Big Banks Seek Regional, Midsize Partners as Downturn Slams Profits

On January 15, 2008, Wells Fargo & Co. announced the acquisition of United Bancorporation of Wyoming, helping the San Francisco-based bank expand its operational footprint into Wyoming and eastern Idaho. The purchase means Wells Fargo adds United of Wyoming’s five banking operations and $1.69 billion in assets. Terms of the transaction were not disclosed.

For larger banks, the market turmoil created by the housing slump and credit crunch has also produced the conditions that make growth by acquisition very appealing in regards to midsized and regional banks.

While the broader Standard & Poor’s 500 index was down 7.08 percent last week from its position a year ago, the index of regional banks was down a staggering 49.15 percent.

Recently Wells Fargo Chairman Richard Kovacevich said the bank may acquire as many as 15 companies in the coming year because prices have declined to reasonable levels.

Market conditions have worked to depress pricing for midsized and regional banks. They face mounting bad loans, strains on their capital, and limited growth through their lifeblood branch networks.

This week, the Federal Deposit Insurance Corp. released its quarterly update on industry results. The 8,534 federally insured banks and thrifts recorded a drop in profits from $145.2 billion in 2006 to $105.5 billion in 2007, a decline of more than 27 percent.

The fourth quarter was much worse. Profits dropped to $5.8 billion, a 16-year low, down from $29.4 billion in the fourth quarter of 2006. This 83.5 percent decline was driven by a dramatic increase in loan defaults from bad mortgages.

Banking institutions also saw a eye-opening increase in the amount of money set aside for loan losses, which more than doubled to $68.2 billion from $29.5 billion from the prior year, further pressuring earnings.

Fewer than half of all FDIC insured institutions, some 49.2 percent, reported increases in net income for 2007.

This financial squeeze will continue to push more activity in the M&A market for midsized and regional bank as larger institutions seek to establish themselves within growing markets around the country, for example, Wells’ acquisition of United Bancorporation of Wyoming established them as the number one bank in the nation’s ninth fastest growing state. Meanwhile, financial pressures will push more midsized and regional banks to consider consolidation.

For the account receivable management industry this trend of consolidation may present challenges to agencies partnered with small and midsize creditors. As smaller banks are enveloped or merged into larger institutions, smaller agencies with a local or regional footprint or those without a relationship to the acquiring bank may be left out.

Dimitri Michaud analyzes trends in strategic receivables management within the consumer finance sector, including the banking, credit card and mortgage markets. He conducts research, writes publications and hosts a regular blog on insideARM.com for Kaulkin Media.