A bank in an attractive market posts two quarters of disappointing results. Management doesn't want to sell, but the investment community is in no mood to cut any slack.
The familiar merger-season scenario may be unfolding again, this time at First Virginia Banks Inc.
Per-share earnings at the $9 billion-asset holding company-the second- largest independent in Virginia after Crestar Financial Corp. of Richmond- fell by 6 cents in the fourth quarter, to 57 cents. It fell short of analysts' estimates by as much as 10 cents.
Though First Virginia, based in Falls Church, posted a 1 cent increase in the first quarter, to 61 cents, return on equity declined to 12.4% from 13.5%.
"They should raise their returns or have someone raise them for them," said Credit Suisse First Boston analyst Michael L. Mayo. He forecasts for below-average earnings growth but rates the stock a "buy" because "the likelihood of takeover is great."
Other banks, such as First Commerce Corp. and CoreStates Financial Corp., were in similar situations before selling to Banc One Corp. and First Union Corp., respectively.
Thomas H. Hanley, a bank analyst at UBS Securities, said First Virginia would be attractive to Crestar, BB&T Corp., and Wachovia Corp., which acquired two banks in Virginia last year. He estimates First Virginia would fetch $65 a share, about $12 above its price Tuesday afternoon.
First Virginia executives dismiss the takeover talk.
"I've been here 25 years and I can't remember a time when we weren't on somebody's top 10 takeover list," said Richard F. Bowman, chief financial officer.
He said First Virginia, essentially a collection of 15 locally managed community banks, sees opportunities acquiring smaller banks in Virginia and neighboring states and luring customers from North Carolina-based Wachovia and First Union as those giants move in on its markets.
First Virginia, Mr. Bowman said, has earned independence. "We feel we have managed the company and provided superior returns. There is no reason to consider being taken over."
First Virginia has built a reputation for conservatism. The net chargeoff ratio since 1991 is 0.23%, and its equity-to-assets ratio is a high 11.2%. Capital at that level depresses return on equity below peer levels.
Mr. Bowman acknowledged that the capital ratios "are a little higher than we'd like" but the bank sees no urgent need to reduce them. Management is especially averse to acquiring companies just so it can reduce capital, he said.
"Traditionally our objectives have been safeguarding our customers' assets, income, and growth - in that order," Mr. Bowman said.
The emphasis on solidity is all well and good, say analysts. But in a robust economy, with companies and consumers typically able to repay their loans, safety and soundness are not the distinguishing characteristics that they were seven or eight years ago. Earnings matter more.
Boosting earnings quickly is the key to First Virginia's continued independence, Mr. Hanley wrote in a recent UBS report. "In the current environment of escalating takeout premiums ... we would expect takeover pressures to intensify if the company does not improve on 1997's EPS growth performance."
First Virginia's sluggishness reminds some analysts of First Commerce of New Orleans. Days after reporting subpar earnings for last year's third quarter, it announced the merger with Banc One.
CoreStates of Philadelphia tallied multiple quarters of disappointing earnings before selling to First Union, despite chief executive officer Terrence A. Larsen's often-stated desire for independence.
In the summer of 1996, CEO Andrew B. Craig 3d of Boatmen's Bancshares assured investors that there were no plans to sell. Four weeks later the St. Louis company agreed to become part of NationsBank.
As a result, when executives at First Virginia or other banks say they do not want to sell, analysts tend to tune that out, and focus squarely on the bottom line.
"We completely discount management statements when it regards whether or not they intend to sell," Mr. Mayo said.