Buyers of failed banks beware.
Nearly two-thirds of failed-bank customers either switched to another bank or were likely to change banks in the months following a takeover assisted by the Federal Deposit Insurance Corp., according to a survey set to be released Thursday by the Deloitte Center for Banking Solutions.
The results raised important questions about the assumptions acquirers make when pricing failed-bank deals, and what actions they should take to minimize customer attrition, analysts said.
"I think it presents both a risk and an opportunity for the banks that acquire failed institutions," said Mark Fitzgibbon, an analyst with Sandler O'Neill. "If you're buying a failed company, it's incumbent upon you to commit a lot of energy to communicate with the customers of the bank, and make sure that they're comfortable with the new institution, and that they know what's happening."
Customers often leave a failed bank for emotional reasons — they don't feel loyal to the new bank — or they are targeted with offers from competitors.
Industry observers said hanging on to those customers requires careful planning before the takeover, and plenty of communication in the weeks following the bank's failure.
"It's all about managing the customer and putting the programs in place to keep them," said Kip Weissman, a partner at Luse, Gorman, Pomerenk & Schick.
The Deloitte survey, conducted in February and March 2009, asked 825 customers of more than 100 acquired banks — those taken over in FDIC-assisted acquisitions as well as in standard deals — about their behavior following the acquisition.
Deloitte found that customers of failed banks were much more vulnerable to switching, with 36% saying they had moved at least one account to another bank compared with 17% of other acquired bank customers.
Another 36% of customers of failed institutions said they were likely or somewhat likely to switch to another bank within the next year — representing a potential loss of value to the acquiring bank.
"With these deals, if you're really buying deposits — and deposits are your customers — and the majority of the customers end up leaving in the course of, let's say, a two-year period, you've lost a large percentage of that," said Toby Kilgore, the study's author. "What have you then bought?"
The first few weeks after an acquisition are the most critical period for retaining customers, Kilgore said. The initial contact that customers have with the new owner's representatives can leave a lasting impression.
"To the extent that the failed bank keeps the customer-contact people, there's a much higher likelihood that people will stay." said Randy Dennis, president of DD&F Consulting Group in Little Rock.
Dennis said the "stickiness" of customer accounts also depends on how many changes the acquiring institution makes to products — smart acquirers keep rates in line with the local market — and how many accounts a customer has with the bank.
Companies acquiring banks in their same market are at a greater risk of losing customers, he said. "Especially in rural towns, people bank at certain banks for a reason," he said.
Still, some observers said they haven't seen attrition rates quite as high as those found in the survey.
"The experience has been a little better, I think, on balance than many expected," Weissman said.
To combat attrition, managers at Valley National Bank in New York City gave "a full-court press" to the core deposit customers of the Park Avenue Bank and LibertyPointe Bank, failed institutions that it acquired last month, said Gerald Lipkin, Valley National's chairman and chief executive.
The bank kept about one third of the failed banks' employees, Lipkin said, and is giving them preference for open positions at Valley National. He said only a minimal number of customers have exited so far.
"We have a lot of customers who were happy to see that we were the acquirer," he said.
Tri City National Bank in Oak Creek, Wis., has managed to hang on to nearly all the customers of the failed Bank of Elmwood — which Tri City acquired in October — by expanding branch hours and adding products and services.
Scott Wilson, the chief financial officer, said the company retained all but eight of Bank of Elmwood's employees, and even the bank's former chairman, who was given a marketing position.
"We thought it was very important to retain the staff, especially front-line staff, so the customers see the same people doing the same job that they were before," he said.