Megamergers Continue As Midwestern Banks Wed

UNITED States banks are prolonging an industrywide rush into mergers by seeking financial matrimony with a new kind of mate: compatible neighbors.

First Chicago Corp. and NBD Bancorp Inc. of Detroit Wednesday announced the second-biggest bank merger in US history through a stock swap worth $5.14 billion. The tie-up into a bank holding company with $120 billion in assets illustrates how merger mania increasingly involves banks from the same region coming together for strategic reasons.

In contrast, mergers in the late 1980s and early '90s, when the banking system was recovering from years of bad real estate loans, frequently involved a strong, opportunistic bank snapping up a weak and distant financial institution at a fire-sale price.

The creation of First Chicago NBD Corp., the seventh-largest bank holding company in the nation, signals the rise of intraregional over interregional bank tie-ups, experts say.

''Banks went into a frenzy of interregional merging where they were picking over a bunch of weak banks with damaged real estate portfolios,'' says Edward Hill, an economist at Cleveland State University.

''Those bad loans have worked their way out of the system so vulture buying is now over,'' says Mr. Hill. ''Now, instead of the opportunistic mergers, we are seeing strategic mergers.''

Together, First Chicago and NDB will dominate banking in Illinois, Michigan, and Indiana. Like several other recent regional mergers, the new combination is partly a reaction to the removal of a major legal barrier hindering interstate banking.

Congress last year voted to allow banks to open branches outside their home state without having to charter a headquarters in each state.

Besides the two major Midwestern banks, other US banks have recently coupled in their regional markets in preparation for the enactment of the law this fall.

In the Pacific Northwest, US Bancorp of Portland, Ore., and West One Bancorp of Boise, Idaho, last month announced a merger.

In the mid-Atlantic region, Pittsburgh-based PNC Bank Corp. announced on Monday the purchase of Midlantic Corp. of Edison, N.J., for $2.8 billion in stock. The merger was partly a reaction to the marriage three weeks earlier of First Union Corp. of Charlotte, N.C., and First Fidelity Bancorp., a rival to Midlantic. The $5.4 billion purchase by First Union is the largest US bank merger ever.

In addition to plain propinquity, a comparatively robust regional economy impelled First Chicago and NBD to merge. Reinvigorated industry and manufacturing have made the Midwest the fastest-growing region in the country.

By combining forces, the two banks can better tap the promising market of mid-sized company borrowers, especially parts manufacturers for the resurgent auto industry. Other bank tie-ups in the states of the Great Lakes Basin should follow, experts predict.

Still, as banks stage mergers designed to cultivate a familiar regional market, they thrust an uncertain future on the people who depend on them for their livelihood, dividends, loans, or interest. A linkup is usually aimed chiefly at satisfying shareholders. But, economists note, it does not always buoy shares in the long term. Shares in the acquired bank enjoy an upward jolt, but the fillip often proves fleeting.

(NBD's stock rose $1.875 per share on Wednesday to close at $34.375 in trading on the New York Stock Exchange.)

Share prices can sag long-term because mergers often prove highly problematic. The partners in many new tie-ups must usually struggle to reconcile their flow charts, computer systems, and long-term strategies.

Ultimately, the biggest losers in a merger are usually bank employees. The new combined bank often closes overlapping branches and lays off redundant back-office employees.

First Chicago and NDB indicated they will lay off about 1,700 workers out of a total staff of 35,000. The combination of retrenchment and branch closings will mean cost savings of $200 million for each of the first two years, according to the banks.

Despite closings and job cuts, banks that merge often fail to achieve greater efficiency, experts say. The new ''megabanks'' usually confront smaller rivals that compete well by farming out many activities to financial-service companies.

Small local banks can profit from the reputation of gargantuan financial institutions for impersonal, sluggish, and inflexible service and too great a concern for the bottom line.

Indeed, politicians, customers, and rival banks reviled First Chicago for imposing last month a $3 fee on many transactions involving tellers.