 Banking
Industry Outlook
Photo at right: Wachovia
Corp. Chairman Bud Baker
and President and CEO G. Kennedy Thompson shake hands
outside the New York Stock Exchange to symbolize
the merger of Wachovia and First Union
Related story: BB&T's five top
officers celebrate 30 years together
Wall Street to Main
Street
Last
September’s merger of Wachovia
Corp. and First Union Corp. stamped its footprint from New York to Key
West, encompassing 2,900 branches, 19 million customers and 90,000
employees and creating the fourth-largest banking institution in the
United States with $324 billion in total assets.
Staggering numbers indeed and the end result of a staggering
transaction unlike any ever seen in the annals of banking history. The
sometimes-awkward courtship was chronicled on the front pages of major
newspapers for weeks, and the bottom-line effects still reverberate
many months later.
So it was that the new Wachovia Corp. emerged Sept. 1 after a bitter
but unsuccessful hostile takeover attempt by SunTrust, with Wachovia
and First Union stockholders blessing the marriage. The melding has
elicited praise from its architects, who note that customers and
shareholders will benefit from the strengths each institution brings.
They also emphasize that a three-year integration plan will ensure an
easy transition and little inconvenience for customers.
“By putting together these two outstanding companies, we have the
opportunity to build a truly outstanding financial services
institution,” says Bob McCoy, co-head of merger integration for
Wachovia. “Both companies bring strengths — a great market share
and a certain reputation for business from Wachovia, and from First
Union, a great product mix. . . . You see the synergies that take the
best from each and make integration as pleasant as it can be.”
Is this new mega force on the banking landscape a harbinger of
similar, future consolidations? Will smaller community banks be
swallowed by large banking corporations? Have we seen the last, or is
this just the beginning, of an era of bigger banking?
Industry watchers and banking officials foresee a slowdown in large
merger courtships in the next decade, although mid-tier banks, though
fewer in number, may seek them out as they grow in strength. At the
same time, industry officials predict there will be little development
of brand new banks. And all banks, no matter what size, will
increasingly try to sell a folksy, neighborhood image, which they say
is crucial to success.
“One of the biggest problems with ‘bigger’ is they tend not to
be as community-focused,” says Tony Plath, professor of finance at
the University of North Carolina at Charlotte. “Customers see the
banks as more distanced and removed from their economic landscape. Can
we capture the benefits of size without losing the hometown feel?
That’s what they’re grappling with.”
The New Wachovia
Wachovia officials say they’re confident they will be able to mold a
new company that not only will be responsive to customer needs but
also emerge as a stronger player in the industry.
“I’m confident, but not to the point of being arrogant, that we
will have a successful merger integration,” McCoy says. “We
can’t control the economy, but we will make the merger as successful
as possible.”
Last year at this time, executives of Wachovia and First Union were
beginning to deliberate and agree upon a merger. But SunTrust had been
in such discussions with Wachovia since the previous fall. In May, it
made an unsolicited bid for Wachovia, launching one of the most
expensive takeover battles in U.S. banking history. Later that month,
Wachovia’s board rejected SunTrust’s offer in favor of First
Union’s.
During the spring and summer of 2001, SunTrust stepped up its pursuit,
first filing a lawsuit challenging the First Union/Wachovia agreement,
which was later rejected by a N.C. Business Court judge. Then it
proposed to amend Wachovia’s bylaws so that it could call a special
meeting of shareholders and install its own directors. The state
General Assembly responded by passing a bill to make it more difficult
for SunTrust to do so.
First Union and Wachovia shareholders approved their merger July 31
and Aug. 3, respectively. The merged bank announced 250 to 300 branch
closings and 7,000 layoffs to be phased in during three years. The
integration plan is still under heightened scrutiny. “The jury is
still out. Customers won’t know any difference yet, and the bank did
it that way on purpose,” Plath says, noting, however that so far,
the two institutions are “right on schedule and doing what they said
they’re going to do.”
First Union, which Plath says got a “bum rap” for its acquisition
of CoreStates Financial Services Corp. in 1998, has improved in recent
years, says Calvin W. Sealey, the head of the Department of Finance
and Business Law at the Belk College of Business Administration at UNC-Charlotte.
“My guess is that there’s not a huge cultural difference,”
Sealey says. “(The merger with Wachovia) will be easier than others
that First Union engaged in, like CoreStates, where there were major
problems.”
One key question, Plath says, is whether the new Wachovia will gain
enough steam in the beleaguered economy to increase its market value.
Building earnings is currently difficult, especially given the
national crisis in public accounting caused by the Enron scandal, he
says.
“If you look at the stock price right now, it’s at the same price
when the merger occurred,” Plath says, adding his target price for
Wachovia would be $40 in the next 12 months. “The test for
management is: Can they grow the bank for market cap in addition to
growing assets? That will be the real test for (President and Chief
Executive Officer) Ken Thomp-son and his management team. Otherwise,
the bank becomes a target itself.”
McCoy says Wachovia’s leadership has followed its promises set last
April, and he believes shareholders ultimately will reward that
effort. “During the turbulent times, this is steering the ship in a
straight way,” he says. “If we make sure we pay attention and
focus on our integration plans and our customers, the stock price will
take care of itself.”
He adds that the management team is not worried about takeovers.
“It’s not even discussed. Yes, we want a higher stock price to
return more to the shareholders. . . . We are so committed to the
merger and integration that that’s all we’re worried about. . . .
To think about merging and then being taken over is just not in the
cards.”
