Mark Lynch of Lehman Brothers may have the best road map available to future bank mergers.

If he wants to know where mergers will occur, he consults market share rankings, culled from regulatory data. They show which banks have the most "pricing power" behind their products -- and where more of it can be gotten.

"Market share will become increasingly important for banks over the next few years," the analyst says, "for the simple reason that the volume growth of their business is going to be less than in previous economic expansions."

In such a business climate, pricing power takes on added importance, and well-managed banks will seek to enhance their power by building what Mr. Lynch calls "fortress market" share where they operate.

In other words, the key motivation for mergers and acquisitions among banks is, or at least should be, exerting more control over pricing of financial services offerings.

Mr. Lynch's studies over several years show deposit rates tend to fall -- often significantly -- in markets where the three largest banks control more than 50% of deposits. The resulting lower cost of funds is, of course, a big factor in bank profits.

Industry Odometer

Charting market share changes is "sort of an odometer showing how far we have come," in consolidating the industry, he said last week. "And you can use it to guess where things are going to happen next."

Besides indicating where the opportunities lie for acquiring more market share and pricing power, the data also can offer clues about Who is likely to be the buyer.

"You can see who is maxed-out in their current territory," he said. "For instance, it was pretty obvious that First Bank [System] had gotten about as far as it can go in Minneapolis and so it has obtained Metropolitan Financial's area to grow into."

Acquiring Metropolitan Financial Corp., a Minneapolisbased thrift institution, adds the states of Nebraska, Iowa, Kansas and Wyoming to First Bank's market territory, The deal, unveiled last month, also expands its presence in Minnesota, North Dakota, South Dakota, and Wisconsin.

In short, market share data can be a useful guide to "determining the geographic strengths and weaknesses of superregional banks and also of identifying takeover candidates."

The latest example of how significant product "pricing power" can be, he said, is in the state of Maine, where KeyCorp's acquisition of Bank of Boston Corp.'s affiliate means the three largest banks now will have 56.2% of the state's deposits.

KeyCorp, based in Cleveland, Ohio, will have a 23.6% share with Fleet Financial Group. Fleet Financial Group, Providence, R.I., is second at 18.2% and Peoples Heritage is third at 14.5%

Maine's fourth-largest institution, will have less than 5% of the state's deposits.

"Deposit rates average 23 basis points less than the national average when the three largest institutions control more than half a state's deposits," Mr. Lynch said.

Since the deposit rates in Maine were 11 basis points higher than the national average last year, he said, the remaining banks in the state "stand to benefit substantially from the reduced competition."

Pricing power does not just mean freedom to increase fees or hold down rates paid on certificates of deposit. Ultimately, it means the chance to become a low-cost producer of financial services able to compete with other major providers of these products.

In years not long past, the consolidation of the banking industry as tracked by Mr. Lynch might have given rise to antitrust questions. But nonbanking competition appears to have softened the issue of banking "oligopolies."

Mr. Lynch noted that Maine is the 12th state where over half the deposits are controlled by three banks. There were just seven such states five years ago.

Alaska Most Concentrated

Predictably, the most concentrated state is sparely populated Alaska, where the top three institutions have a whopping 81.7% of the deposit market, led by National Bank of Alaska with 40%

The Alaska bank's share is also the single-largest slice of a state market held by one bank. KeyCorp is third in the state with 17.6%.

The most concentrated among the heavily populated states is Florida, where the big three banks enjoy a 45.4% share. That reflects the enticement of the state's banking market, which spawned a wave of acquisitions over the past decade.

It also makes clear why Barnett Banks Inc., Jacksonville, is regarded by many as the nation's prime acquisition target. Barnett has a 20.5% market share -- and it is the only sizable independent banking company left in the state.

Many industry observers say Florida is a harbinger of the pattern that finally will be seen in the country's most desirable banking markets.

Illinois Least Concentrated

The nation's least-concentrated major state is Illinois, a legacy of its unit banking laws. The largest institution, First Chicago Corp., has only a 10.5% share, lowest of any top bank in its own state.

The numbers make it obvious why Illinois has been an active area for acquisitions. Opportunities exist for others to build a significant market presence in a major state.

New Jersey, perhaps surprisingly, ranks as the second least concentrated among the big states. The top three there hold 28.8%, led by First Fidelity Bancorp.'s 13.6%.

State's with large portions of their market still held by the thrift industry also are prime areas for acquisitions, because they offer chances for banks to build market positions at relatively lower cost than by buying other banks.

Connecticut, where the thrifts' 55% market share of deposits is the nation's highest, has been a hotbed of bank-thrift deals. So have Massachusetts, where thrifts hold 45%, California with 38%, New Jersey with 33% and Illinois with 26%.

While there will be exceptions, Mr. Lynch says most deals are going to be "devoted to the steady, unspectacular accumulation of market share."

As an example, he noted that during June First Union Corp. agreed to buy Chase Manhattan's branches in Florida, with total deposits of $860 million. First Union already is ranked second in the state with market share of 13.9%

"While the deal marginally improves First Union's position in Tampa, it epitomizes consolidation activity in Florida," he said. "There is not much left for grabs in the Sunshine State and those who haven't already built critical mass are selling out. Market Share of Top 3 Banks in Major States Florida 45.4%Michigan 43.7%California 38.6%Pennsylvania 37.0%Massachusetts 34.6%New York 33.3%Ohio 33.3%Texas 32.2%New Jersey 28.8%Illinois 22.9%Source Lehman Brothers

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