Finance: The Large Economy

By John Greenwald.

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.

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CREDIT: Source FDIC

CAPTION: AMERICAN VAULT DOORS ARE CLOSING . . .

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CAPTION: . . . YET THE U.S. IS STILL OVERBANKED BY COMPARISON

With reporting by William McWhirter/Detroit and Richard Woodbury/Houston