National City on the prowl.

National City on the Prowl

National City Corp., which made a bid to acquire Indianapolis-based Merchants National Corp. last month, is also looking for an in-market partner, perhaps in Cleveland or Toledo.

National City had put Ameritrust into play with an unsolicited offer last May, only to be outbid by Society Corp. All three are based in Cleveland.

But according to senior vice president Tom Richlovsky, National City "does not see its fundamental strategy altered" by the failure to acquire Ameritrust.

That strategy is twofold: an aggressive cost realignment program begun in August and, Mr. Richlovsky said, an aggressive expansion strategy, with one of several options being an "in-city, in-market merger."

For the present, National City is looking most closely at Cleveland for merger possibilities.

Overhead Is High

National City's noninterest expenses through June 30 of this year were 64.9% of operating income, compared to an average of 61.8% for the nine largest banks in the state.

According to Edward B. Brandon, the chief executive officer: "A decade-long aggressive acquisition program that has added over $15 billion of banking assets and 9,000 employees has caused operating expenses to escalate to unacceptable levels approaching $1 billion."

A preliminary survey estimated that National City could save between $50 million and $100 million. A $100 million saving in annual expenses would add $1.08 to National City's yearly earnings per share.

Spotlight on TransOhio

An in-city merger with another commercial bank is unlikely. The only other commercial banks that operate in Cleveland are Society, Ameritrust, Huntington, and Banc One.

However, there are nine thrifts in Cleveland, and any of the five largest might be a good fit for National City.

The largest Cleveland thrift - and the most likely partner for National City - is $5 billion-asset TransOhio Savings Bank, which has 77 banking offices, with a total of $3.1 billion in deposits.

TransOhio is undercapitalized, with an equity-to-assets ratio of 2.55%. The bank suffered disastrous performances in 1989 and 1990.

Last year TransOhio lost $44.3 million, 33.67% of its equity capital.

So far this year, the company has been marginally profitable.

Sale Seems Inevitable

Given the company's fragile financial condition, TransOhio is unlikely to remain independent for long.

A private acquisition, or more likely a sale via the Resolution Trust Corp., will probably result in the acquisition of TransOhio by one of the bidders for Ameritrust - Society Corp., Banc One, or National City.

Myron Filarski, the president and CEO of TransOhio, declined to comment on the possibility of a merger with National City.

The other four large Cleveland thrifts are healthier.

Third Federal

The only mutual of the group is Third Federal Savings and Loan Association, which has $3.1 billion in assets.

Third Federal has only 21 banking offices but is strongly capitalized (with an equity-to-assets ratio of 9.36%) and has an impressive $2.8 billion in deposits.

The institution has also had consistently good earnings, with a return on assets ranging from a high of 1.73% to a low of 1.24% for the last 12 quarters.

Considering the regulatory limitations on inducements that can be offered to managers of healthy mutual thrifts, National City's acquisition of Third Federal through a merger-conversion has to be viewed as a long shot.

Other Candidates

The other three candidates for a merger with National City - Charter One Financial, Cardinal Federal, and Ohio Savings - are publicly traded, adequately capitalized, and profitable.

Cardinal Federal is owned by First Nationwide Financial Corp., San Francisco, which in turn is owned by Ford Motor.

Ohio Savings stock is closely held by the Goldberg family, and Robert Goldberg is the bank's president and CEO.

No Contacts Yet

National City has yet to approach anyone with a merger proposal. But according to Mr. Richlovsky, the company anticipates "becoming a much more active acquiror."

This will occur, he said, when a reduction in expenses and an increase in earnings per share raise the bank's stock price and improve its competitive standing in contested acquisitions.

Mr. McRae is senior editor of Bank Mergers and Acquisitions, a newsletter published by SNL Securities. The data base and publishing firm, based in Charlottesville, Va., specializes in the banking and thrift industries.

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