Just when Citizens Banking Corp. appeared to have regained its footing, a new wave of merger-and-acquisition activity has raised the level of competition in Michigan's banking market to new heights and rekindled speculation that the company is a takeover target.

The pending sales of Old Kent Financial Corp. of Grand Rapids to Fifth Third Bancorp and Michigan National Bank of Farmington Hills to ABN Amro would make $8.3 billion-asset Citizens, of Flint, the state's second-largest locally owned bank. But the deals would also mean that two of its toughest competitors would get even tougher, said John W. Ennest, Citizens' vice chairman and chief financial officer. "Old Kent and Michigan National both were very good banks to begin with," Mr. Ennest said. "After these two mergers, they'll probably be even better."

Making matters worse, Michael Defors, senior vice president of the Michigan Bankers Association, said he expects to see little of the customer runoff that often follows high-profile takeovers. Attrition only occurs when a merger is botched, something neither Fifth Third nor ABN Amro is likely to do, Mr. Defors said.

Those factors seem to support the case that Citizens is ripe for a takeover, and Mr. Ennest said he does not disagree. Citizens' size - bigger than a community bank but too small to go toe-to-toe with super-regional franchises like Comerica Inc. and Fifth Third - creates the perception that his company is an obvious target, he said.

However, Citizens' management has no immediate plans to sell, Mr. Ennest said.

"At the present time, our strategy is to remain independent," he said. "But part of our job is to generate good returns for our shareholders. If we aren't able to do that, our strategy might have to change."

Mergers have dogged Citizens in one way or another for nearly two years.

Citizens' deal to buy F&M Bancorp of Kaukauna, Wis., was announced in April 1999, just as a string of mergers among much larger banks ran into trouble. Investors - many of whom had been counting on Citizens to sell itself - sold the company's stock, which fell 16% that day and by March had dropped 60%.

Unfazed, Citizens quietly went about the business of integrating $2.5 billion-asset F&M, whose 18 subsidiaries were consolidated into three state banks in Wisconsin, Minnesota, and Iowa. Citizens introduced Internet banking to F&M's customers and converted its back-office functions to Citizens' operating system.

The diligence has paid off.

Since hitting its 52-week low of $15.50 on March 15, Citizens' share price has risen 53%. During that span, Citizens has performed better than all but four of the 37 publicly traded banking companies with assets of $5 billion to $10 billion. The stock was trading at $23.69 midday Monday.

But Citizens' recovery has had the effect of curbing analysts' enthusiasm.

Michael Granger, an analyst at J.P. Morgan Securities Inc., downgraded Citizens to "market perform" from "long-term buy" on Oct. 17. He said the company had reached the 12-month price target of $24 that he had set in August, when he initialized his coverage.

A day later Joe Roberto, an analyst at Keefe, Bruyette & Woods Inc., also downgraded Citizens. Like Mr. Granger, the blunt-speaking Mr. Roberto said the company's share price had peaked. "The idea" of investing in Citizens "worked," but "it's time to move on," he said.

A bigger question - whether Citizens itself will be hurt by the sudden merger-and-acquisition surge in Michigan - remains to be answered.

Mr. Granger and Mr. Roberto said they do not expect a quick sale, but Mr. Roberto said Citizens' long-term future is less clear. Its operating margin is shrinking, and the company will struggle to boost its net interest income - still its principal source of revenue - in the rough-and-tumble Michigan marketplace, he said.

The numbers lend some credence to his comments. Though Citizens' third-quarter noninterest income rose 18% from a year earlier, to $22.9 million, its net income increased just 3% during the same span. As a result, its overall earnings growth has been modest. Citizens' profits for the first nine months rose 5% from the same period last year, to $74.7 million.

Eric Rothmann, an analyst at First Security Van Kasper, said a sale of Citizens might not be that far off, because its acquisition of F&M, which closed in November 1999, makes it a more attractive buyout candidate.

"They're in some nice markets," he said.

"A number of players" might be interested in expanding in southeastern Michigan, where Citizens is strongest, Mr. Rothmann said. He mentioned Bank One Corp. of Chicago and Comerica, the largest Michigan-based banking company, as possible buyers.

Still, Mr. Ennest said he remains bullish about Citizens' prospects. Despite its size, the company operates like a community bank, he said. "If we can continue to do that, we can succeed. It is a question of style over size."

Even before the recent downgrades, he said he thought the analysts' ratings should be higher. Citizens has a long history of good credit quality, which should serve it well if the economy continues to slow, he said.

John W. Johnson, president of F&M Bank Wisconsin, also said he likes what he sees in the new Citizens. The company is poised to reap the $9.3 million cost savings it predicted back in April 1999, said Mr. Johnson, 45, who was president and chief executive officer of F&M Bancorp when the acquisition was announced.

"I'm very comfortable with where things are right now," he said. "I expect a very strong year in 2001."

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