When First Union Corp. spent $20 billion to buy CoreStates Financial Corp. of Philadelphia in April 1998, CoreStates customer Jay Ranalli had some unpleasant surprises.

Mr. Ranalli is co-owner of Broudy Precision Equipment Co., a West Conshohocken, Pa., climate-control supply company that had had a 20-year relationship with CoreStates. After First Union took over, Broudy, a company with 30 employees, went through four loan officers in three months.

"A number of them we never met," said the 44-year-old Mr. Ranalli. The officers would call Broudy to plan visits but were replaced before they could make the trips.

Though Broudy had business accounts, a line of credit, and personal loans for the company's officers at First Union, "they had no clue who we were," Mr. Ranalli said.

In the end it was First Union that suffered. Broudy switched to Pittsburgh-based PNC Bank Corp. PNC bankers got to know Mr. Ranalli's company, he said. "PNC didn't just want a customer, they wanted Broudy Precision Equipment as a customer."

Multiplying Mr. Ranalli's experience many times over explains why First Union has been hurting. Its stock has fallen 23% this year, and it has lowered its earnings estimates twice.

The Charlotte, N.C., banking company admits it has had difficulty integrating CoreStates and implementing the new consumer banking approach that it dubbed Future Bank.

"First Union has faced certain challenges over the past year and a half, with the integration of several mergers and the implementation of Future Bank across our entire geographic region," the company said in written response to questions for this article. However, "we are confident in CoreStates and the Future Bank initiative and are pleased with the success they've achieved thus far."

Between the takeover in April 1998 and the end of last year, First Union lost 19% of CoreStates' customers, who took 9% of CoreStates' deposits and 14% of its loans with them.

"They lost one out of five customers," said Peter Kuper, a bank analyst at Keefe, Bruyette & Woods Inc. "That's a clear sign of just how poorly things went."

In response, the bank said volume of its so-called consumer direct, prime equity, and small-business loans soared in the first six months of 1999 to $1.2 billion, 52% more than in the first half of last year.

Still, the deposit drain has hurt First Union's earnings power.

In CoreStates, First Union was buying "a customer base," said Lawrence Cohn, an analyst at Ryan, Beck & Co. in Livingston, N.J. "And by giving up that many customers, the value of what they bought has diminished."

First Union saw total deposits drop 3% in the 12 months through June 30, to $134.5 billion. Its profits for the second quarter fell 1%, $873 million.

First Union's troubles come after an aggressive acquisition spree that increased assets to $224 billion, from $73 billion in 1994.

The North Carolina institution was confident-some analysts say too confident-in its ability to acquire and digest CoreStates. It failed to grasp the difficulties of acquiring the largest bank in Philadelphia, which had a strong, touchy-feely culture that contrasted with First Union's Darwinian style of management.

So confident was First Union, it continued implementing the Future Bank program despite the CoreStates challenge.

Future Bank was a much-ballyhooed strategy designed to move branch employees away from dealing with such mundane tasks as handling deposits, withdrawals, and basic loan applications. It focused branch employees more on selling lucrative products, such as investments, insurance, and home equity loans. When customers entered a branch seeking help, they were sent to telephone kiosks to get their answers.

"CoreStates had a labor-intensive, high-cost, high-touch kind of branch system," said Ryan Beck's Mr. Cohn. "First Union is attempting to build a lower-cost branch setup, moving a lot of operations to call centers. The cost of doing that was losing their customer base."

Among those sopping up disgruntled customers is Sovereign Bancorp of Wyomissing, Pa. After the merger, Sovereign bought 93 CoreStates branches and it continues to woo former customers, said Patrick Canfield, head of Sovereign branches in Philadelphia and Delaware.

"By calling these customers at a time when they aren't perceiving a high level of customer service at First Union, they're eager to come over," Mr. Canfield said.

Former CoreStates employees were frustrated too. After the merger, First Union replaced branches' head tellers with "teller coordinators," who each oversaw five branches, according to a former manager who left the company this year.

But, says the former manager, giving more responsibility to individual tellers in the former CoreStates branches did not work out. Managers of those branches claimed that tellers needed to report to an authority figure.

First Union apparently came to a similar conclusion. In a retooling effort, First Union has reinstituted the head teller position in branches.

It also is adding 2,000 tellers. That may help improve its relations with customers, but also could make it more difficult for First Union to fulfill a promise to pare $400 million in costs.

As part of that cost-cutting effort, First Union said in March that it would cut 5,800 jobs. Hiring the new tellers will reduce the savings by $80 million to $100 million, said Keefe Bruyette's Mr. Kuper. "The Future Bank initiative isn't working," he concluded.

Yet the pains of implementing Future Bank continue. "First Union just tries to ram this through," said Mr. Kuper. "They were ripping out computers installed one to two months earlier."

The former CoreStates manager said she witnessed a drop in morale as First Union tried to instill its sales culture.

"It was put to us this way: If you don't reach your goals, you get fired," this source said. The approach jolted CoreStates workers.

"What First Union found up here was that their goals were not realistic," the former manager said. "Otherwise, they would have fired everyone."

In response, the bank said: "In any job, employees are required to meet goals and are given a time frame in which to do so. The Future Bank model has increased (employees') time to sell and spend with customers in the branch from 20% to 80%."

Nonetheless, the former manager said, many CoreStates employees became disenchanted, and their attitudes affected the service they provided to customers.

"CoreStates people were concerned about their jobs, not worried about their customers," said the disenchanted ex-customer, Mr. Ranalli. "Their whole level of service was slipping."

Compounding the bank's problems were typical merger snafus. Mr. Ranalli said First Union mistakenly closed one of his company's accounts. The bank also lost three or four days' worth of Broudy Precision Equipment's deposits, he said. "They were going into limbo somewhere; it took weeks for them to figure out what was going on."

In another example, the former manager said leads generated by computer had different employees calling up the same person repeatedly.

First Union says the Future Bank initiative is working and has defenders who say the talk about deposit loss might be overblown.

"It's nothing too alarming," said Claire Percarpio, an analyst for Janney Montgomery Scott Inc. in Philadelphia. She said about 50% of deposits change banks every two years.

Michael Ancell, an analyst at Edward Jones & Co. in St. Louis, says First Union's 9% deposit loss compares favorably to the 10% to 12% runoff that is typical in bank mergers.

Saul Behar, a lawyer for Pep Boys-Manny, Moe & Jack in Philadelphia, remains with First Union. He says he likes the far-reaching swath of automated teller machines available without a surcharge.

"I can go to First Union anywhere on the East Coast and not pay an ATM fee," Mr. Behar said. "I'm not looking for a personal banker."

The jury is out as to whether First Union will overcome its difficulties absorbing CoreStates, analysts say. In addition to the hiring plan, "they are trying to improve employee training and enhance marketing and public relations in the CoreStates area," Mr. Ancell said. "It's too early to tell if they will be successful. So far they haven't been."

But to Mr. Ancell, who has a "strong buy" on First Union, the glass is half full. Investors cannot lose, he believes, because the bank either will improve its earnings or be sold.

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