A small Kentucky bank stands to become a leader in a little-known niche market with its deal to buy PNC Financial Services Group Inc.'s military allotment unit.
The deal is set to close by the end of January and would be the second such acquisition in a little over two years for the $206 million-asset First Citizens Bank of Elizabethtown. In October 2004 it bought Financial National Electronic Transfer Inc., a Radcliff, Ky., data processor that specialized in military allotments.
Military allotment allows servicemen and -women to make purchases by having payments deducted directly from their paychecks. The system simplifies the billing process for them and ensures vendors receive timely payments. Banks earn fees for facilitating the process.
Buying the unit from PNC, of Pittsburgh, would strengthen First Citizens' fee income in "an area where very few people compete," said David Darst, an analyst at First Horizon National Corp.'s FTN Midwest Securities Corp. "This will make them one of the leaders in that business."
First Citizens is not far from Fort Knox, home to roughly 23,000 soldiers, family members, and civilians. The bank offers military allotment through its nationwide network of businesses - such as car dealerships and furniture retailers - that sell products to military personnel, usually in financing deals.
"First Citizens Bank has been involved with the military allotment business since 1982," said Lloyd C. Hillard Jr., its chief executive officer. "We're always looking to strengthen our position in this niche."
Banks across the country are trying to bulk up on fee-income-generating assets in the face of contracting margins and a flattening yield curve. Military allotment is "a profitable line of business," Mr. Darst said. However, "it's a niche and it doesn't grow," he said. "Its organic growth rate is not very high."
Mr. Hillard called the military allotment unit a "central part of our business," though he would not say what percentage of First Citizens' revenue it generates. The bank reported that in its fiscal second quarter, which ended June 30, its noninterest income fell 7% from a year earlier, to $1.5 million. Overall earnings rose 19%, to $957,000.
The majority of companies involved in military allotment are based in central Kentucky; the PNC unit is in Elizabethtown.
"We just became aware that they were evaluating their business lines and conversations started," Mr. Hillard said of the Pittsburgh banking company.
Darcel Kimble, a PNC spokeswoman, said: "The function no longer fits with PNC's long-term strategic direction. But we do think that the operation provides great potential for" First Citizens.
Mr. Hillard said First Citizens plans to incorporate all of the PNC unit's staff into its operation.
By adding PNC's network, First Citizens' military allotment unit would have relationships with more than 1,000 businesses, Mr. Hillard said. The deal, which is subject to regulatory approval, was announced Nov. 2. The price was not disclosed.
