LAWRENCEVILLE, N.J. -- Anthony P. Terracciano's two-year acquisition binge has brought First Fidelity Bancorp. many riches: A dominant share of deposits in many of its markets, higher profits, and a reputation a savvy acquirer.
But Mr. Terracciano's spree of buying failed or troubled S&Ls has also given First Fidelity a thrift-like mix of fixed-rate assets and low-interest-bearing deposits that are sensitive to fluctuating interest rates.
With investors jittery over the impact of narrower net interest margins on bank profits, Mr. Terracciano's stature as a smart acquirer is now on the line.
He must convince the market that First Fidelity, New Jersey's largest bank, can manage interest rate risk and continue to improve earnings even while he proceeds with an acquisition plan that could double the bank's $32.6 billion in assets.
If Mr. Terracciano succeeds, it could give a boost to First Fidelity's stock price, which has lost 14% of its market value in the past five months, a fact that analysts attribute in part to investors' concern over interest rate risk.
The bank needs a higher stock price to compete for acquisitions and to remain attractive as a candidate for a merger of equals, says Mr. Terracciano. Though it is by no means an inevitability, he says, merging with another regional bank is "possible." Banking sources speculate that PNC Bank Corp., Mellon Bank Corp., Chemical Banking Corp., and Bank of New York Co. are potential partners.
If First Fidelity executes its plan well, "it would give us a currency that will facilitate making acquisitions but would also give us a stock price that would maximize the price for the shareholder," Mr. Terracciano said in a recent interview.
With characteristic toughness and confidence, the chief executive hasn't a doubt about whether he can deliver.
Asked about the interest rate sensitivity, the 55-year-old New Jersey native quickly responds: "We're not concerned."
"We look at [asset mix] before we decide to acquire something," said Mr. Terracciano, who meets weekly with senior bank officers to monitor the asset-liability mix.
Use of Swaps
Adds Wolfgang Schoellkopf, chief financial officer and vice chairman: "We always do swaps to bring ourselves in balance, so whether rates go up or down our net interest income remains the same." First Fidelity has $3.5 billion in its swaps portfolio.
Still, there are skeptics. Chief among them is Morgan Stanley & Co. bank analyst Dennis Shea, who believes that First Fidelity's thrift-like composition of assets and liabilities makes the bank more susceptible to shifts in interest rates.
Fourteen acquisitions over the past 3 1/2 years have swelled First Fidelity's deposits by 18% to $27.37 billion. Low-interest-bearing savings and NOW accounts made up the lion's share of the increase in deposits.
At the same time, the bank has put a substantial amount of fixed rate assets on its books. Mr. Shea sees interest rates rising modestly and a pickup in loan demand next year.
He expects banks with significant retail operations, such as Banc One Corp., Barnett Banks Inc., and Norwest Corp., to see declines in net interest margin, which could hurt profits.
Banks like First Fidelity, which has an even mix of consumer and commercial business, are usually less susceptible to shifts in interest rates. First Fidelity is different, says Mr. Shea, because of its history of acquiring thrift assets and deposits.
Mr. Shea expects 1993 net income to rise a healthy 26% to $397 million, but his outlook for 1994 is dim. He predicts net income will rise just 7% annually to $427 million.
First Fidelity's margin declined 10 basis points in the third quarter to 4.82% compared with the previous quarter, due in large part to the impact of several acquisitions, the bank said. The margin contraction was partly responsible for a nearly flat quarter-to-quarter level of net interest income.
Although First Fidelity's current margin is higher than the 4.75% average for 21 regional banks Mr. Shea follows, he expects First Fidelity's spread to narrow another 10 to 12 basis points next year.
"It's not a question of their talent in managing the mix of assets and deposits," says Mr. Shea. "It's a question of the risks of having that kind of mix."
Mr. Shea, who has a "hold" rating on First Fidelity's stock, believes that investors' concerns over interest rate sensitivity account in part for the decline in First Fidelity's share price in the last six months.
The stock, which is currently trading at $41, is down 15% from June 30. The American Banker index of 225 banks was flat over the same period. The bank's performance is even worse when the 52-week high of $52.375 per share is considered.
"First Fidelity is perceived as having a different risk profile from other banks," said Mr. Shea. "They're more susceptible to compression in the yield curve."
Market Overreaction Seen
Other analysts worry about margin contraction, but believe the market has, overreacted to First Fidelity's risk profile.
"The acquisition of fixed-rate assets offsets the core nature of their business, which has a middle-market focus," said Scott J. O'Donnell, an analyst at Fitch Investors Service Inc. "We have talked about what net interest margins will do, but I'm not more concerned about them than I am about other regional banks."
Analysts take comfort in Mr. Schoelikopf's estimate that, in a worst-case scenario, a 50-basis-point reduction in the prime would reduce First Fidelity's net interest income by only 1.5%.
Investors' concerns about First Fidelity's risk profile are "legitimate, but overdone," said Anthony Polini, an analyst at Mabon Securities who is rethinking his "hold" rating. He says the hares aren't hot because First Fidelity is no longer viewed as a takeover target.
"It's lost its sex appeal," he said.
Solid Track Record
Mr. Terracciano hopes to change that. His track record at First Fidelity so far is impressive. When he arrived in 1990, bloated expenses and poor credit quality, coupled with the economic downturn in New Jersey, had all but devastated the bank.
Mr. Terracciano quickly slashed expenses by eliminating 1,400jobs, or 10% of the bank's work force. He accelerated a program to consolidate back-office systems by outsourcing the bank's computer operations to Electronic Data Systems. To finance his acquisitions, he has sold a 19.7% stake in the company to Spain's Banco Santander. (The foreign bank can acquire up to 24.9% of shares.)
No. 1 in Many Markets
Three years later, First Fidelity is one of the hottest superregional banks in the Northeast. The bank, which has 600 branches in New Jersey, northeastern Pennsylvania, Connecticut, and the northern suburbs of New York, has the No. 1 share of consumer and business deposits in many of its markets.
Profits were up 31% to $294.5 million in the first nine months of this year, compared with the year-earlier period. Nonperforming assets were down nearly $240 million in the third quarter, to $511.5, versus a year ago. The bank's return on assets is now a healthy 1.24%, and its 55% efficiency ratio is one of the best in the industry.
Those who know Mr. Terracciano say that when he sets his mind to something, he settles for nothing less than success.
"When he came to the bank, he laid out exactly what he wanted to do in a three-year period, and he's done everything he stated," said Rosemarie B. Greco, a former director of First Fidelity who is now with CoreStates Financial Corp.
"Based on that, I have great confidence in his ability to deliver on what he promises." Investors Size Up New Profile Mergers and acquisitions Deposits1991 in millions Branches S&L City Savings, NJ $2,300 48 First National Toms River, NJ 1,300 53 S&L Ensign Savings, NJ 122 3 S&L Alexander Hamilton Savings, NJ 180 6 S&L Atlantic Financial, PA 991 29 S&L Morris Savings, NJ NA NA1992 S&L American Savings, NY 353 5 S&L Howard Savings, NJ 3,100 70 Northeast Bancorp, Conn. 2,500 68 S&L Dime Savings, NJ 329 8 Village Financial, NY 560 9 Pitcairn Private Bank, PA 22 1Pending S&L Greenwich Financial, Conn 261 7 S&L Peoples Westchester, NY 1,500 40 Grand Total $13,518 347 S&L subtotal $9,136 216