As Chemical Banking Corp. approaches the six-mont anniversary lof its merger with Manufacturers Hanover, progress reports have been almost universally glowing. Earnings and expense savings are greater than expected, and the company's credit rating is rising.

Now the merger is entering its second crucial stage: The systems integration of its two lead bank subsidiaries occurs on Friday. Chemical must convince consumers and business owners in New York that it can continue to serve them even as it closes some 80 branches over the next few years. It also must continue to find a way to convince employees to accept a new culture that it maintains will integrate the best of both organizations.

Total integration of the 653 branches in the system - including location, marketing, and advertising - will not be completed for several more months.

"This is where you eithe make the thing work operationally or you screw up customer relationships to a fare-thee-well," said John Leonard, an analyst, at Salomon Brothers Inc. "This is where you get to the meat of the merger."

Chemical is downplaying the merger of the lead banks, saying customers will not notice any changes. But bank executives are clearly anxious, admitting that the real test will come this fall when the brand closings begin.

Though shuttering some 80 branches is the key to overall expense reduction this year, Chemical worries that angry customers can easily take their business elsewhere if a branch closer or their friendly loan officer leaves.

Sales Blitz

According to an internal merger update paper, "nurturing existing customer relationships is critical during the transition."

To date, Chemical has forcused on retaining its middle-market and small-business customers, many of whom deal with the branches. It conducted a number of well-publicized calling blitzes where salespeople - occasionally accompanied by top bank executive - visit business customers.

"They're showing their faces," said the owner of a downton Manhattan market research firm that has $1 million in annual sales. It was the first time a Chemical employee ever set foot in this firm's office.

"It was nice, but neither one of the people who come could approve my loan," said the executive who is applying for a new line of revolving credit. "It always has to go up to the next guy."

Delicate Balancing Act

Some rival bankers, however, say they have been disappointed in courting Chemical's small-business customers.

They may find it easier to steal retial customers. Chemical executives concede that closing the branches will be a delicate balancing Act. But they claim to be confident the right decisions will be made.

"The branch system was built on convenience," Chemical chairman John F. McGillicuddy said in a recent speech. The cost of maintaining a big brick-and-mortar franchise, he said, is too high "in this low-rate environment" when the bank should be investing in alternative methods of distribution, such as electronic banking.

Coping with Employee Morale

When it comes to managing employees, the bank is facing even thornier issues.

More than 2,000 Chemical bankers in the past three months have accepted an early retirement program, part of a mass exodus through layoffs and attritions that thus far has affected 5,073 staffers.

Remaining employees, meanwhile, must cope with the strain of learning a new corporate culture - for Chemical executives insists that one is being created

It is perferable, they say, to having either Hanover or the old Chemical dictate an operational style.

That sounds equitable, but experts say the approach is the most difficult post-merger managerial path to follow.

Problem of |Blended Approach'

"It's the worst way" to do a merger, said K. Palmer Hartl, a Philadephia-based independent consultant in organizational and management development. "When you try a blended approach, then no one knows the culture, and it takes an awful long time to build one."

Mr. Hartl, a former executive at Corestate Financial Corp., surveyed several thousand employees at a bank that obsorbed several other companies over 18 months, and found that "blended culture" mergers led to the lowest employee satisfaction levels. But when a dominant culture prevailed, satisfaction levels rose.

Evidence of the theory's validity can be found in Bank of New York Co.'s takover of Irving Trust Co., experts said. It will be further tested in BankAmerica Corp.'s acquisition of Security Pacific Corp., where the former's culture is clearly dominant.

The question of how things will run at Chemical continues to be the No. 1 concern among employees, according to a former senior manager who left the company earlier this year.

Back-Office Dominance

"There's a lot of stumbling around and learning what has to go on," he said, speaking on the condition of anonymity.

A retail banking officer from the Hanover branch of the family demurs. "People are getting to know each other," he said, "and, from where I sit, thing are really jelling,"

Some of his confidence may come from the fact that one culture does appear dominant in the retail back office. Hanover's managers and systems are prevailing in the retail banking organization.

Chemicals's top management admit that the creation of a new culture continues to be an issue affecting the merger's success.

"The level of pressure brought on the people and how you deal with it - that's one issue that concerns me," said Edward D. Miller, a Chemical vice chairman." "Is the morale throughout the organizations as vibrant as mine is? Obviously not."

Easing the Pain

It is no mystery, Mr. Miller said, that people may find it hard to concentrate when they know Chemical plans to close some 80 branches that are not yet identified.

But the executive, who was formerly Hanover's senior retail banker, insists that the culture blending machine is working

"Given what we're going through, the morale in our organization is better than a lot of others that are going through the same things," he said.

Indeed insiders and outsiders said Chemical for the most part has been admirably straignforward about communicating its plans and easing the pain of leaving.

When the merger was announced in July 1991, the bank quickly came forward to say that 6,200 positions would be eliminated.

Management has kept employees abreast of the status and goals of the merger through memos, meeting and videous, Mr. Miller said.

The early retirement program. which offered bonuses as well as the fruits of a benefits plan that is being scaled back for remaining employees, also has minimized the pain for many who left, Mr. Miller said.

"We have a lot of happy people in the early-out programs," he said.

In addition to the early retirees, 2,985 employees have left Chemical since the merger About half were laid off, while the others resigned or retired and were not replaced, a bank spokesman said.

Mr. McGillicuddy recently opined that the early retirement program will allow the bank to reach its head-count reduction goal without doing more layoffs.

"The remainder of the staff reductions can probably be handled through attrition," he said.

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