It's been a rocky two years for Terry Larsen and the 18,000 surviving employees of CoreStates Financial Corp.
In September 1994, Mr. Larsen launched a reengineering program that cut employment by 20% and shuttered 10% of the branch network. Then came a highly controversial but ultimately aborted plan for the Philadelphia bank company to merge with Bank of Boston Corp. Capping the tumult, CoreStates agreed last October to buy Meridian Bancorp, its biggest purchase ever.
With Mr. Larsen and his team preoccupied with organizational issues, revenues at the $44 billion-asset company have flagged. For the first half of this year, interest and noninterest income together were virtually flat, while other top banks in the Northeast showed percentage gains in the high single digits.
"What we saw," the chief executive said, "was that we weren't losing any business but people didn't have time left for cold calling and soliciting new business."
"Now is the time to look for growth and move forward again," he added. Specifically, he is hoping systematically to tap the combined customer base of CoreStates and Meridian and to continue an expansion into processing businesses.
As it proceeds, CoreStates is addressing a challenge that has become increasingly common at large regional banks nationwide. After years of downsizing and mergers, they are finding that the quest for fresh sales has been knocked down on everyone's list of priorities.
In the era of constant consolidation, observers said, banks hoping to make it on their own must continually prove that they can produce solid internally generated revenue growth to match their drives for efficiency.
CoreStates' ability to meet this test is very much an open question, analysts said. In fact, many question whether the company is sufficiently committed to building revenue internally, given its recent focus on generating 10% annualized earnings growth mainly through cost reductions.
Said Katrina Blecher of Gruntal & Co.: "There has to be more to a bank's story than cost-cutting."
Certainly, the prospects for internal growth aren't helped by the slow- growing economy of CoreStates' home market: eastern Pennsylvania, central New Jersey, and Delaware.
And competition is only getting stiffer. First Union Corp. entered CoreStates' hunting grounds this year, filling out a field that includes Pittsburgh's PNC Bank Corp. and Mellon Bank Corp. First Union, based in Charlotte, N.C., is using its acquisition of New Jersey's First Fidelity Bancorp. as a launching pad for a variety of popular consumer and middle- market lending services.
"CoreStates now has a very formidable competitor," said Lori Appelbaum, an analyst at Goldman, Sachs & Co. "First Union has a strong sales culture and product set."
While the challenges are daunting, CoreStates has earned its stripes as a survivor.
Perhaps most notable are its achievements in efficiency. During the past two years, the bank has used a reengineering program and merger-connected consolidation to improve its efficiency ratio - measured as noninterest expense divided by revenues - from 63% at the end of 1994 to 54% in the second quarter of this year, more than four percentage points better than Goldman Sachs' superregional average.
Largely as a result of this, the company has been able to post solid returns despite the sluggish revenue growth. In its second quarter, CoreStates' operating return on equity was 20.2%, almost four percentage points more than the Goldman Sachs average. Return on assets was 1.78%, compared with 1.45% for the superregional group.
While the company might lack the marketing pizzazz of a First Union, KeyCorp, or Norwest Corp., it is respected for its stable management team and a highly disciplined credit culture that helped the institution escape the loan-loss woes that befell many banks in the late 1980s and early 1990s.
"The riskiness of every dollar of reported earnings at CoreStates is less than the typical bank," said Michael Mayo, an analyst at Lehman Brothers.
Mr. Larsen, a 50-year-old Chicagoan, is the very embodiment of his sober-minded institution. An economist with a doctorate from Texas A&M, he is an unassuming man with a balding pate, a paunch, and friendly blue eyes.
Not comfortable with weaving grand visions for his company's future, he speaks carefully and is reluctant to make predictions other than to say, "We see the ability to outperform the industry in terms of long-term earnings growth."
Mindful of Wall Street's insistence on revenue growth, Mr. Larsen is hoping that the complementary strengths of CoreStates and Meridian will contribute to sales growth from the combined customer base.
"For example," he said, "Meridian was a limited provider of cash management services, but we deliver cash management services to that customer base. On the other hand, Meridian is quite strong in trust and investment management."
He said he is also excited about the growth prospects of the company's three processing businesses - lockbox, credit cards, and check processing - given the industry's trend toward outsourcing these services. And he is also interesting in acquiring more businesses in this area.
"We are always in the market" for third-party processors, he said. "They are usually small and allow for tremendous leveraging."
Given its generally understated culture, CoreStates' talks in July 1995 about a "merger of equals" with Bank of Boston surprised some people.
Though CoreStates executives contended at the time that the deal fell apart when the bank recognized that certain synergies wouldn't be realized, it didn't help matters that Bank of Boston shareholders revolted publicly when it become apparent they wouldn't get a takeover premium.
CoreStates' announcement three months later that it would acquire $15 billion-asset Meridian for $3.2 billion struck observers as far more sensible, given the opportunities for branch consolidation.
While CoreStates has made itself less acquirable now that it's 50% larger, it still looms as a potential target for a larger East Coast or Midwest bank company.
But analysts said they believe CoreStates is more likely to be an acquirer than an acquiree, at least in the next two to three years.
At some point, they said, "fill-in" acquisitions will be made to bolster market share and economies of scale. Possible targets include Summit Bancorp, Wilmington Trust, and a host of smaller banks and thrifts in southern New Jersey and eastern Pennsylvania.
But Mr. Larsen said acquiring a bank now is in "a relatively low position in terms of planning and priorities. We think that growing with our existing customers comes first."
Ms. Appelbaum of Goldman, for one, is inclined to believe him. "This bank has been through a lot," she said.
