United States Bank Mergers & Acquisitions (Fifth Third Bancorp)

Photo: A Fifth Third Bank branch in Sandusky, Ohio.


Fifth Third Bancorp

The history of the U.S. banking system has been one of instability.  It is indeed ironic that the world’s most productive and innovative economy also has a banking system that has seen periodic booms and busts, and a regulatory environment that has swung from extreme liberalism to extreme regulation.  For much of the 18^th and 19^th centuries, no nationwide regulation even existed; each state had its own (however loose) laws governing the state’s banking system.  In the late 19^th century, well over 1,000 banks across the U.S. issued their own banknotes, each backed by various degree of capital reserves.  Due to this lack of regulation, many unscrupulous fraudsters would establish what was known as “wildcat banks,” quickly issuing as many banknotes as possible and using this money to purchase goods, other hard assets, or exchanging their own notes for other more reliable banknotes, then suddenly disappearing with the loots. As a matter of fact, during the first half of the 19^th century, half of all U.S. banks would fail periodically, to be replaced by other equally unreliable new banks.

This finally changed in 1863, when the Congress passed the National Banking Act, creating for the first time a national banking registration and regulatory framework.  This federal bank act created the distinction between nationally-chartered and regulated banks and banks authorized and chartered at the state level.  Under the 1863 Act, only national banks subject to a strict capital reserve requirement were permitted to issue banknotes.  This legal change not only prompted many former state banks to re-organize and apply for a national charter, but also the establishments of many new national banks.  However, many banks also opted to keep their state charters without switching to a national charter.  Further complicating things, national banks are still subject to many state bank regulations at the local level.

It should be noted that the term “national bank” in this context refers to a “bank with a national charter,” and does not suggest a bank with a nationwide branch network.  Quite the contrary, the United States for a very long time heavily regulated where their banks could or could not operate.  Many states allowed their state banks to offer service from just the head office (i.e. “branching” was forbidden) whereas some states permitted branch banking. Meanwhile, the nationally-chartered banks were not allowed to offer branch banking at all.

In order to be fair to both state banks and national banks, the U.S. Congress in 1927 passed the McFadden Act, which basically accorded the same “branching rights” to national banks as to state banks.  As state-chartered banks were not permitted to operate outside of their home states, the McFadden Act forbade national banks based in one state from branching out into another state.  This restriction is why the 1927 McFadden Act is known as the law that banned “inter-state banking.”

It is under such a complex environment that in 1863, the Third National Bank of Cincinnati was founded, the name was adopted because there existed already the First National Bank of Cincinnati and the Second National Bank of Cincinnati.  In 1871, the Third National Bank acquired the Bank of the Ohio Valley (founded 1858) and became the largest bank in the state of Ohio.

Meanwhile, in 1888, the Queen City National Bank, founded six years earlier, underwent a re-organization and somehow condescended to the new name of The Fifth National Bank of Cincinnati.

In 1907, a widespread credit and confidence crisis in the U.S. led to nationwide bank runs; the weakened Fifth National Bank of Cincinnati in 1908 agreed to combine with the Third National Bank of Cincinnati to form the Fifth Third National Bank of Cincinnati.  Then in 1919, Fifth Third National became affiliated with an Ohio state-chartered financial firm called the Union Savings Bank & Trust Company, which was renamed the Union Trust Company in 1923. Fifth Third National’s affiliation with the state-chartered firm gave it the ability to circumvent (as a national bank) the restriction against having branches, and the bank acquired a number of smaller banks around the city of Cincinnati during the 1920s.

In 1927, Fifth Third National and Union Trust finally fully consolidated, and adopted the name Fifth Third Union Trust Company.  As one of the stronger banks in Ohio, the bank took over three insolvent banks between 1930 and 1933, in the midst of the Great Depression.

The rest of the 1930s and 1940s saw few significant changes for Fifth Third Union Trust. During the 1950s and 1960s, the bank consolidated a number of small banks within the state of Ohio.  The rapid growth in consumerism saw the gradual shift from commercial banking to personal banking for the bank.  In 1969, Fifth Third Union Trust adopted a simplified name: Fifth Third Bank. Five years later, a holding company called the Fifth Third Bancorp was created.  Still, despite a history of consolidations over a century, Fifth Third as recent as in 1976 only had 37 branches around the Cincinnati county.

