Mergers of equals can be fraught with problems, but that isn't stopping community banks from embracing them.

Since 1993, a growing number of community banks have entered into mergers of equals to expand their franchises and leverage the latest technology.

"It will allow us to be a solid, large, locally owned and driven financial institution," said Jim Rothenbach, chief executive officer of OSB Financial Corp., Oshkosh, Wis., which is in the midst of such a transaction. In November 1996 the thrift holding company signed an agreement to merge with FCB Financial Corp., Neenah, Wis., to form a $500 million-asset institution.

Three ultimately successful mergers of equals were announced in 1993 and the number has risen ever since, according to data from SNL Securities, a bank research firm based in Charlottesville, Va.

Five successful deals were announced in 1994, eight in 1995, and 10 deals were announced in 1996, five of which are awaiting completion, according to SNL. One deal has been announced in 1997, and more are expected.

The deals-which can be prickly since neither party is "buying" the other, at least on paper-promise to become a more prominent part of industry consolidation as independent-minded community banks try to cope with rising costs and competitive pressures, executives and observers said.

"We're seeing a lot of interest in these," said Gary Mowder, a partner in the financial institutions group of the Chicago law firm Schiff, Hardin & White. Merging banks want "a base to absorb greater costs that are being incurred and to be more competitive and offer a broader range of services at competitive prices."

The case of Triangle Bancorp in Raleigh, N.C., illustrates why community banks' love affair with mergers of equals might be more than a passing fancy.

At the beginning of 1993, Triangle was a $185 million-asset bank itching to expand. In March it signed a deal to merge with similarly sized New East Bancorp, which was saddled with asset and earnings problems and operating under interim management.

The deal was completed by the end of the year, boosting Triangle to $325 million of assets and significantly expanding its franchise.

Moreover, the deal doubled the bank's outstanding shares to five million, the number of shareholders to 5,000, and placed the bank on the Nasdaq over-the-counter market, said Michael S. Patterson, chief executive officer of Triangle. The liquidity of the stock made Triangle a more appealing acquirer, and in 1994 it signed three mergers in one month.

Triangle now has $971 million of assets. Its performance indicators have gotten better across the board. Also, while the number of employees doubled, the percent of noninterest expense taken up by salaries went from 52.5% in 1993 to about 46% now.

The New East merger "helped us get to where we are today," Mr. Patterson said.

In a way, Mr. Patterson was fortunate that New East lacked a chief executive; bankers and observers said that cultural issues-melding managements, lending procedures, and operations-are by far the most difficult part of any merger of equals.

"From an economic standpoint, it makes all the sense in the world," Jack Wainright III, chief executive of United Security Bankshares, Thomasville, Ala., said of the bank's pending merger with First Bancshares, Grove Hill. "But when you get two shareholder groups, two banks, and two managements, you have to be very careful to work it out."

Patrick Hartman, chief financial officer of CU Bancorp, Encino, Calif., said, "It's a great idea, but it's hard to get the humans to do it. You get a whole lot of people in the process and it's very demanding."

CU Bancorp, an active lender, closed a merger of equals in 1996 with Home Interstate Bancorp., which had a strong deposit base.

The SNL data illustrate how difficult these deals can be to pull off. Of the 31 deals announced since 1993, four were terminated.

Another problem with mergers of equals: They can incite shareholder opposition. They don't offer large takeout premiums to shareholders, and sometimes there is a sense no one is in charge, bankers and observers said.

Few people know this better than Kenne Bristol, chief executive officer of Hinsdale (Ill.) Financial Corp. A group of shareholders last year tried to block a merger with Liberty Bancorp, Chicago, in part because it would have diluted potential returns from a Hinsdale supervisory goodwill lawsuit against the federal government.

But Mr. Bristol pushed through the merger, and it could be completed next week.

"You don't want to contemplate it unless one plus one is going to be greater than two," he said.

But Mr. Bristol said opportunities for the new $1.3 billion-asset entity will be broader than for Hinsdale on its own.

"It's a chance to be reborn," he said.

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