Loan Stars

By Barbara Rudolph

Few American industries are currently more merger mad than banking. This year alone, scores of banks and savings and loan associations have joined forces with other institutions. Last week the fever spread all the way from New York City to Texas. First, Chemical New York, whose $56 billion in assets make it the seventh largest U.S. bank holding company, agreed to acquire Houston's Texas Commerce Bancshares (assets: $18.9 billion) for $1.19 billion. If completed, the merger will be among the biggest in U.S. banking history and will create the fourth largest bank company, behind Citicorp, BankAmerica and Chase Manhattan. One day after that deal became public, two large Dallas institutions, healthy Republic Bank and ailing Interfirst, announced a Texas- size merger of their own. The combined bank (assets: $35 billion) will be the $ twelfth largest in the U.S.

One of the main forces generating the mergers is the breakdown of barriers to interstate banking. Today, 36 states and the District of Columbia permit out-of-state financial institutions to buy a local bank, at least under some conditions, up from four states just four years ago. Texas put out the welcome mat last September. Its legislators hope that out-of-state institutions will have the resources to help Texas banks overcome the depression in the region's oil and real estate industries.

Texas Commerce was the first bank in the state to line up a long-distance partner. For its part, Chemical was eager for a presence in the Sunbelt. Quipped Texas Commerce Chairman Ben Love, a friend of Chemical Chairman Walter Shipley's for 20 years: "You could say the chemistry was right." Still, Texas Commerce has been hurt by bad loans to energy companies and real estate developers. Chemical plans to help Texas Commerce expand consumer lending, an area in which the New York bank has more expertise.

Defense against out-of-state competition was probably on the mind of Republic Bank Chairman Gerald Fronterhouse, whose institution aims to strengthen its No. 2 position in Texas by acquiring Interfirst, the state's fourth largest bank. Said Fronterhouse, who will head the combined company: "This is a bank made by Texans for Texans." One challenge will be to help Interfirst dig out from under a $1.1 billion pile of sour energy loans and depressed real estate holdings.

Texans were heartened by the mergers, which need Federal Reserve Board approval. Paul Horvitz, a professor at the University of Houston, called the deals a "vote of confidence in the Texas economy." Still, their success is not assured. Said Mark Alpert, a banking analyst at Bear, Stearns, a New York City investment firm: "Nobody really knows where the bottom of the Texas slump might be."

While Texas banks were leaping into mergers, San Francisco's BankAmerica was trying to elude Los Angeles-based First Interstate Bancorp. BankAmerica, staggering from losses of $600 million over the past nine months, has steadfastly ignored First Interstate's offers of a friendly merger, but the would-be acquirer last week unveiled a hostile bid that it values at $3.23 billion. BankAmerica Chairman A.W. Clausen called the action "reckless." Whatever happens to BankAmerica, it is increasingly clear that from the Texas oil patch to the California coast, virtually any institution is a possible target for the new merger-minded empire builders of banking.

With reporting by Frederick Ungeheuer/New York and Richard Woodbury/Houston