State and federal restrictions on branch banking finally relaxed in the 1980s, first allowing Ohio banks to open branches outside of their home counties, then certain states within the same region began to permit each other’s banks to cross state borders.  In 1985, Fifth Third Bank acquired the American National Bank of Newport, just across the Ohio-Kentucky state line.  Even though Newport is part of the Metropolitan Cincinnati area, as it is in the state of Kentucky, Fifth Third was now allowed to operate there until the legislation change of 1985. Suddenly liberated from the branching restrictions, Fifth Third quickly acquired more banks in northern Ohio, Kentucky and Indiana (the state to the west of Ohio).

The decade from 1985 to 1996, however, was otherwise very turbulent times in the American banking system.  A sudden sharp rise in interest rates due to soaring inflation caught the savings and loans (S&Ls, as banking co-operatives are known in the U.S.) off-guard, as their business model relied on using personal deposits as the source of capital, then lending it as mortgage loans to borrowers. As personal deposits are often short-term and open in nature, but the mortgage loans are of longer and fixed-terms, as interest rates spiralled in the early 1980s, the S&Ls found their cost of capital (interest rates paid to personal deposits) rising high above the rate of returns (mortgage loan rates that were fixed before the sudden interest rate jumps).  Before long, the S&Ls were suffering from severe losses from the asset-liability mis-match. At the same time, the credit crisis led to a sharp drop in real estate prices and the overall economy, and mortgage defaults skyrocketed.  As capital was depleted, many S&Ls became insolvent.  The situation became so dire that even the government-run deposit insurance schemes at quite a few states went bankrupt.

Fifth Third, being a more cautiously-run bank, took advantage of the crisis and absorbed many smaller rivals in financial trouble throughout the late 1980s and early 1990s, and slowly but surely expanded its branch network and market share.  Then in 1992, Fifth Third held private talks to merge with Ohio rival Star Banc Corp., which traces its history to the First National Bank of Cincinnati.  However, the discussion failed to result in a deal.  (Star Banc Corp. eventually became U.S. Bancorp.)

In 1994, Fifth Third made two acquisitions.  First, it bought the Cumberland Federal Bancorporation for USD $149-million, gaining 43 branches across Kentucky.  Later in the same year, it bought Falls Financial for USD $76-million.  Falls Financial was a small bank based in northeastern Ohio.  Then in 1995, Fifth Third bought a small bank in Florida called the Bank of Naples, which had three branches.

Throughout the rest of the 1990s, the bank made numerous bank acquisitions in its core market of Ohio, Kentucky and Indiana, each time gaining no more than a dozen branches or so.  Fifth Third, as such, was still a regional bank with meaningful operations only in three conjoining Midwest states at this time.

Recent transaction(s):

• In 1998, Fifth Third (branded as “5/3”) bought another Ohio rival CitFed Bancorp of Dayton for USD $727-million, whose subsidiary Citizens Federal Bank had 36 branches.
• Also in 1998, 5/3 purchased State Savings Co. for USD $918-million. The deal added 43 branches in the Columbus (Ohio) area and ten in Arizona to 5/3’s network, though the small Arizona network was disposed of later. By now Fifth Third had over 450 branches across Ohio, Kentucky, Indiana and Florida.
• Also in 1998, 5/3 bough two other financial services firms, namely the Ohio Company, a full-service broker-dealer and investment manager; and W. Lyman Case & Co., a commercial mortgage financier.
• In 1998 and 1999, 5/3 acquired several smaller banks in Ohio, Kentucky and Florida.
• In 1999, 5/3 made its biggest acquisition to date when it bought CNB Bancshares of Indiana for USD $2.3-billion. CNB’s subsidiary Civitas Bank had 145 branches and 200 ATMs mostly in Indiana, but also a small presence in Kentucky, Illinois and Michigan.
• Also in 1999, 5/3 bought Peoples Bank Corp. of Indianapolis for USD $228-million. Peoples Bank & Trust had nine branches.
• In 2000, 5/3 bought Ottawa Financial Corp. for USD $168-million.  Ottawa Financial had 27 branches in Michigan.
• Also in 2000, 5/3 bought Capital Holdings of Ohio for USD $244-million.
• In 2001, 5/3 acquired Old Kent Financial Corp. for USD $4.92-billion.  Old Kent had 340 branches in Michigan, Illinois and Indiana. The deal made Fifth Third one of the top five banks in Michigan and the Chicago area.
• In 2004, 5/3 bought First National Bancshares of Florida, Inc., for USD $1.58-billion. First National Bank of Florida operated 77 branches mainly in Southwest and Central Florida.
• In 2007, 5/3 agreed to purchase R-G Crown Bank from Puerto Rico's R & G Financial Corp. for USD $288-million. R-G Crown Bank operated 30 branches in Florida and 3 in Georgia.
• In 2007, 5/3 bought First Charter Corp. of Charlotte, North Carolina, for USD $1.09-billion. First Charter Bank operated 61 branches in North Carolina and another 2 in Georgia.
• By 2014, 5/3 operates over 1,300 branches across 12 contiguous Midwest states of Ohio, Kentucky, Indiana, Illinois, Michigan, Missouri, Georgia, North Carolina, Pennsylvania, West Virginia, Tennessee and Florida.
• In May 2018, 5/3 agreed to acquire Chicago-based MB Financial for USD $4.7-billion. MB Financial Bank's 91 branches will join Fifth Third's existing 148 branches in the city, though as many as 50 branches will be shut following the consolidation. The purchase will expand Fifth Third's deposit base in the Chicago area from $11-billion to $25-billion, making it one of the top four banks in the market.

