If Mergers Were Simple, Banking's Troubles Might Be Over

But protests from special interests and squabbling among bankers often poison potential unions

For years, executives at First Interstate Bank System of Montana Inc. and Commerce Bancshares Inc. debated the merits of a merger. Linking First Interstate's seven banks with Commerce Bancshares, across the state line in Sheridan, Wyo., would create a bigger, more efficient network. Combining back offices would also cut costs. And working out the merger seemed a cinch. The two privately held banks shared many of the same family stockholders and a few top executives. After clearing state regulators, the banks expected a swift approval when they filed a merger application in September, 1989, with the Federal Reserve Bank in Minneapolis.

The application is still pending. The Federal Reserve has delayed a final decision while it investigates a claim by local activists that Billings-based First Interstate has discriminated against a local Cheyenne Indian reservation. "The reservation has been redlined for years by the bank," alleges Gail M. Small, director of Native Action of Lame Deer, Mont., who wants to make sure the merged bank doesn't continue the policy. First Interstate denies the charge. But the bank has yet to persuade regulators to let the merger go ahead. Says William H. Ruegamer, First Interstate's chief operating officer: "We're amazed this merger has not been approved. It's a routine business transaction, and the issue is irrelevant."

LOTS OF DANCERS. Many more bankers will likely experience similar frustration in the years ahead. Absent major reform legislation from Congress, bankers and others say that consolidation is the best way to revitalize the ailing banking system. Only through mergers can the industry slash its debilitating overcapacity and improve its profitability. Regulators are now pressing banks to combine, and talk of possible pairings dominates industry grapevines. "Thousands of minuets are being acted out between bankers," says one investment banker.

It's becoming increasingly apparent, though, that the path to bank consolidation will be far more tortuous than most people realize. "It's a tough, agonizing thing to do," acknowledges Walter V. Shipley, chairman and chief executive officer of Chemical Banking Corp., considered to be a prime merger candidate.

Opposition by Native Action is just a sample of what lies ahead for merger aspirants. Dozens of such special-interest groups across the country are arguing that consolidation will create giant, sprawling banks that will be unresponsive to community needs. Still other organizations are disturbed by the social costs of bank mergers. A coalition of community groups has already voiced opposition to Bank of Boston Corp.'sbid to acquire failed Bank of New England Corp., partly because the takeover would mean closing more than 100 branches, throwing some 12,000 workers out of jobs.

Winning over community activists is only half the battle. Arranging a happy, healthy bank marriage during one of the most distressed periods in banking history is chancy at best. In several instances, two weak banks sought security in each other's arms only to find they had created a bigger but even weaker bank. What's more, bankers are learning they must win over corporate cultures typically steeped in a tradition of independence. The biggest hurdle is often deciding who will get the corner office. "Unless the Secretary of State starts appointing some bankers ambassadors, picking the new CEO will be a major issue," says an attorney who specializes in bank mergers.

Whatever the obstacles, there is little doubt that a massive wave of mergers and buyouts is necessary if the banking industry is to become competitive again. Even today, the industry remains highly fragmented, a creature of provincial regulations that tended to restrict banks to narrow slices of geography. With 12,230 institutions, the U. S. has more banks per capita than any country in the world. Even during the best of times, the industry has found it increasingly difficult to make money.

FRESH CAPITAL. Nowadays, with banks reeling from bad loans, even the most independent-minded banker has embraced the concept of consolidation, at least in theory. Not only do mergers expand market share, but they also produce significant cost savings. This is especially true when banks in the same region tie the knot. Entire levels of management can be eliminated. And duplicate branches, many within a block of one another, can be closed. In the 18 months after it acquired cross-town rival Crocker National in 1986, Wells Fargo & Co. of San Francisco closed 160 branches and laid off 4,500 employees.

The prospect of fresh capital is another lure. A leaner, more efficient institution, many bankers believe, will be able to easily vanquish its competitors once the industry climbs out of its slump. Bank stocks have enjoyed a dramatic comeback in recent months, and Wall Street is betting that the first round of mergers will attract a flock of investors. When rumors first hit the stock market in mid-January about merger talks between Wells and Los Angeles-based Security Pacific Corp., the market responded eagerly. Over an eight-week period, Wells Fargo stock shot up 89%, to a high of 82.

Much of the gossip these days focuses on New York City's giant money-center banks, which have grown flabby in recent years. Chemical and Manufacturers Hanover Trust Co. are the most likely pairing, according to bankers and analysts. Some on Wall Street are betting that the two will strike a deal by this fall. And other deals are rumored to be in the offing. "Most of the banks in New York are looking at what they would look like partnered with another New York bank," says Robert Hedges, a bank consultant with MAC Group Inc. "They all have task forces looking at it."

Strong regional banks are also studying possible partners and building war chests. Banc One Corp. in Columbus, Ohio, is among the most active. It pulled out of the bidding for the failed units of Bank of New England, but it announced plans to raise $250 million in fresh capital to pursue other deals. "There are going to be some attractive opportunities for us other than this one," says William P. Boardman, Banc One's M&A specialist. Analyst Thomas H. Hanley of Salomon Brothers Inc. says other potential regional acquirers include CoreStates Financial of Philadelphia, First Wachovia in Charlottesville, N. C., and KeyCorp in Albany, N. Y.

