$2.1 billion sale means three U.S. superbanks likely to raise fees, lower interest rates

Citigroup agreed Monday to purchase Wachovia's banking operations for $2.1 billion in a deal arranged by federal regulators, making the Charlotte, N.C.-based bank the latest casualty of the widening global financial crisis.

The deal greatly expands Citigroup's retail franchise, giving it a total of more than 4,300 U.S. branches and $600 billion in deposits.

It leaves the nation with three superbanks, reshaping the U.S. banking landscape in the midst of unprecedented financial upheaval.

For customers of those institutions -- Bank of America, Citigroup and JPMorgan Chase -- the consolidation may result in higher fees on everything from checking accounts to bounced checks and overdrafts, and lower interest-rate yields on deposit accounts, banking experts said.

Loan availability also remains in question in the near term, particularly after congressional defeat of the government's proposed financial bailout plan.

"The larger the bank is, theoretically the more power they have to set pricing and other policies," said Nancy Atkinson, senior analyst at Aite Group, a financial services research firm. "I expect we'll start to see free checking accounts start to disappear, and rates on overdrafts could go up. Savings rates could drop."

But the news isn't all bad. Atkinson and others are convinced that the approximately 8,500 remaining regional and community banks nationwide will continue to play a role, providing consumers with more options.

"If you are a customer of the Big Three, you're probably going to see some increased fees because these banks have increased their market shares -- dramatically in some instances," said Tim Yeager, associate professor of finance at the University of Arkansas and a former economist at the Federal Reserve Bank of St. Louis. "From the community bank point of view, I don't think you're going to see much change."

Wachovia, which employs more than 30 people at its branches in Santa Rosa, Petaluma and Clearlake, holds 4.5 percent of total bank deposits in Sonoma County. All three branches, which it purchased during its 2006 acquisition of World Savings, are expected to remain open, local managers said.

Citibank has four branches in Sonoma County, but none in Mendocino or Lake counties.

Citigroup, Bank of America and JPMorgan now own about a third of the banking market, said Anant Sundaram, professor of finance at the Tuck School of Business at Dartmouth College.

"That is a level of concentration that we have not seen in the banking industry," he said.

Now that a deal for Wachovia is complete, the most troubled of the nation's largest financial institutions have been dealt with. However, the Federal Deposit Insurance Corp. estimated there were 117 banks and thrifts in trouble during the second quarter, the most since 2003, and probably more during the third quarter.

"If there is any further consolidation, it is not clear who the large buyers are going to be at this point, unless they are foreign," Sundaram said. "It's not clear to me that the three large banks that are remaining have the ability to acquire dozens of regionals."

To finance the Wachovia acquisition, Citigroup will slash its quarterly dividend in half to 16 cents. It also will dilute existing shareholders by selling $10 billion in common stock to shore up its capital position.

In addition to assuming $53 billion worth of debt, Citigroup will absorb up to $42 billion of losses from Wachovia's $312 billion loan portfolio, with the FDIC agreeing to cover any remaining losses. Citigroup also will issue $12 billion in preferred stock and warrants to the FDIC.

The agreement comes after a fevered weekend courtship in which Citigroup and Wells Fargo & Co. both were reportedly studying the books of Wachovia, which was weighed down by losses linked to its ill-timed 2006 acquisition of mortgage lender Golden West Financial Corp.

Wachovia, like Washington Mutual, which was seized by the federal government last week, was a big originator of option adjustable-rate mortgages, which offered very low introductory payments and let borrowers defer some interest payments until later years. Delinquencies and defaults on these types of mortgages have skyrocketed in recent months, causing big losses for the banks.

Wachovia shares, which had slumped as the global credit crisis intensified in recent months, dropped $8.16, or 81.6 percent, to close at $1.84. They had traded as high as $52.25 over the past year.

Citigroup shares, meanwhile, fell $2.40, or 11.9 percent, to $17.75. Shares have traded between $12.85 and $48.95 in the past 12 months.

The FDIC asserted Monday that Wachovia did not fail, and that all depositors are protected and there will be no immediate cost to the Deposit Insurance Fund.

Federal Reserve Chairman Ben Bernanke, in a statement Monday, said he supports the "timely actions" taken by the FDIC "which demonstrate our government's unwavering commitment to financial and economic stability."

The transaction, which has been approved by the boards of both companies, is subject to approval by Wachovia's shareholders and regulators and must close by Dec. 31.

This story was compiled from reports by Staff Writer Michael Coit and the Associated Press.