Rare Selloff Greets Failed Bank Buy

Buying a failed institution's assets has typically been a great way for a bank to drive up its stock price, but that wasn't the case Monday for Umpqua Holdings.
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) -- Buying a failed institution's assets from the

Federal Deposit Insurance Corp.

has typically been a great way for a bank to drive up its stock price, but that wasn't the case Monday for

Umpqua Holdings Corp.

(UMPQ) - Get Report


Umpqua's shares were falling more than 5% Monday afternoon after it purchased Seattle's


from the FDIC in a deal announced on Friday.

A report from Sterne Agee argues Umpqua's stock price already reflected investor expectations it would be buying failed banks from the FDIC. The share are up about 35% over the past three months versus a roughly 15% gain for the

KBW Regional Banking ETF

(KRE) - Get Report


Sterne Agee's analysts believe the deal is "strategic rather than financial," as it gives Umpqua a foothold in Seattle. Seattle lost one of the nation's largest banks in 2008 when

Washington Mutual

(WAMUQ.PK) was seized by the FDIC in 2008 and the bulk of its assets were sold to

JPMorgan Chase

(JPM) - Get Report

. Sterne Agee estimates the


deal will lead to a one-time gain of one to 15 cents per share for Umpqua, plus an additional five to eight cents in earnings annually.

Many banks have benefited after they bought failed institutions from the FDIC, including

East West Bancorp

(EWBC) - Get Report


PNC Financial

(PNC) - Get Report


U.S. Bancorp

(USB) - Get Report


Wells Fargo

(WFC) - Get Report


However, after a number of bank stocks jumped late last year following their acquisitions of failed banks, investors became wise to the phenomenon, and started bidding up banks like Umpqua. Even the FDIC has gotten into the act. The regulator

has lately begun structuring deals to allow it to participate in a small part of the upside

when a bank's shares spike after it buys a failed bank.

There still appears to be some upside left for acquiring banks in certain cases, however.

Columbia Banking System

(COLB) - Get Report

, which bought

Columbia River Bank

from the FDIC Friday, saw its shares open more than seven percent higher on Monday, though much of those gains had been erased by early Monday afternoon.


Written by Dan Freed in New York


Read More:

A recent profile of Umpqua.