ROANOKE TIMES
Copyright (c) 1995, Roanoke Times
DATE: Sunday, December 3, 1995 TAG: 9512010065
SECTION: BUSINESS PAGE: G-1 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
It will be next week before Western Virginians see signs as evidence of a new bank, but operators of First American Corp. hope they eventually will come to share the high opinion of customers in its hometown.
"You can't say anything bad about them in Nashville," said bank analyst Henry J. Coffey Jr.
The Tennessee-based company entered the Western Virginia banking market Friday in a $77 million acquisition of Charter Federal Savings Bank, making Roanoke the headquarters for its $400 million, 14-office Virginia operation.
First American's popularity in its hometown, Coffey said, stems from its creation of a low-cost checking account that "focused on Mr. and Mrs. Nashville. ... The typical Nashville family and this account are designed for each other."
The account has "brought in phenomenal balances for them," said Coffey, a securities analyst with J.C. Bradford & Co., whose office is just down the block from First American's headquarters. "That's the kind of marketing they bring to the table."
It's that attention to individuals that First American's executives hope will create a niche for them in Virginia's crowded banking market. As the industry becomes dominated by super-regional banks with global interests, First American plans to earn its business with consumers and small companies.
First American's been busy with other deals, too. The company took over the $525-million-asset Heritage Federal Bancshares of Kingsport, Tenn., on Nov. 1. First American expects to finalize acquisition of First City Bank of Murfreesboro, Tenn., in the first quarter of 1996 and just last month signed an agreement to buy Smoky Mountain Bancorp. of Gatlinburg.
These deals, when completed, will increase First American's assets from $8.4 billion to $10.2 billion and its deposits from $6.3 billion to $7.7 billion. The number of branches will jump from 139 to 178.
Despite this growth, First American - like many banks of its size - is now seen as ripe for a take-over "in this very acquisitive environment," said Chairman Dennis C. Bottorff. "The better job you are doing in your marketplace, the more lists you seem to be on."
First American's board, however, has adopted a strategy of continuing independence, Bottorff said, although it has done nothing to head off a potential suitor.
Three other banking analysts said First American has a good reputation in the industry, having recovered from the problems of six years ago (First American has no relation to the Northern Virginia bank of the same name that was closed last year by the government on charges of fraud). Like many U.S. banks, First American was saddled with soured loans on risky commercial real estate.
Analysts credit Bottorff with the bank's turnaround and spearheading its growth. He joined First American in 1991 after serving as president of C&S/Sovran, which later merged with NCNB Corp. to form NationsBank Corp.
Bottorff said First American bid for Charter Federal because of its Tennessee branches that help solidify its hold on its home-state business. "Had Charter not been in the Tennessee market," he said, "we would not have been as interested" when Charter put itself up for sale.
Despite First American's primary interest in growing its Tennessee market, Bottorff said he did not back off from entering Virginia, citing what he sees as deterioration of customer service at larger banks here. Yet he predicted "a big struggle" with those banks, particularly First Union - which controls 40 to 45 percent of the Southwest Virginia market.
David Scanzoni, spokesman for First Union, said that bank is "proud of its customer service record and always welcomes new competition." Scanzoni said its service and a wide variety of products are the factors that "keep First Union customers loyal."
Even though First American is entering Virginia for the first time, it's officers bring some knowledge of the area.
The bank's president is John W. Boyle Jr., whose father three decades ago was president of the old Mountain Trust Bank of Roanoke. He is also the brother of Barbara Lemon, a Roanoke investor who was a founder of Valley Bank.
Cecil R. "Andy" McCullar, who was president of Charter, is moving from its old headquarters in Bristol back to Roanoke, where he lived from 1988 to 1991 when he worked as a retail executive officer for the former Dominion Bank, now First Union National Bank of Virginia. He will serve as president of First American's Virginia bank.
Coming with him will be Douglas Deppen, who was chief financial officer of Charter and will be senior vice president for consumer banking with First American's Virginia bank.
The new $400 million Virginia bank will use what's been empty space on the third floor of Charter Federal's Tanglewood branch at Electric and Ogden roads in Roanoke County as its headquarters. |n n| Charter put itself up for sale because of changing circumstances in the money markets, McCullar said.
While the thrift's name traces back just 10 years when First Federal Savings and Loan Association of Bristol merged with Peoples Federal Savings and Loan Association of Roanoke, those institutions had long histories in their communities.
Charter later grew as it acquired, in 1982 and 1985, several thifts that were failing. That's despite having come back itself from being, in McCullar's words, "literally bankrupt." That was about 21/2 years ago after Charter lost a legal fight with the federal regulators over an accounting procedure that the government earlier had encouraged. It involving what the accountants called supervisory goodwill.
This concept means thrifts got intangible assets, but ones to which they could assign a dollar value for the purpose of computing their own financial strength. In Charter Federal's case, the $41.1 million credit for goodwill made the difference in its ability to meet standards for continuing to operate.
Goodwill has been described by American Banker, a trade newspaper, as the hole in a financial doughnut. It is not real money in the bank, but it was counted as if it existed.
The practice, since abolished, meant the government allowed a rescuing thrift could count the hole as part of the financial doughnut.
The government allowed this pratice as an incentive to encourage strong savings and loan associations to help the government clean up the remains of the thrift industry's massive failures in the 1980s.
Congress later abolished this practice - overnight undoing the deals. As a result, many of the rescuing thrifts went under themselves, when subtracting the value of goodwill left them with too little capital to meet government operating standards.
Charter, however, fought the move and filed suit in a vain attempt to retain the practice.
Even though it ultimately lost the court fight, the two-year litigation gave Charter time to turn around its finances.. That, in turn, enabled it to sell stock to investors, thus meeting government standards for financial strength.
