DEAL WATCH: BOTTOM LINE LOOKS A BIT CHEESY AT WISCONSIN’S BIGGEST BANK: ASSET, COMMERCIAL LOAN GROWTH WAS CLOSE TO FLAT AND PROMISED EARNINGS HAVE NOT COME THROUGH

One of Chicago’s biggest banking stories this year may actually be unfolding elsewhere – north of the state line, in Milwaukee.

Firstar Corp. is Wisconsin’s largest bank holding company, but its two principal individual shareholders are Chicagoans: sports, real estate and liquor magnate William W. Wirtz, a shareholder since 1980, and local bank executive C. Paul Johnson. Both are said to be increasingly interested in exploring a sale of Firstar in order to capitalize on record, but vulnerable, bank stock pricesH .

Any deal would involve Firstar’s $2.7 billion in Illinois assets – the area’s eighth-largest bank group – and a leading potential buyer is another Chicago institution, First Chicago NBD Corp.

Firstar management has insisted that it wants to keep the company independent. But it seems to have stumbled – and given sale advocates an opening – with a strategy of keeping buyers at bay through promises of robust earnings increases that haven’t materialized.

shaky earnings

The bank company earned $2.03 a share last year, significantly less than the $2.36 originally projected by Chairman Roger L. Fitzsimonds, and earnings estimates for 1998 have been falling, too. The latest consensus: about $2.15, up 6% over last year, or less than half the increase forecast for some of Firstar’s would-be predators.

Analysts have projected that Firstar could fetch more than $50 per share, or $7.25 billion, a 25%-plus premium over current market prices. But major shareholders undoubtedly worry about a collapse of share prices that have doubled in two years, if interest rates rise or a rapidly consolidating banking industry bypasses Firstar.

“The Chicago contingent to that board is known to be unhappy and pushing for a sale,” says Ben Crabtree, a bank analyst for Minneapolis-based Dain Rauscher Inc.

Firstar’s biggest shareholder, with 2.58 million shares (or a 1.9% stake), is Mr. Wirtz, who did not return phone calls. In a recent statement, Mr. Wirtz denied being interested in a sale of the comp
any.

Second – with 1.73 million shares, or a 1.1% stake – is Mr. Johnson, former chairman of First Colonial Bankshares Corp., whose 1995 sale to Firstar was the Milwaukee bank’s entree to the Chicago market. Mr. Johnson, 66, declined to comment.

Mr. Fitzsimonds, 59, also did not want to be interviewed. A bank spokeswoman says, “We are not out there seeking a buyer.”

Top prospects among potential Firstar acquirers are two Minneapolis-based bank companies, Norwest Corp. and U.S. Bancorp, according to New York-based Keefe Bruyette & Woods Inc. analyst Joseph Roberto, who says each could afford to pay as much as $56.60 per share for Firstar. (U.S. Bancorp, formerly First Bank System Inc., already has a small presence in the Chicago market through its 1993 purchase of Boulevard Bancorp Inc.)

But First NBD is also a strong possibility, he adds. Although the Chicago bank’s relatively weaker stock price likely would limit it to paying a maximum $46.71 per share, Mr. Roberto says Chicago’s fragmented banking market would not pose antitrust issues that could arise with an acquirer in the Twin Cities – a virtual banking duopoly – where Firstar has 40 branches. Firstar has 46 branches in all of Illinois.

Firstar’s clouded outlook is emblematic of other banks (and non-banks) that have slashed costs to boost competitiveness, only to struggle with revenue challenges.

Firstar’s commercial loan volume (excluding assets gained through a 1996 acquisition) was flat during the 12 months ended last September, and 1997’s net interest income likewise was stagnant.

first, the bad news

Though fee-based and other income sources grew faster, the bank’s “Firstar Forward” restructuring program seems to have stalled. Targeting a 55% “efficiency ratio” – roughly a measure of non-interest expenses to revenues – by mid-1997, the actual figure has risen since September 1996’s 57.4%.

Meanwhile, Firstar has avoided doing deals for more than a year. Assets grew less than 0.5% last year, to $19.8 billio
n.

Some observers think the Firstar Forward program cut too deeply and impaired the bank’s ability to generate new revenues. The restructuring, begun in 1996, resulted in the elimination of 1,450 jobs.

Analyst Mr. Crabtree, who says Firstar lost more customers than it gained, says, “We’ve got the bad news of the equation without the good news.”

Crain News Service