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FEATURE Most small and community bank presidents have only a vague notion about the nuances of banking and consequently didn't have enough safeguards in place to mitigate risks. bank's overall business strategy. For instance, U.S. Bank recently bought a small Knoxville, Tennessee, institution because it wanted to establish a larger presence in a new market. The question then is "does it make strate- gic sense," Winick says. "Is this a place that I want to be?" If the answers are yes, then it's time to study the failed bank's financials and figure out the least expensive way to make a purchase. Zweifler recommends starting at FDIC.gov. The site, which has call reports on all 7,500 banks, includes the age of the existing loan portfolio, the amounts of loans, and the characteristics of loans that are not performing. "You are really making a bet that the underlying collateral is going to be firm," he says. Reviewing the call reports, the operating statements, and the balance sheets reveals the strengths, weaknesses, and worth of the failed bank's loan portfolio. When Zweifler evalu- ates a bank, he also looks to see if existing property owners are currently paying at least the interest on their loans. He also wants to know whether the purchase price covers the loan amount if the property must be sold. "The risk is that the resale price won't hold up and the owner won't continue to pay," he says. "You want to buy mortgage portfolios where people have a vested interest. By that I mean homeowners who are still occupying troubled mortgage properties." Winick says the examination should also cover the branch network, the deposit base of the bank, the number of core deposit clients, and core deposit base. "Very often in any failed bank acquisi- tion, there is a pretty high level of customer attrition," Winick says. "So while the pur- chaser is going to acquire attractive assets at an attractive basis, there is a fairly high amount of loan and deposit runoff." That information, along with ascertaining what the loss over the life of the failed bank's loans will be, costs, and added infrastructure to support working out the bad assets, are all part of the formula for arriving at a bid. Going Forward E ven as well-funded small banks continue to digest Friedman's "zombie banks," no one expects loans, especially mortgages, to be more readily available anytime soon. Why are banks so reluctant? "They're scared," Zweifler says. "This has been the sharpest downturn since the Great Depression. They can't afford to make mis- takes. They don't want the exposure because if something goes wrong in the slightest way, they could be in very deep trouble." Nevertheless, says Friedman, the small banks that remained healthy throughout the financial collapse will continue buying up failed banks but most likely at a slower rate. "It's going to continue to putter along," he says. "It's slowing down. I think the FDIC is taking that approach because it doesn't want to absorb anymore losses." Still, he says, the small banks that were economically strong throughout the down cycle will continue to take advantage of the market. "If you made the right decisions on loan concentration," he says, "and you had enough capital, you are reaping the rewards today." Built to Fit Your Mortgage Lending Needs All-Inclusive Mortgage Lending Solutions • Web Production Portals • Web Origination • Embedded Closing Document Production • Imaging & Electronic Document Management (EDM) • E-Delivery to Investors • Secondary Marketing • Product & Pricing Eligibility Integration • Over 70 Interfaces in 16 Categories • Award Winning Support and Service Contact us today to learn more about how Mortgage Builder fits your needs. 800.850.8060 www.mortgagebuilder.com THE M REPORT | 33