Two years after the merger that created it, more analysts are giving National Commerce Financial Corp. of Memphis a thumbs-up for double-digit earnings growth, fast-growing markets, and an expansion strategy that includes in-store branches.
They also say the $21 billion asset company, which operates in six southeastern states, could benefit if customers flee the post-merger Wachovia Corp. when it begins consolidating branches next year.
In recent weeks new "buy" recommendations from several analysts have boosted National Commerce's average rating among sell-side analysts to its highest point since the summer of 2000. That is when National Commerce Bancorp. of Memphis and CCB Financial Corp. of Durham, N.C., completed their $1.5 billion merger of equals.
The company was renamed National Commerce Financial in May of last year. Now analysts on average now rate the shares 1.8 on a five-point scale, where 1 is a "strong buy" and 5 is "sell," according to Thomson First Call.
Said one analyst who has long had a "buy" rating on the stock: Recommending National Commerce is suddenly "cool."
"What took so long?" joked Ernest C. Roessler, National Commerce's president and chief executive, last week when asked about all the new attention. "Over the last two years since the marriage, and successful integration, and now a successful expansion … we feel that attention should be there."
And though success has made the company the subject of takeover rumors, in June chairman Thomas M. Garrott hinted in an interview with American Banker that it might prove more of an acquirer than a target.
"I have a concern about size," Mr. Garrott said. "We never managed the bank for size; we've always managed it for profitability and made our decisions based on that."
But some much larger banking companies "are doing extraordinarily well," he noted, and "the most significant" of those is Fifth Third Bancorp of Cincinnati. "They are roughly four times the size of our bank, and they've been able to sustain a very high-quality bank, so I know it can be done," Mr. Garrott said.
It was Fifth Third, which was looking to expand into Tennessee that was rumored to be interested in acquiring National Commerce. Last month Fifth Third agreed to acquire another Tennessee company, Franklin Financial Corp. of Nashville, for $240 million.
Meanwhile, the second-quarter earnings National Commerce announced July 17 exceeded Wall Street expectations by a penny per share. The company earned $81 million, or 39 cents a share, up 46% from a year earlier. Cash earnings, excluding deposit intangible amortization and other one-time expenses, were up 20%, to $92 million.
Analysts pay closer attention to cash earnings than net income at National Commerce because of deposit intangibles, which are the product of mergers and branch purchases. With purchase accounting, a bank that buys another bank or branches must treat the premium it pays for deposits as an expense, and amortize it over time, typically about 10 years. In National Commerce's case, deposit intangibles are significant, amounting to 20 cents a year right now, or 13% of earnings.
By contrast, the accounting rule costs most companies no more than a few cents a share, though that will change as more big mergers are completed under purchase accounting. The issue also has arisen in the case of Wachovia, whose year-ago merger - First Union Corp. bought the old Wachovia and took its name - is the largest since the end of pooling-of-interests accounting.
National Commerce's second quarter included increases in lending and fee income, and a steady stream of fresh deposits from new in-store branches in Atlanta and other key markets. It also included results from 37 branches in four states acquired from Wachovia and from $671 million-asset SouthBanc Shares Inc. of Anderson, S.C., which National Commerce bought in November.
National Commerce shares fell 5%, to $22.97, on July 18, the day after its earnings announcement, and a day when all banks lost ground. But investors were buying again last week, and the stock closed Monday at $24.36, up 6% from July 18.
Though some analysts have long recommended National Commerce stock, Jeff Davis at Midwest Research in Nashville and Jennifer Thompson of National Bank of Canada's Putnam Lovell Securities in New York both upgraded it to "buy" recently. And Jefferson Harralson at Keefe, Bruyette & Woods Inc. of New York started coverage of National Commerce with an "outperform" rating last week.
Both Mr. Davis and Mr. Harralson consider the shares a good buy right now, and Mr. Davis calls it "an attractive entry point for one of the industry's better growth and profitability stories."
Mr. Davis said the National Commerce-CCB merger has been a success in cost savings (the company has put the figure at $50 million a year) and in positioning National Commerce for "above-average revenue growth," he said in an interview last week. He considers it a "good growth stock."
Meanwhile, he said, National Commerce already has been able to hire employees who have lost their jobs or fled the post-merger Wachovia. And National Commerce appears likely, along with BB&T Corp., SunTrust Banks Inc. and others, to benefit when Wachovia starts consolidating branches in Virginia, Georgia, and the Carolinas next year.
In the Carolinas, National Commerce operates Central Carolina Bank. In Virginia, Tennessee, and Georgia, also markets where Wachovia will be consolidating, it operates as National Bank of Commerce. In Richmond, Va., it is a 49% owner of First Market Bank, an in-store banking partnership with Ukrop's, a local supermarket chain.
"The opportunity is really going to be measured by how much brick-and-mortar and people one institution has in the vicinity [of Wachovia branches]," Mr. Davis said.
In-store branches are a major part of the company's strategy, and now account for about one-third of branches. National Commerce typically builds a collection of store branches, which offer full services, around a traditional "hub" branch.
That is the approach it is taking in the Atlanta area, where it has added 11 branches in the Kroger grocery stores this year and hopes to have 30 within three years.
"I like the 'hub-and-spokes' model, how they tend to find markets and use both supermarket as well as traditional branches to take market share from existing players. I think their foray into Atlanta is a good example," said Jason Goldberg, an analyst at Lehman Brothers in New York. Nevertheless, Mr. Goldberg, who had been rating the stock "buy" on a five-grade system, last week changed that to the equivalent of "hold" on a new three-grade system.
Though store branches have been a success, Mr. Harralson said that sustaining deposit growth at them could be a challenge. In a research note Thursday, when he started coverage, he said he had analyzed deposit trends and found that deposits "plateau" after about five years. But that many National Commerce branches are relatively new bodes well for growth, he wrote.
Analysts also point to National Commerce's nonbanking subsidiaries as an important effort to diversify revenues. Those units, which account for about 12% of net income, include a broker-dealer, a card payment unit that targets the trucking industry, a 401(k) administrator, and a Chapter 13 bankruptcy administrator.
In June, Mr. Garrott pointed out that the fee-based businesses generate returns on equity averaging about 35%, nearly double the returns on basic banking. And though banking remains National Commerce's bread and butter, these lines of business have helped drive up the value of the company, he said.
"We've never gotten away from what brought us to the party, but we also added value by getting into other things," Mr. Garrott said.
Alan Kline contributed to this story.
