Citi Eyes Smaller Fish in Deposit Quest

Citigroup (C) is setting its sight on smaller fish, after its quest to build its deposit base suffered a setback in its failed effort to buy Wachovia (WB).

The Wall Street Journal on Thursday reported that the New York banking titan is in acquisition talks with privately held Chevy Chase Bank, which has 285 branches in the mid-Atlantic and roughly $11 billion in deposits and $15 billion in assets.

Citi has also may have had discussions with Valley National Bank (VLY), according to Gary Townsend, the CEO and president of private equity firm Hill-Townsend Capital. Townsend says he had no firsthand knowledge of the talks, but had heard the rumor from "market sources."

While the regional banks are much smaller than Wachovia, which Citi failed to acquire last month, they may be more manageable targets for the troubled bank.

Citi on Thursday declined to comment regarding the merger rumors, according to a spokeswoman.

Citi's domestic retail banking operation has suffered over the past few years as the company focused on its institutional and international businesses.

While Citi has solidified some branch acquisitions, it hasn't done much in the way of acquiring whole retail bank franchises over the past five years. The last deal Citi completed for a retail bank was in 2005 when it acquired First American Bank of Bryan, Texas. That deal gave Citi just over 100 branches in Texas.

But these days, since the capital markets essentially remain frozen, Citi CEO Vikram Pandit, along with other banks, has been scoping out acquisition targets in order to boost their deposit bases. The deposits provide a cheap source of funding for the banks.