CHICAGO -- The prospect of takeover premiums has allowed small-cap bank stocks to outperform larger-cap stocks, says Gregory P. Anderson, an analyst with Chicago Corp.
The Nasdaq's bank index, which is mostly made up of small-cap bank stocks, has moved up 12% since the beginning of April, while the bank stock options traded on the Philadelphia exchange, which is made up mainly of larger institutions, were up 8%. The S&P 500 was up 3% for the same period.
Mr. Anderson, a 30-year-old vice president, sees many takeover possibilities among the smaller bank and thrift stocks his company follows, particularly companies that have diversified their revenue base.
He and the other senior bank analysts, Christine A. Pavel and James M. Schutz, are narrowing their focus and will soon be concentrating on companies with market capital ranging from $100 million to $2 billion.
Mr. Anderson, who joined the firm last fall and previously worked for Duff & Phelps and as an examiner with the Office of the Comptroller of the Currency, recently discussed takeover possibilities among the firms he follows.
Q.: Why have the small-cap stocks done so well?
ANDERSON: I think the primary reason is takeover speculation on the smaller names has kept them more stable. The Nasdaq index hit its low in early April. Since then, the smaller banks have done very well, up almost 12% versus the S&P up about 4%.
General banks have done well, too. Margins aren't eroding as badly as people has anticipated, and banks are fundamentally cheap.
The reason for the prior selloff was a lot of skepticism over loan demand and, even more important, earnings growth. But over the last couple of quarters, you've seen consumer loan demand is picking up very strongly -- even in the double-digit range -- and commercial loan demand is picking up steam as well.
Q.: What takeover patterns do you expect to see continue in the Chicago area?
ANDERSON: The Chicago market is unique. It's composed of several relatively small firms because of the restrictive legislation in Illinois until fairly recently. The reason I think you've seen a lot of consolidation here is for that reason.
The only large institution left here is First Chicago. In order to accumulate market share here, you have to buy a lot of institutions. You can't come in here and buy one and get a 30% market share.
The pattern I think you're going to see is going to depend somewhat on pricing. The activity is going to pick up. I think you're going to see some of the bigger institutions making smaller acquisitions.
Q.: If interstate branching is established, what new companies might enter the market?
ANDERSON: For most of the large companies, Illinois falls into the target range. NationsBank isn't here. Keycorp isn't here -- that's probably a possibility. Bank America is here now, though it's on the corporate side. I wouldn't be surprised if at some point they decided to come in on the consumer side as well. A lot of companies [already here] want to expand their presence. I think First Bank, Norwest, Banc One are relatively small [in the market].
Q.: What are your takeover picks in Illinois?
ANDERSON: Amcore Financial in Rockford is a very attractive franchise. They've really developed their revenue base. They've expanded into non-interest-income-type revenue. Theirs is an attractive market to somebody who wants to come in who may not want to go downtown [Chicago] right away.
Firstbank of Illinois, is not going to have the same takeover speculation as a Chicago-based company. But they are the largest institution headquartered in downstate [Springfield] Illinois. Their earnings growth has been more than double digit. Another thing I like about them is they've got a proven ability to go out and do small acquisitions. They have really had the foresight to diversify their revenue base and to realize that they're not just in the banking competition anymore, it's financial services.
There are some other attractive franchises around here. First Oak Brook [Bancshares], First Midwest [Bancorp, Naperville], Southwest Bancshares [Chicago], to name a few.
Q.: What about in other areas?
ANDERSON: Security Capital Corp. in Milwaukee is an excellent franchise. They have good position in larger markets in Wisconsin. It's still trading at 80% of book value. Citfed Bancorp. in Dayton, Ohio, is a community-banking-oriented thrift. They've really built up the trust business, they have built up the consumer deposit franchise. They're the No. 2 mortgage originator in the Cincinnati-Dayton-Columbus area.
FFY Financial in Youngstown town [Ohio] is another attractive franchise. The Youngstown market is equidistant to Pittsburgh and Cleveland; it's a good market. I also think their mortgage orgination ability is excellent. They've got 8,000 mortgage relationships. Also, they're really building up their consumer side. They've got a home equity product coming out that's going to give them the ability to bring in a lot of consumer credit. I think you're going to see solid loan growth there, as fundamentals are very good. They're trading at 80% to 82% of book value.
Q.: Do you see mergers of equalsbecoming more common as an alternative to being acquired by a larger institution?
ANDERSON: I do think you're going to see more mergers of equals, but they can't be done just for size purposes. It's got to be done for a strategic business purpose. They're difficult. You have to have management cultures that are going to be able to work together.
As consolidation continues, the competition is going to increase. The strength of the competition is going to force people to be more efficient.
The ability to use your branch structure, your distribution system more effectively is going to be a key, and I think that's where yo're going to see some of the mergers of equals enhance your delivery system and your product base. The companies that are not able to do that are not going to survive.