Some analysts have cooled on shares of First of America Bank Corp., citing the Michigan bank's lackluster earnings prospects and the likely dilution from two recent high-priced acquisitions.
On Wednesday, First of America was downrated by Joseph A. Stieven of Stifel, Nicolaus & Co. Inc., St. Louis.
The downgrade came on the heels of a report Friday by Jeffrey B. Naschek of Salomon Brothers Inc. who sliced his rating on First of America to "hold" from "buy," saying deteriorating fundamentals and costly dealmaking "cloud" the company's outlook. He also cut earnings estimates for the second time this year.
In Wednesday's market, the Kalamazoo-based superregional was unchanged at $39.25, well off the 52-week high of $42.875.
The projected dilution stems from First of America's pending $80 million purchase of First Park Ridge Corp., Chicago, and $58 million purchase of 36 Florida offices of the defunct Goldome Federal Savings Bank.
"The dilution is disappointing" said Thomas J. Maier of Kemper Securities Group Inc., who has also cut earnings estimates. He retains a "strong buy" rating on the stock, however, partly because an acquisition of First of America itself seems possible.
"They have been trading around eight times expected earnings. If they don't get a higher multiple on their stock they become more and more vulnerable to a takeover," he said Wednesday.
"They have an attractive franchise for a lot of people," he said, mentioning Norwest Corp., First Banc System Inc., PNC Bank Corp., Keycorp, and Banc One Corp. as potential suitors.
First of America operates mostly in Michigan, Indiana and Illinois. It has the largest banking franchise in Illinois outside Chicago.
Other Rankings Cut
Mr. Stieven reduced his rating on First of America to "long-term buy" from "buy," and lowered his earnings estimate.
He reduced ratings on 10 other Midwestern banking companies, as well, noting that many have reached all-time high stock price levels.
Mr. Naschek of Salomon Brothers said that it was a "difficult decision" to cut his rating on First of America. He did so after reasoning that the company's management "would rebuke a bear hug" - an unsolicited but highly attractive acquisition offer. The chances of a negotiated transaction are "even lower," he said.
If it occurred, an acquisition would probably carry a significant premium over First of America's current book and market values, Mr. Naschek acknowledged. "Our acquisition model analysis suggest takeout [stock price] levels well in excess of $50."
Norwest could afford to pay $54 to $58 per share for First of America, Banc One could pay $50, and Keycorp. $45 to $49, he estimated. NBD Bancorp., Detroit, aided by in-market efficiencies, could probably make a bid near Norwest's level.
Mr. Stieven said the general reason for his ratings downgrades was the "unhealthy" speculation that has occurred in some Midwestern bank stocks because of the good chance that Congress will soon pass nationwide interstate banking legislation.
Downgraded to "long-term buy" from "buy" by Mr. Stieven were Republic Bancorp. Inc., Owosso, Mich.; Boatmen's Bancshares, St. Louis; Mercantile Bancorp., St. Louis; Old Kent Corp., Grand Rapids, Mich.; and Capital Bancorp., Cape Giraradeau, Mo.
Downgraded to "hold" from "long-term buy" were First Colonial Bankshares, Chicago; First Midwest Bancorp., Naperville, Ill.; Liberty National Bancorp., Louisville, Ky.; and Peoples First Corp., Paducah, Ky.
Suburban Bancorp., Chicago was downrated to "hold/sell" from "long-term buy.
Mr. Stieven also upgraded two companies to "buy" from "long-term buy." They are First Source Corp., South Bend, Ind., and Simmons First National Corp., Pine Bluff, Ark.