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United States Bank Mergers & Acquisitions (American Express)

Photo: American Express offers a number of credit cards that are affiliated with airline loyalty programs, like this American Express Canada's AeroplanPlus card that earns rewards on Air Canada and other Star Alliance airlines.

American Express Company

As a financial services company, American Express is a curious one. Most people immediately associate the name with its namesake credit cards and travellers cheques. It also arranges travel for corporate clients and offers savings and travel insurance products.

Back in the 1830s, the western frontier of the U.S. was wild, lawless, and undeveloped in many aspects. The U.S. government postal service (USPS) was extremely limited, slow and unreliable. Nothing larger than a letter-sized envelope could be handled by the USPS. Many states west of the Eastern Seaboard were not covered by USPS at all. Yet the ever-expanding western frontier needed a delivery system for mail, parcels, currency, precious metals, consumer goods and industrial tools to be transported across the continent. This demand created opportunities for adventurous entrepreneurs to fill the gap that USPS could not provide.

Unbeknownst to many, the American Express Co. and Wells, Fargo & Co. share a common origin. In 1841, Vermont native Henry Wells established the Wells & Co. to provide express delivery service between New York City and the upstate Great Lakes port of Buffalo. The express delivery business in the 1840s was new and risky, but potentially highly profitable. One of Wells & Co.’s many rivals was Livingston, Fargo & Co., headed by Crawford Livingston and William G. Fargo. In 1849 yet another new competitor arrived: John Butterfield’s Butterfield, Wasson & Co.

In 1850, recognizing they could operate far more efficiently and expand coverage by combining, Messrs. Wells, Fargo and Butterfield consolidated their businesses into a joint-stock express association named the American Express Company. The new firm offered delivery service in the U.S. Northeast and the Midwest states of Illinois, Ohio and Iowa. In 1851, it signed an agreement with its arch-rival Adams & Co. (Adams Express Co. as of 1854) to split the market that probably would be considered as collusion today. American Express was to focus on the market north and west of New York state, whereas Adams would be free to expand in the U.S. Southeast.

Foreseeing the great potential of the massive migration of people to the Pacific Coast, Henry Wells and William G. Fargo soon proposed expanding American Express’ service to California, but the other directors balked at the risky move. Undaunted and determined, Mr. Wells and Mr. Fargo left American Express and New York for San Francisco to launch their own Wells, Fargo & Co. in 1852, offering gold trading (gold dust, bullion and coins), safekeeping as well as delivery services.

In 1857, the American Express Co. created the Overland Mail Co. as a joint-venture with rivals Wells, Fargo & Co., Adams Express and United States Express. One year later, the Overland Mail Co. won a USPS contract to carry mail over the southern Great Plains between St. Louis and California. Wells, Fargo & Co. eventually became the sole owner of Overland Mail Co. in 1866.

Rather than disrupting business, the American Civil War between 1861 and 1865 was ironically highly profitable for the express industry. American Express shipped military and other supplies to army depots, mail and parcels between soldiers and their families, and even delivered election ballots during the Union-Confederacy struggle.

