Leaner, Wiser Union Planters Back on Acquisition Trail

Union Planters Corp. returned to the mergers and acquisitions arena in June with the announcement of a deal to acquire Fidelity Bancshares Inc., a $1 billion-asset thrift in Nashville. The deal signals not only the Tennessee banking company's renewed focus on expansion, but also the emergence of a leaner, wiser Union Planters.

Memphis-based Union Planters, with $3.8 billion in assets, was an active player in 1989, announcing six acquisitions with a combined value of about $82.1 million between March and October of that year. Although two of the proposed deals were subsequently terminated, the four remaining transactions allowed Union Planters to attain further geographic diversity by entering markets in Alabama and Arkansas and expanding its franchises in Tennessee and Mississippi.

Stumbling Block

In mid-1989, an internal review of Union Planters' credit situation led to some strategic changes. Although its community banks had long maintained low loans-to-assets ratios, Union Planters realized that a number of its city banks were carrying unsavory credit risks. "At one point we had, I believe, $38 million in LDC-type credit back in the 1984-85 period," said Benjamin W. Rawlins Jr., Union Planters' chief executive. He noted that the company liquidated those credits at prices ranging from 52 cents to 70 cents on the dollar.

"It's a bitter pill, but sometimes the early loss is the least loss when you recognize the very serious situation," he said.

Faced with the troubles of managing a high-risk loan portfolio, Union Planters decided in 1989 to reevaluate and restructure its credit practices and transform itself from a high-risk to a low-risk lending institution. Executive vice president Robert L. Booth Jr. said the institution had three objectives in mind as it restructured: (1) to grow with its "good-quality companies," (2) to "shore up and reprice ... marginal credits or move 'em out," and (3) "to generate as many new quality credits" as possible.

"We revisited all of our credit policies and practices, and really tried to instill a new credit culture at that time. And we've stuck with that credit culture ever since," Mr. Rawlins said. "The principal changes were in our collateral requirements and the size of individiual loans or concentrations that we wanted to deal with."

Union Planters' revisions have extended well beyond the procedural level as the institution sold some of its credits to reduce risk.

"We tried to learn from the past," Mr. Rawlins said. "We sold credits in the market in 1989, for instance, for 38 cents on the dollar and took substantial losses.... But at least one of those credits is totally worthless today." Union Planters' decision to take losses on some of its credits was coupled with a decision to begin internally pricing deposits and loans - effectively marking the portfolio to market.

A Conservative Stance

Union Planters again became a conservative lending institution, content with maintaining high loan quality at the expense of volume. "If you look at our loan levels, they are down, but primarily that's a result of our trying to weed out marginal credits, which I think we've been very successful in doing," Mr. Booth said. In 1989, Union Planters had 2.14% ratio of net chargeoffs to average loans, compared with 1.10% in 1990. Union Planters' bottom line also reflects a turnaround: The company reported profits of $22.7 million in 1990, versus a loss of $22.3 million in 1989.

With Union Planters' "credit quality constraints" reducing its loan volume, particularly in the current economy, the company has focused on reducing expenses. "Our staff levels, for instance, are down 5% from the first of this year," Mr. Rawlins said.

Union Planters has emerged as a low-cost, low-risk institution ready for regional expansion. The announcement of its agreement to purchase Fidelity Bancshares for $74.6 million, or $23.50 a share, marks a return to the in-region acquisition strategy that Union Planters pursued before its restructuring.

Multiple Mergers, in Effect

Union Planters plans to merge Fidelity with a wholly owned subsidiary of Union Planters National Bank, the company's largest subsidiary. After the acquisition is completed, Fidelity would convert to a national bank and merge with the bank. Since Union Planters National Bank and Fidelity operate in the same Tennessee markets, "we'll have [the equivalent of] five or six in-market mergers," Mr. Rawlins said. "And we expect that through time we will get considerable economics out of that." These savings would include the closing of seven or eight locations where Fidelity and Union Planters National Bank operate across the street from each other.

"In most cases, we would likely close a UPNB branch as opposed to a Fidelity branch to create as little disruption [as possible] to the new assets and deposits that we're acquiring," Mr. Rawlins said.

More In-Market Deals

While Union Planters will spend the immediate future completing the acquisition of Fidelity, the not-too-distant future seems likely to hold more in-region acquisitions for the newly revamped Union Planters. Maintaining geographic diversity, Mr. Rawlins said, allows regional banks like Union Planters to weather economic downturns. In the future, he said, Union Planters would continue to look at in-market opportunities for expansion.

"We'd like to be deeper into markets we're already in," Mr. Rawlins said. That's the same plan Union Planters had two years ago, but now it's being pursued by a company that has found the answers to banking in the '90s by learning from the mistakes of the '80s.

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