Wave of Takeovers Predicted After Interstate Hits

Alan F. Morel, a bank analyst with Louisville-based brokerage firm J. J. B. Hillard, W. L. Lyons Inc., says community bankers would be wise to build a

banking network that commands a significant portion of the market before federal interstate banking laws are passed.

The reason: There will be a wave of acquisitions following passage of the bill and those community banks that have built a large network could either sell out for a big premiums or compete effectively with larger institutions. Banks that don't build will be strangled by the competition, he says.

The 45-year-old Mr. Morel follows 150 banks across the country, but he pays particularly close attention to community banks in Kentucky. Of the state's 300 banks, he expects a third will disappear by the end of the decade. The consolidation will be driven by superregionals that want to get into the state and a group of aggressive Kentucky community banks that have been building size.

A native of London, Mr. Morel attended the University of London, but cut short his studies in economics to become a political assistant to the minister of health for the National Health Service.

He came to Louisville in 1973 on a health care lecture tour, and two years later he moved to the city and joined Hilliard Lyons, an investment banking firm with 50 offices.

When Mr. Morel isn't crunching numbers, he's selling soccer equipment at his store in Louisville, called the Soccer Warehouse, which opened a year ago. The store is housed in a building that was once home to a bank.

"Banking is my life," he said.

Q.: Are a lot of Kentucky community bankers building their banks in anticipation of interstate bank expansion?

MOREL: A minority of the 300 banks are aggressively seeking acquisitions. The others, I just don't think they've given it much thought. Some are thinking somebody is going to come along and buy them [regardless of their size]. That was the case after 1984 because banks simply wanted strategically to occupy a place in what they thought ... were strategic markets. Now, when banks get the opportunity to expand their presence ... they will be targeting vigorous banks that are building up area banking networks.

Q.: How fast are small banks going to be acquired?

MOREL: There will be a frenzy of acquisitions when interstate banking becomes law. When that frenzy reaches the crest, if you are a bank that wants to be bought, you better be viable. After that crest is past there...will be a premium commanded by [the larger] intrastate area banking networks. They will command a healthy premium because of the savings that the purchasing bank will see from buying a group of community banks rather than one bank at a time.

Q.: When does the window close?

MOREL: Between now and the end of the century. Far fewer of the smaller banks than people think are going to be taken over. Every banker who wants to be sold thinks they are a candidate for somebody to buy them. That ain't necessarily so. Somebody is going to buy you [only] if you are worth buying.

Q.: What if you aren't worth buying?

MOREL: They [the competition] are simply going to surround you and bring a haunt to any of your ambitions. If you don't sell ... you will be isolated and die on the vine.

Q.: Why can't you survive being a niche player?

MOREL: Suppose a Bank America wants a piece of the action in Kentucky and you are not one of the banks they want to buy. You are not offering all the services they offer and you are relying on the customers who would rather go to you than anybody else. Eventually those loyal customers are going to up and die on you. They won't be replaced by younger people who are sophisticated and less loyal. What loyalty there is to banking is pretty weak.

Q.: What can a community bank do to have some control over its destiny?

MOREL: They have to put themselves in a position to choose whether they want to sell or not. It is a positioning determined by strength. If you are strong enough ... you have a currency ... to go in and expand your own bank if you want to. Then you have to decide whether you want to build up one of those area banking networks. It will enhance the prospects of you being taken over than you being bypassed. The best way to determine whether you are a purchase candidate is to ask yourself if you would buy your own bank.

Q.: Who's on your acquisition hit list in Kentucky?

MOREL: I don't have a list like that.

Q.: No hit list?

MOREL: We have a hit list, but it is our hit list.

Q.: Which of Kentucky's community banks are the most active acquirers?

MOREL: Pikeville National, Peoples First, Trans Financial, Cardinal, and the three Evansville banks, National City, CNB, and Old National.

Everybody is networking all over the place. Cardinal is very aggressive. Chip Mahan [Cardinal's chairman] has been out pressing the flesh with every bank and S&L president in the state of Kentucky.

Q.: Who else is out and about?

MOREL: Doug Lester at Trans Financial does the same thing. They day, "If you want to sell, you call me."

Q.: Whey are they so actively looking for acquisitions?

MOREL: It is the nature of the beast - very strong personalities. They have a desire to expand and work up to their full potential.

Q.: Who is the front runner, the most prolific acquirer?

MOREL: I wouldn't want to call that one. In terms of final result they have all been neck and neck over time. They are all players. But market share is still up for grabs. You can really buy a lot of banks and still not have a handle on an identifiable market share. Pikeville in the east and Peoples in the west, as strong as they are ... they couldn't lay claim to control of the market.

Q.: So they are vulnerable?

MOREL: Because of their current size, it means they are susceptible to somebody else coming in to compete. But if the did sell out they would be at a significant premium, but neither has that plan.

Q.: What do you look for in a bank?

MOREL: For me, banking is the ultimate diversified industry. Pikeville National is in the middle of the coal fields, but less than 4% of their loans are in coal. If you want a company protected by diversity, you want one with a finger in every pie.

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