JACKSONVILLE, Fla. -- In an industry where the strongest players are hungry to swallow their rivals whole, Barnett Banks Inc. is determined to stay off the menu.

In fact, Barnett would only consider selling if "the dadgummed [purchase] price was mind-boggling," says Allen L. Lastinger Jr., the company's president and chief operating officer.

Maybe so, but Barnett will have to work fast if it wants to avoid being served up for lunch. Though the company has a great franchise in its home state of Florida, it is still feeling the ill effects of the Florida real estate collapse.

Indeed, a troublesome 3.8% of its assets are classified as nonperforming. In addition, Barnett has the second-highest operating costs of any bank in its peer group.

To repair the damage, the company has launched an ambitious repair effort over the past 18 months. Management has been reorganized, credit controls tightened, technology operations centralized, and a new emphasis placed on loans to small businesses.

"We may have been a little tardy" getting started, concedes Mr. Lastinger. "But when this organization focuses on a mission, we can get it done pretty quickly."

Clearly, Mr. Lastinger and chairman and chief executive Charles E. Rice want Barnett, with its $32 billion in assets, to remain independent. And no takeover threat appears to be imminent.

One reason is that the most likely acquirers are busy elsewhere. NationsBank Corp. of Charlotte, N.C., is still preoccupied with melding its predecessor companies, NCNB Corp. and C&S/Sovran Corp. Meanwhile, SunTrust Banks Inc. of Atlanta and Wachovia Corp., Winston-Salem, N.C., are not likely to make a bid as long as Barnett's management insists on remaining independent.

|Period of Grace'

"It seems to me Barnett has a certain period of grace," said Richard I. Stillinger, banking analyst with Keefe, Bruyette & Woods Inc. in New York.

Barnett is trying to use that grace period to recover ground. In 1989, the company's earnings reached a peak of $257 million, for a 0.94% return on assets, culminating 14 years of consecutive quarterly earnings increases. Then the bottom fell out of Florida's real estate market, and Barnett's ROA slumped to 0.22% and 0.39% during the next two years.

The long slog back has been slow. By the second quarter of this year, ROA had climbed back to 0.66%, nearly double the year-ago quarter. But this level of profitability still lags behind those of Barnett's four super-regional peers.

A Rude Awakening

The ordeal shook up Barnett's management, which had grown accustomed to easy profits in an ever-growing market. "I would not characterize the last two years as enjoyable or fun," says Mr. Rice. "The recession, after 14 years of earnings increases, brought the reality that we're not bulletproof."

Mr. Lastinger's promotion, to president from vice chairman, in October 1990 was one of the earliest visible signs that Barnett had gotten the message. Unlike his predecessor, Albert D. Ernest, who began his career in the timber industry, Mr. Lastinger is a professional banker with retail and marketing expertise.

Affable and outgoing, in contrast to the more reserved Mr. Rice, Mr. Lastinger is widely credited with spurring Barnett to reexamine its most hollowed beliefs. Another spur was the Office of the Comptroller of the Currency, whose examiners complained about Barnett's fragmented credit quality controls.

In February 1991, the bank appointed its first "credit czar," or chief credit policy executive. Richard B. Jordan, formerly head of the company's northern region, arrived with a mandate to shake things up and a junkyard dog image. "He had a reputation as somebody who could collect money; he takes it personal," says chief financial officer Charles W. Newman.

The immediate problem was on the corporate side. Barnett runs a decentralized operation in which chief executives of the 33 subsidiary banks enjoy wide autonomy in making loans. A few of the larger banks, particularly in South Florida, had over-indulged in commercial real estate.

"We had gotten caught up, as had most of the other banks in the market, with a competitive feeding frenzy. We didn't want to lose customer relationships," Mr. Lastinger says.

Stricter Loan Review

Mr. Jordan's challenge was to centralize credit controls while preserving local autonomy at the individual banks. He implemented stricter policies for reviewing loans and brought some top-notch talent into what had been one of the company's sleepier divisions.

"You can't build a credit culture unless you have proper respect for the credit policy people," Mr. Jordan says.

But bank CEOs still have the final say on loan approvals, and Mr. Jordan admits that emphasizing credit quality is easier when business is slow. "The test will come when business heats up and everybody's trying to make the next deal. I don't intend to bend under the pressure," he vows.

To clean up the problems of the past, Mr. Jordan hired away Bob Miller from NationsBank in Texas to head Barnett's special assets or loan workout team. Mr. Miller brought several other NationsBank workout specialists with him last year to begin pruning away the forest of non-performing assets, an essential task in restoring earnings.

In the second quarter, Mr. Miller's team sold $36 million in foreclosed real estate, up from $30 million in the firt quarter. Mr. Jordan says Barnett has another $37 million under contract with a 75% chance of closing in the third quarter.

Controls on the Retail Side

Although Barnett's major problems had involved commercial real estate -- 40% of non-performing assets -- Mr. Jordan took advantage of his house-cleaning mandate to improve credit controls on the retail side as well. He installed new systems for monitoring the portfolios and promoted greater use of credit scoring.

Barnett's reorganization last year targeted production as well as loan quality. The company hired Douglas K. Freeman away from San Francisco-based Wells Fargo & Co. to head corporate lending. Mr. Freeman's current focus is to improve Barnett's share of Florida's small-business market, now only 11%.

