Is thinking small a better way of entering new markets? Many banks are beginning to believe so. But Comerica Inc. learned the hard way that even baby steps can lead to skinned knees.

The Detroit-based banking company bucked the conventional wisdom that dominant market share is a prerequisite for success in a new market. It instead established toeholds in California, Florida, and Texas.

The rationale: Bite-size banks and thrifts are easier to manage, more affordable, ostensibly carry less risk, and provide better platforms for niche marketing.

Sounds good, but in fact, Comerica is coming off a series of acquisition misadventures, mostly because it paid too much and misgauged unfamiliar locales. The company suffered losses or steep profit declines after entering all three markets.

"We have clearly had our challenges in the initial phase," said Charles L. Gummer, president of Comerica Bank Texas.

Dramatic Difference

Apparently learning from its mistakes, Comerica recently bought the $1 billion-asset Texas franchise of Hibernia Corp. for $63 million in cash - a 15% discount from book value. That compares with the two times book or more that it had paid on other occasions. And having been in Texas for three years, Comerica this time knows exactly what it is buying.

Comerica's experiences illustrate the perils of buying into roller-coaster regional economies, where the potential for high growth can all too quickly be offset by the reality of a steep decline.

"When you start dealing with high-growth markets and high-net-worth clients, you are dealing in a sense with booms, so there can always be busts," said Anthony Polini, an analyst at A.G. Edwards & Sons, St. Louis.

The Allure of Growth

That Comerica would go to the trouble of reaching into markets hundreds of miles off speaks to the allure of regions expected to grow healthily.

States such as California, Florida, and Texas "hold promise in the '90s and afford us a chance to grow faster than if we had just stayed here in Michigan," said Comerica executive vice president John Lewis, who oversees the company's affiliate banks.

This rationale has motivated bank after bank in the Midwest to take positions in the southern or western United States.

In July, for example, Cleveland-based Society Corp. snatched up the $1.1 billion-asset First Federal Savings and Loan of Fort Myers with an eye to expansion in southwest Florida. And the Community Bankers Association of Florida said that Florida banks own less than 46% of the state's banking assets.

Execution makes or breaks a strategy, however, and here's one example of how Comerica got into trouble: The company in 1989 paid a hefty 2.2 times book value for the $480 million-asset Plaza Bank of Commerce in San Jose, Calif., which had excellent asset quality and a 2.02% return on assets.

Paying for Apparent Value

"We realize we paid a relatively high price, but we believe it was important that we acquire a strong institution," explained chairman and chief executive Eugene A. Miller in Comerica's 1989 annual report.

As it turned out, however, Comerica bought at the top of the market. As the California economy crumbled over the past two years, Plaza's earnings fell 43%, and profitability was cut in half.

Clearly, Comerica had not anticipated the Golden State's economic troubles. And the same sort of reversals occurred when it entered Florida and Texas.

Rising to the challenge, Comerica has set out to build the franchise value it thought it was buying. By cultivating the affluent and catering to middle-market commercial clients, Comerica has positioned itself as a specialized bank offering customized service.

Recovery in Texas

With the cooperation of a slowly rebounding economy, the approach is beginning to pay off in the Lone Star State: Comerica Bank Texas, with $1.4 billion in assets, last year earned $3.7 million, a 0.94% return on assets. That can be compared to a loss of $3.5 million in 1989, the year after Comerica acquired it.

The company credits its niche focus for the Texas turnaround. And it is hoping to export that success to its California and Florida franchises.

Analysts predict success will come eventually. "Their strategy of providing fee-based services to high-net-worth individuals will pay off," said Anthony Howard, an analyst at Roney & Co., Detroit.

Competition - and Room for It

It won't be a cakewalk, however: Northern Trust Corp., for example, has proved particularly adept at targeting the trust needs of the affluent - and in the very markets Comerica has pegged for expansion.

The Chicago-based banking company manages trust assets of $8.8 billion in Florida, $6.2 billion in California, and $800 million in Texas. And it is but one of the rivals Comerica faces.

But the beauty of this type of competition, Comerica believes, is that it occurs in select, upscale communities that have room for sharp players of any size.

In a Texas market where NationsBank Corp. controls $35 billion of assets and Banc One Corp. will control $20 billion of assets, Comerica seems perfectly content to be buying the $1 billion of assets and 23 branches of Hibernia National Bank Texas.

The deal will give the Detroit banking giant access to the lucrative Houston, Austin, and San Antonio markets. By next year, Comerica will control $2.3 billion of assets in Texas.

Experts say it's a safer time for incursions into Florida and Texas than a few years ago, based on reviving economic indicators and rising bank profitability in those regions.

California is another story, however, and experts say Comerica's travails clearly highlight the dangers of entering that market right now.

Buying at the wrong time in a regional economic cycle and at the wrong price can lead to disappointment instead of profits, Comerica learned, and those banks considering a California foray might do well to review the Detroit bank's experience.

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