A little noticed provision of the interstate banking bill could actually make some interstate acquisitions more difficult.
Fleet Financial Group, of Providence, R.I., as well as several highly prized banks in the western United States that are widely seen as long-term acquisition targets, could prove harder to buy under. pending versions of the bill.
The bill, which is expected to gain congressional approval sometime this summer, would limit the deposit share a bank could accumulate upon entering a state.
Ceiling on Share
The House version caps the share at 30% and the Senate version caps it at 25%.
Eight banks already exceed the 30% level, and most of these are rumored to be acquisition targets.
The banks are fleet and Wilmington Trust Corp. of Delaware in the east; U.S. Bancorp in Oregon; West One Bancorp in Idaho; Banc One Arizona Corp.; First Security in Utah; National Bank of Alaska; and Bancorp Hawaii.
If the provision remains in the final bill, the banks would have to divest deposits in order to be acquired.
The impact of the bill "is going to depend on whether or not the federal and state regulators will allow a transaction to go forward subject to divestiture," said Gerard L. Smith, the managing director in Salomon Brothers' financial institutions group.
"Any institution that was in that position [having greater than 25% or 30% market share] would have to argue for that kind of treatment, otherwise they are unpurchasable," he said.
One investment banker identified U.S. Bancorp, National Bank of Alaska, Bancorp Hawaii, First Security, and West One as the most likely to sell in the next few years.
Only Banc One Arizona, a unit of Banc One Corp. in Columbus, Ohio, is seen as unlikely to be in play.
The provision would not completely rule out acquisitions in any of the states except Alaska, said the investment banker, who requested anonymity. "It only complicates them," he said.
National Bank of Alaska, which has 40% market share, would have a tough time shedding the necessary 25% of its deposits because of the weak Alaska economy, the investment banker said.
Disappointing Returns
Keycorp, which has the third largest bank in Alaska, has had disappointing returns in the state, he said.
In the other states, however, finding buyers for divested deposits or for the banks would pose little problem.
Divestitures could make the transactions more costly. But according to Richard J. Kelly, an investment banker with M.A. Schapiro & Co., the divestitures of deposits would also create opportunities for smaller banks in these states. The larger banks, he said, will often buy into a state only 'if it means being the No. 1 or No. 2 bank.
This scenario recently occurred in Wisconsin, which has its own cap on market share.
Marshall & Ilsley Corp., in order to complete its $875 million acquisition of Valley Bancorp. last year, was forced to auction of some of its deposits to abide by the state cap. The auction drew more than 20 bidders, said Mr. Smith of Salomon Brothers, which represented Marshall & Ilsley in the deal.
This could become common if the interstate banking bill is passed, said Mr. Kelly.
Passage of the bill is by no means certain. Its fate hinges on the treatment of foreign banks. Some in Congress want to restrict foreign banks' access to interstate banking based on their home countries treatment of U.S. banks, a position the U.S. banking industry opposes.
Provision Given 50-50 Chance
Even the 30% provision is not assured inclusion in a final bill if it does emerge from the HouseSenate conference. One source said the provision had a 50% chance of surviving. But a staffer on the House Banking Committee said it would definitely be included.
It is the thinking of the members, the staffer said, that current antitrust regulations are insufficient. The idea of the provision, which was introduced by Democrats on the Senate Banking Committee in 1991, is to prevent over-concentration before it occurs.
Banks expanding within a state are now subject to the Herfindahl-Hirschman test by the Federal Reserve, which determines the appropriate market concentration in the states.
In addition, a handful of mostly midwestern states have their own market caps.
It is also unclear whether the final provision will apply to a bank's initial entry into a state. The authors of the House bill, reasoning that market concentration is unchanged when an out of state bank acquires an in state bank, did not ban acquisitions by newcomers of banks with market share in excess of the threshold.
Under the House bill the ban would only apply if the acquirer already had deposits in the state.
The Senate version applies the limit to initial entry, which could prove central in the fate of these banks.
Senate Banking Committee Chairman Donald Riegle, D-Mich., is said to be a backer of the provision.
If the market share threshold does apply to initial entry, a banking industry lawyer said, the provision could become a perfect defensive measure for banks like West One, which have publicly stated an intention to remain independent.
Another bank that has fiercely resisted acquisition feelers - Barnett Banks Inc. - would not be helped by the law. Although Barnett is the largest bank in Florida, it has just more than 20% of market share, well short of the bill's market cap.
How the provision handles mergers of equals is also unclear. The House Banking Committee staffer said mergers were important only where the newly merged company changed market share in a third state.
For example, if two banks based in New York and Ohio merged, and both had assets in Arkansas, then the change in deposit'concentration in Arkansas would be at issue.
Another unresolved question is a proposed cap on total national deposit share, the industry lawyer said.
The bill limits total national share to 10%, which would put U.S. banks at a competitive disadvantage to their European counterparts, who have a far greater share of their own national markets, he said.
Few banks control even half that figure, with BankAmerica Corp. closest at roughly 5%. But with the advent of interstate banking, that could change.
