Pa. Bank Sees Opportunity in CoreStates Sale

Charles H. Meacham silently cheered when the takeover rumors about CoreStates Financial Corp. finally came true.

Then Mr. Meacham, chairman and chief executive of $2.3 billion-asset Commonwealth Bancorp, began plotting how to steal his big-bank rival's customers.

Though $144 billion-asset First Union will be tough to beat, Mr. Meacham is bent on making the consolidation craze work to Commonwealth's advantage.

"Our strategy is to serve the Philadelphia metro area," Mr. Meacham said in an interview. "We know that market and we know it well. We can also deliver better-quality service than large banks like First Union and Mellon."

Problems with an acquisition and internal expansion have dragged down Commonwealth's earnings in recent years. Still, the thrift company, with 57 branches in seven southeastern Pennsylvania counties, will be the largest locally owned financial institution once the CoreStates deal closes in April.

His window of opportunity on the First Union merger is narrow; Mr. Meacham estimates he has just over a year. To beat the clock, Commonwealth has increased its marketing budget to $2 million this year-a 30% jump from 1997.

"The biggest threat is their marketing clout. They're going to be able to develop the type of brand identity that we're never going to be able to develop," said Commonwealth president Pa-trick J. Ward.

That limitation, combined with an inability to match larger banks' price and product offerings, has forced many institutions of Commonwealth's size to sell. Indeed, several analysts wonder whether Commonwealth can remain independent.

But Mr. Meacham said he sees the thrift's middle-of-the-pack position as an asset.

Commonwealth is small enough to offer business customers one-on-one service, and large enough to offer a varied product mix, including access to 2,000 mutual funds, he said.

Analysts applaud Mr. Meacham for launching a preemptive strike. "For them it's an opportunity to pick up incremental business," said Marni Pont O'Doherty, a vice president at Keefe Bruyette & Woods in New York. "If they can pick up just 10 $2 million relationships, it would be very helpful to them."

Ms. Pont said Commonwealth is going to have to engage in some "blocking and tackling" to catch the fallout from the First Union merger. "You go after the accounts that you might have tried before," she said. "There's always some movement of accounts when there's an acquisition. Start knocking on doors."

Mr. Meacham said his commercial lending officers are already on the job.

"We believe there's going to be a shakeout of loans below $1 million," Mr. Meacham said. "Those loans are going to be handled by '800' numbers out of North Carolina."

He contrasts that with Commonwealth's typical face-to-face meetings with small-business owners. The thrift does not use credit scoring. And on most days, Mr. Meacham and Mr. Ward take small-business customers out for lunch.

First Union is hardly running scared. Robert L. Reid, executive vice president and general bank group head for First Union's Atlantic division, said his small-business customers have the option of dealing with their banker in person, via a toll-free telephone call, or by computer.

"In terms of our ability to compete with the small local guy, we feel real good about being able to stack up against that competition," Mr. Reid said. "We welcome Commonwealth's competition, but we're frankly not concerned about it."

Even without the potential business from the CoreStates merger, Commonwealth was already pursuing a growth strategy, opening 17 supermarket branches in the past three years. Another three are expected to open this year.

In 1996, Commonwealth, headquartered in gritty, industrial Norristown, just north of Philadelphia, bought 12 branches that were divested in CoreStates' acquisition of Reading, Pa.-based Meridian Bancorp. The acquisition brought Commonwealth $379.7 million of deposits and $122.4 million of single-family residential, commercial, and consumer loans.

The deal also helped Commonwealth become more bank-like. Predominantly a mortgage lender, the thrift used the new loans to bolster its fledgling commercial loan department.

Commonwealth's purchase was not without its problems, however. Commonwealth is suing CoreStates, alleging that a snafu with ATM cards issued to former Meridian branch customers caused many of them to switch banks.

"We certainly lost customers as the result," Mr. Meacham said. "We've had to work very hard at recovery, rather than just maintaining."

CoreStates and First Union officials refused to discuss the pending lawsuit. Commonwealth did not specify how much it is seeking in damages.

The transition has hit earnings, too. As of Sept. 30, Commonwealth had a 7.56% return on equity and a 0.73% return on assets.

Glitches in the supermarket expansion were a $2 million drag on earnings last year. Employees were turning over at a high rate, and Commonwealth realized it was not hiring the right people. The thrift now uses personality profile tests to determine if potential branch employees have a knack for sales.

Mr. Meacham said the pains of building the supermarket branch network were worth it because it gave Commonwealth a fast, cheap way to expand its branch system. "We could see a distribution disadvantage to the large banks," he said. "We needed to have more locations and have more branches quickly."

Several analysts agreed and said they expect Commonwealth's supermarket investment to pay off within the next two years.

"I'd say Commonwealth has a pretty good grasp as to what's required to run these supermarket branches in a profitable manner," said John M. Kline, associate director of Sandler O'Neill & Partners in New York. "It's kind of been a learning curve for them. As they've gone on, they've learned more and more."

"I think they have a darn good chance of making it work," concurred Don Kauth, a bank analyst at BT Alex. Brown in New York.

Mr. Ward and Mr. Meacham said it is payback time for shareholders.

"We sacrificed near-term earnings for long-term success," Mr. Ward said. "We want to stick around to make all the changes work."

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER