Overspending? First of America's Daniel R. Smith thinks acquisitions are the way to go. Wall Street thinks he has got carried away.

KALAMAZOO, Mich. -- Daniel R. Smith says his outlays for fee businesses and distant takeovers are enhancing First of America Bank Corp.

Analysts fume that he's eroding value by overspending on operations and overpaying on deals.

The view that prevails could decide the fate of the $23 billion-asset outfit.

As chairman and chief executive of First of America, Mr. Smith presides over a healthy regional banking company operating more than 600 branches in Michigan, Illinois, Indiana, and Florida.

The executive, who also serves as president of the American Bankers Association, began running into trouble in the first quarter. Credit card, mortgage banking, and mutual fund operations sagged at a time when he was pouring seed money into all three areas -- undercutting efficiency and profitability.

Stock Declines 10%

Even as analysts began questioning internal strategies and controls, Mr. Smith signed a series of takeover contracts in Florida and Illinois, prompting further criticism that he had overpaid.

In the space of roughly two weeks after the June 14 announcement of the second of three Florida thrift deals, First of America's stock plummeted by more than 10% to a 52-week low.

The banking company's stock rose 37.5 cents on Friday, closing at $34.875, or 135.7% of book value.

Remembering past acquisition controversies at First of America and observing many banks doing a better job of juggling efficiency and fee growth, analysts have criticized Mr. Smith's strategies.

"With earnings under obvious pressure, investors are starting to question whether First of America should be making acquisitions," said Joseph A. Stieven, a banking analyst with Stifel, Nicolaus & Co., St. Louis.

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Takeover Target?

If Mr. Smith can't muster the efficiency and integrative prowess of regional rivals, adds analyst Carole Berger of Salomon Brothers Inc., "ultimately, it may not be in shareholders' best interests for First of America to remain independent."

That language is strong stuff, given that Mr. Smith is operating a solid institution. A second quarter annualized return on assets of 0.96%, though far from stellar, does not commonly create a crisis of confidence.

Analysts, however, say the heavy pressure bearing down on Mr. Smith is indicative of the slower, harsher banking climate of the 1990s.

Back in the mushrooming 1980s, when industry revenues were growing by up to 15% annually, "it was much easier to rationalize earnings dilution from acquisitions in the name of some greater strategic thinking," says Ms. Berger.

Furthermore, analysts say, individual banks cannot reasonably expect to escape peer comparisons as they broach the delicate task of honing efficiency while at the same time shelling out cash or stock to develop new businesses.

First of America's ratio of expenses to revenues rose by 327 basis points between the fourth quarter and the first quarter, to 65.82%, according to Keefe, Bruyette & Woods Inc. By contrast, a 35-bank Midwest peer group tracked by Keefe shaved its efficiency ratio by 34 basis points, to 63.57%.

"Performances have to be taken in context of what's happening in the industry," said Jeffrey B. Naschek, a Salomon analyst. "If the rest of the industry is getting more efficient, you can hardly afford to go in the opposite direction."

At his office at First of America's Kalamazoo headquarters, a tastefully renovated brick structure originally occupied by the YWCA, Mr. Smith says his Florida incursion precisely addresses the issues raised by analysts.

Noting that Florida is enjoying one of the highest rates of population growth in the nation, Mr. Smith says First of America will be well-served by diverting reinvestment monies out of the inert Michigan market and into the Sunshine State.

Indeed, Mr. Smith said he eventually wants to build a $5 billion-asset franchise in Florida -- quintupling the presence the bank has there now.

"We intend to be a major player in Florida," he says. "That's where the growth is."

Did He Pay Too Much?

While some analysts concur with Mr. Smith's reasoning, they still give a thumbs down to the amount he has spent for some acquisitions.

According to documents released by the Resolution Trust Corp., Mr. Smith's winning bid of $58.4 million for 36 offices and nearly $400 million of deposits from Goldome Federal Savings Bank was more than three times the next highest offer, constituting a 14.5% premium on acquired deposits -- exorbitant, by some analysts' reckoning.

"It makes sense to go to Florida for growth, but I am critical because of the prices Dan is paying," says Tony Howard, an analyst with Roney Co., Detroit.

"Longer term, shareholders may benefit," says Mr. Howard, who maintains a long-term buy recommendation on First of America, "but near-term damage has been done and is reflected in the stock price."

Smith Cites Synergies

Mr. Smith, whose 1993 salary and bonus totaled $910,000, says analysts have a myopic tendency to evaluate deals in isolation, overlooking synergies arising as a number of properties are brought together in a region.

Although First of America was excoriated over the 1992 acquisition of Michigan's Security Bancorp, Southgate, that and other acquisitions "figure strongly in the loan growth we are showing today," he says.

Fueling Wall Street's critical attitude, he adds, is a fixation on short-term trading gains.

"Analysts really are looking for a quick buck," says Mr. Smith. "They don't come right out and say it, but they want to see banking companies sold. Their dream is to recommend bank XYZ today and see a merger announcement tomorrow."

Instead of "reading each other's reports," Mr. Smith says, analysts ought to spend time understanding the unique strengths of each company.

For example, he says, First of America is pursuing a supercommunity bank strategy that emphasizes better-than-average credit quality versus its peers -- something the bank has been able to boast about for the past five years.

To be sure, these strengths have not been completely overlooked during Mr. Smith's recent travails. By no means is it clear that the banker ultimately will find himself on the receiving end of a takeover.

History Is Good

Despite lagging trading multiples, First of America's stock has offered solid investment returns in recent years, says Smith Barney analyst Henry C. Dickson.

The analyst also notes that First of America has a comparatively low concentration of institutional investors, minimizing the odds of concerted investor pressure.

Current levels of investor frustration with First of America "would have to persist for a much longer period," Mr. Dickson says, before the company gets tagged as a takeover target.

Though obviously more than mildly irritated with some of the recent volleys fired from Wall Street, Mr. Smith says he is sensitive to investor concerns. For example, the executive already has declared a one- to two-year moratorium on so-called "strategic" acquisitions, or entries into new markets.

But Mr. Smith's efficiency message is mixed.

On the one hand, he is loath to cut down on profit-sapping investments in fee businesses, saying noninterest income has been a comparative weakness whose cure should not be slowed on account of transitory market lulls.

On the other hand, he indicates more can be done to streamiline First of America's sprawling branch network, saying "We are not as efficient as we should be." He declines to discuss expense cuts on the grounds that they "haven't yet been made known to employees."

While Wall Street is in no position to usurp Mr. Smith's discretion, the situation is not such that he can shrug off criticisms and go have a beer.

According to a detailed analysis published by Salomon's Ms. Berger and Mr. Naschek, a variety of acquirers could rather comfortably afford to pay in excess of $50 a share -- or at least a 45% premium over current trading levels -- in a stock-swap takeover of First of America.

Market Curtails Options

Moreover, Mr. Smith's acquisition options are at least temporarily crimped by the collapse in First of America's stock trading value, a governing factor in stock-swap mergers.

"This pressures management," says Mr. Stieven of Stifel, Nicolaus. "In its present position, First of America can't make further acquisitions, and the company is more vulnerable to takeover."

Does this mean Mr. Smith has been given a wake-up call? Says Mr. Stieven: "I would say the bell has been rung."

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