It all started three years ago with clusters of red and blue dots.
Executives of U.S. Bank, a regional giant headquartered in Minneapolis, drew up an ambitious plan to expand into the California market, a state where the bank had little presence. They didn’t know it at the time, but the plan would vault the bank from the 22nd largest in Los Angeles County all the way to No. 6 today.
In a strategy known internally as the “California initiative,” executives identified a handful of vulnerable community banks in Los Angeles that it expected to become available if the economy deteriorated.
Strategists mapped out the bank’s California branches along with those of targeted acquisitions. Red dots marked existing U.S. Bank locations; blue dots signified targeted bank branches. That speckled map allowed the bank to pinpoint the institutions that would fit best in its existing footprint.
“We mapped out our entire franchise (and) we looked at all our competitors,” said Vice Chairman Joseph Otting, who was transferred from Minneapolis to Los Angeles last year in anticipation of the bank’s expansion.
Since then, the bank, owned by U.S. Bancorp, has grown dramatically in Los Angeles, buying several high-profile failed banks from the Federal Deposit Insurance Corp. Most recently, the bank took over the large local branch network of California National Bank, which was closed by regulators Oct. 30.
“The FDIC transactions that have come along have really aided our ability to get faster and deeper into the (Southern) California marketplace,” Otting said.
While its competitors, including Wells Fargo & Co. and JPMorgan Chase & Co., bought beleaguered rivals early in the financial crisis, U.S. Bank has taken a more measured approach, analysts said. The institution has rolled up more than a dozen acquisitions in the past year of mostly community banks and thrifts.
U.S. Bank’s largest and highest-profile purchases have come mostly in Southern California, including Downey Savings & Loan, a large thrift in Newport Beach that failed late last year, and PFF Bank & Trust, a Pomona-based bank that was closed the same day.
Through the acquisitions, U.S. Bank has more than tripled its local branches. In the process, it has become the sixth largest bank by deposits in Los Angeles County – vaulting several notable institutions, including L.A.’s largest homegrown bank, City National Corp.
Already, industry observers are taking notice.
“They are going to become a player out here,” said Wade Francis, president of Long Beach bank consulting firm Unicon Financial Services Inc.
Golden State strategy
Despite its sign atop the city’s tallest high-rise, U.S. Bank for years has been little more than an afterthought in the L.A. banking community, with about four dozen local branches as recently as last year.
With the California initiative, however, the bank began eyeing specific institutions in the area.
“We always had (PFF) and Downey in our sights,” Otting said. “Cal National was also on that list.”
In summer 2008, U.S. Bank was able to make some headway in its effort to penetrate the local market with the acquisition of Mellon 1st Business Bank, a smallish L.A. subsidiary of Bank of New York Mellon Corp. The subsidiary bank, which did not fail but was nonetheless made available, added seven offices and more than $2 billion in deposits to U.S. Bank’s then-modest local operation.
The initiative picked up later in the year as the financial crisis felled a number of institutions. The bank acquired PFF and Downey on Nov. 21, doubling its Los Angeles County branches practically overnight to more than 100.
Analysts praised the bank’s initiative, saying it is cost-efficient since the FDIC is sharing in future losses on the failed banks’ assets.
“It’s a very good strategy,” Francis said. “There’s very low risk on the part of U.S. Bank and they’re getting some very established branches – PFF and Downey have been around for so long.”
Otting said there are a number of factors – including branch locations, product lines and client base – that have influenced which institutions U.S. Bank has pursued.
In the case of Downey, for instance, U.S. Bank saw an opportunity not only to expand its presence in Los Angeles and Orange counties, but also to sell a range of new products, such as credit cards and car loans, to Downey’s existing customers. What’s more, Otting said, thanks to its mapping exercise, the bank targeted institutions where there would be minimal branch overlap, thereby eliminating the need to close locations.