The Big Four express companies’ good times came to an abrupt end in 1867, when a group of powerful New York merchants founded the Merchants Union Express Company to break the oligopoly. Competition became so fierce that American Express suffered its first ever annual loss in that year. The next year, American Express and Merchants Union Express merged to form the American Merchants Union Express Co., though the name was reverted back to American Express in 1873.

American Express began transporting goods from New York City to over a dozen major European cities in the 1870s, marking the company’s first international operations. The 1880s and 1890s saw the launch of the money order and travellers cheque products. Even though the U.S. postal money order had been available since 1864, its use was hindered by the relative ease of altering the face value. In 1882, American Express created its version of the money order that was safer, simpler and cheaper than the postal money order. The new product became a major new source of revenue for the company.

In the 19th century, American tourists and businessmen faced great inconvenience if they wanted to obtain local-currency cash while visiting Europe. They must first bring with them a letter of credit from their American home bank, and then visit the American bank’s European correspondent bank office, which would verify the letter of credit and release payment. The service was severely restricted by where the correspondent bank had offices and their banking hours. As can be imagined, even with much pre-planning, significant delays in obtaining cash were unavoidable. To make the process less cumbersome, American Express invented the travellers cheque in 1891. The travellers cheque can be easily and immediately cashed and converted to a local currency at American Express’s offices in Paris (opened in 1895) and London (1896). Soon, more offices opened in Antwerp, Zurich and Berlin. Holders simply love its simple and effective “signature and counter-signature” security feature. And if lost or stolen, the travellers cheques can be cancelled and replaced at any American Express office.

Before long, American tourists were flocking to American Express’ offices in Europe not just to cash their travellers cheques, but to obtain information about local attractions and hotels. Still, at this time, the travel advice provided was informal, and only for its travellers cheque clients. The company’s official entry into the travel agency service only began in 1915. Within several years, the name American Express became synonymous with luxury travel around the world.

The firm gained a legendary reputation for dependability at the outbreak of World War I in 1914, when some 150,000 American tourists were stranded in Europe, their American letters of credit suddenly becoming useless when war-time European banks refused to honour them. Words soon spread that American Express was accepting the letters of credit and dispensing cash to the stranded tourists. Thousands flocked to their offices to obtain cash to buy passages back to America.

American Express’ entry into the travel and selective banking business proved to be a saviour when its domestic express delivery business was nationalized in 1918 by the U.S. government as a war measure. By the Roaring Twenties, American Express’ offices had expanded to Argentina, Brazil, Japan, China, Hong Kong, India and Egypt, Turkey, Greece, Italy, Switzerland and Belgium, providing payment, banking and travel services for the high net-worth clientele.

American Express' autonomy was temporarily suspended in 1929 when it was disclosed that Chase Securities Corp, a subsidiary of Chase National Bank (forerunner of J.P. Morgan Chase & Co.) had quietly bought up 97% of American Express' outstanding shares. Chase was eyeing American Express’ prized banking licences and operations around the world. Interestingly, holders of the remaining 3% of the shares steadfastly refused to tender their stake to Chase. As the struggle continued, the Stock Market Crash of 1929 hit and things got complicated for Chase. Then in 1931, the Austrian and German economies collapsed, unleashing a wave of banking crises across Europe and the U.S. Losses soared at both Chase and its subsidiary American Express.

In 1932, the U.S. Senate launched an investigation into the roles the securities firms played during the stock market bubble just before its collapse. The Congress passed the Glass-Steagall Act in June 1933, prohibiting American banks from stock and real estate investment, and from investment banking and other non-bank activities. Chase was forced to spin off its Chase Securities division, which still held 97% of American Express. As Chase Securities Corp. had no use for American Express’ banking or travel businesses, it subsequently relinquished control of the firm back to public shareholders.

American Express' London Cornhill office became a legend in World War II when it resumed for business just one day after being destroyed by a German bomb. Throughout the war, the office made travel and freight forwarding arrangements for Allied military personnel and diplomats from the office.

The first modern-day credit card was invented by the Diners Club in 1950. Initially resisting the idea, American Express launched its signature travel-and-entertainment charge card (the green card) in 1958. It became an instant hit for wealthy globetrotting clients who already bought the travellers cheques and booked travel arrangements through American Express. Within five years, the card boasted over one million cardholders and 85,000 establishments where the card was accepted.

