Merger Mania : Profits, Efficiency Fuel Frenzy of Bank Consolidations

This is likely to be another wild year for the nation’s banking industry, with the drive to consolidate so powerful that few financial institutions, no matter how large, are safe from merger or takeover, industry experts say.

The questions asked among industry leaders now: Who is on the prowl for what,and how fast is the current merger pace going to accelerate? There were 380 banking industry mergers in 1992 and the same number in 1993, and some industry analysts believe that as many as half of the existing 11,000 commercial banks may not be around in 10 years.

What’s more, BankAmerica Corp.’s recent proposal to buy Continental Bank Corp. in Chicago for $1.9 billion is the latest example of a newer trend that goes beyond mergers involving financial institutions in the same city or state.

The latest deals increasingly involve forays into different regions and the acquisition of new financial service products, as illustrated by the desire of California-based, consumer-driven BankAmerica to buy a Midwestern bank that caters largely to blue-chip corporate America.

“Mergers are really taking a different turn,” said Victor J. Riley, chairman of KeyCorp. in Albany, N.Y., whose proposed $4-billion purchase of Society Corp. of Cleveland would wed the nation’s 25th- and 30th-largest banks. “Banks are now going to try to merge with different organizations and different product mixes. Before, they looked at the synergies.”

One financial institution hot on the acquisition trail is Los Angeles-based First Interstate Bancorp, which bought five financial institutions in California and Texas in 1993. And there is no shortage of acquisition candidates.

“Of the 400 or so banks in California, half of them are for sale,” said one major California bank’s chief executive, who asked not to be identified.

Lenders increasingly see virtue in size. The bigger the financial institution and its cushion of capital, the bigger the loans they can make--a key issue for U.S. lenders playing catch-up with large Japanese and European banks that have captured a major chunk of the U.S. corporate lending market.

In addition, the bigger the financial institution, the more acquisitive it can be. It’s known as the “springboard effect.”

“The bigger you are, the more acquisitions you can make,” said attorney H. Rodgin Cohen of Sullivan & Cromwell in New York, a bank merger expert who thinks 1994 merger activity will equal or surpass last year’s rapid pace.

Who loses? “Redundant” employees who face layoff are obvious victims. So are retail branch customers who complain that service inevitably declines after a merger. Former Security Pacific customers still complain of account snafus nearly two years after their bank was swallowed up by Bank of America.

That dissatisfaction reflects how big banks increasingly rely on technology to cut costs and justify the mergers financially.

For example, San Diego Trust & Savings Bank, a service-oriented bank being acquired by First Interstate, was one of the last big banks in California to employ mainly full-time tellers. Those jobs are now being phased out in favor of part-time employees to keep costs down.

One graphic case of how customers suffer from consolidation exists in Julian, a picturesque former mining town turned tourist destination in the mountains 60 miles east of San Diego.

Julian’s only bank branch, an office of HomeFed Bank, was closed in December after Great Western Bank acquired HomeFed’s branches. Great Western thought the deposits in the branch were not large enough to justify a branch there. As a result, Julian’s 5,000 residents must now travel 30 miles to the nearest bank branch and automated teller machine.

While advocates of consolidation concede that “dislocation” is inevitable after a merger, they insist that consumers benefit from lower-cost loans and higher-paying deposits. And regardless of the complaints of small customers, the merger pace is unlikely to slow.

While no national banks exist today, the regulatory barriers to interstate banking are falling fast. As a result, between 10 and 20 national banks, as well 50 to 100 large regional banks, could be created by 2000, said Joel P. Friedman, a bank specialist with Andersen Consulting in San Francisco.

Why is the industry contracting so rapidly?

First and foremost, mergers are profitable. As one banker put it in industry argot, mergers are “an efficiency play,” providing financial institutions with a way to boost profit in today’s highly competitive market. By combining two large banking concerns, the acquiring bank can cut as much as 40% from the overhead costs of the bank being taken over.

The acquisition strategies--and profits--of First Interstate, Wells Fargo and other so-called super-regional banks such as NationsBank, Banc One and KeyCorp, have caught the attention of banks nationwide, said Paine Webber banking analyst Lawrence W. Cohn.

The chance to cut costs and boost earnings was the driving force behind Comerica’s purchase in recent years of two large independent banks in San Jose: Plaza Bank of Commerce and Pacific Western Bank.

It’s easier to boost earnings after a merger than it is to simply compete “with 11,000 other banks in a very mature industry,” says J. Michael Fulton, who heads Comerica’s operations in California. (Detroit-based Comerica is the nation’s 27th-largest bank, with nearly $30 billion in assets.)

The banks have little choice. Competition from mortgage bankers and mutual funds has forced them to be more efficient. And investing in the computer equipment to remain competitive is so expensive that it makes sense only for banks that can spread the cost over a larger base of customers.

Having expanded its retail base on the West Coast and in Texas with 23 acquisitions since 1989, BankAmerica is now focusing on leaping across state boundaries into commercial loan markets.

A losing bidder for Bank of New England commercial bank in 1991, BankAmerica could follow the Continental deal with similar moves in eastern and other Midwestern cities, analysts say.

