Capitol Bancorp Ltd.’s most recent deal puts a different spin on cradle-to-grave service.
The Lansing, Mich., multibank holding company has agreed to buy a majority stake in Forethought Federal Savings Bank, a Batesville, Ind., thrift whose sole business is managing trust accounts set up for funeral expenses.
The $122 million-asset Forethought already controls about 20% of the estimated $1.5 billion funeral trust market, and Capitol’s goal is to establish the thrift as the industry’s market leader.
The $4.9 billion-asset Capitol also expects to boost its fee income by selling Forethought’s services at its dozens of community banks nationwide through its Capitol Wealth Advisors.
“Capitol has been trying to diversify away from net interest income,” said Michael M. Moran, its chief of capital markets. “With this deal, we are looking outside of the box to improve the overall growth of the company.”
Robert R. Hogan, the president and chief executive of Capitol Wealth Advisors, said that even though the business of managing funeral trust accounts continues to grow, there is no dominant player.
“We think through the joint venture we are really going to be able to tap into that and become the industry leader,” he said.
On March 18, Capitol announced that it would acquire a 51% stake in Forethought. DeGorter Capital Partners LLC, a Charlotte investment management company headed by David deGorter, the former president and CEO of Wachovia Insurance, would acquire a 25% stake. Forethought’s current holding company, Forethought Financial Group Inc. in Indianapolis, would retain a 24% stake.
Mr. deGorter introduced Forethought to Capitol, Mr. Hogan said. The deal is expected to close in the third quarter.
Buying a stake in an existing thrift is a departure for Capitol, which typically invests in start-ups.
Once it identifies a market where it wants to establish a bank, it puts up 51% of the start-up capital and raises the rest from local investors. After about three years it typically buys the bank outright.
Capitol currently has a network of 62 banks in 17 states, including Michigan, Indiana, Arizona, California and Texas. The company has opened roughly a dozen banks in the last year.
Capitol established its wealth management unit, based in Charlotte, in 2006 as part of an initiative to increase its fee income.
David Scharf, an analyst with First Horizon National Corp.’s FTN Midwest Securities Corp. called the Forethought deal “opportunistic.”
But even though he expects it to increase Capitol’s noninterest income, he also said revenue from the funeral trust business alone would not bring the company in line with banks of similar size.
Only about 10% of Capitol’s revenue comes from fee income, but its peers are generating closer to 25% to 30% of their revenue from fees, according to Mr. Scharf. The best way for Capitol to add meaningfully to its fee income would be to increase the size of the wealth management unit’s sales force, he said.
Currently about half of Capitol’s banks have Capitol Wealth Advisors representatives on-site.
Mr. Hogan would become the president of a bank holding company that would formed for the thrift.
Forethought Federal Savings’ clients are mainly cemeteries and funeral parlors that set up trust accounts for customers planning ahead for the cost of memorials, burials, and other services. Funeral trust funds also can be used to pay for perpetual care.
Eric Todd, an executive vice president and the chief investment and risk officer at Forethought Financial, said the average size of a funeral trust account is $5,000 to $10,000.
The growth potential in the business is undeniable; only a small fraction of the more than 300 million people living in the United States have set up trust accounts for funeral expenses, Mr. Todd said.
Mr. Hogan said that Forethought Savings’ primary marketing strategy would be to target customers of Forethought Financial, which offers insurance, retirement, and end-of-life products and services to employees of roughly 4,000 mortuaries, cemeteries, and other death-related businesses. Few of those companies participate in Forethought Savings’ funeral trust program. Mr. Todd said.
Eventually, Capitol Wealth Advisors would use its parent’s banks as conduits for drumming up business.
Under the Capitol umbrella, Forethought Federal Savings also likely would begin offering more traditional banking products and services, Mr. Todd said.
“Beyond the funeral trusts, there is an opportunity to broaden the list of banking products with Capitol,” he said. “There is a lot of untapped potential there.”
