NASHVILLE -- While most analysts are fixated on better known markets in Florida and Virginia, Henry Coffey of J.C. Bradford & Co. points to Memphis as the likely site for consolidation in the banking industry.
The city, which falls within or near the territory of as many as seven regional banks, is home to such attractive targets as First Tennessee National Corp., Union Planters Corp. and Leader Federal Bank for Savings, a thrift.
Mr. Coffey, a partner at Nashville-based J.C. Bradford, says that even with the unwinding of the Southeast Compact, there will be few mega-deals in the next round of mergers.
Rather, he says, the greatest activity will come as South-Trust Corp., in Alabama, and its peers snap up smaller banks in new markets.
During recent interviews, the Rhode Island native explained his views of Southern banks:
Q.: What is your outlook for banks?
COFFEY: You have bull and bear markets. We are in a neutral market, when company-specific items tend to dominate. There is trading money to be made in superregionals, but the real trend if you invest over the next two years is consolidation.
Q.: Is consolidation the basis of all your recommendations?
COFFEY: We have a few recommendations that are driven by fundamentals, but we are telling people that the theme for the next 24 months is consolidation. The Southeast Compact is effectively gone. If we have federal legislation, it will just speed up the process. If we just have to go with regional laws, it will maybe add another year to our calendar.
Q.: Who are you recommending?
COFFEY: On a fundamental basis the stock we are pushing the hardest is SouthTrust. This is a bank with a track record that can only be matched by companies like National Commerce in Memphis, Wachovia, SunTrust, First Alabama. That's the peer group for this bank, which has had basically only two bad quarters in 20 years.
Q.: What else makes SouthTrust stand out?
COFFEY: The bank has come up with a growth strategy that is unique and has worked for them. [Chairman and CEO] Wallace Malone has an interesting insight. He wants to go into growing markets. What's the point of buying a country bank and never seeing any growth?
What Wallace has done is gone into markets like Florida and Atlanta, and now [he is] building in the Carolinas. These are growing markets where business relationships change and new players come on the field and it's easier to move market share.
I tell portfolio managers all the time that if you own superregionals like NationsBank Corp. on fundamentals and you don't own SouthTrust, then you've missed something.
Q.: Who is out of favor on the fundamentals?
COFFEY: I've always been uncomfortable with First Union Corp.'s approach to banking, both in terms of their balance sheet management - which they are open about and good at - and their strategy of managing their acquisitions.
I think they come in and by [standardizing] things they lose much of what they could have gained. That slash and burn cost-cutting mentality produces good financial results, but it tends to produce tremendous alienation in the market.
Q.: Which markets are you recommending based on takeover speculation?
COFFEY: Memphis. When you look at the South, it's apparent that Virginia, Atlanta, and Florida are great markets and they will attract deals. But most of those stocks are selling at very thin discounts to their potential takeover price and the number of potential acquirers is smaller than you think.
When you look at Memphis, however, it is easy to come up with four to as many as seven potential acquirers, which are banks that have already made a commitment to the Tennessee market.
First American in Nashville; the three Southeastern superregionals; Boatmen's Bancshares; and then all you have to add to expand the list is Banc One Corp., which is already in Kentucky and Louisiana. PNC Corp. and National City are already in Kentucky.
In our mind, more banks are more likely to benefit from buying a Memphis bank than any other major market in the South.
Q.: What is it about Memphis that makes it a great banking market?
COFFEY: It's not. The hot markets are someplace else. But if you look at what's going on, the obvious expansion strategy is there. If we think of it in terms of a "seize" mentality, look at the number of Huns surrounding Memphis.
Q.: So who are the likely targets?
COFFEY: The largest bank is First Tennessee Corp., and if given the choice that is what anybody would go for.
Q.: Do you exclude the possibility of a merger with First American in Nashville?
COFFEY: We do not in our analysis, but from a practical point of view, you have to rule that one out for now.
Q.: Who else in Memphis is a target?
COFFEY: Second on any list is Union Planters Corp., which is the third largest bank in the market. But I would take National Commerce off the list. I think they have a [national grocery store banking] strategy so that no acquirer can enrich shareholders like current management. If you give up that investment to a large superregional, you have gone from having a high growth stock to a cyclical bank.
There is Leader Federal, a $1 billion-asset thrift. When you think of acquisitions, often small is beautiful and certainly small is less risky. If you are putting together a list of targets, you would put them there. First American would be a logical acquirer for that bank because they could gobble it up with very little effort.
Q.: You also see Louisiana as a potentially active acquisition market. Why?
COFFEY: You've got Banc One with a stakeout position in Premire Bancorp, but you've also got Fist Alabama that seems committed to that market. To date, they have been nickeling and diming themselves with small community bank acquisitions.
Eventually, one those two have to get frustrated with what's going on. Community banks have been selling for over three times book and eventually they are going to want to look at a larger acquisition.
Q.: Who makes sense?
COFFEY: First Commerce Corp., Hibernia, and Whitney National Bank would all be vulnerable. I think the Whitney would be the most digestible. It is a smaller bank that has a CEO [Bill Marks] that the Alabama banks know and have a tremendous respect for.
Q.: In Memphis and Louisiana, you are talking about markets that are not high growth. What kind of multiples could those banks fetch?
COFFEY: Generally, we have seen companies taken over at 30 to 40% premium to market. What we are probably talking about is 12 to 15 times earnings, but nine to 10 times post-merger potential earnings. For instance, First Tennessee would be worth between $58 and $60 a share, that's a 40% premium to current market. Union Planters would be worth $35 to over $40 a share, that's a 30% premium to market.