However, BankAmerica’s chief financial officer, Lewis W. Coleman, said in an interview that the company is more interested “in running what we’ve got” than jumping into another major merger deal.

Federal and state rules prohibiting encroachment by out-of-state banks are gradually disappearing, and several bills in Congress would eliminate them altogether. However, regulators are likely to raise yellow flags when a proposed merger gives a financial institution at least 50% of the deposits in a major market.

As Thomas D. Thomson, executive vice president of the Federal Reserve Bank of San Francisco, put it: “We will have to make sure we don’t get a degree of market concentration that leads to market power in which the consumer might be ill-served.”

Biggest Banking Mergers

Lured by big profits and disappearing barriers to interstate mergers, financial institutions are stepping up the pace of acquisitions. Most of the mergers--18 of the 25 largest deals since 1990--involved banks and thrifts based in different states, a trend exemplified by Bank of America’s proposed merger with Continental Bank of Chicago announced Jan. 28.

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Buyer, location: BankAmerica, San Francisco Seller, location: Security Pacific, Los Angeles Completion date: April, 1992 Value (millions): $4,666.9 *

Buyer, location: NCNB Corp., Charlotte, NC Seller, location: C&S;/Sovran, Norfolk Completion date: Dec., 1991 Value (millions): 4,456.6 *

Buyer, location: KeyCorp, Albany, NY Seller, location: Society Corp., Cleveland Completion date: NA Value (millions): 4,039.6 *

Buyer, location: BankAmerica, San Francisco Seller, location: Continental Bank, Chicago Completion date: NA Value (millions): 2,300.2 *

Buyer, location: Chemical Banking, New York Seller, location: Manufacturers Hanover, New York Completion date: Dec., 1991 Value (millions): 2,142.5 *

Buyer, location: NationsBank Corp., Charlotte, NC Seller, location: MNC Financial Inc., Baltimore Completion date: Oct., 1993 Value (millions): 1,360.7 *

Buyer, location: Society Corp., Cleveland Seller, location: Ameritrust Corp., Cleveland Completion date: March, 1992 Value (millions): 1,261.1 *

Buyer, location: Banc One Corp., Columbus, OH Seller, location: Valley National Corp., Phoenix Completion date: March, 1993 Value (millions): 1,247.8 *

Buyer, location: Comerica Inc., Detroit Seller, location: Manufacturers National, Detroit Completion date: June, 1992 Value (millions): 1,147.4 *

Buyer, location: NBD Bancorp, Detroit Seller, location: INB Financial Corp., Indianapolis Completion date: Oct., 1992 Value (millions): 912.0 *

Buyer, location: First Union Corp., Charlotte, NC Seller, location: Domirion Bankshares, Roanoke, VA Completion date: March, 1993 Value (millions): 905.5 *

Buyer, location: Barnett Banks Inc., Jacksonville, FL Seller, location: First Florida Banks, Tampa Bay Completion date: Dec., 1992 Value (millions): 885.0 *

Buyer, location: Marshall & Ilsley, Milwaukee Seller, location: Valley Bancorp, Appleton, WI Completion date: NA Value (millions): 873.0 *

Buyer, location: Banc One Corp., Columbus Seller, location: Liberty National Bank Corp., Louisville, KY Completion date: NA Value (millions): 842.0 *

Buyer, location: KeyCorp, Albany, NY Seller, location: Puget Sound Bancorp, Tacoma, WA Completion date: Jan., 1993 Value (millions): 807.2 *

Buyer, location: Wachovia Corp., Winston-Salem, NC Seller, location: South Carolina National, Columbia, SC Completion date: Dec., 1992 Value (millions): 782.3 *

Buyer, location: Banc One Corp., Columbus, OH Seller, location: Team Bancshares, Dallas Completion date: Nov., 1992 Value (millions): 782.3 *

Buyer, location: Banc One Corp., Columbus, OH Seller, location: Firstier Financial, Omaha Completion date: NA Value (millions): 706.7 *

Buyer, location: National City Corp., Cleveland Seller, location: Merchants National Corp., Indianapolis Completion date: May, 1992 Value (millions): 703.5 *

Buyer, location: Washington Mutual Savings Bank, Seattle Seller, location: Pacific First Financial, Tacoma, WA Completion date: April, 1993 Value (millions): 663.0 *

Buyer, location: Bank of New York, New York Seller, location: National County Banks, West Patterson, NJ Completion date: August, 1993 Value (millions): 651.8 *

Buyer, location: ABN-AMRO Holding, Netherlands Seller, location: Cragin Financial, Chicago Completion date: NA Value (millions): 563.3 *

Buyer, location: First of America, Kalamazoo, MI Seller, location: Security Bancorp, Southgate, MI Completion date: May, 1992 Value (millions): 550.3 *

Buyer, location: Banc One Corp., Columbus Seller, location: Key Centurion Bank Shares, Charleston, WV Completion date: May, 1993 Value (millions): 545.5 *

Buyer, location: First Bank System, Minneapolis Seller, location: Colorado National Bank Shares, Denver Completion date: May, 1993 Value (millions): 527.7 Source: SNL Securities, Charlottesville, Va.