers should consider the advisor firm’s expertise in the areas of balance sheet focus, ability to manage large and complex amounts of data, agility in producing results and experience interfacing with external stakeholders such as auditors.
SS&C Primatics, through its professional expertise and proprietary loan valuation platform, provides key financial valuation advice in a time-sensitive manner to banks seeking to acquire failed banks. Our valuation process also produces life-of-loan cash flow results at the loan level, significantly aiding acquirers in understanding the potential CECL impacts as well as the fair value impact.
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Written by Mike Green
Senior Manager, SS&C Primatics