Banks Stake out an Interstate Future
Fraust, Bart, American Banker
NEW YORK -- In recent years, a number of large bank holding companies have staked claims on out-of-stake banks in anticipation of possible changes in interstate banking laws.
They have done so in a variety of ways.
The easiest is to buy 4.9% or less of the outstanding common stock of the target bank. Regulatory approval is not required for this type of investment, and often the purchases are can't-lose situations.
The investing bank has an inside track on acquiring the target. But if another suitor is chosen, the investor gets bought out at a premium.
Sometimes, these investments include "informal cooperation" or "enriched correspondent banking relationships" between the banks. Texas commerce Bancshares of Houston has made this kind of investment in banks in colorado, Wyoming, Arizona, Oklahoma, amd Louisiana.
Other banks, though, buy 4.9% stakes purely for investment purposes, and bankers say Provident National Bank of Philadelphia and its chairman, Roger A. Hillas, are the kings of the hill of this type of deal.
A more complicated method of staking a claim on an out-of-state bank is to make a maximum 24.9% investment in its equity capital.
The investments include nonvoting stock that is converticle into or has warrants for common stock. The stock cannot be converted or warrants exercised until federal and/or state laws are changed.
Marine Midland Banks Inc. of Buffalo, N.Y., has this type of arrangement with Centran Corp. of Cleveland and with Industrial Valley Bank & Trust Co. of Philadelphia.
Other examples are Mercantile Texas Corp. of Dallas and Utica Bankshares of Tulsa, Okla.; and Bank of Boston Corp. and Chittenden Corp. of Burlington, Vt.
So far, the Bank of Boston is the only banking company that has successfully converted nonvoting equity arrangements into actual merger agreements that can be completed under current laws.
New England's largest bank holding company last year signed an agreement to acquire Colonial Bancorp Inc. of Waterbury, Conn., which had received a capital infusion from the Bank of Boston.
Casco-Northern Corp. of Portland, Maine, another beneficiary of bank of Boston's largesse, also eventually agreed to become a subsidiary of the Boston bank.
Incidentally, Bank of Boston turned a 4.9% investment in RIHT Financial Corp. of Providence, R.I., into an agreement to merge. In doing so, it outbid CBT Corp. of Hartford, Conn., another company that held 4.9% of RIHT's stock.
A variation is a 24.9% investment plus an agreement to merge once the law is changed.
Examples of this type of deal include Chase Manhattan Corp. of New York and Equimark Corp. of Pittsburgh; First Bank System Inc. of Minneapolis and Banks of Iowa inc. of Cedar Rapids; Chemical New York Corp. and Florida National Banks of Florida Inc., Jacksonville; and U.S. Bancorp of Portland, Ore., and Old National Bank Corp. of Spokane, Wash.
The most recent stakeout, First Union Corp. of Charlotte, N.C., in Florida Coast Banks Inc. of Pompano Beach, Fla., is another example.
Bank of New York Co. Inc.'s arrangement with Northeast Bancorp Inc. of New Haven, Conn., is different in that there was no initial equity investment, only an agreement to merge once the law is changed. Merger of Equals
Another type of interestate stakeout is the "merger of equals," in which banks agree to make investments in each other with the understanding that when the law is changed, they might do something bigger.
One example is the three-way deal among Trust Company of Georgia, Atlanta; AmSouth Corp. of Birmingham, Ala.; and South Carolina National Corp. of Columbia. The three invested $2 million in each other's stock.
The agreement between Southeast Banking Corp. of Miami and First Atlanta Corp. is another example. First Atlanta has acquired preferred stock and convertible debentures of Southeast, and Southeast has agreed to make a similar investment in First Atlanta later.
Banking industry analysts believe there will be more stakeouts of all types, but they doubt a stampede of such deals will occur.
At present, there are 14 interstate equity deals, not including 4.9% arrangements.
Five interstate equity deals were announced in 1981, two in 1982, six last year, and one so fart his year. Six included contingent merger agreements.
John D. Hawke Jr., a former general counsel to the Federal Reserve Board and now an attorney with the Washington law firm of Arnold & Porter, said Federal Reserve regulations have made stakeouts somewhat less attractive than they once were.
In July 1982, the Federal Reserve issued a policy statement on stakeouts.
Under the rules, the investment cannot exceed 25% of the target bank's total equity; securities issued in the transaction cannot be converted into more than 24.9% of a target bank's common stock; and the investing bank cannot have any control over the target bank's management and policies.
The Fed, in December 1982, made an exception by allowing the Bank and Boston to acquire about 35% of Colonial Bancorp's total equity. Colonial was experiencing serious financial difficulties at the time.
While not a formal policy, the Federal Reserve, over the years, has limited merger agreements in that the target bank must be given the right to accept a higher offer
"The Fed threw cold water on the arrangements," said John Lyons, who heads the bank consulting firm of Lyons, Zomback & Ostrowski Inc. "For the staker, there is agreat deal of risk and not a lot of comfort since it can't own more than 25% of the stakees' total equity." A License Is Not Control
Another interesting question involves what constitutes "control.' The Fed prohibits investing banks from exercising a controlling interest in the management and policies of a target bank.
Citicorp, one of the first stakers, was said to have run the back office of Central National Bank of Chicago before the latter was acquired by Exchange National Bank of Chicago in 1982.
