Psst, buddy, want to buy a failed bank?
With the closure of two Northern Colorado banks in July, customers in both Larimer and Weld counties have been introduced to new institutions, one headquartered in-state and one based hundreds of miles away. They have assumed the deposits of banks with long histories in the area and are beginning the lengthy process of turning a failing bank into a healthy one.
Signature Bank, formerly headquartered in Windsor, was closed by state regulators July 8. The Federal Deposit Insurance Corp. authorized Points West Community Bank, based in Julesberg, to assume all of Signature's deposits.
Likewise, Bank of Choice, formerly headquartered in Greeley, was closed on July 22, with Kansas City, Mo.-based Bank Midwest, National Association, assuming all of Bank of Choice's deposits.
Sixty-three banks have been closed nationwide, as of press time, including five in Colorado, year-to-date in 2011. In most cases, when a bank is closed, the FDIC is able to find a buyer who will assume the deposits of the failed bank, keeping the transition as seamless as possible for depositors.
But who are these buyers? How does an institution go about making a deal with the government to become the new face of banks that customers have known for years, sometimes decades?
On the list ahead of time
According to Mark Brase, Front Range President of Points West, the process actually begins long before a new bank moves into town. The FDIC contacts the strongest banks and asks whether they would like to be considered as a potential purchaser in the future. If the answer is yes, the FDIC then determines where the banks would be interested in purchasing if the opportunity should arise.
Locations can be chosen by state, or a bank can choose to be considered to purchase a bank anywhere in the nation. The size of the bank to be purchased is also taken into consideration. Points West agreed to become a potential purchaser a few years ago, Brase said.
When a bank in the preferred location and of the proper size comes under an enforcement action from the FDIC, the due diligence phase begins, both on the part of the FDIC and on the part of the bank or banks that are considering buying the undercapitalized institution.
The FDIC takes into consideration many different factors when deciding which banks should be allowed to buy other banks, including the CAMELS system, a tool regulators use to analyze six different factors affecting the strength of a bank. These six factors are:
C - Capital adequacy
A - Asset quality
M - Management quality
E - Earnings
L - Liquidity
S - Sensitivity to market risk
CAMELS for individual banks are not disclosed. Eligible purchasers participate in a bidding process that is kept completely confidential, according to Brase. No one knows which bank they could be buying, or against which other banks they may be bidding, or for how much.
"All you can do is put your best and final bid together and submit it," Brase said.
The FDIC also requires a capital plan that details how a purchaser plans to recapitalize a troubled bank.
Once a holding company has purchased and taken control of a bank in trouble, it must put into action the recapitalization plan, which in some cases, includes a loss-sharing agreement, in which the FDIC absorbs a portion of the losses on a certain pool of assets, maximizing the recovery of assets and minimizing losses for the FDIC.
The Points West-Signature deal includes no such loss sharing agreement, Brase said.
The Points West team is counting on the customers already cultivated by Signature to get the bank recapitalized, he added.
"Our goal is to retain as many customers as we can," Brase said. "Our retention rate has been very good so far."
Additionally, Points West wants to build on those relationships, keeping customers at their bank for any banking needs, from basic checking accounts to loans, financing, and more.
Points West has its roots in western Nebraska, but moved into Colorado with its Julesberg location in 1997 and is "not unfamiliar with the Front Range," Brase said.
They'll be learning a lot more in the near future.
Molly Armbrister covers the banking industry for the Northern Colorado Business Report. She can be reached at 970-221-5400, ext. 209 or email@example.com.