BATON ROUGE, La. - Premier Bancorp could be excused for waiting passively for its future to be decided - after all, Banc One Corp. has an option to purchase it after June 30.
But Premier executives have not just been sitting by the phone waiting for Banc One to call.
Last year Premier, Louisiana's third-largest bank, launched its busiest- ever acquisition drive. And this year it is completing an ambitious reengineering program.
The acquisitions took Premier into New Orleans, the state's best market. The reengineering program, called Premier First, promises to streamline virtually every work process in the bank and produce major cost savings.
However, the ultimate benefits of both the acquisitions and reegineering will surely be enjoyed by Banc One rather than Premier. The Columbus, Ohio- based superregional shows every sign of following through on its option to buy Premier.
Last year, Banc One repurchased 18 million of its own shares to use in a stock purchase of Premier, which has $5.4 billion of assets.
For the record, Banc One is noncommittal. "We haven't made any movement to buy Premier at all yet. And we won't until we get closer to that date" of June 30, said spokesman John Russell.
But Premier chairman G. Lee Griffin, 56, doesn't have much doubt. "I think they'll definitely exercise their option," he said during a recent interview at the bank's headquarters in Baton Rouge. "I don't think they're going to let our bank get away."
It's perfectly understandable why Banc One wouldn't want to let Premier go. The 1992 agreement allows Banc One to buy Premier for a mere 125% of book value, at a time when healthy banks can be expected to go for two times book or more.
Fulfilling the agreement on its original terms could produce the most attractive acquisition in Banc One's history, considering that Premier is above regulatory capital requirements and closed 1994 with a 1.39% return on assets and 17.63% return on equity.
"Obviously, for a bank that's in our condition today, it's a very modest price," says a rueful Mr. Griffin.
Premier's fire-sale takeout premium has to do with its anemic condition in the early 1990s. Premier, a retail and small business lender, was staggered by the collapse of Louisiana's energy-based economy in the late 1980s and experienced serious losses from 1986 to 1989.
The Banc One agreement gave Premier a needed capital infusion of $65 million and also restored its credibility in the market. "I do believe that doing the Banc One deal sent a message out there to the public that we were a good bank and had a good future," Mr. Griffin says.
But since Premier recovered from its problems faster than anyone - including the bank's management - had expected, the question of the ultimate takeout price becomes more complicated. Mr. Griffin is clearly hoping that Banc One will up its premium because of the recent initiatives Premier has taken.
"It goes without saying that if you think you can get a higher price for something, you try to get it," he says. "It's natural for that to occur."
Last year's acquisitions, for example, added $1 billion of assets. The reengineering program required $17 million of investment in new hardware and software and involved hundreds of employees on various project teams.
Bank executives expect Premier First to cut the bank's expense base - $195 million last year - by $5 million a year pretax when fully implemented. Chief financial officer R. Neil Williams predicts the full 10 cents a share in additional pretax earnings will materialize in 1996, but said the first installment of 5 cents a share should come later this year.
Premier earned $69.5 million, or $2.08 a share, in 1994.
What are these franchise enhancements worth to Banc One?
"It's a reasonably good guess Banc One will eventually have to pay up," says analyst John Mason, with Interstate Johnson Lane in Atlanta. "If Banc One doesn't want to come up with a somewhat better offer than they've made before, I think all bets are off."
The major uncertainty in the situation has to do with Banc One, not Premier. Stung by derivatives losses and lower-than-anticipated earnings last year, Banc One's stock fell to about $24 in December from more than $37 earlier in the year. It has since recovered to around $30.
All of a sudden, the "done deal" appears less sure.
"The monkey wrench came when Banc One's stock fell apart," Mr. Mason says. "That is the first time people said, Well, it's possible there will be a delay in the deal or the deal won't go through."
Mr. Mason believes Banc One will exercise the option if its stock rebounds to over $31 a share, but may decide to wait if it doesn't. The option agreement gives Banc One until March 1997 to make a decision.
Theoretically, Premier could break the agreement and seek another buyer. Mr. Griffin points out that Merrill Lynch, Premier's investment banker, issued a fairness opinion approving the original agreement and will be called on to do so again, assuming Banc One decides to exercise the option.
It's unlikely, however, that Premier would decide to leave Banc One standing at the altar. The option gives Banc One the right, in the event of such an occurrence, of forcing Premier to cough up a 30% premium over its book value, currently $12.55 a share, or about $142 million.
"Anybody that would think about acquiring us outside of Banc One would have to be in the position of paying that 30% cancellation fee," Mr. Griffin says. "So Banc One definitely has that much of an advantage."
While the mating dance with Banc One continues, Premier has been aggressively moving forward on several other fronts. Most apparent to outsiders is the acquisition spree.
A flurry of community bank deals last year expanded Premier's franchise in Lake Charles, Shreveport/Bossier, Ruston, and New Orleans, adding an additional $1.2 billion of assets.
The move into New Orleans is considered particularly significant. Premier began 1994 with only two branches there and ended up the year with 22 through the purchase of Alerion Bank and the failed Oak Tree Federal Savings Bank.
Premier remains a minor player in New Orleans, with $650 million of deposits accounting for less than a 3% market share, the city's fourth largest. But the franchise does provide a solid foundation for Premier (or Banc One) to expand further in New Orleans.
It also allows Mr. Griffin the opportunity to get Premier into some form of international banking, leveraging New Orleans' role as the nation's busiest seaport. Premier does have some expertise in international banking through its president, F. Walker Lockett Jr., who ran NCNB Corp.'s Hong Kong office for a year and a half in the mid-1980s.
"We don't know exactly where we're going to go in that business," Mr. Griffin says, still mulling the matter over. "But we might have a niche."
Like many banks around the country, Premier expects to suffer from some compression in its net interest margin this year because of rising deposit costs. It is also likely that Premier will have to begin, for the first time in several years, putting some money back into the loan-loss provision.
Ever since 1993, Premier has benefited from "negative" provisions, in which funds are shifted from the reserve back to the bottom line. Now that a revival of loan growth requires rebuilding the reserve, the bank can no longer rely on that easy boost to earnings.
The problem came into focus in the first quarter, when Premier reported no provision, compared with a $1.9 million negative provision in the year- earlier quarter. This factor, along with a smaller gain on securities sales ($97 million versus $483 million), drove earnings down 8% to $14.3 million.
But Mr. Griffin believes the disappearance of negative provisions will be offset somewhat by cost cutting related to the reegineering program, which will begin contributing to earnings later in the year, and particularly in 1996. With an overhead ratio of 67%, somewhat high by industry standards, Premier can get good returns just by improving its efficiency.
"We should have a decent year," Mr. Griffin says. "We're not going to increase our earnings 20%. But when the financial world evaluates our bank for 1995 vis-a-vis the industry, I think we'll look pretty good."