The company also promoted Thomas P. Johnson Jr. to chief retail banking executive. Mr. Johnson, formerly head of the trust division, had come to Barnett from NCNB in 1985.

His current challenge is to promote better cross-selling in Barnett's branches. "With 600 offices, all you have to do is sell a few more services and you've got dramatic numbers," Mr. Johnson says.

Operations Centralized

Another big chance occurred in the technology area. Jonathan J. Palmer, formerly with American Express Co.'s Shearson Lehman Brothers unit, joined Barnett in July 1990 and became chief technology officer in early 1991.

Mr. Palmer's major innovation has been to strip technology operations out of the subsidiary banks and centralize them in a separate unit, Barnett Technologies Inc. In the process, he consolidated 30 data centers into three.

Mr. Palmer's work is key to Barnett's hopes of improving its efficiency ratio, which is currently 64.1%, the second highest among the southeastern super-regionals. An efficiency ratio measures the percentage of revenue used to cover operating expenses.

Underlying all these changes is a behind-the-scenes shift in Barnett's emphasis from volume to quality. Says Mr. Lastinger, "We have been in pursuit of market share for the past 20 to 25 years. Now it's time to strategically shift the focus to how we can create value in the future."

Bank Grew Along with Florida

The self-scrutiny began in 1990. While in the process of updating Barnett's annual strategic plan, Steven R. Settles Jr., director of corporate planning and development, matched data showing 25 years of Florida deposit and loan growth with Barnett's own growth in earnings per share.

He found the correlation "phenomenal." Both Barnett and the Florida market had grown at roughly a 15% compound rate over the period.

The implications were unsettling for Barnett: As the recession took hold in the Sunshine State, estimates of deposits and loan growth fell to an 8%-to-10% range over the next five years. Barnett could no longer maintain its customary growth rate just by building branches and buying banks.

Mr. Settles, a 1987 graduate of the Wharton School, next pulled together about seven years of historical data examining how the stock market valued various banks. He also quizzed his former employer, the OCC, about what the regulators like to see in banks.

Not surprisingly, Mr. Settles found that both the market and regulators valued good credit quality, strong capitalization, and diversification, and tended to value noninterest income over pure lending.

Capital-Raising Effort

When presented to Barnett's management committee in February 1991, Mr. Settles' "fortress banks report," as it's known within the company, prodded the top executives to launch a major effort to raise new capital. By the end of the second quarter, Tier 1 capital had reached 8.09%, up from 5.86% in the year-ago quarter.

But will all the improvements, Barnett has also sent some mixed messages to Wall Street that clouded the company's image. The departure of longtime chief financial officer Stephen A. Hansel in January raised suspicious of turmoil in Barnett's upper management.

Mr. Hansel, who took a job as chief executive officer of New Orleans-based Hibernia Corp. in March, declines to talk about his former employer except to say he considers Barnett "a great company with excellent management and a terrific franchise."

Then, on May 18, Barnett announced it had agreed to acquire Tampa-based First Florida Banks Inc. for $885 million in stock. Barnett's stock, then at $39.25, immediately tumbled more than $3 a share because of widespread concern that the $55-a-share purchase price was too steep.

Barnett's share only recently began to climb back to their pre-May 18 level. The stock was trading Friday afternoon at $37.875.

Bid May Have Been Too High

Barnett officials say their bid was designed to forestall a second round of negotiations. But the fact that First Union Corp., the next highest bidder, offered only about $37 a share suggests Barnett could have gone substantially lower and still been preemptive.

A source involved in the negotiations says Charlotte-based First Union would have been unlikely to raise its offer more than a few dollars per share.

To meet its goal of adding about 7 cents a share to earnings in 1993, Barnett must now reap substantial cost savings from the acquisition. Kidder, Peabody & Co. analyst Thaddeus W. Paluszek says Barnett will probably succeed in its objective, but considers this a "pyrrhic victory" since Barnett's earnings next year are expected to remain depressed from their 1989 peak.

The First Florida deal raised another, more fundamental question: Is Barnett wise to keep putting so many of its eggs in the Florida basket? Barnett executives respond: Where else can we go? None of the states bordering Florida are growing as fast, so how can Barnett pay a premium for a bank in, say Alabama, and generate enough earnings to recover the resulting dilution?

Barnett's one attempt at interstate expansion, into Georgia in the late 1980s, fared badly. Its Atlanta bank, which has $687 million in assets, lost $8.7 million last year, and another $76,000 in the first quarter, according to Sheshunoff Information Services Inc.

Mr. Lastinger says, long-term, Barnett must either "get bigger in Georgia or downsize," meaning sell the Atlanta bank.

Barnett's banks in Columbus and Brunswick, Ga., were profitable last year and represent a more natural extension of its Florida market.

"Our strategy is basically leveraging the franchise we've created in Florida," Mr. Lastinger says. "We can create diversification in Florida on a faster growth curve than we can find anywhere else in the country, other than maybe Texas or California."

Whether that strategy produces strong enough earnings to allow Barnett to remain independent remains to be seen. But Mr. Lastinger and other Barnett executives clearly believe there are worse places to be than Florida, which is likely to remain one of the country's fastest-growing states.

"It's kind of like being locked in heaven," Mr. Lastinger says.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.