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FDIC Launches Small-Bank Fire Sale


Investors can take advantage of industry's attempt to bounce back.

Major banks are snapping up failed regional banks at bargain prices, thanks to the Federal Deposit Insurance Corporation.

The FDIC seeks to resolve bank failures in a way that takes the smallest bite out of the deposit insurance fund. Typically, this means selling a troubled bank to a more robust competitor.

FDIC-approved sales give major banks an opportunity to expand quickly at low cost, acquiring a network of branch banks and scooping up new customers. Most customers stay put when their bank changes hands because at the retail level, banking might as well be a commodity business and one bank is generally as good as another.

JPMorgan Chase (JPM) snapped up Washington Mutual, making it one of the nation's largest banks by deposits. The de-zombification of WaMu extended JPMorgan Chase's reach into California and Florida -- key markets where it had been nearly invisible. Washington Mutual had about 700 branches in California and about 250 in Florida.

The action isn't limited to major players; regional banks are also picking up failed banks.

Zions Bancorp (ZION) of Salt Lake City, Utah picked up 4 banks from the FDIC.

US Bancorp (USB) took over Downey Savings and PFF, thrifts that went under on the same day.

Private-equity firms are also active in the sector, picking up IndyMac and BankUnited.

Some analysts say Fifth Third (FITB), SunTrust (STI) and BB&T (BBT) are likely candidates to take over troubled banks in the future.

Meanwhile, acquisitions of non-troubled banks continue. M&T Bank (MTB) recently completed the takeover of Provident Bankshares to increase its reach in the mid-Atlantic region. Under the terms of the merger agreement, Provident common stockholders received 0.171625 shares of M&T common stock in exchange for each share of Provident common stock they own, and holders of Provident's preferred stock will receive shares of new series of M&T preferred stock having substantially identical terms.

Acquisition of failed banks under FDIC guidelines is part of the banking industry's effort to bounce back from the housing crash. The FDIC raised its fees on banks this year to rebuild the fund, suggesting some banks will continue to fail in the immediate future. The takeovers may result in more profitable nationwide and regional banks, creating an opportunity for savvy investors.

The only downside: continued homogenization of the banking industry, at least for those who like a bit of local color when handling banking chores. Names such as Security Bank of Bibb County, Temecula Valley Bank, Vineyard Bank, and Founders Bank are probably gone forever.
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