Bank mergers through the end of the decade will be much larger than the market-share acquisitions that have dominated the industry in the past few years, a new report by First Manhattan Consulting Group predicts.

Most large acquirers have reached market dominance in current operating areas through so-called "fill-in" purchases. The next step is to move outside their current regions, the authors said.

"With the decline in distressed bank deals and the concentration of market share in many metropolitan areas, acquirers will have to rely more on extracting value from acquisitions that are in adjoining or new territories or in speciality businesses with attractive growth potential," said John F. Grundhofer, chairman and chief executive of First Bank System Inc., in a forward to the report.

The report, called Bank Consolidation: Strategies for the Next Wave, was commissioned by the Bank Administration Institute.

It said that faced with mounting revenue pressures, banks must reach a certain economy of scale to compete. As a result, the number of nonmetropolitan banks could fall by as much as 50% over the remainder of the decade.

Even banks as large as $20 billion to $30 billion should not be considered to large to be bought, the report said. "More large strategic deals will occur because they offer the potential to solve short-term earnings growth problems of the larger superregionals and national contenders, mostly because of cost takeout opportunities," wrote authors James McCormick and William Bowen, respectively the president and a managing vice president of First Manhattan.

For example, in 1987 only two banks over $1 billion of assets were sold. In 1991 that number increased to eight. In 1992 the number surged to 27 and in 1993 there were 16 such deals, the report said.

This trend should continue because the larger acquirers, while dominant in specific regions, still have poor geographic diversity, the authors said.

While eight of the top 10 U.S. banks have significant market presence in six to 10 of the top 50 major metro areas, only one, Banc One Corp., is in more than 10.

Another factor that will drive acquisitions, according to the authors, is the phenomenon of double-dipping. This occurs when the merged entity is itself bought, giving the bank originally acquired two purchase premiums.

Most of the active buyers in the 1982-to-1988 time frame have since been bought, and the increase in mergers of equals can make the combined entity more attractive, they said.

Firstfed Michigan Corp.'s merger of equals with Charter One Financial this week can be seen as creating a more desirable entity for a larger bank or thrift.

To be sure, not all small to midsize banks and thrifts will fall before consolidation, they added.

There are more than 6,000 independent commercial banking entities located outside metropolitan areas, and many have large market shares in their communities.

The report urges banks to establish a good track record in acquiring banks and integrating them cost effectively. If subsequently a high premium is paid, than analysts may be more willing to overlook the price and forego a ratings downgrade.

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