Is Banc One Corp. changing it stripes? Recent cost-cutting initiatives have been perceived by some as the company's first step toward consolidation.

Not so, says John B. McCoy. "We are a super community bank. We are not in the business of making $100 million loans. Our customer is the guy at the hardware store who needs a $100,000 loan. And we believe in decentralization of decision-making at the local level. It works for us; that's how we compete with centralized institutions."

While decentralization is an important component of Banc One's strategy, it should not be applied to every aspect of the company, says McCoy.

Consistent with the super community banking philosophy, certain businesses and operations offer compelling economies of scale that enhance, not detract, from customer service levels.

Investment management data processing, compliance, mortgage banking, and capital markets activities are all examples of bank businesses where larger is better and more profitable.

Super community banks have been searching for the fight balance between centralization and decentralization, recognizing the cost and control benefits of centralization but weary of the potential damage to local decision-making and entrepreneurship. Banc One continuously evaluates where the company is on the continuum.

"The question is where you are on the curve. We have historically been a highly decentralized organization. Our lending, for example, was done on a very decentralized basis, including businesses such as auto loans and mortgages," says McCoy.

Other successful super community banks, such as First Security and First Virginia Banks, elected to centralize their auto loan underwriting and, in the process, enhanced turnaround time and asset quality. They maintained local relationship, management and distribution, yet centralized customer-transparent components of the lending process.

It appears that Banc One is moving toward that model from the highly self-contained model that they have successfully executed tO date. "It doesn't make sense to run 81 separate securities companies or mortgage companies," says McCoy. "Reality has changed our way. New products have changed our way."

Banc One management, like other industry participants, has observed the changing profitability dynamics of the banking business. "A remarkable change has happened in our business. For a long time, the small bank had better returns than the larger ones. That has changed. In our company the most profitable banks are over $1 billion. We asked ourselves, why aren't the smaller banks as successful as they used to be?"

That question is asked by hundreds of community bank chief executives every day.

Banc One's management believes that a combination of factors contributed to the declining profitability of small banks relative to bigger ones. Low rates reduced the profitability of deposit products and created pressure on earnings. That pressure was compounded by the nonbank banks and their full-product-line approach to the customer.

"Competition and the product line are more sophisticated than ever before," says McCoy. "For example, at any one time our mortgage company has over 30 products to offer."

A small bank cannot market such variety and specialization. A number of smaller banks within the Banc One 81-bank family told McCoy earlier this year that they could not maintain their annual 10%-plus earnings increase. Natural consolidation was the answer.

"We consolidated some of our small banks. While they all retain their presidents and maintain advisory boards, they now have a lower cost base and more product to sell," says McCoy. He further explains: "We've never had a problem, so we never had to do dastardly things. At the same time, implementing appropriate scale for our banks presented us with wonderful opportunities."

The issue of scale in banking has been debated without resolution for some time.

What is big enough yet not too big? I asked. "I am not sure there is one universal answer," McCoy replied. "For example, Arizona is a one-bank state for us. We bought it that way, and it works. Ohio, on the other hand, has 28 banks and needs to consolidate to some degree to achieve appropriate mass. In some markets, we have already implemented partial consolidation, such as the Colorado market, where 28 banks were clustered into six institutions." It appears that the market dictates Banc One's consolidation rather than a predetermined target size.

One of Banc One's crown jewels is its fabled management information reporting system. What will become of that, now that banks will be consolidated? Will the famous ratio listings be eliminated? Not so, says McCoy. "We'll still measure companies by market. We're not going to change the system. We will continue to account for everything the same way to ensure that we compare apples to apples. Individual markets will continue to be most important to us. At the same time, Arizona taught us that we can have one statewide company and still get the same community orientation." Banc one will now base its management information on market identity instead of legal entities.

What Banc One has set out to do has been executed in many successful super community banks. It does not signal a departure from the company's original philosophy but rather its refinement.

The balancing act between centralization and decentralization is ongoing, and the fight place for each company varies in different points in time.

For Banc one, the time has come to move along this curve more toward consolidation. Other super community banks need to continuously evaluate their position on that curve as well, recognizing the importance of cost efficiencies and freeing line people to serve the customer, while ensuring that centralization does not strip staff of local autonomy and decision-making capability.

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