Just hours after Newport Harbour National Bank collapsed, a Monterey Park bank, eager to expand into Orange County, got the nod from the federal government to take over the insolvent institution.
Now, some two years later, executives at Trans National Bank are less than enthusiastic about their decision.
"There were a lot of negatives now that I look back, " said Trans National President James Liu, as he ticked off a list of headaches, including ridding Newport Harbour Bank of the favorable loan rates and chauffeured limousines it offered its wealthy Newport Beach-area customers.
"I'm not telling anyone not to go out and buy a failed bank," Liu said. "But if I had to do it over again, I wouldn't."
Consultants Generally Agree
Bankers and industry consultants generally agree with Liu's assessment that such acquisitions are risky and often turn out to be more trouble than they are worth.
But as bank failures nationwide have increased dramatically--from 10 in 1981 to a post-Depression record of 79 in 1984--many financially stable banks are jumping at the chance to buy their doomed brethren.
At first glance the benefits of buying a failed bank seem appealing: it is cheaper and quicker to acquire an existing bank than to start a new one; the acquiring bank instantly inherits an established clientele and presence in a new market, and regulators often allow the new bank to reject the failed bank's bad loans so it can start with a clean financial slate.
Still, Edward Carpenter, a Los Angeles consultant who has worked on many such takeovers, said, "It's been my general experience that banks that have bought failed banks have historically found they did not live up to their expectations."
Referring to the rushed and clandestine atmosphere surrounding negotiations with the Federal Deposit Insurance Corp. for purchase of a failed bank, Carpenter said "there is never enough time to verify the core depositors or do a full review of the bank's loan portfolio. They're often buying a little bit blind."
Ernest Leff, a Los Angeles banking attorney, agrees. "The situation is always worse than you assume it to be. The people who know the problems are gone, so you have people who don't know . . . and they botch it."
Leff said another drawback is the drain on management. The acquiring banks often have to take their most talented managers out of the healthy bank and assign them to the offices of the failed bank in order to get those branches back on their feet and running smoothly.
With 43 failures so far this year, and 2,500 of the country's 14,700 federally insured banks currently in financial trouble, the opportunities for expansion-minded banks to take them over will undoubtedly grow. The action is particularly hot in California, where 18 institutions have collapsed since 1981. And Orange County, which leads the state in bank failures, is a prime testing ground for expansion-minded banks.
"It's at a point now, with so many failures, that you can at least call some of your banking brethren to find out some of the common pitfalls" of a takeover, said Jack Abe, president of Los Angeles-based Wilshire State Bank. Wilshire State paid the FDIC $200,000 for insolvent West Olympia Bank's two Los Angeles branches in February, 1984.
Nonetheless, Abe added, "All of us pretty well feel it takes a couple of years to digest (a failed bank acquisition)." Abe said that like most acquiring banks, Wilshire State had the unpleasant task of laying off a number of employees and spent almost one year meshing the two banks' computer systems.
"In general, if you have really done your homework and researched the failed banks' numbers based on the information given to you by regulators at the pre-bidding meetings, you can pick up a good facility," according to Jack Fried, a Los Angeles attorney who represents banks throughout California. Fried cautioned, however, that banks sometimes overpay the FDIC--which serves as receiver for all federally insured failed banks--"because they don't understand what they're getting."
Liu's case is instructive.
Trans National Bank, then Trans American National Bank, paid the FDIC $475,000 to assume the leases on Newport Harbour Bank's building and equipment. It also acquired assets with an estimated value of $13.9 million and assumed liability for the failed bank's 2,200 deposit accounts, which held about $40 million in FDIC-insured funds.
By June, 1984, deposits at the Newport Beach branch had dwindled to $2.4 million, according to figures provided by the Office of the Comptroller of the Currency.
Thus, in just over one year Trans American had to pay out nearly $38 million to deserting depositors. Those pay-outs erased the $31.2 million the bank got from the FDIC to cover the difference between Newport's assets and insured liabilities. The result: a decline in the cash available to Trans American for funding profit-producing loans.