Outperform for Summit, 1st of America, 1st Security

Lehman Brothers added three midsize banks to its coverage list and upgraded another Wednesday, saying consolidation would boost their returns to shareholders.

Coverage of Summit Bancorp, Princeton, N.J.; First of America Bank Corp., Kalamazoo, Mich.; and First Security Corp., Salt Lake City, was initiated with "outperform" ratings from Lehman analyst Michael Mayo.

He also upgraded Imperial Bancorp, Inglewood, Calif., to "buy" from "outperform".

Any lift the upgrades created was offset by a broad market decline.

Summit shares lost 12 cents to close at $43.75; First of America fell 62 cents to $58.25, First Security fell 25 cents to $33.75; Imperial gained one dollar to $23.34.

"These are names with attractive franchises and otherwise favorable fundamentals," Mr. Mayo said. "The threat of takeover has encouraged the management to become more shareholder-focused, and that's a unique factor to this sector."

Mr. Mayo estimates Summit will earn $3.30 a share this year and that First of America will earn $4.10. He projects earnings per share of $2.30 for First Security and $1.65 for Imperial.

"Some of the best opportunities are in the midsize banks, and we continue to think that there will be more consolidation in this industry," the analyst added.

David Berry, head of equity research at Keefe Bruyette & Woods, rates Summit's shares "attractive" and estimates earnings of $3.75 per share for 1996.

"Since Summit has leading market share in New Jersey and has penetrated the small-business market. It has attracted a lot of interested parties," he said. "The bank is a conceivable partner for someone down the road."

"Its own performance is up quite a bit from the cost savings of the merger with United Jersey Bank (earlier this year), and I expect it to be a leader in efficiency next year. There is a lot of untapped potential in that company," he said.

But others are not so optimistic about these stocks.

Fred Cummings of McDonald & Co. said that First of America is appropriately valued. He has a "hold" rating on the stock, and estimates it will earn $4.10 per share this year.

Separately, Harold Schroeder of Keefe Bruyette & Woods upgraded SouthTrust Corp. of Birmingham, Alabama, to "attractive" from "market perform," saying that its "strong revenue" makes it a "very attractive franchise".

"SouthTrust is still cheap, trading at 11.8 times earnings," he said, adding that the average southeastern bank of its size is trading at 12.6 times annual earnings.

SouthTrust shares fell 37 cents to $34.87.

Other banks felt pressure Wednesday from the falling Dow. The S&P bank index fell 1.63% to 452.54, while the Nasdaq bank index fell 0.52% to 1258. The Dow Jones industrial average fell 1.09% to 6,402.52.

Wells Fargo& Co. took a particularly hard blow, dropping $6.37 to 268.

"I'm not surprised that the bank stocks are under pressure," said Sandra Flannigan of Merrill Lynch & Co. "There is no change in the near-term fundamentals, and it's natural that (investors) should take some profits."

Richard Cripps, market strategist at Legg Mason Wood Walker, called the trading atmosphere "very very nervous" this morning.

"You could call it a fear of heights," he said. "For so long we've looked at all the things that are right; now we're looking at the things (like the dollar) that are out of our control.

Even so, Ms. Flannigan remained positive about the bank stocks, and noted opportunities for putting new money into this group.

"The fundamentals haven't changed, and they're not bad. And their growth is far stronger than the S&P."

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