Competition Puts Crimp On Bank South Shares
Recent declines in the price of Bank South Corp. stock offer evidence that being the No. 1 independent bank in a market matters less than being No. 4, behind superregional competitors.
"Investors are beginning to think like bankers do," said John Mason, a securities analyst with Interstate/Johnson Lane in Atlanta, where Bank South is located. "They'll put a high premium on No. 1 in a market, maybe No. 2, but after that, they get glassy-eyed," he said.
In terms of market share, Bank South trails the Atlanta units of C&S/Sovran Corp., Wachovia Corp., and SunTrust Banks Inc. Despite assets of $5.1 billion, Bank South is not a tempting target for an outsider seeking a foothold in Atlanta.
Nevertheless, investors' enthusiasm for the bank has not waned completely. Even though its 7% ratio of nonperforming assets to total loans and real estate owned is one of the region's highest, Bank South still trades at 67% of its book value of $8.89 a share. Some other regional banks with better nonperforming asset ratios, such as First Florida Banks Inc. and Hibernia Corp., sell at low prices relative to book value.
Bank South executives take this as a sign that investors still attach value to independence, even in a crowded market. "We have a premium in our stock primarily because of the franchise," said chief financial officer Ralph E. Hutchins Jr.
But a surge in problem loans last year produced a $2.4 million loss, causing Bank South's stock to tumble from its high of $12.50 a share at the beginning of 1990 to $6.50 late Tuesday afternoon.
Few analysts follow Bank South closely, so it hurt when Mr. Mason switched his rating from "neutral" to "sell" on May 28. Mr. Mason said he was neutral from March 1 to May 28, following a July sell recommendation, because Bank South participated in the bank stock rally. He finally decided the shares were overvalued.
"The bottom 10% to 20% of the stocks in this industry are too risky to fool around with," Mr. Mason said. "When you have problem assets, in my opinion, much above 6% or 7% [of total loans], you really are skating on thin ice."
Earnings Expected to Improve
Bank South has a long way to go to match its peak performance in 1986, when return on assets was 1.0%. In the most recent quarter, the bank earned $5.6 million, 51% less than a year earlier. Mr. Mason has declined to estimate Bank South's 1991 earnings because of uncertainty regarding their future loan-loss provisions.
The Robinson-Humphrey Co., another Atlanta-based brokerage firm, has rated Bank South a "sell" since last September, when analyst Jon Burke became alarmed at the company's growing credit problems.
Mr. Burke also thought Bank South's stock was artificially boosted by short-sellers covering their positions. The short position in Bank South reached 1.5 million shares in October 1990 and has since declined to about 494,000 shares. [Graph Omitted]