U.S. regional banks grow on the cheap amid financial crisis

"It's a significant opportunity because they are able to acquire assets that have been backed-stopped by the FDIC (Federal Deposit Insurance Corporation), that means the losses are covered by the FDIC," Standard & Poor's analyst Erik Oja told AFP. Quite often, he added, it's a "very, very good deal for the surviving bank" that gets assets at a discount.

More than 120 banks went belly-up this year in the United States, the highest bankruptcy rate since the savings and loan crisis of 1992. The current financial crisis has led to a big consolidation drive by the country's largest banks: JPMorgan Chase bought Bear Stearns, Bank of America acquired Countrywide and Merrill Lynch, Wells Fargo purchased Wachovia and PNC absorbed National City.

The same consolidation move is sweeping smaller, regional banks, with some launching into takeover frenzies. Earlier this month, California's East West Bank doubled in size after it acquired San Francisco-based United Commercial Bank.

Minnesota-based U.S. Bancorp, the country's sixth-largest commercial bank with US$264 billion in assets, has expanded across the country this past year to the tune of some US$26 billion. In October alone, U.S. Bancorp took over nine banks in the southwest.

Even the small Ameris Bank, of Moultrie, Georgia, the U.S. state hardest hit by the sub-prime mortgage crisis, has bought two banks in recent weeks. By agreement with the FDIC, Ameris acquired United Security Bank's US$111 million loan portfolio at a 33 million dollar discount. It also assumed US$150 million in deposits. Ameris also bought American United Bank at aUS$20 million discount, assuming US$101 million in deposits and US$83 million in loans.

In both cases, "the loans being purchased are covered by a loss share agreement which affords Ameris Bank significant loss protection for the next five years," Ameris said on its Web site.

The Stillwater, Minnesota-based Central Bank, purchased four banks from its region. A rapid expansion, however, is often based on leverage. East West, for example, financed its acquisition of United Commercial Bank with a new share issue.

Despite the FDIC loss-share agreement, takeovers are not risk-free. As with any merger, it involves harmonizing two different business cultures, computer systems and procedures, as well as keeping the best employees and clients, who often move deposits to a rival bank, Oja said.

Banks planning a takeover must first touch base with the FDIC, which looks into their financial standing before allowing access to a target bank's balance sheet and possibly giving a green light for bids. The purchasing offer for the target bank has to be reconciled with the asking price, and the FDIC also makes sure the takeover does not reduce banking services in rural areas.

Subscribe to The China Post and save 25%. Click here

SharePrintEmail

Write a Comment

Terms

Enter your comments - 3000 characters max

Type in image code

Submit

 Receive China Post promos
 Respond to this email