If knowledge is power, Barnett Banks Inc. is about to exert some serious muscle against its competitors in Florida.

Jacksonville-based Barnett, the Sunshine State's largest bank, recently began supplying its line personnel with a depth of customer information that ranks among the best in the industry. Using the enhanced customer- information system, Barnett tellers and loan officers can examine balances, transactions, and profitability ratings for each account.

Working from a list of their 10 most profitable customers, Barnett branch officers are now able to concentrate on retaining those relationships, a critical advantage in an industry where 5% to 10% of customers contribute 90% of retail profits.

The bank's marketing staff, meanwhile, will soon have enough seasoned data to devise strategies for steering marginal customers into cheaper alternative delivery channels, such as ATMs, telephones, and supermarket branches.

Barnett president and chief operating officer Allen L. Lastinger Jr. says he expects that these technological advances, combined with a lower- cost distribution system, will boost the bank's future earnings above peer levels and help it to remain independent.

The industry will be watching with keen interest, since Barnett, with $41.6 billion of assets, is regarded as one of the most attractive acquisition targets left.

At the same time, few banks have invested as much money and effort building customer information files and alternative delivery channels as Barnett has over the last five years. If knowledge is truly power, then Barnett may help set the pace for the industry.

In a recent interview, Mr. Lastinger, 53, said Barnett would eschew out- of-market bank acquisitions, but will continue to look for opportunities in three business lines: mortgages, consumer finance, and indirect auto. He also said Barnett might consider other strategic alliances like the one involving mortgage servicing it recently signed with Bank of Boston Corp.

Mr. Lastinger cited mutual funds as one area where a strategic alliance might make sense.


Are you still committed to the Florida-only strategy for your banking franchise?

LASTINGER: For the foreseeable future, the answer is yes. Right now, there are three dynamics that don't work in our favor to expand outside of our current market. One is just the relative growth dynamics. Florida continues to be a very, very attractive market and is much better than any other market in the Southeast.

Secondly, we are seeing a maturing of our major revenue stream, the net interest spread. In a lot of areas around the country you're seeing net interest spreads contracting. So if we buy a bank outside of Florida and it looks like 95% of the banks around the country, it will be heavily dependent on a mature revenue stream.

The third negative is the distribution system. If we were to go into another market today, would we want to be encumbered by the brick-and- mortar branches? Wouldn't it be much more efficient and as effective in a few years to go into supermarkets or into interactive TV or something like that?

We have not figured out how you pay the premiums that are being demanded by banks to get into slow-growth markets with a mature revenue stream and mature distribution system.

I see where, as an industry, we're kind of at a crossroads in terms of strategic direction. I would classify one road as the bank acquisition/cost rationalization strategy, where you try to create economies of scale and focus mainly on eliminating redundancies and reducing cost. If this strategy is pursued without investing in new revenue-generating capabilities, you're on a dead-end street.

The other road is to use the new advances in technology, information, management systems, and marketing to develop a revenue-generating capability that will be sustainable. That's really what we've decided to do. And we think that's more viable long-term than the cost rationalization strategy.

I think there are companies that can do both successfully. But at the end of the day, you're going to have to have new revenue-generating capabilities, whether you're big, medium size, or small.

How will your enhanced customer information system, which now tracks profitability, help generate those new revenues?

LASTINGER: Fundamentally we are at a point where we can understand what products a customer has, where and how often they access the bank, and what their contribution is to profitability. And we have that on a monthly basis.

That's the good news. The bad news is that we only have four months of that information. So we are not about to make any major strategic, pricing, or product decisions until the information has been seasoned a little bit.

We've got the capacity. We've got the information. We don't have the insights yet because we don't want to come to premature and potentially false conclusions.

When will you see some earnings impact from this technology?

LASTINGER: I think we're seeing the earnings impact now. For example, the information that we get is being used to better target business solicitation mailings. We have a better idea of who is likely to buy a certain product now. We improved one of our mailing outcomes by about 40% by using the information.

We're also able to provide our office managers with a list of their 10 most profitable customers. This is important because of the retention need. You may not see a profit contribution, but we may be avoiding attrition by spending more time with these very profitable customers.

We're also able to identify what I call the "abusers" of our distribution system and try to figure out some form of intervention to change that behavior.

How do you shift people from using branches to alternative delivery like ATMs in a way that doesn't punish them?

LASTINGER: Alternatives. Alternative product lines and alternative pricing schemes. You can do this in a way that changes behavior without being punitive.

Now having said all that, you're probably going to lose some customers.

When you have a mature business, you respond to the market. We need to be more efficient and we need to know more about our markets and our customers so we can meet or exceed the value propositions being offered by nonbank competitors.

While we have 27% of the bank deposits in Florida, and probably an equal share of the bank loans, we have only about 8% or 9% of what people spend on financial services in Florida.

Any chance of Barnett going out and buying a big mutual fund company?

LASTINGER: Not at today's prices. It's a huge, huge business in terms of dollars under management. But if you work that down to the bottom line, it's relatively insignificant. It takes multibillions of funds under management to make a meaningful impact on a company in terms of what Barnett earns.

You still have 600 branches. When can you begin a radical pruning of that network?

LASTINGER: There's a broad range of alternatives relating to distribution. I know that somewhere in between the full-service branch and the ATM and telephone is the right answer.

One of the alternatives we're developing is the Publix supermarket branches. If we have convenience at a place the customer is going anyway, we think that will work to our advantage. To the extent that we expand through Publix, we'll probably reconfigure simultaneously our branch network.

We've also thought about different configurations for our offices. To the extent that we have additional space that we don't need, what would make sense? Maybe it would be a Barnes & Noble bookstore, or a Blockbuster Video. I don't know. We're thinking about how we generate traffic in proximity to where we have offices.

With all the improvements you've made in recent years, do you feel safe now, or bulletproof in regard to a takeover?

LASTINGER: Never bulletproof. And I'm not sure 'safe' is the right word, either. We will do whatever is in the best interests of shareholders.

We continue to think, however, that we can create more value as an independent company. If we develop a strategy and execute it well, there's no reason in the world that we can't grow our earnings faster than the industry. That, at some point, should be reflected in a premium multiple.

Right now, if you compare Barnett with the top 50 banks, we have a below-average P/E, which to me represents a buying opportunity. What we're doing is laying the foundation for a much stronger stream of earnings than the industry can produce.

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