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What is the future of mid-sized banks?

Banking Today

The rapid-fire announcement of several big bank mergers last month — Citicorp/Travelers, Banc One/First Chicago NBD and Nations Bank/ BankAmerica — underscored the heightened pace of bank consolidation. While these institutions rank among the very largest in the U.S., their pairings raise continued questions on the future of mid-sized banks. Not surprisingly, some investors are snapping up regional bank stocks on the speculation of future buyouts. But in their quest for rich takeover premiums, do these investors understand why they’re buying these stocks? Moreover, do they comprehend the dynamics shaping many contemporary mergers?

My hunch is that a lot of investors don’t. More times than not, the “rationale” motivating the purchase of bank equities is the latest rumor du jour at the coffee shop. All too frequently, some investors lack perspective on stock trading levels, company fundamentals, management depth and key performance ratios. While it’s true that the consolidation pace has heightened during the past few years, it’s important to recognize three critical issues: First, not all smaller-to-mid-sized banks are compelled to sell out, as many already outperform their larger counterparts; second, in an era of mega-monster financial providers like the proposed Citigroup, many consumers are turning to smaller and mid-sized institutions for more personalized service, making smaller banks an attractive consumer entity; and third, a major correction in what has been a hot stock market could potentially shake up banking’s merger rally of recent times, at least for a while.

It’s also useful to understand the logic directing several contemporary deals. One strategy doesn’t fit all. However, banks of all sizes are becoming more visionary in their merger decision making and are increasingly focused on what they want to buy and why they want to buy it. At times, however, investors tend to blanket big-bank or regional-bank activities. This was particularly evident in the Deep South when Columbus, Ohio-based Banc One announced its intent to buy New Orleans-based First Commerce Corp. last fall. Almost immediately, some investors began to speculate that other megabanks like First Union or NationsBank would gobble up other regional players because Banc One bought FCC. But the reality is that Banc One was strengthening its already considerable Louisiana presence by purchasing a market-share dominant player in FCC. This fit Banc One’s strategic goal of being number one or two in market share in geographic areas where it does business.

Indeed, the ability to reinforce market dominance played into Banc One’s decision — not a cherry-picking of one particular company.

It’s also important to consider how superregionals prioritize potential deals. Most of these bank CEOs have told journalists and analysts that large population centers with above-average economic growth, low unemployment and two-income families are highly attractive. Of course, other circumstances can come into play from time to time. But for the most part, regional economics are significant factors in merger decisions. And while investors have drooled over the weighty premiums of recent times — deals ranging from three to four times book value — it’s important to note that franchises that dominate attractive geographic areas or niche businesses are the ones that are fetching these prices.

If the recent past has taught us anything, it’s that there is no formulaic recipe for doing bank deals. But investors who are bent on purchasing bank stocks because of the current acquisition rally should at least weigh — at a minimum — the following: How strong is the company’s geographic presence in terms of economic quality of markets? Does it dominate these markets by being primarily one, two or three in market share? Does it possess any well-defined and highly profitable niche areas, such as credit cards or mortgage lending that an acquirer would covet? What is the demographic outlook of the company’s major markets? Are the economics compelling enough for a tier-one player to want to get in on the action? Or is a merger more likely among an equal-sized institution or a second-tier regional player?

Additionally, it’s also worth noting that many institutions are committed to remaining independent. Some are nimble enough to make the necessary investments in technology and infrastructure on their own, while providing attractive returns to shareholders.

Tupelo-based journalist Karen Kahler Holliday writes a monthly banking column for the Mississippi Business Journal. She is senior contributing editor for U.S. Banker magazine.

Indeed, some of these institutions are benefitting even more as independents by the contemporary merger boom because they’ve been able to attract large-bank customers — and employee talent — who seek a more personalized banking environment.


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