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November 20, 2014

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Bank Takeovers 101

How the FDIC manages the takeover of troubled banks

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Ulf Buchholz

Security Savings Bank was taken over by the Nevada Financial Institutions Division on Feb. 27.

They wait in the parking lot, men (and women) in black.

An order is issued. It’s Friday, end of the business day. They get out of their cars, walk in the front doors, close the place down and announce they are the new owners.

Bank takeovers managed by the Federal Deposit Insurance Corp. are kept secret until the last moment. The tellers, credit officers and other support staff of a failed bank are going about their business, perhaps serving the last customer of the day and — surprise! — executives from another bank and the FDIC are standing in the lobby with an order from a state or federal regulator handing over the bank to them.

But the takeover doesn’t happen overnight.

Before that Friday, the FDIC and bank executives are working behind closed doors under strict confidentiality.

On the auction block

A common misconception is that the FDIC is the agency that closes banks, agency spokesman David Barr said.

The FDIC doesn’t start marketing a troubled institution until it gets notice of closure from the state or federal institution that regulates the bank.

That can be anywhere from 90 days before to just a few days before.

“The more time we have, a wider net we can cast,” Barr said.

Depending on the time frame, the FDIC begins developing marketing materials and creating a secure Web site to give bankers confidential information on the failing bank’s deposits and assets.

When the FDIC has time, it will post the financial and demographic information, branch locations and the communities it serves.

While the FDIC is doing all this, it is also sending out e-mails to potential buyers.

To get an FDIC e-mail, a bank that wants to bid has to have cleared a review process and been approved by its state or federal regulator.

“We have an opportunity for you to buy a troubled institution,” Barr said, paraphrasing the text of a typical e-mail sent out. “If you’re interested, sign and return to us the confidentiality agreement.”

The banks that return the signed agreement will get a second e-mail that includes general geographic information (such as the bank is located in the Midwest) and the size of deposits.

“If you’re still interested, sign and return this (higher-level) confidentiality agreement,” the e-mail will read.

Those that respond will then receive a link to a Web site and a password. There they will find all the information on the troubled bank, including which one it is.

The banks will typically have until the Tuesday before failure Friday to place their bids. Some will place two bids: One for the insured deposits only, and one that could include all the deposits and some or all of the bank’s assets.

If there is only a day or two to find a buyer, the FDIC may only offer the insured deposits and a percentage of the assets.

The FDIC doesn’t want to risk selling bad assets to a healthy bank, and without the time to audit the failing bank’s books, the FDIC would rather carry the bad assets itself than drag down another bank.

One thing to understand about a bank’s balance sheet: Deposits are considered liabilities because they cost banks money with the payout of interest and the services and technology to support those deposits. However, deposits give banks much of the capital they need to offer loans, a major component of a bank’s assets and profit stream.

So, the bids are placed. The FDIC then sorts through those bids to determine the one that costs the agency least, and notify the winning bank that evening.

Congratulations — it’s a bank!

Nevada State Bank executives found out on a Wednesday — (April 15) two days before the takeover — that they were the new owners of Great Basin Bank, Nevada State Bank Chief Financial Officer Terry Shirey said.

That day, the bank notified 20 people — 20 of its department heads and crucial support staff — to pack their bags and tell their spouses and significant others they had to go out of town for business — for what, they were not allowed to say.

They bought plane tickets and flew into Reno-Tahoe International Airport, setting up a base of operations for the next day’s change of guard.

Before the takeover happened, only three Nevada State Bank people knew of the pending acquisition of Great Basin Bank: the CEO, Shirey and an executive at the bank’s parent, Zions Bancorp, in Salt Lake City.

If a bank is interested in bidding on a failing bank, it registers with the FDIC. When a bank is at risk of failing within the next month or so, the FDIC will notify qualified bidders.

To bid, banks have to be a “healthy, going concern,” Shirey said.

When Silver State Bank was acquired, Nevada State paid a 1.3 percent premium for the bank’s $650 million in insured deposits. Although the bank said previously it had bid for the uninsured deposits as well, the FDIC decided it would cost it less to sell just the insured deposits.

With bank failures happening every Friday across the country, depleting the FDIC’s insurance fund, the agency prefers — if the deal is right — to sell the whole bank, deposits and assets including loan portfolios.

That’s what happened when Nevada State Bank acquired Great Basin Bank on April 17.

“We were very happy they offered a whole bank (takeover) with Great Basin,” Shirey said. Not only did the acquisition give the bank a strong entrance into Northern Nevada, where Nevada State Bank’s reach was limited, but it makes for a smoother transition for customers, he said.

“Just getting insured deposits can be very challenging to manage,” he said of the bank’s purchase of Silver State Bank’s insured deposits. “The FDIC is very busy, so now the first couple of weeks can be very challenging.”

There’s a lot of work involved when loans are acquired, too, and a lot of oversight by the FDIC — but the agency will also share in some of the losses of the acquired loan portfolios.

The tricky part in bidding for all of a bank’s deposits — insured and uninsured — is that to win the deposits not insured by the FDIC, an acquiring bank needs to place a “fairly substantial bid,” Shirey said.

The information the bidding banks receive about the uninsured deposits is not precise.

And there is only one shot to bid. The process isn’t an auction. Bankers can’t come back and offer more, or less to win the bank’s assets and deposits.

On the down low

“Don’t look now, but there’s something funny going on over there at the bank, George. I’ve never seen one, but that’s got all the earmarks of being a run.”

— A man on street to Jimmy Stewart’s character, George Bailey, in the movie classic “It’s a Wonderful Life.”

