Which big bank will be the next to go?

It's a truism that the United States is overbanked and that consolidation is inevitable. But some industry observers see several factors converging that they say will quicken the pace of deals involving the nation's biggest banks. They include the removal of remaining barriers to interstate banking, a competitive marketplace that requires ruthless attention to efficiency, the need to invest big dollars in technology, and the prospect of slower revenue growth in a softening economy.

Earlier this year, for example, Tom Hanley, a banking analyst at CS First Boston, told Management Strategies that "we really think that around Labor Day . . . you're going to see a marked acceleration in terms of M&A activity."

Why? Because many banks planning their 1996 budgets will foresee a shortfall in revenue. Another reason, he added, is technology. "It's a huge barrier to entry," he said.

There is some evidence that the M&A race has already begun. In four bank mergers announced in recent months, both the buyer and the target ranked among the 100 largest bank holding companies. That has heightened interest in the M&A speculation game.

With that in mind, Management Strategies set out to find 10 banks that are vulnerable to these forces - and who might choose to sell while the selling's good. The universe has been limited to the top 100 U.S. bank holding companies, and the time frame is the next 12 months. Selections were based on several objective criteria, as well as conversations with analysts.

First, we looked at banks that compared unfavorably with their best- performing peers on three ratios: return on assets, return on equity, and efficiency.

"The below-average ROA or ROE is, a lot of times, a function of inefficiency," said Stephen R. Schroll, an analyst at Piper Jaffray in Minneapolis. "If you lower the efficiency ratio to where it ought to be, from, say, 65% to 60%, that's really going to bump up the ROA to more reasonable levels."

The efficiency ratio, while an imperfect indicator of performance, is of key interest because acquiring banks typically look for cost reduction opportunities when they shop.

"When it comes down to it, in almost all cases, at least threequarters of the premium earnback comes out of cost reduction," said Mr. Schroll.

But that profitability and efficiency criterion would not have explained, say, First Union Corp.'s interest in First Fidelity Bancorp., which had been posting strong earnings and long had a reputation as a cost- conscious institution. So another criterion was included: prospects for revenue growth. (First Fidelity's estimated growth in earnings per share is 6% in 1995 and 10% in 1996, below average for the banks tracked by Natwest Securities Corp.)

"In terms of pure financial criteria, what you're looking for is banks that fundamentally are laggards," said John A. Heffern, an analyst with Natwest Securities. "Not structurally broken beyond repair, but simply where there is a failure to optimize profitability or growth."

Finally, the list had to account for more subjective factors, including the intentions of management.

Of course, there is no way to predict precisely which banks will sell, and it's even more precarious to make short-term projections. But the banks listed below do face significant near-term challenges that make selling a reasonable, if not likely, option.

Indeed, PNC Bank Corp. bumped one bank off our initial alphabetical list shortly before we went to press by announcing its intention to buy Midlantic Corp.

Here is the revised list:

Barnett Banks Inc. This Jacksonville, Fla.-based bank is often bandied about as a potential takeover candidate despite management's stated desire to remain independent.

But Henry J. Coffey Jr. of J.C. Bradford noted that Barnett's franchise is largely within Florida's borders.

Eventually, said Mr. Coffey, its growth strategy "will run out of gas" and the bank will be pressured to sell. "It may be one year, it may be five years," he said.

The state of Florida is also an attractive market for hungry banks, Mr. Coffey noted. "What's important to these companies are trophy deals."

BayBanks Inc. The announcement earlier this year that Fleet Financial Group would buy Shawmut National Corp. changed the New England banking landscape. One thing that didn't change, however, is the expectation among some bank watchers that BayBanks will be sold.

A Keefe, Bruyette & Woods Inc. report noted that "BayBanks is an acquisition candidate that most banks would be willing to stretch for."

While the Boston-based bank is highly regarded for its retail banking prowess and boasts one of the nation's biggest ATM networks, profitability ratios have been lagging. In 1994, the bank posted a return on assets of 1.04% and return on equity of 14.46%. And the efficiency ratio for the year was 65.58%.

Comerica Inc. With $34.1 billion of assets, this Detroit-based bank is the largest on this list. Comerica has been posting solid but undistinguished numbers - in 1994, for example, the ROA was 1.23% and the efficiency ratio was 59.59%.

Mr. Heffern of Natwest Securities said the bank is his pick for the next blockbuster deal. "People may not want (to expand in) Michigan so badly," he said, "but Comerica does bring Texas and California to the table, which could be attractive."

Comerica is also expected to produce less-than-average growth in earnings per share over the next two years.

