AIB will continue to do small fill in acquisitions in the US as part of a group strategy to become one of the top three banks in its chosen regional market, according to group chief executive Mr Tom Mulcahy.
But the $1.36 billion (£840 million) takeover of Dauphin Deposit Corporation announced this week will go a long way towards building scale and providing growth opportunities in the Maryland, Washington DC, Pennsylvania and Virginia regions.
AIB is now seen "as a player" in the rapidly consolidating US marketplace. "We have a corridor and market share in an area with a population of 8.2 million, a bank deposit base of $122 billion and in a market where the top 10 banks only have 10 per cent share of the market. We are going to grow within this region," Mr Mulcahy said.
AIB has projected that the Dauphin acquisition would be earnings neutral in 1997, modestly earnings enhancing in 1998 and significantly earnings enhancing in 1999. But these earnings forecasts are based on "very conservative" assumptions, according to Mr Mulcahy. "We have assumed lower revenue growth than Dauphin's recent experience and below what US analysts are projecting," he said.
AIB has pencilled in 5 per cent loan growth in 1997 compared with Dauphin's growth of 8 to 10 per cent in 1996, and a 1 per cent growth in fee income compared with growth of 31 per cent in 1996.
"We've assumed some fall off in revenue because of the dislocation and rationalisation of the takeover, he said. He is confident that the bank would beat these projections because of the strong potential for revenue growth. "If we can do half as well as First Maryland Bankcorp (FMB) in those categories we would be well into double digits," he said.
Dauphin has invested in upgrading its branches, introducing telephone banking and new loan approval and treasury systems. These investments are now starting to show a return. AIB will spend some $60 million on a rationalisation programme to eliminate duplication and give annual cost savings of about $48 million.
Dauphin is a perfect fit for FMB. It has a similar profile as a bank with a strong franchise in its local market. There is very little branch overlap and significant opportunities for cost savings. Asset quality is good - its credit card losses are less than half the national average, according to Mr Mulcahy.
There are opportunities to improve product sales and to use FMB expertise, including its cash management system, to boost profits. Dauphin operates in a market where the household income is 4 per cent above the national average.
The acquisition improves the overall business mix of AIB's US operations adding more industrial business to the services oriented FMB operation. This will provide resilience in the face of any changes in the temperature of the economy, Mr Mulcahy explained.
The takoever will be funded through shares and cash with the final mix up to the Dauphin shareholders. With 75 per cent of the Dauphin shares held by retail investors, there is expected to be a strong demand for shares because of the tax advantage for retail investors in taking shares rather than cash - they can postpone capital gains tax.
AIB would like a 70/30 shares to cash mix. The final deal will be based on the average share price in the last 20 days before the deal closes.
The takeover process began about two months ago when Dauphin wrote to FMB asking if the Irish owned bank was interested in expanding into south central Pennsylvania. Against a background of bank consolidation in the US, Dauphin wanted to become part of a larger group while retaining its community focus in as a perfect fit. It knew Dauphin well and was impressed by its record of strong earnings growth.
AIB's mergers and acquisitions team in the US (known as the MAC group) had its eye on Dauphin but did not know when or if it would become available, Mr Mulcahy said. Led by Mr Jeff Maddox and his number two, Mr Jim Smith, MAC had been researching suitable acquisitions for about two years. Dauphin's headquarters in Harrisburg is only 1 1/2 hours along the highway from the FMB headquarters in Baltimore.
When FMB responded positively, the bank was invited to submit full details of the group, to include its earnings track record and its geographic and business profile.
"Dauphin liked what it saw and we were then invited to put in bid price range subject to due diligence and details of the structure of a deal as we saw it. There were others interested but we do not know who or how many, Mr Mulcahy said.
"AIB was invited to do a due diligence examination of Dauphin over the holiday weekend (last weekend) and to submit its final offer. There were probably others doing the same," he said.
The Dauphin board was meeting on Tuesday to discuss proposals. At 5.30pm Irish time Mr Mulcahy was informed that the board had decided to accept the AIB offer.
That news has started the drawn out process of taking over a bank. It is expected to be completed in the summer.
