National Commerce Bancorp. of Memphis is buying a boutique trust company to help reposition itself as a national provider of financial services.
The banking company announced Friday that it would acquire First Mercantile Trust of Memphis for an undisclosed amount of stock. National Commerce has $7.2 billion of assets; First Mercantile manages $1.4 billion.
The deal would cement a relationship that began this year, when National Commerce began outsourcing its trust business to First Mercantile.
Privately held First Mercantile primarily provides processing and servicing for 401(k) and employee benefits plans. The deal would let National Commerce mine many of those 2,000 relationships. First Mercantile, meanwhile, plans to leverage the relationships National Commerce has with its bank, nonbank, and third-party affiliates.
The deal, expected to close in early July, continues National Commerce's strategy of building its financial services business through the purchase and growth of "high-growing, high-return" lines of business, said Lewis E. Holland, National Commerce's vice chairman and chief financial officer.
In December the company expanded its transaction processing business through an alliance with Payment Transaction Solutions LLC, a Memphis-based merchant services provider. In January it announced the acquisition of FleetOne LLC, a card processing company, from Mapco Inc. of Nashville.
"We're going to be very active building our bank franchise but even more active in acquiring and growing [fee-based] companies," Mr. Holland said in an interview. He expects First Mercantile, which last year had $20 million in revenue, to add about 2% to National Commerce's fee-based income. The company's long-term goal is to have noninterest income make up 30% of its bottom line.
National Commerce is in the process of buying $8.5 billion-asset CCB Financial Corp. of Durham, N.C. Upon completion of that deal in late July, the company's fee income is expected to be about 15% of its net income.
While the deal advances National Commerce's plan to diversify its product offering and expand its customer base, for First Mercantile the agreement brings more than just another distribution channel.
"It gives us a tremendous, stable base. It's one thing to say we're First Mercantile. It's another thing to say we're part of a $15 billion financial services firm," said Kenneth B. Lenoir, chairman and chief executive officer of First Mercantile. Mr. Lenoir would retain his position at the trust subsidiary, which would continue to operate under its own name.
Despite the lack of financial details, observers applauded the deal, because it adds to National Commerce's net income at a time when rising interest rates are slowing bank companies' earnings growth. While banking companies contend with variables such as interest rates, credit risk, and high capital requirements, other financial services companies are often free of those concerns.
"Banking is a great business, but it's not a high-multiple-earnings business," said Jeff K. Davis at J.C. Bradford & Co. in Nashville. "It's anther example that traditional banks have got to diversify their revenue stream away from spread revenues" as soon as possible, he said.