First Union Bid Wins Ailing Bank in Miami

The Federal Deposit Insurance Corp., as expected, has decided to sell ailing Southeast Banking Corp. to First Union Corp. of Charlotte, N.C.

Federal regulators were poised to seize Southeast Banking late Thursday afternoon, according to government sources. The FDIC scheduled a 6:30 p.m. press conference to announce sale of the $11.3 billion-asset Miami banking company.

Barnett, Sun Trust |Not Close'

Regulatory sources said First Union's bid handily beat out those of two rivals, Jacksonville, Fla.-based Barnett Banks Inc. and Sun Trust Banks Inc. of Atlanta.

"It wasn't even close," one regulator said Thursday.

The FDIC and First Union agreed to an unusual deal under which losses on Southeast's $600 million in nonperforming loans would be split between the FDIC, which would absorb 85%, and First Union, which would absorb the rest, sources said. The nonperforming loans will stay on First Union's books.

In past big bank bailouts, the FDIC has been stuck with virtually all of the losses on the failed bank's bad assets.

The FDIC has also agreed to fund the $600 million portfolio with a five-year, interest-free loan.

The cost to the FDIC will be much less than expected for a failure of this size, the sources said. The fund's loss was held down because Southeast still had some equity and regulators had forced the bank to bulk up loan-loss reserves over the last year.

But regulators were unable to arrange a so-called open-bank rescue, under which private capital and FDIC aid would have been blended to bolster the bank without its failing, technically. Initially, the government sought such a deal, thinking that it might reduce the bailout's cost, but buyers rejected that approach.

First Union's shares continued to climb Thursday as word of the agreement leaked out. Its stock rose Thursday by 50 cents, to $25.75, on unusually heavy volume of 565,000 shares. That came on top of a $1.625 gain Wednesday.

Southeast Banking's bonds, which had drawn interest on the prospects of open-bank assistance from the government, slumped in value.

The American Banker reported Thursday that the FDIC was in final negotiations with First Union about the takeover.

Wall Street's Optimism

The rising stock price reflected the market's optimism that the FDIC would provide adequate guarantees against Southeast Banking's problem loans to minimize the risk to First Union. The acquisition will bring 212 branches, greatly bolstering First Union's presence in Florida.

Southeast has sustained almost $500 million in losses, mostly on real estate loans, over the last 18 months. The bank has remained liquid the last two months only by borrowing from the Federal Reserve's discount window.

After Southeast went to the window, the Federal Reserve was said by government sources to begin pressuring the FDIC to move quickly. The Fed made a deal with Congress this summer to limit its lending to undercapitalized banks to 60 days of any 120 days and does not want to be caught violating it with Southeast.

With the acquisition, First Union will achieve its long-desired goal of becoming one of the top two banks in Florida.

A source at the company said planning for a takeover had been under way for a month, with executives already assigned to take charge of key Southeast Banking operations.

Greater Motivation

First Union clearly had a greater desire and need to acquire the the Miami company than did Barnett or Sun Trust.

With assets of $39.7 billion, First Union lacks a dominant presence in any of the three major states in which it operates. In its home state of North Carolina, it essentially runs even in a three-way race with NCNB Corp., Charlotte, and Wachovia Corp., Winston-Salem.

First Union is fourth in South Carolina and fifth in Georgia. And without Southeast, it would be either third or fourth in Florida once NCNB merges with Atlanta-based C&S/Sovran Corp.

But combining First Union's Florida franchise - assets of $16.8 billion and 337 branches - with Southeast would result in the second-largest bank in that state, behind Barnett, which has in-state assets of $30.7 billion and 551 branches.

Enhanced Status

"If market share is what you're being driven by, there's no question" it helps First Union, said Timothy G. Rayl, banking analyst at Southeast Research Partners, Boca Raton, Fla. "It makes them a major player in every market in the state."

Attaining critical mass in Florida is also important for First Union to regain credibility on Wall Street. The company has been criticized for a costly acquisition strategy that invariably left it with smaller, secondtier banks. First Union bought a scattered network of community banks in Georgia after Wachovia won the most attractive franchise, First Atlanta Corp.

In Florida, the largest acquisition went to Sun Trust.

First Union chairman and chief executive Edward E. Crutchfield Jr. first signaled his intention to become a top player in Florida two years ago, when First Union struck a deal to acquire Jacksonville-based Florida National Banks of Florida Inc. That boosted First Union's non-performing assets considerably but strengthened its position in northern Florida.

Among Top Competitors

In a 1989 interview with the American Banker, Mr. Crutchfield explained the Florida National acquisition this way: "We felt the latter part of the 1980s is the time to build a major bank in Florida. In our minds, it will shake down to four or five major competitors, and that will be it."

In August, First Union won the bidding to acquire $1.9 billion in deposits of Florida Federal Savings Bank from the Resolution Trust Corp., beefing up its presence in the Tampa Bay area. The acquisition of Southeast would, for the first time, give First Union a major share of the South Florida market, particularly in Miami, and also fill out its branch network in central Florida.

Donaldson, Lufkin & Jenrette Inc. analyst Thomas K. Brown has been among First Union's critics. But he said Thursday that the acquisition of Southeast would be positive for the North Carolina company if it could boost operating efficiency while consolidating branches.

Barnett apparently felt less pressure to buy Southeast, although it held discussions with the Miami bank several times in past years. Even without Southeast, Barnett remains the state's top bank.

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