NCNB Gambit: Big Rewards, Big Risks, Too

ATLANTA - By acquiring C&S/Sovran Corp., Hugh L. McColl Jr. would take a giant step toward achieving his long-time dream of making NCNB Corp. a nationwide banking power. But the merger would carry significant risks.

The biggest questions for the NCNB's management and directors are:

* How extensive are the recently discovered problems with C&S/Sovran's commercial real estate loan portfolio?

* How difficult would it be to merge with a company that itself is still grappling with the aftereffects of a messy merger?

* Can NCNB, which has grown at a breakneck pace in the last decade, swallow a bank almost as big as itself without stretching its management and controls to the breaking point?

Deal Still Up In The Air

It's not at all clear that the merger, which would create the nation's second-largest banking company, will be pulled off.

After a board meeting Thursday, C&S/Sovran chairman Bennet A. Brown issued a statement saying that the directors are "looking seriously" at NCNB's merger offer and had authorized the company's management to continue discussions. But the statement also said that the board "has not made a decision to depart from its strategy of proceeding as an independent institution."

The preliminary offer by NCNB, which is based in Charlotte, N.C., has been reported to be about $28.50 a share, or $3.9 billion. C&S/Sovran's stock rose 87.5 cents Thursday, to close at $23.625. While the shares have increased by more than $4 since the merger talks were confirmed Wednesday, investors are evidently still uncertain that a deal will be pulled off. NCNB's stock fell $1.25 cents Thursday, to $37.

Far-Reaching Goals

Mr. McColl, the NCNB chairman, has never made any secret of his national, even global, aspirations. As Congress takes up proposals for expanded banking powers, Mr. McColl has become one of the industry's leading spokesman for national interstate branching.

Acquiring C&S/Sovran would certainly herald a new, grander status for NCNB, which has $66 billion in assets. "You would produce, for the first time in the South, a gigantic company that can function competitively with the money-center banks," said John Mason, banking analyst with Interstate/Johnson Lane in Atlanta.

Gnawing Loan Problems

With combined assets of $116 billion, NCNB and C&S/Sovran would cover the southern U.S. from Baltimore to El Paso, Tex. It would exceed San Francisco-based BankAmerica Corp. in size, and be second only to Citicorp, New York, which has assets of $216.9 billion.

"There's no question that if you didn't have the real estate problems, this franchise would be a powerhouse," said Frank Anderson, analyst with Stephens Inc. in Little Rock, Ark.

But there's the rub. C&S/Sovran sits on $1.1 billion in nonperforming loans, 3.25% of total loans plus foreclosed real estate, most of it concentrated in the metro Washington D.C. area.

Stretched Too Thin

A merger would carry other risks. C&S/Sovran, which resulted from the September 1990 merger of the largest banks in Georgia and Virginia, has been plagued by major organizational problems as it attempts to combine the two companies into one. Competitors have noticed that C&S/Sovran's forward movement virtually ground to a halt while it struggled to sort out its organizational charts and integrate its technology and marketing efforts.

NCNB, meanwhile, became the Southeast's fastest-growing bank by expanding its assets through acquisitions, from $7.7 billion in 1981 to $66 billion today. Some industry observers believe NCNB has stretched its management resources thin in the process and would compound that problem by attempting to acquire a company suffering as much internal turmoil as C&S/Sovran.

To maintain as much stability as possible at C&S/Sovran, some analysts believe the deal can only be done on a friendly basis, which seems to be the the way NCNB is proceeding, at the moment. "To make this work, the [C&S/Sovran] management has to buy off that this is a good deal and stay," said Mr. Anderson, at Stephens Inc.

To protect itself from the risk in C&S/Sovran's portfolio, analysts say, NCNB would have to structure a bid that would be difficult for C&S/Sovran's board to reject and yet at the same time be favorable to its own shareholders.

"If the price was right, the deal would be extremely positive" for NCNB, said Sanford C. Bernstein & Co. analyst Moshe Orenbuch. The New York-based analyst calculates that it would be too risky for NCNB to offer to pay more than 0.8 share of its stock for a C&S share, which would amount to $30 a share based on Wednesday's closing price.

Most analysts believe an offer of 0.75 share, (or about $28.50), which has reportedly been discussed in preliminary talks between the two companies, would be favorable to NCNB. But they doubt the bidding will stop there. "You've got to figure your first offer is not your last offer," Mr. Anderson said.

Experience with Bad Loans

With its experience managing bad real estate loans in Texas, NCNB is considered particularly capable of handling C&S/Sovran's problem assets in Washington. In addition to its work out of troubled loans from acquired Texas banks, an NCNB subsidiary is the nation's leading servicer of assets held by federal thrift regulations.

Some analysts have speculated NCNB might, at some point, be able to combine the troubled C&S/Sovran loans with its other problem assets into a separate "bad bank" subsidiary. But even this scheme offers no panacea.

"Even if you have somebody special doing the collecting [on bad loans], if you built [the projects] in the wrong place, if you built them in a terrible real estate cycle, you're still going to have some pain," Mr. Mason said. "You have to ask: is the prize worth the price?"

On the plus side, NCNB would be able to realize some substantial cost savings by consolidating overlapping branch networks in Florida and South Carolina. It would also be able to combine holding company functions and operations such as credit cards, trust and mortgage servicing.

Mr. Orenbuch at Sanford C. Bernstein estimates such consolidation could produce savings of $250 million to $300 million within the first two years following the merger.

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