Will Spence, CEO for Wachovia in the Carolinas, agrees and notes that
the business climate in the Carolinas, even in a recession, is still
good. “Recessions may come and go, but if an area is going to do
well in the Southeast, it’s the Carolinas,” Spence says, adding
that the integration plan, slated to be complete here in mid-to-late
2003, is proceeding well. Employee morale remains strong and is aided
because there are more opportunities to cross into other departments,
Spence says.
“Since the economics of this deal were very conservative, that means
we have the benefit of time in addressing any cost savings,” he
says.
Sealey, of UNCC, predicts that the new Wachovia will retain a
“strong consumer presence” and remain a major force in the banking
industry. “They’re going to try to position themselves about where
they are now,” he says. “They may end up doing that with
additional mergers, or they might divest something — who knows? But
their market position will stay about where it is now.”
Plath cautions that the economic environment will still dictate
results in the immediate future for the new bank. “They have the
broadest, steepest franchise in Eastern Seaboard banking,” he says.
“You could argue that on one hand, it makes them an effective
competitor, but if their stock price doesn’t go up, it makes them a
target. Can they get better as they get bigger?”
Economy Slows Consolidation
As far as the rest of the banking industry, don’t expect too much
change in the near future, other than surprise mergers such as First
Union’s and Wachovia’s, “which just pop up one day,” Sealey
says.
“For the time being, we’re not going to see too many more
considerable-sized mergers,” he says. “The two large banks in this
state have not exhausted their taste for mergers, but they certainly
have taken all they can take care of for a while.”
Plath notes that smaller franchises in the $200 million to $500
million range have been coming together in the past six months. “As
a way to keep their stock prices moving, they will think more about
consolidation. I expect to see more in the $200 million category.”
He notes that with the present economy, those banks “don’t have
the loan growth they used to,” and that creates a need to join with
others.
“If you don’t have 7 or 8 percent growth in your loan portfolio,
when the economy slows, your profit growth slows, and it’s hard to
demonstrate to shareholders that you’re holding your own,” Plath
says. “Will that drive consolidation? Yes. We have a lot of young
banks in North Carolina. It gets more difficult for them to continue
growing to achieve critical mass and give profitability to their
shareholders.”
Even so, other banks are in a strong position. One mid-tier bank to
watch is BB&T, Plath says. “BB&T with its stock price will
be an acquirer rather than acquired. With Wachovia gone, BB&T is
the only mid-tier super regional bank we’ve got.”
Sealey agrees, “There’s quite a few opportunities for banks like
that to either merge or acquire some other banks that are within the
medium-sized range.”
John A. Allison IV, chairman and chief executive officer of BB&T,
says the bank’s goal is to remain independent.
“There’s no question that banking is a consolidating industry. The
major determiner is performance, not size. Size is only important if
it helps you be good. … We think we’re large enough to play.
We’ll be the 13th largest in the U.S.,” he says.
“We have to earn our right through superior performance.”
Plath says the other banking industry trend may be out-of-state
acquisitions, especially because North Carolina has been harder hit by
recession as a result of manufacturing jobs leaving the state.
“The Midwest may recover quicker. Other banks may see their entry
into the Southeast in a favorable way,” he says, noting that it has
been the opposite case for the past 10 years. North Carolina had been
a “fortress” and difficult to penetrate by banks in other states,
he adds.
Attractive franchises may be First Citizens Bank, a family-controlled
bank, and First Charter Corp. of Charlotte, which has bought out other
banks and is growing in size, Plath and Sealey say. First Citizens has
more than $11 billion in assets; First Charter has $3.14 billion.
Jim Hyler, vice chairman and COO of First Citizens Bank and First
Citizens BancShares, says that like BB&T, his company intends to
stay independent.
“We are making investments based on long-term plans and have no
intention or plans whatsoever for being a merger or an acquisition,”
says Hyler, who was installed last month as chair of NCCBI. “We have
a strong balance sheet. If you look at the growth markets in the
Southeast, we happen to be in those. North Carolina will continue to
be a great market, and Virginia will continue to be a good market.
Atlanta, southwest Florida, Fort Lauderdale and Jacksonville are all
good markets. We are well-positioned to be successful, and as the
economy rebounds, we will continue to be in a good position.”
Retaining Community Feel
Meanwhile, the market for emerging community banks “has just about
run its course,” Sealey says. Plath notes that in the ’80s and
’90s, new, smaller banks developed as larger banks merged. He
predicts that in the next three to five years there will be no such
growth.
Instead, he says, banks growing to $1 billion in assets will see
themselves as community-oriented banks.
“The banks that comprise the holding company will operate as
autonomous units. In that way, they retain the flavor or focus of a
community bank but combine with others to benefit from a common
operating system and product line,” Plath says. The trick will be to
convince the public they fit the community mold, he adds.
McCoy and Spence of Wachovia say they feel confident the public will
perceive them as such. For example, one of the first things the new
bank did after the merger was change all ATM machines so that both
sets of customers could use them. On the brokerage side, the bank is
offering “a wealth of mutual fund offerings because of the
merger.”
“Our philosophy is to treat the customer in the way they need to be
treated and make sure their experience with Wachovia is a good
experience,” McCoy says. “It’s not a new philosophy. It was a
philosophy we had at the time of the merger. It stays out in front.”
Spence, who has been with Wachovia for 33 years, says he feels the
bank is like it was “in ’69 when I joined.”
“In those days, we were a very large North Carolina bank, but we
looked very local. The way we are strategically aligned, in as much as
we have gotten bigger, we still look and feel like the bank in ’69.
. . . Folks go to church with their customers, buy their groceries at
the same place. We look like a small bank while at the same time have
the benefit to offer first-class service.”
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