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Acquisition and integration considerations for banks in 2024

Mike Green
January 24, 2024
Read Time: 0 min

Account for the details before your FDIC bank acquisition 

Consider these tips for assessing your institution and a to-be-acquired institution for a smooth integration

You might also like this webinar, "Valuation and purchase accounting: Navigating the changing M&A landscape."

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FDIC list

The state of acquisitions in a rising rate environment

According to the FDIC, there were 44 banks on the problem bank list in the third quarter of 2023, and the agency expects that number to continue to climb in 2024. As such, the FDIC announced in its 2024 budget that it is increasing its examination staff to include 189 new positions. The increase is not only due to the projected rise in problem banks but also in response to three significant bank failures in 2023.

These failures were primarily brought on by liquidity concerns around bank stability from severely decreased values of bank security portfolios and inadequate equity to absorb the hit. The rapidly increasing interest rates in 2023 led to publicly traded banks with more than $20 billion in assets having tangible common equity ratios (adjusted for fair value adjustments on held-to-maturity instruments such as loans) of less than 3% as of September 30, 2023, according to S&P Capital IQ. 

Coupled with the rise in interest rates, bank analysts and several large banks have advised caution regarding commercial real estate loan exposure from increased vacancy rates post-COVID. These analysts have observed increased net charge offs, primarily in non-owner occupied commercial real estate properties. 

Should we panic?  Absolutely not, as the industry continues to be very well-capitalized.  However, several banks have announced their desire to acquire banks from the FDIC. The FDIC bid process is highly confidential and typically operates within a short window before the FDIC officially closes a bank and declares a successful acquirer.

Acquisition process

Navigating the FDIC bid process

The FDIC bid process relies heavily on off-site due diligence, which involves leveraging virtual data rooms to share crucial information like loan portfolio tapes and other data. On-site evaluations aren't typically an option, so bidders need to absorb and analyze this data quickly for informed decision-making. Successful acquisition of failed banks requires organization and rapid comprehension of vast amounts of data, particularly concerning the targeted loan portfolio. Bidders need access to a large data platform with business analytics capabilities and experienced credit and valuation professionals who can use it to understand the data and make value decisions.

Another critical focus of bid submission is the deposit base of the to-be-acquired institution. Pivotal considerations include:

  • Understanding the nature of core deposits
  • Assessing core deposits’ intangible value
  • Differentiating between insured and uninsured deposits
  • Analyzing deposit mix and rate structures
  • Predicting potential deposit runoff

Beyond the bid

Considerations for a smooth integration

Even if a merger or acquisition looks great on paper, any weak links in an institution’s data processes, report production, or regulatory compliance systems will come to light during the acquisition. Realistically assess your organization before taking on another institution with the following questions:

  • Does your staff have the bandwidth to manage a bigger or more complex organization? 
  • Can your systems perform the critical day 2 accounting for accretion and amortization?
  • How will the acquired portfolio impact your CECL calculations and processes?

 Integrating an acquisition is far more time-consuming than you might imagine, and the task becomes challenging when your internal processes need work. Outsourcing some or all of the ALM model or getting help with monthly ALM reporting can ease the burden.

One more area to keep in mind when considering an acquisition is the potential for regulatory changes and your institution’s ability to adapt to them. For example, adopting the current expected credit loss standard (CECL) required a well-planned strategy and ample time dedicated to the operational and technical transition. For acquisitive financial institutions, the required efforts have been elevated, as CECL changed how public and private financial institutions account for these acquired assets. Potential changes to portfolio risk standards add another layer of complexity to mergers and acquisitions, so be sure your organization is on top of its game before adding another to the mix.

Support for acquisition

Easing acquisition and integration with help from an advisory team

Considering the diversity and complexity of analytics on both sides of the balance sheet, acquisitive financial institutions often seek external experts' assistance to help staff manage their time during the short acquisition bid window while handling the concurrent demands of daily banking operations. When choosing the right third-party advisory team, banks should assess the team’s:

  • Expertise in balance sheet analysis and valuation
  • Capability to manage and analyze complex data
  • Agility in delivering results
  • Experience in liaising with external stakeholders such as auditors

A third-party advisory provider like Abrigo can quickly offer critical financial valuation advice to banks seeking to acquire financial institutions, including failed banks. Abrigo’s loan valuation process not only furnishes comprehensive life-of-loan cash flow results at the loan level but also aids acquirers in comprehending potential CECL impacts and fair value assessments.

About the Author

Mike Green

Manager, Advisory Services
Mike Green is a Manager for Abrigo Advisory Services focused on valuation, consulting, and credit risk management, a role he has had since joining the company in 2021. Prior to joining Abrigo, Mike was a senior manager in the EVOLV Business Services group at SS&C Primatics, a role he held

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About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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