Will Merger Create Value In Market?

The merger plan hatched by NCNB Corp. and C&S/Sovran Corp. could soon pay off in the form of fresh capital.

NCNB told analysts Monday morning that it may raise $200 million to $400 million by issuing new shares. Such a move would raise the tangible equity-to-assets ratio of the new bank to roughly 5%.

The pitch to investors, of course, can be expected to play up the merged entity's improved profit potential, brought about by deep cost cutting. NCNB chairman Hugh L. McColl Jr. sounded almost as if he were in a road show peddling stock, saying, "It's a great ground-floor investment."

He touted the institution as "well-managed, aggressive yet conservative, and very profitable."

Added capital could also help bolster the two banking companies' credit ratings, which several rating agencies are now reviewing. "We'll review both of them and try to determine the positive and negative points of the merger," said Robert Swanton, a vice president at Standard & Poor's Corp.

For now, NCNB has a a higher credit rating than C&S/Sovran. Its senior debt is rated A2 by Moody's Investors Service and A by Standard & Poor's, a notch higher than the ratings awarded C&S/Sovran. At Fitch Investors Service, NCNB's senior debt is rated A-plus and C&S/Sovran's is rated A-minus.

Nevertheless, in recent weeks Standard & Poor's expressed a negative outlook for the stronger of the two banks, while prospects for C&S/Sovran were seen as stable, Mr. Swanton said.

Strengths Differ

The merger joins two banks whose balance sheets reflect different strengths and weaknesses.

NCNB, for example, has lower tangible equity relative to assets and a portfolio containing lots of highly leveraged transactions.

C&S/Sovran, meanwhile, has a larger book of commercial real estate loans in very weak markets, but its capital ratios are stronger.

Capital ratios at Nations-Bank, which the combined entity will be called, may also benefit from a possible cut in C&S/Sovran's dividend. Shareholders in that company will receive their normal quarterly payment of 39 cents a share in September, but the rate could fall after that.

Attitude of Bondholders

As bank bond investors see it, the merger is a plus for C&S/Sovran. The Georgia bank's 9.75% subordinated capital notes due in 1999 rallied Monday, with the yield premium on the securities dropping to 160 basis points from 175 basis points the week before.

In contrast, plans to combine NCNB and C&S/Sovran did not strengthen prices on the bonds of NCNB Corp. The bank's 9.5% subordinated capital notes due in 2004 continued to trade at a yield 140 basis points over comparable Treasuries, the same as a week earlier.

NCNB's capital ratios are currently weaker than at C&S/Sovran. Tangible common equity, excluding all intangible assets, was just 4.24% of assets at NCNB on June 30, well below the 5.02% at the smaller bank.

National Asset Bank is no more, having won approval from its shareholders to relinquish its bank charter and reshape itself into an asset management concern.

The Houston concern, formed to liquidate bad loans made by the now-defunct Allied Bancshares Inc., will now try to buy loans and other assets from the Federal Deposit Insurance Corp. and the Resolution Trust Corp. He said the new NAB Asset Corp. already has three bids in on RTC assets.

PHOTO: Risk Premium Drop For NCNB, C&S/Sovran Source: Keefe, Bruyette & Woods Inc.

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