When First Fidelity Bancorp. withdrew from the bidding for Chemical Banking Corp.'s highly prized southern New Jersey branch system last month, observers were left scratching their heads.

New Jersey's largest bank had missed an obvious opportunity to increase its strength in the state. And perhaps worse, the winning bid - by PNC Bank Corp. - brought a new and powerful competitor into the backyard of the $33 billion-asset holding company.

While First Fidelity denies it, some experts are saying the acquisitive Lawrenceville-based bank had to drop out because it was carrying too much goodwill from previous acquisitions and could not afford the deal.

Goodwill represents the premium over market value an acquirer pays. It is accounted for through a series of quarterly, noncash charges to earnings over an amortization period, often 15 years. In addition to depressing reported earnings, goodwill can also weaken banks' core capital ratios.

Because First Fidelity is not the only large bank that is burdened by goodwill, its inability to pull the trigger suggests that the intangible asset could become a key strategic factor in the era of interstate banking.

"Major banks need to be careful about their goodwill loads," said Tanya Azarchs, senior analyst with Standard & Poor's Corp. "To the extent that they lever up and depress their Tier 1 capital ratios, there could be a problem for a major merger."

While the industry may be flush with capital, goodwill is increasingly crimping the acquisition strategies of large U.S. banks, observers say.

As large acquirers have gone on buying sprees funded in large part by cash, capital ratios for some regional banks are nearing levels that make the large purchases problematic.

First Union Corp., NationsBank Corp., Mellon Bank Corp., and BankAmerica Corp., all expected to lead the consolidation wave along with First Fidelity, also face significant goodwill hurdles.

The gap between tangible and book value at traditional acquirers ranges from 25% to 40%, investment bankers said. The level for smaller banks is zero to 15%.

Regulators closely watch these ratios, and credit rating agencies often downgrade debt when banks are highly leveraged.

With more than $400 million of goodwill on its balance sheet, and a whopping 42.5% difference between tangible and book value, First Fidelity may have had little choice but to pass on the Chemical branches. "Without a doubt, goodwill was an issue in its decision not to submit a final bid for the branches," one investment banker said.

First Fidelity's leverage ratio, which measures capital risk, stood at 6.58% at yearend. This figure does not include the intangibles acquired in an early February acquisition of some Household Bank branches in Maryland.

Had First Fidelity acquired the Chemical branches at the price PNC paid, $504 million, the New Jersey bank's leverage ratio would have declined to 6% or less, a level banks consider risky, said Keefe, Bruyette & Woods analyst David Berry.

The bank has never acknowledged its interest in the branches. Investment bankers have said, however, that the company submitted the high bid during preliminary bidding in January, and then did not submit one in the final round.

On the subject of goodwill, the bank is just as tight-lipped. "Goodwill carry is not a constraint to our acquisition program," is all a bank spokesman would say. Several days after receiving the inquiries, the bank said chief financial officer Wolfgang Schoellkopf was willing to talk, but an interview could not be arranged in time for this article's deadline.

Goodwill clearly was a concern for other acquirers in the Chemical branch sale. Indeed, PNC issued perpetual preferred stock in addition to cash to pay for the branches, in order to offset the impact of the goodwill.

Weeks before the transaction, Moody's Investors Service had placed PNC on a list for possible downgrade, citing its large share repurchase program and numerous acquisitions that were already depressing its leverage ratio.

In the branch transaction, there was no possibility of pooling stock, the usual strategy to avoid goodwill problems.

Most past bank deals were stock swaps. But in the last two years, acquiring banks have turned to cash as a way to burn excess capital and to avoid paying too much in stock as equity prices declined.

S&P recently downgraded Star Banc Corp. after the Cincinnati regional acquired 24 branches of Household Bank at a lofty 10% premium in a cash transaction.

The ratings agency said the move would depress Star's Tier 1 capital ratio from 6.27% to 5.54%.

Chief financial officer David Moffett said the Tier I ratio, which is a slightly different measure of capital risk than the leverage ratio, had already been depressed by previous purchase transactions.

Purchase transactions can be made in either cash or cash and stock. To be a pooling, a deal must meet several stringent accounting guidelines.

"We are convinced the Household deal will strengthen our position in Columbus," Mr. Moffett said.

To be sure, most banks are swimming in capital, and can't unload it fast enough to satisfy shareholders, who want a strong return on equity.

The large number of share repurchases in the industry indicates most banks are unconcerned about leverage ratios.

Even BankAmerica, with a 6.73% leverage ratio and more than $4.4 billion of intangibles on its balance sheet, has undertaken a major share repurchase program.

But banks like First Union Corp., which has made a host of mutual fund and small bank purchases, are pushing the edge of the envelope. First Union's leverage ratio at the end of 1994 was 6.13%.

Its crosstown rival, NationsBank Corp., had a 6.18% leverage ratio at the end of 1994, and has made two mortgage servicing acquisitions this year that would lower the ratio.

NationsBank is even rumored to be eyeing First Fidelity. But NationsBank's stock is so low that experts think the deal would have to be in cash.

Two other acquisitive banks with low leverage ratios are Minneapolis' First Bank System Inc. and Norwest Corp.

Both passed on an opportunity to buy Michigan National Corp., which instead was sold for $1.5 billion in cash to an Australian bank.

Because Michigan National had a large stock repurchase program, which limits pooling options, a cash deal was the only viable route for acquirers.

BankAmerica, AmSouth Bancorp. and National Westminster Bancorp, which also passed on Chemical's New Jersey branches, have goodwill-to-equity ratios over 20%, S&P said.

The bottom line: As banks look to expensive nonbanks that cannot be bought with stock, and as megamergers within the industry are increasingly hampered by low stock prices, goodwill could dampen the consolidation wave.

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