McCullar said Charter, as a new stock company, had a good 1994 fiscal year, posting profits of $9.6 million.
About that time, however, short term interest rates began to rise, McCullar said. That trend affects the rates banks must pay on deposits before it affects the interest they can earn on loans.
Charter's strategy was to act more like a bank, relying on consumer and small business loans, McCullar said. But the market change caught Charter still functioning like a thrift, with its money tied up in long-term mortgages at fixed interest rates.
That situation, he said, was going to hurt Charter's earnings for the 1995 fiscal year ended June 30. In fact, its earnings fell to $5.5 million for the year.
Ahead lay still more problems. McCullar said thrifts, starting in September, are charged 23 cents for each $100 of deposits in federal deposit insurance premiums. Compared with 4 cents per $100 being charged commercial banks, there is a "huge disparity" between competing institutions, he said.
Deppen, Charter's chief financial officer, said deposit insurance costs Charter $1.2 million more than a comparably sized bank would pay.
With those factors in mind, McCullar said, three major holders of Charter Federal stock - Robert E. Torray, an investor from Bethesda, Md., who owned 20.5 percent; The United Co. of Bristol, which owned 15 percent; and Line Power Co. of Bristol, which owned 10 percent - approached Wheat First Butcher Singer, a Richmond-based investment firm, for advice about the company's future. Wheat conducted a feasibility study beginning in the fall of 1994.
In February, he said, Wheat urged Charter to consider selling because a significant number of banks were interested in such acquisitions.
The initial list, McCullar said, contained the names of about 25 banks, which Wheat pared to 19. In March, Charter's board chose five to start negotiating with, and four conducted intensive studies of Charter's financial condition.
On May 17, McCullar said, Charter's board accepted the best bid, from First American. The deal involved an exchange of stock rather than cash.
Even before that offer was accepted, McCullar said, First American suggested rolling the Bristol and Abingdon branches into the Tennessee bank. First American also proposed moving its headquarters to Roanoke instead of having a main office so close to Tennessee.
"Coming back to Roanoke appeals to me," said McCullar, who already has signed a contract to buy a home in Roanoke County's Hunting Hills neighborhood.
Charter shareholders approved the merger Thursday and the deal closed that afternoon with an effective date of Friday. First American plans a ceremonial opening Dec. 11.
The deal generally was seen as a good one for Charter shareholders. At the rate of 0.3398 of a share of First American for each Charter share, the value for Charter stockholders was $15.10 a share, based on recent Nasdaq trading in First American stock.
Prior to February, trading in Charter shares ranged from $7.50 to $8. The price shot up to about $12 after the acquisition was announced, but it likely would have fallen back to the original level had the deal collapsed.
McCullar said investors who bought Charter stock for $10 a share in the original 1993 stock offering realized a gain of 51 percent. "I feel pleased about that on behalf of the shareholders," he said. In addition, they had a dividend of 40 cents a year, a yield of 2.8 to 3 percent - the highest of any thrift in Virginia, McCullar said.
The shareholders could get still more. In an Oct. 11 amendment to the May agreement, First American agreed to split 50-50 with Charter shareholders any windfall in the next five years from renewed litigation over the goodwill accounting issue.
The possibility arose because of a decision in a California case that awarded a thrift money damages for the loss of goodwill. Further hearings are planned to determine the amount the government owes, and the original decision is also on appeal to the U.S. Supreme Court. Meanwhile, Charter filed suit in Washington to pursue the new possibility of recovering damages from the government.
"It gave our legal counsel renewed hope we might recover something," McCullar said, but the outcome and the amount of any award are still up in the air.
If the stockholders are winners from selling the company, however, some Charter employees are losers.
Charter has not filled vacant positions for about a year in anticipation of a merger, a move that also has reduced the number of people affected by the sale.
Forty positions were eliminated in Tennessee, McCullar said - but only 10 people were involved, and five of them volunteered for retirement.
In branches near the Virginia border, First American chose to retain all five Charter branches but closed two of its own offices. That affected seven people, who were laid off. At the operations center, five people were laid off and 50 positions were transferred to the Virginia bank. A total of 18 people were laid off, none of them in Virginia.
For tax reasons, First American has set up another thrift to control the former Charter branches in Virginia.
Even though the Virginia subsidiary will be known as First American Federal Savings Bank, at least for now, McCullar said his goal is to transform Virginia branches into a more bank-like organization, de-emphasizing mortgages and building consumer and small business loans.
In his opinion, McCullar said, "there's going to be no future for the thrift industry. It's passe." Banks, he said, can do a better job serving customers. One day the thrift in Virginia may be changed into a bank.
Even the old Charter, McCullar said, "had made tremendous strides in increasing consumer lending, especially in Virginia." The merger, he said, will give Virginia customers more banking products and even credit cards, which Charter had terminated years ago.
While First American introduces new banking products over a period of time, old Charter customers need not do anything because of the acquisition. They will keep the same accounts and can continue using their present checks and deposit slips.
McCullar said he would like to fill in some holes in the Virginia bank's market area, which extends from Marion to Roanoke.
That might include a branch in Christiansburg to complement those in Radford and Blacksburg. In the Roanoke Valley, he said, he would like to see new branches at Oak Grove and in Salem.
"I don't think we've tapped the potential" of the Western Virginia market, McCullar said.
LENGTH: Long : 233 lines ILLUSTRATION: PHOTO: Stephanie Klein-Davis. 1. Cecil R. "Andy" McCullar,by CNBformer president of Charter Federal, is moving to Roanoke to be
president of First American's Virginia bank. color. 2. Chairman
Dennis Bottorf. Graphic: Charts by staff. 1. First American Corp. 2.
Financial data. 3. Types of loans. color. KEYWORDS: PROFILE