Community Banks and "Community Banks"

Somewhere between community banks and Wall Street lies the regional banks.  They started off as small-town banks and expanded throughout an entire section of the country over the years.  They still like to promote themselves as "community banks," but they don't quite fit the bill.

Somehow, these banks have come out ahead in the Great Recession, courtesy of the FDIC.  The majority of community banks shut down by the FDIC have been snapped up by these regional banks, and they have made a tidy profit.  In the South, Bank of the Ozarks is quickly becoming a mighty presence.  How on earth did a rural Arkansas community bank creep across states from Texas to North Carolina and amass over 100 branches?

"Since the start of 2010, the bank estimates it has bid on over 50 failed banks. Its goal? To buy them cheap using a conservative low bid strategy. Of the 50, the company has won 7 deals, a good indication the bank is succeeding in not overpaying." -Todd Campbell, Seeking Alpha (article)

So how is that strategy working out?

"Bank of the Ozarks today [July 13, 2011] announced record second-quarter earnings of $50.2 million, compared to $10.9 million a year ago.

"The whopping 361 percent increase was powered by two FDIC-assisted acquisitions. The company's purchase of First Choice Community Bank of Dallas, Ga., and The Park Avenue Bank of Valdosta, Ga., marked its sixth and seventh FDIC-assisted deals." -George Walden, Arkansas Business (article)

Huh.  So how did those failing community banks suddenly become profitable?  According to Campbell, "the deals are designed to contain risk thanks to FDIC agreements to reimburse up to 80% on losses on disposed loans and foreclosures."

The FDIC shuts down community banks, auctions them off to regional "community banks," and the FDIC pats the buyer on the back and reassures them that the government will absorb any losses.  Sounds like a pretty sweet deal.