Merging to Stay Afloat in N. England

How many New England banks will escape the grim reaper?

The question should be foremost in the minds of many bank managers and directors, as the signs of pending failure are known to all. And with the economy undergoing adjustments, a cure seems ever more elusive.

Is the only solution intervention by regulators? The answer is almost inevitably yes.

Why? Because the closed-bank assistance program is so attractive.

Who knowingly and wittingly would invest in an institution whose profitability has been diminished, whose equity has been eroded, and whose nonperforming assets continue unabated when just around the corner stands the regulator ready to intervene, close the institution, and sell it to new investors?

Though the sale is executed in an auction-like setting, all the unwanted assets and liabilities and indeterminable risks are absorbed by the regulators.

The Losers in an Intervention

The process, while affording rich opportunities to the new shareholders, is fraught with destructive components. Distressed borrowers are given little chance to revive. And employees and shareholders lose their livelihoods and investments.

The distressed prices at which assets are sold diminish the market value of similar assets held by others.

And taxpayers absorb the costs without the regulators being accountable to these taxpayers.

What's in Store

What will be the final result of this process? As is already the case, the Federal Deposit Insurance Corp. will be the biggest bank in the country. Large, nationwide banks will make significant acquisitions. With rare exceptions, banks with capital of less that $50 million will disappear.

During healthy economic times, marginal performance of smaller banks escaped attention. With major setbacks, such as occurred in the Southwest during the 1980s and is now occurring in New England, all of the warts are revealed.

Over-leveraged institutions, pressed to generate new income to pay for expensive liabilities, are confronted with fewer investment opportunities.

Management is taxed beyond its means in strengthening the loan portfolio, collecting bad debts, and meeting a melange of regulatory requirements.

A Solution for the Problem

What is apparent is the lack of management capacity, together with a lack of capital capacity.

One solution is merger.

Even among relatively weak institutions, there remains a way of preserving some shareholder value through creating economies of scale.

Three institutions merged together do not require three presidents, three treasurers, and three senior loan officers. Likewise, after a merger, three institutions do not require three administrative headquarters, three processing units, or three boards of directors.

Pitfalls to Togetherness

There are a number of hurdles to be overcome to make the process work.

Efforts must be made to negotiate out of unneeded leases, equipment, and service contracts. Personnel issues must be addressed because fewer people will be required, particularly at the more senior level.

Finally, the most difficult hurdle of all: turf. Who yields?

If there is one dominant player, then the issues are more easily resolved. However, if each institution is similar in size, market share, and book value, there is greater reason to merge and yet more grounds for dispute.

When Options Are Few

In the final analysis, the purpose is survival and preservation of shareholder value.

When faced with the alternative - dissolution - there are many incentives to be creative and cooperative. Still, when faced with this opportunity, there are precious few directors and managers who are willing to take the risk.

Will reason prevail or will the grim reaper have his way?

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