The planned merger announced early this week of the Chemical Banking Corp. and Manufacturers Hanover Corp., both New York based, is designed to greatly strengthen the two companies by increasing the capital level and sharply reducing overhead. The merger will enable the closing of dozens of overlapping offices and reduction of thousands of employees.
The intended merger is also winning back confidence among many investors who like bank stocks but have been wary of them. The concept of large banks combining with each other has boosted the value of bank shares because it is a favorable factor with no deadline. Whether banks combine with each other now or not, the fact is that they may be more inclined to do so some day and their share prices will reflect this possibility indefinitely.
A similar merger is being considered by the C&S/Sovran Corp. and the NCNB Corp. -- Southern-based companies with operations in Maryland. The two banks will be stronger as one, or so the thinking goes.
The merger news sparked bank-share prices around the country, but so many bank stocks are under their normal trading ranges that they still may be at bargain levels.
For many investors, banks have been suspect investments due to a slump in current earnings and a great number of what have become non-performing loans -- those on which interest and principal are not being paid as scheduled. All banks are not doing badly but enough are to have sharply damaged the investment appeal of the industry.
Not every bank has been caught in the web of overextended real estate loans, but the poundings taken by MNC Financial of Baltimore, John Hanson Bancorp of Beltsville and Second National Bancorp of Salisbury have cast a shadow over the banking industry that does not reflect the entire picture.
Traditionally over the years, bank stocks have been secure investments whose earnings and dividends have grown steadily. They were defensive stocks that did better than average during difficult times in the economy and stock market. Investor confidence has been shattered in recent years because of the collapse of many savings and loan associations, and the massive real estate losses at a lot of major banks.
Conservative investors can own shares of successful banks that have a chance of benefiting from a merger, rather than count on a rebound in the share prices of bank stocks depressed because of severe problems. In other words, stick to investing in the strong companies and avoid the weak ones.
A few years ago, banks with conservative management were avoided by many investors who considered them slow movers. Today, these same banks are gems. Among them are Mercantile Bankshares Corp., priced at about $25, and Citizens Bancorp., about $19, each selling for just over 10 times earnings. Both of these bank holding companies have succeeded in these difficult times by avoiding speculative real estate lending.
Baltimore-based Mercantile has fewer branches than Laurel-based Citizens, but at nearly $5 billion, it has almost double the assets. The company earned about $69 million last year ($2.32 a share) and about 17 percent on stockholders' equity, an especially strong percentage.
Citizens earned more than $26 million ($1.83 a share) and more than 10 percent on stockholders' equity. For comparison, Baltimore Bancorp earned less than 4 percent on equity, and MNC had no earnings at all.
Earnings have been hurt slightly at both Mercantile and Citizens, because a recession does cut into consumer borrowing, and there have been some problems with commercial real estate loans. But both banking companies have well-covered dividends, with Citizens now yielding about 6 percent and Mercantile 3 1/2 percent, and there are increases in most years.