By Ari Levy and Linda Shen
Dec. 5 (Bloomberg) -- Los Angeles residents already know U.S. Bancorp because the city’s tallest building bears its name. Now, the Minneapolis company is courting locals and taking aim at Bank of America Corp., its top rival in the region.
The 72-story U.S. Bank Tower has worn the company’s logo since it bought the rights in 2003. That hasn’t translated into market leadership: U.S. Bancorp was ranked just 14th by deposits in the Los Angeles area before it acquired branches of failed lenders Downey Financial Corp. and PFF Bancorp last month.
U.S. Bancorp is buying banks and moving executives to keep up with Bank of America, Wells Fargo & Co. and JPMorgan Chase & Co., which have expanded in Southern California through acquisitions. The three rivals control 45 percent of the territory by deposits, according to data from SNL Financial, with Bank of America in the lead at 19 percent.
“U.S. Bank has very minimal geographic presence” in parts of Southern California, said Joseph Otting, vice chairman and senior executive in charge of the West Coast for U.S. Bancorp, who moved to Los Angeles from Minneapolis in April. “Other than just a couple locations, we have virtually no crossover” with Downey and PFF.
U.S. Bancorp Chief Executive Officer Richard Davis is betting on growth in Orange County, which has expanded by more than 10 percent in five years, and Los Angeles County, with about a quarter of the state’s population. Downey and PFF bring 213 branches to U.S. Bancorp to make it the seventh-biggest bank by deposits in the Los Angeles area, according to SNL. Los Angeles County is the nation’s most-populated, with about 10 million residents.
U.S. Bancorp, whose largest shareholder is Warren Buffett’s Berkshire Hathaway Inc., is pitted against the top three banks by deposits in the U.S. Wells Fargo, which is second in the region behind Bank of America, also counts Berkshire as its biggest investor.
“The hurdle presented is huge” because competitors are more established, said Derek Ferber, an analyst at SNL in Charlottesville, Virginia. Bigger banks have gained deposits in recent months and “strengthened their positions even further,” he said.
Bank of America added to its Southern California deposit base earlier this year buying Calabasas-based Countrywide Financial Corp. JPMorgan bought Washington Mutual Inc.’s branch network, and Wells Fargo agreed to buy Wachovia Corp., snagging offices across the region.
Downey, located in Newport Beach, and Rancho Cucamonga-based PFF became the 21st and 22nd banks to fail this year on Nov. 21, as the mortgage meltdown morphed into the worst financial crisis since the Great Depression.
More than 15 percent of Downey’s loans were no longer collecting interest in the third quarter, compared with less than 1 percent at U.S. Bancorp. PFF, stung by soured loans to home builders, agreed to sell itself to a privately held bank in June after losing almost all its market value. Regulators stepped in before that deal was completed.
“U.S. Bancorp will have to work through Downey’s Option-ARM book and PFF’s construction plus mortgage book,” Goldman Sachs Group Inc. analyst Brian Foran said in a Nov. 23 note to investors. He estimated that a combined 22 percent of the loans are nonperforming or delinquent.
U.S. Bancorp avoided the riskiest loans, such as the Option- ARMs that plagued Downey. In announcing the acquisitions, the company said it plans to rework about 35,000 mortgages using the Federal Deposit Insurance Corp.’s loan-modification program.
U.S. Bancorp has dropped 15 percent this year, compared with the 50 percent plunge in the KBW Bank Index. The stock fell $1.02 to $26.89 yesterday on the New York Stock Exchange. As part of the U.S. Treasury’s bank-recapitalization program, U.S. Bancorp received $6.6 billion.
U.S. Bancorp was alerted by the FDIC that it had won the bid for Downey and PFF on Thursday, Nov. 20. Just after 6 p.m. New York time the following day, the FDIC announced that U.S. Bancorp was acquiring the failed banks’ deposits.
“FDIC notifies us midday, we get 240 people to California, assign them to branches, train them, and then host events on Saturday and Sunday,” Otting said in a Nov. 24 interview.
Otting said the company expects to rebrand the Downey and PFF branches over the next five to six months and has no immediate plans to shut any offices or dismiss employees. The bank is adding about 3,000 employees to its staff of 54,000.
U.S. Bancorp has a branch presence in 24 states, and with the added $11.3 billion in deposits, California will become its largest market. In March, U.S. Bancorp agreed to buy a unit of Bank of New York Mellon Corp. with seven branches in Southern California, a “growth region,” Davis said at the time.
It’s an increasingly attractive region for banks because of a growing Hispanic population and a rising number of young families locating to the area, said James Barth, senior finance fellow at the Milken Institute in Santa Monica, California.
“You’ve got the right demographic group and a group that’s going to become more educated and have increased incomes,” said Barth, former chief economist at the Office of Thrift Supervision, in an interview. “California has some of those attributes that you don’t have in some other parts of the country.”
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