Once an active acquirer of Midwestern banks, Merchants and Manufacturers BanCorp. Inc. in New Berlin, Wis., has been idle on the deal front for two years, but its top executive plans to end the hiatus soon.
Over a five-year period that ended in 2004, the company bought five banks. The acquisitions extended its branch network into Minnesota and Iowa, but also strained its infrastructure and, eventually, its relations with some shareholders.
Since its last bank purchase, Merchants and Manufacturers has spent $9 million to consolidate its back-office operations and add technology to put most of its nine banks on the same platform. It also fended off a shareholder proposal that would have bound it to seek a buyer.
Michael J. Murry, its chairman and chief executive officer, says it is now time for the company to reap the benefits of its investments, and that means scouting for another bank to buy.
"The next step is to take advantage of the system that we have in place, and we have to grow through acquisition," he said. "We have to show the shareholders by the end of 2007 that this is working."
The $1.5 billion-asset company plans to double in size over the next two years, primarily by acquisition. Likely targets would have assets of $250 million to $750 million, Mr. Murry said. At the same time, however, it intends to consolidate in certain areas and focus more intently on its home state.
"We think we know Wisconsin best," Mr. Murry said. "The minute you start going out of state - out of your range - there are certain risks that you take."
Merchants is already in the process of selling some assets from its Minnesota bank and absorbing the rest into other subsidiaries. The overall objective is to get earnings growth back on track, the CEO said. Aside from the instant heft of potential acquisitions, it anticipates "some substantial internal growth" in the Milwaukee area, he said.
Though Mr. Murry is upbeat about his company's direction and progress, its latest earnings results were not stellar. It posted a fourth-quarter profit of $23,000, or a penny a share, compared with a $74,000 loss in the year-earlier period.
The results reflected a credit hiccup, the inverted yield curve, and a third-quarter dip in loan volume, items that combined to slash earnings by 53 cents a share, Mr. Murry said. (Though loan volume rebounded in the fourth quarter and was up for the year overall, the third quarter had a 6% dip in net loans on a linked-quarter basis.)
He said the company anticipates losses this year related to several real estate development projects of one longtime customer, so it added a "substantial" amount to its loan-loss reserves. He did not specify how much the losses might be, but the company reported a loan-loss provision of $12.8 million for the fourth quarter, up 11%, or $1.2 million, from the third quarter.
The ratio of nonperforming assets to total assets in the fourth quarter doubled from the year-earlier period, to 1%.
Still, Mr. Murry said the investments in 2004 and 2005 started to pay off last year, despite the industrywide net interest margin pressure. Second-quarter earnings per share increased 32% over the first quarter, and third-quarter earnings per share increased 16% over the second quarter.
"The trend of double-digit increases was expected to continue in the fourth quarter and beyond," Mr. Murry said.
Getting an outside read on those results is complicated by the fact that no analysts cover Merchants, whose stock is a thinly traded Nasdaq bulletin-board issue.
Acquisitions are a key to Mr. Murry's plan to rekindle profit growth, but he says the company continues to trim expenses. Cost-cutting initiatives under way include the consolidation of Lincoln State Bank and Franklin State Bank.
Mr. Murry said customers already know that Lincoln and Franklin, which are part of the Community Financial Group, have the same parent company. "So there's no effect to the customer, yet by making this combination we can grow substantially without adding to the staff or anything else," he said.
The move is expected to reduce expenses by $130,000 this year and $300,000 next year. It should be complete by next quarter.
Mr. Murry was unsure whether the banks would continue using their own names. "The marketing people will mull that over with the management of those two banks," he said.
Merchants recently announced a sale and leaseback transaction on its headquarters building. It expects that to save $90,000 in operating expenses in each of the coming two years.
Mr. Murry said the company had consistently been meeting its strategic objectives until its struggles a couple of years ago. He said it uses a strategic planning process to chart its direction, and he says the four main elements of an initial five-year plan running through 2003 were all achieved: exceed $1 billion of assets through acquisitions by 2003; increase annual earnings per share by 10%; maintain above-peer-average asset quality; and expand into nontraditional bank products.
But with all the expensive initiatives it undertook the following year, plus a growing regulatory burden, earnings per share fell to $1.14 for 2004, Mr. Murry said. "Although the shareholders had been informed about everything we were doing, that's a real issue - $2.56 to $1.14," Mr. Murry said.
Merchants' stock started a decline that year that continued into 2006. Its stock price is down 30% over the past 52 weeks. But it rosed 3.6% Friday, the day after Merchants released its fourth-quarter and full-year results.
