Latest Mergers Won't Dry Up Overcapacity

The second quarter brought the announcement of a number of large mergers that will extend the reach of several banks. But the deals are not the precursors of the long-awaited consolidation, because they will do little to take the fat out of an industry bloated with overcapacity.

Wachovia Corp.'s $797 million deal to acquire South Carolina National Corp., Columbia, S.C., was the largest deal unveiled, according to the American Banker's quarterly roundup of merger announcements. The acquisition will increase Wachovia's assets by nearly a third, from $25.6 billion currently to $32.7 billion.

Banc One on the Move

Banc One Corp.'s $374 million agreement to buy First Illinois Corp., Evanston, Ill., was the second-largest deal - and marked the third time this year that the superregional, based in Columbus, Ohio, has bought a bank in Illinois.

The third-largest deal of the quarter, and the only other valued at more than $100 million, involved a foreign bank. It was the $130 million purchase of York Bank and Trust Co., York, Pa., by First Maryland Corp., Baltimore, which is wholly owned by Allied Irish Banks, Dublin.

None of these deals measured up as the long-awaited catalytic blockbuster event, observers said. Nor is it likely that National City Corp.'s unsolicited bid for its weaker Cleveland rival, Ameritrust Corp. will trigger more bidding elsewhere.

But hope springs eternal.

"I still believe the dam will eventually burst and we will see a lot of activity, possibly even this year," said H. Rodgin Cohen, a lawyer with Sullivan & Cromwell in New York who specializes in banking matters.

Experts are pinning such hopes to a combination of two Southeastern giants, NCNB Corp. and C&S/Sovran Corp.

"That one, if it actually happens, has the potential to creat a me-too syndrome in the industry that we haven't really seen since the last wave of mergers among the big New York City banks during the 1950s," said a West Coast lawyer who has helped structure several mergers.

Several factors might stir action, Mr. Cohen and others said. Later this year, when the shape of banking industry reform legislation is clearer, bank managers may step up the pace of informal talks that presage deals. At the same time, pressure from regulators may intensify.

Meanwhile, the rally in bank stock prices appears to have peaked. If bank stocks do not keep up with the rest of the stock market, bank shareholders may begin exerting pressure on managers to maximize values by striking deals.

Some industry watchers said this year's sharp recovery in bank stock values from their 1990 lows would spark more deals, since banking regulators encourage the use of stock rather than cash for acquisitions among banks.

So far, the 32% gain in bank stock prices during the first half of the year, as measured by the American Banker index of the nation's 225 largest publicly traded banks, has generated little response.

Inertia Called a Problem

The uncertain quality of bank loan portfolios is doubtless a barrier, but even banks with relatively few problems have not jumped into the merger fray.

The real obstacle is inertia, according to Mark Alpert and Mark Lynch, the bank securities analysts at Bear, Stearns & Co. in New York.

The number of commercial banks in the United States fell by 3% last year, but there are still more than 12,000 of them, they noted, although "the number of customers dependent on the banking system has been declining for years."

The resulting overcapacity is an acknowledged drag on the industry and is effectively reduced not by the high-profile interstate deals that occurred in the last decade but by combinations of banks with the same state or city.

But, merger-of-equals boiler-plate not withstanding, "mergers within the same geographic area really mean one bank survives and the other doesn't," Mr. Alpert and Mr. Lynch noted.

"Few bank managers are suffiently desperate or shareholder-oriented to accept their bank's assimilation into another bank, their employees fired to eliminate earnings dilution and the bank's tradition and culture annihilated.

"Unless the pressure to merger is intense or management is unusually motivated to maximize shareholder returns, inertia triumphs and nothing happens," they said.

Mr. Alpert and Mr. Lynch pointed out that there have been significant intrastate banking mergers in only nine states in the last two years, two of which were Fleet/Norstar Financial Corp.'s acquisition of failed Bank of New England's Connecticut and Maine subsidiaries from the Federal Deposit Insurance Corp.

While unassisted dealmaking among banks was moribund, government-related activity involving the federal government was also slow. The FDIC currently lacks the financial resources to shutter large troubled institutions, which might spur action elsewhere on the merger front.

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