When bad banks buy worse banks

The FDIC has sold several failed banks to institutions that are also losing money. Should this be a cause for concern?

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By Paul R. La Monica, CNNMoney.com editor at large

Regions Financial and Zions Bancorp have each bought two failed banks in the past few months. But investors are worried about the banks' own financial health.

NEW YORK (CNNMoney.com) -- Nine banks have failed so far this year. That's not good news, particularly since 25 failed last year.

Fortunately, customers of these banks have had little to worry about. In most cases, the FDIC immediately found a buyer for the failed banks, so depositors simply found a new name on their bank the Monday after the takeover.

What's more, the FDIC now insures up to $250,000 in individual accounts.

But none of that means everything is A-OK. In several cases, failed banks have been taken over by banks that are also struggling.

For example. Regions Financial (RF, Fortune 500), which acquired the assets of FirstBank Financial Services of McDonough, Ga., after it failed Friday, is expected to lose $705.8 million this year, according to consensus estimates of analysts. And this is Regions' second acquisition of a failed bank in the past year.

Zions Bancorp (ZION), the parent of California Bank & Trust, which is acquiring Alliance Bank of Culver City, Calif., another bank that failed Friday, is expected to lose $117.5 million in 2009. This is also the second purchase of a failed bank for Zions in the past year.

And CenterState Banks of Florida (CSFL), which bought Ocala National Bank of Ocala, Fla., after it failed last month, posted a loss in the fourth quarter and is expected to lose money for the next two quarters.

Is it a problem that weak banks are being allowed to buy failed banks? After all, shouldn't banks that have fewer problems of their own be the ones to scoop up more deposits and assets?

A spokesperson for the Federal Deposit Insurance Corp. was not immediately available for comment.

Still, several industry analysts pointed out that the FDIC would not sell a failed bank to another bank that was also in imminent danger.

In fact, some would argue that when the FDIC approves a takeover of a failed bank, it is an endorsement of the acquirer's own financial situation. To that end, shares of Zions Bancorp were up 2% Monday morning while shares of Regions Financial surged 12%.

Jason Goldberg, an analyst with Barclays Capital, who covers both Regions and Zions, wrote in notes to clients Monday morning that investors do view the deals as a "signal from the FDIC that the buyer is 'healthy.'" He added that the purchases should add to earnings for the two banks.

However, it's debatable if the one-day pop in Regions and Zions means that either bank is out of the woods. Shares of Regions and Zions are both down about 40% this year. Clearly, investors are worried about the long-term health of the two institutions.

And even though the FDIC has largely won raves for how it has handled the banking and credit crisis, its judgment isn't perfect. Remember, before Wells Fargo (WFC, Fortune 500) agreed to scoop up all of Wachovia last year, the FDIC originally brokered a deal for Citigroup (C, Fortune 500) to buy the banking assets of Wachovia.

Imagine how much worse shape Citigroup, which has already received $45 billion in bailout funds and more than $300 billion in loan loss guarantees, might be in if it was also trying to integrate Wachovia.

Nonetheless, another bank analyst noted that it's important to differentiate between how a bank's stock is doing and how the actual operations of the bank are faring.

"In this day and age, some of the best banks I know are struggling with asset quality issues and investment issues that they will get through," said Bill McDonald, managing director with RSM McGladrey, a Minneapolis-based accounting and consulting firm focusing on mid-sized institutions, including community banks.

And to be fair, not all acquirers of failed banks are faring poorly. Westamerica Bancorp (WABC), which bought the third bank that failed last Friday, County Bank of Merced, Calif., has remained profitable throughout the credit crisis and actually increased its dividend last month.

BB&T (BBT, Fortune 500), which acquired Haven Trust Bank of Duluth, Ga., after it failed in December, has also been one of the better performing regional banks during the economic downturn.

Then there's Community Bankers Trust Corp (BTC)., a relatively small bank in Virginia that has bought two failed banks in the past few months through its Bank of Essex subsidiary. It has also remained profitable for the past few quarters.

"Regulators are doing a good job, when arranging a marriage, of making sure it's confident the buyer is someone that's holding up well," said McDonald. To top of page

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