Bank Merger Fever : Mega-Mergers Have Smaller Banks Clapping Their Hands

Who writes their material? Top executives of First Interstate, First Bank System and Wells Fargo, the mammoth banking companies involved in the latest merger-go-round, have been talking sweetly about benefits for Southern California consumers and small businesses.

But sophisticated people know that big bank mergers have little to do with consumers or local businesses. Smaller banks handle that business.

Rather, the giants’ mating dance is driven by stock market considerations: how to cut costs, boost earnings, impress Wall Street and keep stock prices up--and, coincidentally, preserve bank executives’ jobs.

To be fair, it’s a tough job running a large bank these days. First Interstate’s William Siart, First Bank System’s John Grundhofer and Wells Fargo’s Paul Hazen must make dramatic acquisitions to make profits grow as fast as institutional investors demand.

At their great size--$37 billion to $55 billion in assets--making loans to hundreds of companies is too laborious to generate rapid profit growth.

And their ultimate competitors are not other banks so much as investment companies and non-bank lenders like Merrill Lynch and GE Capital, which are more efficient than banks.

The real story in Southern California is that small to medium-sized banks are gleeful at the antics of big competitors.

In Sherman Oaks, Frank Ures, president of American Pacific State Bank, hopes that Wells Fargo comes back with another offer for First Interstate, because a merger of two California banks would drive more depositors and borrowers to his bank, which has eight branches in the San Fernando and Santa Clarita valleys.

In South-Central Los Angeles, Wayne Bradshaw, head of Family Savings, knows that big banks are not eager to open branches in his central city territory to begin with. And greater size will make them less able to reach down for small loans and deposits. “Big banks are not good at dealing with customers who have imperfect credit records,� Bradshaw notes. But his local bank knows the customers and can make housing and other loans.

In the South Bay, Cathy Allen, president of Peninsula Bank, notes that large banks “don’t lend until a business has a two-year track record. But we lend against home equity for someone starting a business or lend a mortgage down payment to a doctor starting a practice.�

In Anaheim, Larry Hartwig, president of Southern California Bank, says you don’t have to be big to offer sophisticated services like the giants do. Southern California Bank has $480 million in assets, or less than 1% of First Interstate’s or Wells Fargo’s assets. Yet the small bank offers computer-aided cash management accounts, 24-hour phone service-- and access to the president. “I spend 45% of my time visiting customers, and they can get me on the phone,� says Hartwig.

Still, there are limitations and insecurities in being small. As more Southern California companies develop overseas business, small banks find themselves handing over customers to larger banks for letters of credit and other services.

And lending to uncertain borrowers can be costly. Banking experts anticipate rising loan losses next year among consumers and small businesses. Those could wipe out many community banks.

Fortunately, the long recession gave California a silver lining in that regard. With business lagging here, banks made fewer loans. In contrast to a 19% rise in commercial loans nationally since 1992, bank loans in this state increased 7%, and small banks in Southern California cut their loan portfolios. So they’ve kept their powder dry.

And there’s more heft than meets the eye in this area’s banks. Peninsula Bank, for example, is combining with Bay Cities Bank of San Pedro to form a $120-million institution that is owned, in turn, by Community First Bank Holding Co. of Indianapolis.

Family Savings has investments from First Interstate, American Savings and others wanting to support inner-city home ownership without opening more branches there.

Foothill Group, a local non-bank lender, sold out this year to Norwest Corp., a giant bank headquartered, like First Bank System, in Minneapolis. Thus $650-million-in-assets Foothill now has $62-billion Norwest behind it.

The prospect, as big banks consolidate and small ones proliferate, is for two-tier finance--with flexibility a hallmark of the small.

“As they focus on earnings per share to boost the stock price, big banks are centralizing operations and curtailing independence among their branches,� reports Michael Morrow, an Austin, Tex.-based bank consultant.

That gives small banks opportunities for service. William Hanna, president of Cedars Bank in Downtown Los Angeles, sends messengers to collect deposits and help business customers with paperwork. Big banks might regard such personal service as too costly, but Cedars manages it. The 8-year-old bank has 32 employees and $100 million assets, more assets per employee than any of the banks in the merger-go-round.

But if local banks are the answer for business and consumers, what role is there for the giants being formed by these mergers? Well, some few will survive to serve global companies with sophisticated financing, as J.P. Morgan & Co. does now.

But most face the unenviable prospect of shrinking their staffs to boost earnings in order to buy in shares to reward shareholders, all the while competing for customers with GE Capital, Merrill Lynch, Charles Schwab, Fidelity Investments et al. Darwinian selection ain’t pretty.