TIME: Almanac 1993/TIME Almanac 1993.iso/time/071591/0715202.000

Text File | 1992-08-28 | 7.2 KB | 149 lines

                                                                                BUSINESS, Page 48

FINANCE

The Large Economy Size


As the U.S. braces for a colossal wave of bank mergers, customers
wonder whether bigger will be better

By JOHN GREENWALD -- Reported by William McWhirter/Detroit and
Richard Woodbury/Houston


    If your local bank has not yet been gobbled up by a
larger one, chances are it will be in the next few years.
Burdened by too many banks chasing too few customers, the
troubled industry is headed for a surge of mergers that will
determine its survival and affect the way Americans borrow and
save. Acquisitions and closings have already shrunk the number
of U.S. bank holding companies, which own one or more banks,
from nearly 13,000 a decade ago to 10,000 today. With bills now
before Congress to permit big banks to take over smaller ones
anywhere in the country with ease, experts predict that just
7,000 banking firms could be left within five years.

    The big buyers so far have been regional banks that are
bulking up at a furious pace. In a deal that would create a
banking company second in size only to Manhattan's Citicorp,
North Carolina's NCNB began merger talks last month with
C&S/Sovran, a company based in Atlanta and Norfolk, Va., that
grew out of a regional combination just a year ago. Even as
those talks got under way, Wachovia, another aggressive North
Carolina firm, agreed to acquire South Carolina National for
$835 million. And last week Providence-based Fleet-Norstar
completed the acquisition of Boston's failed Bank of New
England, which banking regulators spent $2.5 billion to bail out
this year. "Fleet-Norstar is now the Beast of the East. It is
now the dominant bank in New England," says Don Kauth, who
follows the industry for the securities firm First Albany.

    Banks are rushing to merge because consolidations, when
well managed, enable them to slash their costs and expand into
new markets. After a merger, banks typically close overlapping
or unproductive branches and lay off managers and workers who
are no longer needed. At the same time, banks can reap big
savings by combining their computer systems and clerical
operations. All that can ensure higher profits and boost the
banks' ability to make big loans at home and abroad.

    But is bigness a boon to customers? The '90s-style merger
fever has stirred fears that buyouts could lead to more
stringent, impersonal lending policies and higher service fees
as new owners seek to make their deals pay off. While banking
analysts insist that surviving local banks and other lenders
will give customers plenty of choices, many consumer advocates
remain unconvinced. "Even though there are far more banks in the
U.S. than in any other nation, many communities are underserved,
particularly in rural areas," says Stephen Brobeck, executive
director of the Consumer Federation of America. "We worry that
many communities could well lose banking services."

    Even banking behemoths in New York and California feel
compelled to bulk up. But since many are too freighted with bad
debt to compete with hard-charging regionals for attractive
merger partners, the big urban banks may have little choice but
to join forces with one another. Banking experts believe that
such Manhattan giants as Chase, Chemical and Manufacturers
Hanover are ripe for consolidation. Yet no deal will shore up
the faltering banks for long unless they can clean up their loan
books and raise fresh capital. "Mergers can't produce magic,"
says Lawrence White, a New York University economist. "You can't
save big banks by simply jamming them together."

    Many highly touted bank mergers of the past decade have
turned out to be flops. According to a 1990 study by the
consulting firm FMCG Capital Strategies, investors believe most
deals made by the top 200 U.S. bank holding companies during the
1980s were fruitless. "The fate of the typical acquirer was that
its stock price four or five years after the acquisition was
only about 65% of what it would have been without the merger,"
says FMCG president James McCormick. The problem, he notes, was
that purchasers usually paid about twice what target banks were
worth and then could not boost profits enough to recoup their
investments.

    Some experts are casting a critical eye at the proposed
NCNB-C&S/Sovran deal. While that merger would create a
powerhouse with an initial 1,900 branch offices in nine states
from Maryland to Texas, both banks are still contending with
loan problems they acquired in the '80s. C&S/Sovran remains
burdened by troubled mortgages in the Washington area that it
inherited from a predecessor company. And NCNB is struggling
with its own real estate loan problems across the Southeast.
Moreover, a deal could lead to a culture clash between NCNB, run
by the gruff ex-Marine Hugh McColl, and C&S/Sovran's more
laid-back Deep South management. "It's an absolute monster,"
says Texas banking consultant William Ferguson of the proposed
merger. "It's going to be a lot to digest."

    Some banks have avoided the risk of overreaching by
clinging to their homey, small-town habits. Ohio's Banc One has
grown from 18 banks in 1980 to some 50 banks in the Midwest and
Texas, with combined assets of $44 billion. But Banc One still
concentrates on loans to consumers and small- and medium-size
companies. The bank puts local managers in charge of all lending
decisions. "The owner of Sam's Machine Shop wants to get his
loan from someone he sees at the Kiwanis Park or on the golf
course," says Banc One chairman John McCoy.

    Banc One retains that folksy approach at such branches as
its office in Waukesha, Wis., which has gone through three
successive ownership changes since its days as the First
National Bank of Waukesha ended in the 1970s. "They've always
treated me right," says John Maday, 64, a semiretired salesman
and longtime customer. Munching a cookie from a tray in the
lobby, Maday notes that many old-timers still return on the
first of each month to deposit their Social Security checks.
Says he: "I would think they would be the first to leave if they
felt the bank had lost the personal touch."

    Small banks can use that same touch to keep their
customers and their independence in the face of the merger
onslaught. In Alexandria, Va., president Taylor Burke fosters
loyalty to his family's 139-year-old Burke & Herbert Bank &
Trust while walking the floor with a parrot on his shoulder and,
as he puts it, "treating people like human beings." That can
mean anything from greeting customers by their first name to
speedily granting them a wide range of loans. Such heedfulness
may be one of the things that Americans would like most from the
U.S. banking system.

    In an Associated Press poll released last week, 55% of the
1,000 adults surveyed called the banking system unsound, vs. 38%
who said it was on a solid footing. If mergers are done well,
they could go a long way toward shoring up the sagging system.
But even well-run giants must guard against sacrificing the
services and personal touches that are part of America's banking
heritage.