A traditional bank profits from the difference between the short-term rates it pays depositors and the (usually higher) long-term rates it receives from loans to customers. However, as short-term rates and long-term rates get closer -- what's known as a flattening yield curve -- banks' profits get squeezed.
Texas-based bank Amegy
Call me skeptical, but I just don't buy the banks' ostensible reason for merging. Zions and Amegy are regional banks, both exposed to yield curve risks. Combining the two does little if anything to curb those risks. In fairness, the two companies are probably stronger together than apart, but a flat yield curve would still be a powerful direct hit on their combined business.
The companies said they expect to reap an 18% cost reduction from the merger. I'm doubtful. If Amegy and Zions were a pair of superbanks standing to consolidate a lot of marketing expenses and benefit from easier cross-selling, I might believe them. But both are fairly small, and their markets don't seem to overlap much geographically. Plus, neither seems diversified enough to score huge marketing savings from easier cross-selling. Their regional separation makes management redundancies unlikely as well. Functions such as IT and human resources will likely bear the cost-savings brunt. I'm not so sure they can.
There's more. On April 1, Amegy executives signed new change-in-control agreements, giving them higher compensation if terminated "without good reason" upon completion of a merger. At today's 6.25% prime rate, the difference between the three years' discounted compensation executives formerly received and the three years' compensation they now get is about $694,000 before taxes. At 12%, it comes to somewhere around $1.2 million (again, before taxes). Given this, I doubt that Amegy's executives had much reason to fear a merger.
Keep in mind, however, that we don't yet know which employees, if any, will be let go -- or how the company might define "good reason."
Bank on this related Foolishness:
At the time of publication, Fool contributor Tom Taulli held no financial position in any company mentioned in this article.