Banc One Reopening Negotiations With Premier
Bank One Corp. acknowledged Thursday it might cancel a $65 million investment in Premier Bancorp because of a regulatory decision that would hold it responsible for propping up the ailing Louisiana banking company.
"It is unreasonable to assume that our shareholders would take on the risks associated with any $4 billion financial institution without having actual management control," said John B. McCoy, chairman and chief executive of Banc One, in a prepared statement.
Banc One said Thursday that it was negotiating with Premier to restructure the deal - a stakeout position with an option for a future acquisition. Both parties agreed to extend a yearend deadline to March 31.
No Exemption from Doctrine
The Federal Reserve Board approved Banc One's proposed acquisition this week. But the Fed denied the Columbus, Ohio, company's request for an exemption from the so-called source-of-strength doctrine, which requires that a bank holding company provide whatever assistance is necessary to keep troubled subsidiaries solvent.
Investors apparently were unswayed by the news. Banc One shares rose in line with the strong market Thursday, gaining 50 cents by midafternoon to reach $50.875. Premier's shares fell 25 cents, to $6.25.
Premier said earlier this year it would be in severe trouble if the Banc One deal fell through.
Funds Had Been Earmarked
Baton Rouge-based Premier, with $3.9 billion in assets, is counting on the $65 million to retire a $12 million note and recapitalize its lead bank.
Banc One Agreed earlier this year to provide the $65 million in capital to Premier and gained an option to purchase all the company's outstanding stock for 125% of book value by 1995.
As a condition of acquiring Premier, Banc One asked the Fed not to classify its holding as a controlling interest. But the Fed refused, opening the possibility that Banc One might be forced to make additional interim investments in Premier should the institution experience further trouble.
Little Improvement Made
Premier eked out a meager $13 million profit during the first nine months of 1991. It finished the period with $213 million of delinquent and foreclosed loans, equaling 83% of its combined tangible equity and loss reserves.
The delay and possible derailment of the deal is a sign that the Fed's source-of-strength doctrine is impeding the efforts of strong banks to acquire weaker ones, experts said.
"This significantly discourages investments of this type, probably making them impossible," said H. Rodgin Cohen, a lawyer with Sullivan & Cromwell, New York.
Clarification from Congress
Ironically, Congress appeared to clarify the source-of-strength doctrine in the recent banking bill, said Howard Cayne, a lawyer in the Washington offices of Arnold & Porter.
The law specifies that bank holding companies must either guarantee the capital restoration plans of troubled subsidiary banks or relinquish the banks to federal regulators.
Thus, Mr. Cayne said, a banking company choosing not to guarantee a capital restoration plan apparently could limit its loss on a failing subsidiary to the amount of its original investment - which is exactly what Banc One is seeking to do.
But the law makes no specific mention of the Fed's source of strength policy, making it unclear as to whether the regulatory agency could continue to enforce its doctrine. Mr. Cohen speculated that the issue would not be clarified until a major lawsuit was heard in federal court.
Problem in Thrift Law
To achieve full protection on the Premier deal, Banc One also must gain an exemption from the cross guarantee" provision of the 1989 thrift reform law, which specifies that healthy banks must support failing affiliates.
The company said it has not yet applied to the Federal Deposit Insurance Corp. for the exemption. However, an FDIC spokesman said the agency usually is willing to grant waivers as an inducement for healthy banking companies to acquire weaker rivals.
"I would not be surprised if [Banc One] looked for another partner," said James Marks, analyst at SNL Securities.
Mr. Marks acknowledged that First Commerce Corp., New Orleans, may be too strong to be considered a likely acquisition target.
The other major Louisiana bank, beleaguered Hibernia Corp., probably would not merit consideration unless seized by the government and sold with assistance, Mr. Marks said.
Elsewhere in the market, Citicorp edged into the double digit range on the Big Board's heaviest volume. Shares rose $1, to $10.75.
Stephen Kleege contributed to this report.