There's a pretty good chance your bank will get caught in a consolidation. Should you worry?

In the game monopoly, just about the only thing you can't buy or sell is the bank. But in real life, banks are the hot properties these days -- as popular a category for acquisition and consolidation as those cobalt-blue cards for Broadway and Park Place.

With credit going to both the easing of federal regulations on ownership and stronger balance sheets in the wake of the big loan-loss write-offs of the 1980s, banks are merging in record numbers. Economies of scale are helping to fuel the push, as is an apparent fear among already large banks that if they don't buy while the getting is good, their competitors will.

That's good news for owners of bank stocks, whose shares are trading at as much as 12 times earnings, a pricey level for the industry. But for customers, the activity is a cause for concern rather than celebration. Warren Heller, who for 14 years has headed the research department at Veribanc, a bank-rating service in Wakefield, Mass., explained to Inc. what company owners ought to watch for.

Inc.: How big a deal are bank mergers and acquisitions, anyway?

Heller: A lot of banks have gone away in the last year. As of June 30, 1995, we had 10,774 banks in the United States. A year earlier, on June 30, 1994, we had 11,327. The difference is the net of consolidations and absorptions, minus new start-ups. But there haven't been too many start-ups -- maybe 70 or 80 -- so there were about 600 institutions that disappeared. So in a year like last year, you have roughly one chance in 20 of your bank's changing its ownership. That's a high percentage.

Inc.: Should I worry about my bank's being involved in the mergers-and-acquisition action?

Heller: If your bank is doing the acquiring, it's probably neutral news, because its policies are probably going to stay pretty much the same. If it's being acquired, it's almost always bad news. Because it just about guarantees that you're going to see new directions and new types of procedures; at the minimum, you're going to have to throw away your checks and deposit tickets and get ones with the new logos. It also means that the competition in your area is probably lessening.

These days, loans almost never get called as the result of an acquisition, unless you're in arrears or in violation of some of the covenants. And conventional financial services don't become a problem; they're a commodity. But having to deal with new personnel is serious. Because when a bank's committee makes a decision either to renew a line of credit or to grant a new loan application, that decision is based on a combination of the hard financials that are sitting in front of it -- hopefully, the earnings that are going to allow you to comply with the bank's terms -- and discussion along the lines of "Oh yeah, I know Mr. Smith, he's been in this business for some years, doing business with the bank." You typically have an internal champion in the bank; if that person is gone, and nobody there now knows you, you go from facing a favorable lending environment to, at best, a neutral one.

Inc.: Can I track the chances that my bank will be acquired?

Heller: The acquisition thing right now is a wild card. A lot of good institutions are being acquired, and the weak ones almost certainly are. By weak, I mean institutions that have some of the lowest capital ratios, or are running consistent losses, or have high unreserved problem-loan positions. If you look at the institutions that rank in the lowest tenth in terms of overall health, I'd be willing to bet that half will be gone in a year. Not failed but gone, because they've been absorbed by somebody else.

If there's media speculation about acquisitions, or you get announcements from the bank about discussions being opened -- if the bank's in play, in other words -- you should start asking questions of your lending officer. A particular deal might not materialize right away, but you can bet that if it doesn't, your bank is probably going to look for another one.

Inc.: What about banks' shutting down? Is that still the problem it used to be?

Heller: No. If we'd had this conversation in 1991, the threat for a business would be that its bank would have loan-repayment problems that would put its capital in a precarious situation, and that the bank would close its lending window so it wouldn't fall below required capital levels. Your chances of getting caught up in that were very high: I think during the early 1990s probably a good 30% of the industry did significant throttling back of new loans. That threat really doesn't exist today; practically every bank in the country is well capitalized, even some of the ones in trouble.

The exception is California, which hasn't come back. Of our down-rated banks, more than half are in California, and of bank failures last year, I think three-quarters were in California. The economy there is still in sufficiently bad shape that bank failure and institutions' making sharp cutbacks to stave off failure are much bigger risks to business owners than mergers are.

Inc.: So how much about my bank's business do I need to know, anyway? And where do I get basic information?

Heller: The little statements you get at a bank aren't too useful, because they usually don't talk about the problem loans and the foreclosed properties; they're usually pretty vanilla, listing income and capital. But most banks these days, especially the large ones, will give you their quarterly call reports -- the information they have to give to the government. Those are the same data we have access to. The only problem is that it's an embarrassment of riches: you have 30 or 40 pages of dozens of numbers per page -- the total content of a call report is about 1,500 data items. If you've got the time, you can sit down and do the analysis. The question is, do you really want to go through that time and effort every quarter? That's one of the reasons bank-rating services like ours exist.

Inc.: Which are the key things to look at in assessing a bank's general health?

Heller: There are three. The first is the equity-to-assets ratio, which, to receive Veribanc's highest rating, has to be at least 5%. The second is that an institution should always be profitable. And the third one is that the bank's problem loans shouldn't be enough to sink it.

We look at the institution's problem loans (including delinquent securities and derivatives contracts), give it credit for the reserves it has against them, and then look at what's left -- the unreserved problem loans. And we ask, "If those all had to be charged off right now, what kind of equity hit would the bank take?" Our threshold is that if the unreserved problem loans have the potential to reduce the bank's equity to less than 4% of assets, then we start down-rating it.

Of course, that doesn't cover everything -- last year, for instance, when there was some concern about the institutions' securities portfolios and the depressed bond market, we started factoring those considerations in. Insider lending and the condition of the holding company are also important. But if you get a good measure of an institution's capital, its income, and its problem loans, then you've covered 90% of the bases.