FirstMerit Corp. in Ohio has acquired five banks and thrifts in the past two years - and with each purchase it ended up facing more competition than it had bargained for.
In all five deals, executives of the $10.1 billion-asset Akron banking company knew they would be going up against entrenched giants such as Bank One Corp. and KeyCorp. What they did not count on was at least one start-up bank opening in each of the markets.
"They're trying to fill in the gap of what we're not going to provide, to go after customers that are really, really high-touch," said John R. Cochran, FirstMerit's chairman and chief executive officer. "It's an interesting phenomenon."
At the third annual Super-Community Bank Conference in Chicago last week, officials from FirstMerit and other leading Midwest community banking companies said they feel a conflict in trying to match their heavyweight rivals' product offerings while delivering the service on which community banks pride themselves.
"We're in the middle," said Robert C. Gallagher, president and chief operating officer of $12.5 billion-asset Associated Banc-Corp in Green Bay, Wis. "We get tough competition from both sides."
The conference, sponsored by seven banks, drew an audience of about 100 brokers, investment bankers, and analysts.
The banking companies, which ranged in size from Associated down to $4.3 billion-asset Amcore Financial Inc. of Rockford, Ill., said they often have to vie both with larger players for consumer business and large loans and with smaller ones for small-business customers.
"We tend to do fairly well against both," said Robert J. Vitito, president and chief executive officer of $7.9 billion-asset Citizens Banking Corp. in Flint, Mich. "They each have weaknesses we can exploit - whether it's price, service, or products."
But even if these in-between banks succeed in the day-to-day fight for customers, it is getting harder for them to compete with their bigger rivals for acquisitions.
In many cases, these banks said the price of their stock - often the "currency" in deals - has dropped more than stock prices for the industry as a whole. FirstMerit's Mr. Cochran called his company a bargain for investors. It is trading at only 8.3 times its 2000 earnings forecast, compared with a 10.5 multiple for other publicly traded banks.
The in-between banks said the market has ignored them.
"With our stock being where it is, it's difficult for us to conceive of being acquirers now," said Robert L. Hoverson, president and chief executive officer of $10.5 billion-asset Provident Financial Group Inc. in Cincinnati.
The bankers also said the intense competition has forced them to lend to less-qualified borrowers than they might otherwise. So far, they said, credit quality has held up, but they questioned how long this could last.
For instance, the ratio of chargeoffs to assets at Old National Bancorp in Evansville, Ind., has steadily dropped - from 0.3% in 1996 to 0.17% in 1999 - but the company's chief financial officer cautioned that the trend will not last much longer.
"Our credit-quality folks are getting increasingly uncomfortable about how long this can be sustained," said John S. Poelker, chief financial officer and a senior vice president at the $6.8 billion-asset Indiana company. He said he does not foresee a problem this year but that a credit-quality crunch could strike in two to three years.