The FDIC keeps bank failures secret to avoid depositor runs on banks.

Runs can cause a problem. Most banks don’t keep much money in their vaults. If every depositor came to the bank and asked for all their money, the bank wouldn’t be able to pay them.

It’s like George Bailey said in the 1946 movie: “You’re thinking of this place all wrong, as if I have the money back in the safe. The money’s not here. Why, your money’s in Joe’s house and the Kennedy house ... You’re lending them the money to build, and they’re going to pay it back to you the best they can.”

Or perhaps President Franklin D. Roosevelt, speaking to the nation on March 12, 1933, about the banking crisis, put it best:

“The bank does not put the money into a safe-deposit vault. It invests your money in many different forms of credit: bonds, commercial paper, mortgages and many other kinds of loans. In other words, the bank puts your money to work to keep the wheels of industry and of agriculture turning around.”

Regulators don’t warn the public before a failed bank is shut down.

There are several reasons for this, Barr said. The main point, and one that the FDIC and the banking industry consistently repeat, is that, since the FDIC was established in 1933, not a single depositor has lost a single penny of insured deposits.

Then there are the rare times when a bank has gotten a last-minute investor to save it from failure.

If the public had known of the bank’s troubles and the bank’s customers started pulling out their money, that investor would have walked away, and the FDIC would be left holding the bag.

There was an occasion, Barr recalled, when the FDIC was en route to take over a bank, and the cell phone rang: “Turn the convoy around and return to base. The bank has been saved.”

But more often than not, there isn’t a white knight swooping in to save the day.

When rumors come true

By midsummer, rumors swirled about the demise of Silver State Bank, well before it was ordered closed in September by Nevada Financial Insurance Commissioner George Burns. The rumors were fueled by the sudden departure of Douglas French, executive vice president of commercial real estate lending, and the resignation of then-presidential candidate John McCain’s son, Andrew McCain, from the bank’s board and financial audit committee.

“Silver State Bank was more challenging because there was so much speculation,” Shirey said of Nevada State’s acquisition.

That speculation led to some of the bank’s customers pulling out their money, some seen just moments before the FDIC rolled in, white envelopes clutched in hand.

The speculation was so rampant that television news crews were staked out front of Silver State’s headquarters, eyeballing anyone in a dark suit or carrying a box for documents.

The loss of depositors — which Nevada State had paid for — wasn’t that severe, Shirey said. Still, Nevada State contacted customers who had core business with Silver State and encouraged them to bring their money back.

“Once they understood their money was safe, they usually brought their money back,” he said.

Shirey expects bank runs — these days more electronic than pedestrian — to slow as people’s fear of losing their hard-earned money is replaced by an understanding of how the FDIC’s insurance program works.

Since the start of the year, the FDIC has taken over 33 banks — two in Nevada.

The first bank to close after the recession started in late 2007 was First National Bank of Nevada in July, followed by Silver State in September and Security Savings Bank in February.

The deposit insurance program began in 1934 after massive bank runs and failures in the 1920s and early 1930s.

It’s funded by premiums paid by insured financial institutions.

Meet the new boss

Almost all of the employees at the failed bank don’t know the takeover is happening, Shirey said.

In the Great Basin case, the FDIC and Nevada State Bank officials walked in, met with the employees and told them the news.

“There’s a lot of emotion,” Shirey said of the employees. “There’s a lot of uncertainty ... We will be honest: As of right now, they are part of the Nevada State Bank team.”

The FDIC usually has three people in the room when the takeover occurs, Barr said: The receiver-in-charge, a closing manager and an attorney.

The process of what will happen during the next few days is explained to the employees, who are then given a few moments to themselves or to call family.

“We like to give the employees a little time to comprehend what is going on,” Barr said. “They may have heard the bank was having financial difficulties, but it’s still a big surprise that it’s closing.”

But even those moments are brief. The media are notified. A notice is taped to the door. Police are stationed outside.

And teams of workers, anywhere from 40 to 200 people — and strangers to the failed bank’s staff — swarm in and transform the bank overnight to be ready to open the next morning. The Web site is taken down and a new one is put in its place. ATMs are shut down. Accountants close the bank’s books. Loan specialists pore over accounts.

“It can be overwhelming for people who just learned their bank had just been closed,” he said.

Same teller, different name

The first day of business after a bank takeover, customers come into the bank with relatively simple questions:

“I just ordered checks. Can I still use them?” “Does my debit card still work?” “Will I still have direct deposit?”

For Shirey, it was a nice change of pace to be in Northern Nevada, working in the lobby as opposed to sitting at a desk crunching numbers.

Behind the scenes, the bank’s accountants, technology and human resource employees were working to roll Great Basin’s system into Nevada State’s.

Monday morning, when things start running smoothly, many of the FDIC specialists leave.

But with the limited time before the takeover, bank officials don’t know which employees will be kept or which branch offices will stay open.

Because Great Basin offered Nevada State an entry into Northern Nevada, there is more room to grow.

When Nevada State acquired Silver State, it had 90 days after it took over to decide which branches it wanted to buy, and which ones it could do without. Because there was a lot of overlap between the two banks, or the primary customers were unprofitable ones, many of the branches were left to the FDIC.

Because Nevada State didn’t have much of a presence in the north, most Great Basin branches are likely to be acquired, Shirey said.

The bank is still working with Great Basin’s former management, Shirey said.

“A lot of them are key to getting through the first few weeks,” he said, while Nevada State evaluates them to see if there is a place for them at the bank. “A lot of them have nothing to do with the bank’s failure.”

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