Crestar Financial Corp. This Richmond-based banking company, like hometown rival Signet Banking Corp., is often rumored to be a takeover candidate, in no small measure because of the attractive markets where it does business. But Crestar's financial performance has been somewhat less impressive than Signet's. Last year's ROA was 1.24% and the efficiency ratio stood at 63.19%.

(Signet has also received attention for its plans to market a series of products nationally, building on the marketing and technology skills honed at the successful credit card division it spun off earlier this year.)

Michael K. Diana, an analyst with Bear, Stearns & Co., has included Crestar on his list of five top takeover candidates.

But not everyone believes Signet or Crestar will be on the block any time soon. "Neither one of those seems to be experiencing a level of substandard financial performance that would drive it quickly into the arms of someone else," said Mr. Heffern. But he added, "I think both companies are unlikely to be long-term survivors."

First Commerce Corp. While there is widespread speculation that at least one of New Orleans' three major banks will be sold in the next year or two, there is disagreement among analysts about which it will be.

Mr. Coffey said Whitney Holding Corp. is the most likely candidate. But at $2.9 billion of assets, it doesn't make the radar screen for this list. Hibernia Corp. is also mentioned. But that bank has emerged from big losses in the early 1990s to be stronger, more profitable player. (Earlier this year, chief executive Stephen Hansel told Management Strategies that one bank director had told him, "You couldn't give the company away two years ago, so why should you sell it cheap today?")

That leaves $6.9 billion-asset First Commerce. The efficiency ratio is in the mid-60s. The ROA for 1994 was 0.99%.

Among the three Big Easy banks, Natwest's Mr. Heffern said, "I would pick First Commerce."

Integra Financial Corp. Pittsburgh's third-largest banking company posted strong numbers the past two years. But $13.9 billion-asset Integra is expected to produce slower revenue growth this year and next. ROE for the first quarter was 1.16%, down from 1.53% a year earlier. And the efficiency ratio has been creeping up: under 58% in 1993, 59.13% last year, and 62% in the first quarter.

Mercantile Bancorp. The interstate banking legislation passed last year is expected to have a big impact on Missouri, where banks had been protected from acquirers beyond the neighboring states.

Mr. Diana of Bear, Stearns said St. Louis-based Mercantile is his top takeout candidate for the state.

The $13 billion-asset bank has been a solid performer in recent years. The ROA was 1.33% in 1994 and efficiency has been improving steadily for five years.

Mr. Diana said that, and Mercantile's attractive markets, would be appealing to several hungry banks, said Mr. Diana, including Norwest Corp., First Bank System Inc., Banc One Corp., NationsBank Corp., BankAmerica Corp., and NBD Corp.

Mr. Diana said Mercantile's crosstown rival, Boatmen's Bancshares, is also on his list.

Meridian Bancorp. The Reading, Pa.-based bank has earned respect for its work developing alternatives to branch delivery. But less-than-stellar performance has led the bank to announce a major restructuring to improve efficiency and boost earnings.

The move suggests Meridian has no intention to sell. But analysts say the bank could be vulnerable until the improvements are actually achieved.

"I don't think the mere announcement of a restructuring program is a poison pill," said Mr. Heffern of Natwest Securities. "In fact, I think it's a confirmation that there is vulnerability."

Mr. Schroll noted that the likelihood of a takeover lessens as the bank achieves the major pieces of its cost-cutting efforts.

Provident Bancorp. This $4.7 billion-asset Cincinnati bank has posted stronger numbers than any other institution on this list and appears on several analysts' takeout lists.

But when its stock price reached record highs early in 1994, the company tried to dispel published reports that it was seeking a buyer. Several suitors had approached Provident, the bank said, but were rejected.

At any rate, Provident's future will depend on the wishes of Carl H. Linder, a prominent Cincinnati financier, who, with his family, owns 55% of the bank's stock.

"The most likely buyers would be those that could realize significant cost savings," said a Keefe Bruyette report. "Therefore an in-market acquisition by Fifth Third, Star, or PNC could lead to a relatively high price."

UJB Financial Corp. This New Jersey-based bank often appears on analysts' takeout lists. While economic growth in the Middle Atlantic region trailed the South and Midwest in the last recovery, the area is home to one of the highest concentrations of affluent households in the United States. Those attractive demographics help explain two big deals in the Garden State this year - the Midlantic purchase and the industry's biggest merger ever, between First Union and First Fidelity.

Mr. Diana of Bear Stearns said now that Midlantic has agreed to sell, he has bumped UJB to the top of his takeover list.

The $15.2 billion-asset bank has posted below-average profitability ratios for the last couple of years and the efficiency ratio, while declining, still tops 60%.

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