American Express diversified into other financial services during the 1960s, first with the purchase of securities brokerage firm W. H. Morton in 1966, then property & casualty insurer Fireman’s Fund Insurance Co. in 1968. Throughout the 1970s though, the firm faced increasing competition as both VISA and MasterCard entered the travellers cheque market. American Express suffered a major publicity disaster in 1979 when it launched a hostile offer for McGraw-Hill Publishing Co. The takeover attempt eventually failed.

In 1981, the company took over revered investment bank Shearson Loeb Rhoades for USD $915-million. However, American Express saw a reversal of fortune in the early 1980s. Its Fireman’s Fund Insurance used questionable accounting practices to hide falling revenues and rising losses. Though these troubles didn’t halt American Express’ ambitions to diversify: in 1984, it successively acquired Investors Diversified Services, Inc. (IDS, provider of financial planning, mutual fund and insurance products) and investment bank and broker Lehman Brothers Kuhn Loeb (for USD $360-million), which was merged into Shearson/ American Express to form the new Shearson Lehman Brother Holdings Inc.

The strategy to cross-sell expanded financial and travel products flopped, however, as existing clients were reluctant to switch to Shearson Lehman Brothers. American Express at the time also had a 50/50 cable-TV joint-venture called Warner-Amex. The concept to offer banking service via the TV screen was innovative but probably two decades too premature. In 1984 the firm sold its 50% stake in Warner-Amex to Warner Communications. Meanwhile, American Express in 1985 began to relinquish Fireman Fund Insurance’s P&C operations, while retaining its life insurance business.

In March 1987, American Express sold a 13% stake in Shearson Lehman Brothers to Nippon Life for USD $568-million, and distributed another 27% through an IPO. This turned out to be an opportune sale as investment banks suffered heavy losses during the Black Monday crash just months later. In 1988, the still 60%-owned Shearson Lehman bought broker E.F. Hutton & Co. for USD $1-billion, and adopted a new name Shearson Lehman Hutton Inc. American Express reduced its Shearson Lehman Hutton stake to below 50% in 1989, and finally sold its remaining stake to insurance giant Travelers Group in 1993. (Travelers spun off the investment banking business in 1994 as Lehman Brothers Holdings, which collapsed spectacularly in September 2008 during the global Subprime Mortgage Crisis.)

During the 1990s, however, smaller, independent merchants unhappy with ever rising commission fees led to a movement to leave the American Express system, or to openly discourage customers from paying with American Express cards. The movement appeared to have been futile in getting American Express to reduce the fees, as Visa and MasterCard both increased fees on their own premier credit cards.

Recent transaction(s):

• In 2003, American Express bought Great Britain's Threadneedle Asset Management Holdings from Zurich Financial for GBP 340-million (USD $570-million).
• In 2005, American Express spun off its asset management and advisory business into an independent NYSE-listed company called Ameriprise Financial.
• In 2007, American Express sold American Express Bank Ltd. to Great Britain's Standard Chartered plc for USD $1.1-billion (GBP 550-million). American Express Bank served 10,000 clients and provided services to financial institutions and affluent individuals. It had 75 offices across 47 countries.
• In 2008, American Express bought GE Money's Corporate Payment Services division from General Electric for USD $1.1-billion. GE's Corporate Payment Services provided credit card, purchasing and payment services for corporate clients as opposed to consumers. It had more than 300 large corporate clients. GE was exiting the private-label credit card business.
• Following the lead of Britain’s GBP 37-billion (USD $64-billion) partial nationalization of The Royal Bank of Scotland Group, HBOS and Lloyds TSB Group, the U.S. government unveiled a similar plan on 2008-10-14 under which the U.S. Treasury injected USD $250-billion in nine major U.S. banks: Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley, Merrill Lynch, Bank of New York Mellon, and State Street. The funds were disbursed under the name Troubled Asset Relief Program (TARP).
• As the credit crisis deepened, other financial firms faced mounting pressure to raise their capital reserves, and American Express joined almost 200 other financial companies to request an expanded TARP program that saw a total of USD $431-billion being distributed. In order to qualify, American Express converted itself to a bank holding company and obtained USD $3.39-billion in TARP funding, which it fully repaid the U.S. government in June 2009.

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