CULTURE CLASH. The hoped-for merger wave, though, will require a lot more than deep pockets. Despite all the speculation, there have been relatively few mergers over the past year or so. One major reason is the industry's lingering suspicion about credit soundness. Even the canniest bankers often don't have a full grasp of the potential problems in their own loan portfolios, let alone that of possible partners. And without that critical piece of intelligence, they know, a merger could be catastrophic. That's what occurred in 1987 when Dallas-based InterFirst merged with RepublicBank. The new institution, First RepublicBank Corp., was well on its way to paring $600 million from operating costs when it collapsed under a tide of bad real estate loans. "When the whole region is economically distressed, I think it's really dangerous to put two weak banks together," says Charles H. Pistor, former vice-chairman of First RepublicBank.

Another barrier is a likely clash of corporate cultures. That can happen in any merger, but the problem is more acute in the banking industry. The same raft of state and federal regulations that bankers say are an obstacle to prosperity have also afforded individual banks substantial protection. As a result, banks have developed distinct cultures. While that makes the job of marrying two banks a daunting challenge, it can make picking a new CEO a virtual nightmare. It's never easy for any boss to give up control. But without a single, paramount decision-maker, efficiencies may come slowly, if at all.

That's what's happening in the merger of Atlanta-based Citizens & Southern Corp. and Sovran Financial Corp. in Norfolk, Va. After a year-long regulatory review, the two banks finally got together last September. The combined institution, with $51.2 billion in assets, has 1,008 branches in seven states stretching from Maryland to Florida. But consolidation has slowed to a snail's pace. "It's almost a classic case of the problems of mergers of equals, where, in effect, nobody's in charge," says a former C&S executive. "They've decided to go the consensus route on all decisions." C&S/Sovran Corp. declines comment. Despite promises of immense cost savings, the bank did little to cut fat last year. Its 1990 annual report pledges that 1,200 jobs, or 4% of the work force, will be cut this year through the elimination of duplicated services.

SOLID PLAN. Avoiding such stalemates may take deft boardroom choreography. But it's possible. Analysts are high on a Chemical and Manny Hanny merger, partly because both banks are thought to have a solid succession plan. Once a deal is made, analysts believe Manny Hanny Chairman and CEO John F. McGillicuddy, 60, will resign, allowing Chemical's Shipley, 55, to run the show. In turn, Shipley will hand over the top job to Thomas S. Johnson, 50, in five years. Johnson, the president of Manny Hanny, used to be Shipley's second-in-command at Chemical.

Even after potential merger partners hammer out their differences, they still will likely face a battle in the public arena. Most active are special-interest groups who believe their local bank isn't responsive to community needs. Their main weapon, which can often delay merger plans, is called CRA, three letters that bankers have come to dread. The Community Reinvestment Act of 1977 requires banks to make loans equitably to both rich and poor neighborhoods. Regulators have stepped up enforcement of the law. The First Interstate-Commerce Bancshares deal isn't the only one delayed because of a CRA complaint. The Federal Reserve held up First Union Corp.'s acquisition of Florida National Bank for several months in 1989 after community groups challenged the Charlotte (N. C.) bank's CRA record.

Public challenges won't end there. Several consumer groups have criticized Treasury proposals to allow banks to branch easily across state lines, sparing banks the hassle and expense of operating separate corporations in each state. Kent Brunette, banking lobbyist for the politically powerful American Association of Retired Persons, argues that repealing the McFadden Act of 1927, which prohibits interstate branching by national banks, would sever ties between banks and communities. Local branches would be controlled by banks perhaps thousands of miles away, making it difficult, these groups contend, for consumers to obtain loans and other personalized services. "We think it's heading down the wrong path," Brunette says.

Those who want to maintain local control over banks are most afraid of foreign banks, some of which are keenly interested in acquiring U. S. institutions. Nowadays, Canadian banks top the list of foreigners seeking broader U. S. market share.

Such arguments may sound provincial. But they are getting a sympathetic hearing from many states, who regulate two-thirds of the nation's banks and 45% of the industry's assets. State governments often want to preserve their own regulatory apparatus and protect local banks from outsiders. The Conference of State Bank Supervisors is pushing a plan that would let each state decide the interstate branching question. Jill M. Considine, New York's superintendent of banks but a proponent of interstate branching, believes that "states should have the upper hand in decision-making."

Still, the most strident public opposition will likely focus on something far more tangible: jobs. Cost savings from cutting staff is one of the biggest benefits of a merger. As many as 30% of the 2.3 million people employed by the nation's banking system may lose their jobs through consolidation over the next few years, analysts predict. Some bankers fear a storm of protest from community groups. Worse, local and state politicians, often responsive to constituency protests, may be tempted to pass legislation to slow consolidation.

BACKLASH? This is a big concern in New York City, where banks are one of the biggest private employers. Since the stock market crash of 1987, local officials have seen the financial services industry contract, costing thousands of jobs. Mergers among some of New York's biggest banks will only add to the city's unemployment woes. Moreover, roughly 40% of banking's work force in New York is made up of minorities, adding to the potential for a political backlash. A spokeswoman for New York Mayor David N. Dinkins says he hasn't yet established a policy on bank consolidation but that City Hall is studying the matter.

And so are many other city halls. But they are unlikely to come up with easy answers, for bank consolidation cannot help but be painful for consumers, politicians, and bankers themselves. One can only hope that the gain for the nation's banks will turn out to have been worth the pain.

    Before it's here, it's on the Bloomberg Terminal.