“We always model out the retail banking locations and how it fits in relation to U.S. Bank’s current footprint,” Otting said, pointing to the bank’s red dot-blue dot method.
Typically, when a bank is facing a closure, the FDIC will contact institutions that have expressed interest in acquiring a failed bank in that area. The FDIC e-mails interested parties with limited details about the nameless institution. After a series of correspondences and confidentiality agreements, the FDIC will give serious bidders the bank’s name and access to detailed financial information.
When it comes time for the FDIC to pick a winner, the process is fairly simple, said David Barr, a spokesman for the FDIC.
“There’s only one deciding factor: the bottom-line cost to the FDIC’s insurance fund,” he said. “By law, we must enter into the transaction that is least costly to our insurance fund.”
Barr could not say why U.S. Bank has been more successful at winning their bids than other rivals. “They just seem to know what we’re looking for.”
One of the main reasons U.S. Bank has been able to pick up so many failed banks, analysts said, is that it is simply in better shape than many other banks.
“It’s a strong institution,” said Ross Demmerle, a stock analyst with Louisville, Ky.-based Hilliard Lyons Inc. “It’s probably just a little better managed than some of the other banks out there.”
Still, the bank has not made it through the recession unscathed. Demmerle, who rates the bank’s stock “neutral,” pointed to higher loan losses and slashed dividends as blemishes on U.S. Bank’s recent performance.
The bank, however, scored its biggest coup just two weeks ago when regulators shuttered Cal National and its affiliated banks.
With 68 Southern California branches and $7.8 billion in assets, Cal National was one of the largest banks headquartered in Los Angeles. But the bank, owned by Oak Park, Ill.-based FBOP Corp., could not recover from a massive, half-billion-dollar write-down last year on investments in mortgage giants Fannie Mae and Freddie Mac.
With mounting loan losses, Cal National was unable to bring its capital levels up to required levels and regulators closed the institution. At the same time, the FDIC closed FBOP’s eight additional subsidiary banks and sold them to U.S. Bank.
The competition for the banks was intense, Barr said, as 41 institutions submitted bids.
“That’s the most I’ve seen in a while,” he said.
One of the advantages for U.S. Bank, in addition to its experience integrating failed banks, was the fact that its size allowed it to acquire all nine of FBOP’s subsidiaries without breaking them up, analysts said.
After the integration of Cal National, U.S. Bank now boasts roughly 160 branches in Los Angeles County, trailing only Bank of America Corp.; Wells Fargo; and JPMorgan Chase, which acquired Washington Mutual’s branch network late last year. (See list, page 25.)
The bank’s acquisitions have not been limited to California. It has gained branches in Idaho, Arizona, Illinois and elsewhere, but the largest pickups have been in Southern California.
For the bank’s senior management, the California initiative represents a homecoming of sorts.
A number of top executives have lived and worked in the L.A. area, which Otting said was a factor in some of the bank’s recent decision-making. The bank’s chief executive, Richard Davis, was born in Hacienda Heights, while Richard Hartnack, the bank’s head of consumer banking, was born in San Diego. Even Otting spent nearly two decades in Southern California with Union Bank.
“The senior management of the bank really has a strong history and presence in Southern California,” Otting said. “It really has been our mission to bring all of that knowledge and expertise together and put forth a stronger presence in the state of California.”
Indeed, the bank still plans to expand. Without providing names of targeted institutions, Otting said he’s still scrutinizing that map of blue and red dots.
“By no means,” he said, “are we done in California.”
For reprint and licensing requests for this article, CLICK HERE.
Stories You May Also Be Interested In
- Capital Levels Crash at Lender
- No Lines, No Fears in Downey Takeover
- FirstFed’s Fault Lines
- S & L; Lessons Served CEO During Mortgage Frenzy
- Exec From U.S. Bank Tapped to Head OneWest
- PFF to be Acquired by California National Bank's Parent
- PFF Bancorp Stockholders Approve Merger
- Crunch Time for Two L.A. Banks