Citicorp began its stakeout before the Fed promulgated its rules.
And Marine Midland has close correspondent ties with its target banks.
In general, anything beyond traditional correspondents ties runs the risk of being challenged by the Fed.
In allowing Marine Corp. of Milwaukee to make a 21.9% investment in Elm Bancshares Inc. of Elmhurst, Ill., the Federal Reserve also approved a licensing arrangement between the companies.
Under the arrangement, Elm is entitled to use the corporate name, logo, and symbol of Marine Bank NA, the principal subsidiary of Marine Corp., in items identifying of Marine Corp., in items identifying Elm Bancshares, but not its subsidiary bank.
In addition, elm Bancshares was allowed to service loans and provide credit analysis, for a fee, to Marine Bank. Marine Bank is permitted to participate in loans generated by Elm.
However, the Fed said the licensing agreement does not contain any covenants or restrictions on Elm's management or policies and does not include any operating or quality-control standards that restrict the Illinois company.
Elm is not required to purchase any services from Marine Corp.
The Fed rejected a number of covenants included in Chemical's original agreement with Florida National.
These would have restricted Florida National's operations and policies by placing limitations on its loan-to-equity ratio, on its ability to engage in new banking and non-bank activities, and on its ability to acquire other companies. The Fed recently approved an amended agreement for Chemical and Florida National. All Stars Must be in Right Place
H. Rodgin Cohen, an attorney with the New York law firm of Sullivan & Crowell, believes stakeout Federal Reserve has approved a few more interestate arrangements.
"I anticipate that now that the Federal Reserve has approved First Bank System-Banks of Iowa and Chemical-Florida National, lingering doubts about whether these arrangements are legally valid will be dispelled," he said.
William Weaver, vice president for the financial services industry and the merger and acquisition group at First Boston Corp., thinks there have not been more interstate equity deals because no many factors are involved.
"All bank deals are a puzzle," he said. "Interstate stakeouts have more pieces."
For these deals to work, he added, "all the stars have to be in the right place."
There are three situations where target banks find stakeouts to be strategically useful, Mr. Weaver said:
* When it wants to buy out a dissident shareholder. He said the Chemical-Florida National deal was an example.
* When the target wants to avoid a hostile takeover. Northeast Bancorp of New Haven, Conn., did not want to sell out to another New England company, Mr. Weaver said, so it signed its conditional merger arrangements iwth the Bank of New York.
* When the target critically needs capital. Bank of Boston's deals with Colonial and Chittenden and U.S. Bancorp's arrangement with Old National are examples.
Investing banks find stakeouts attractive when they are so big that alternatives for intrastate expansion are limited.
For example, Mr. Weaver noted that First Bank System is so large that it probably does not need to buy another bank in Minnesota.
Its principal competitor, Norwest Corp. of Minneapolis, already owns banks in Iowa because it established them before the enactment of the interstate banking laws.
Consequently, Iowa is a natural market for First Bank System.
The move toward regional interstate banking zones has increased the attractiveness of stakeouts for New York banks.
"New York banks can't participate in the New England experiment," Mr. Weaver. "they are watching desirable candidates being acquired, and they are helpless without stakeouts."
Another advantage for the stakers is that the deals can be structured so that the buyers earn a substantial return whether or not the acquisition is completed.
The Federal Reserve requires that target banks be allowed to accept higher offers, and investing banks are compensated if this should occur. However, the level of compensation cannot be so high as to discourage competing offers, Mr. Cohen of Sullivan & Cromwell said.
"This effectively sets a floor for the target bank and leaves it free to find a higher offer," Mr. Weaver said. He added that an interstate stakeout tends to be priced higher than a merger that can be completed under current law.
Conditional merger agreements run from the seven years provided in the Chemical-Florida National agreement to the 14 years in the Bank of New York-Northeast accord.
Mr. Cohen believes that in the future an increased number of interstate equity deals with be mergers of equals, such as the Trust Company of Georgia-AmSouth-South Carolina National arrangement.
"A Citicorp, with its financial clout, can do so much that no one else can afford," Mr. Cohen said, referring to the New York giant's acquisitions of troubled savings and loans in Miami and Chicago.
"Whey should they do stakeouts? They can afford to do other things.
"But most banks today could not afford to do more than one acquisition, "he added. "For banks in the $1 billion to $10 billion range, mergers of equals are a logical alternative."
Washington attorney Hawke said some acquiring banks may not consider mergers of equals to be attractive.
"They present a lot of sociological problems, such as which bank will come out on top after the merger is completed," he said.
A rush of interstate equity arrangements is unlikely because, from a strategic point of view, they are not for everyone.
There are disadvantages for both sides.
For the investing bank, its funds are tied up for years, and they might have to forgo a current deal because of it.
The lack of control over the target bank during the "going-steady" period leaves the investing bank exposed.
From the target's point of view, the principal disadvantage is that "Big Brother may be looking over its shoulder," Mr. Hawke said.…
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Publication information: Article title: Banks Stake out an Interstate Future. Contributors: Fraust, Bart - Author. Magazine title: American Banker. Volume: 149. Publication date: April 2, 1984. Page number: 1+. © 2009 SourceMedia, Inc. COPYRIGHT 1984 Gale Group.
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