Too many of the recent bank mergers have been driven by the wrong reasons, primarily financial ones rather than ones tied to strategy. These deals are poorly thought out and poorly funded, or based on questionable assumptions by investment bankers, lawyers, and even some bank chief executive officers.

Historical and empirical evidence suggests that the larger a bank gets, the more it becomes unmanageable, creatively in-bred, and slow to react to changing customer needs. Economies of scale and synergies are usually talked about in justifying the mergers, but few are realized.

What is usually achieved is a short-term boost in earnings due to massive personnel cuts, branch closings, and removal of competition, with the resultant ability to raise prices. Among all the hype in the merger reports, few speak of reinventing the merged bank to increase revenues, introduce new products, or apply cost-saving technology.

Were there true strategic reasons behind the First Union-First Fidelity or KeyCorp-Society mergers, which are seen as reshaping the banking landscape? Perhaps the more relevant question is, what is to become of the midsize regional banks that were often overshadowed by the megamerger phenomenon?

In fact, the midsize banks and thrifts continue to thrive, and data compiled by my firm on 36 such institutions indicate that the superior ones have a bright future. Even those with average performance records can succeed if they emulate the better performers' repositioning strategies and business practices.

For example:

*The return on assets of superior midsize banks increased by a dramatic 43% between the 1991-92 and 1993-94 periods. Return on capital rose 12%, and employee productivity - revenue per employee - soared 160%. Meanwhile, the aggregate nonperforming asset ratio fell 37%.

*Average performers held reasonably steady between those periods in terms of ROA and ROC, employee productivity rose 46%, and nonperformers declined 14%.

*Technology expenses were up 277% at the superior performers, to 2% of assets; and 114% at the average banks, to 0.6%.

Most midsize banks, however, are lookalike institutions. Those that will be successful as the industry evolves will be characterized by increased differentiation in terms of product mix, delivery systems, earnings growth and profit potential, and capital utilization. Focus, not size, will be the hallmark.

Midsize, multi-unit banks can best their competitors by operating as a partnership of smaller, more focused, autonomous affiliates or subsidiaries. Managers of such independent profit centers will automatically strive for, and achieve, superior results. TCF Financial Corp. is an excellent example of this strategy.

The successful midsize bank will position itself for success by slimming down to a few well-defined business lines - the 10% or 15% that they do best. Then they will expand on that 10% to 15%, which is based on historical or acquired strengths, and continue improving productivity and innovation for enhanced profits.

An alternative strategy is to become a niche player, for example, specializing in venture-supported, start-up technology companies or emerging industries, as Silicon Valley Bank in California did. With expertise in chosen niches, banks can manage risks better, offer greater value to customers, and in turn charge premium prices and earn superior profits.

A third, more evolutionary option, and probably the least risky one, is to remain a community-based bank - with the key difference of focusing on one or two niches that might yield 70% of profits. Examples might be technology-based or consultative services to smaller banks or nonbanks, as in credit card or mutual fund processing, management training, or Internet banking. One company in the last category is Security First Network Bank, a unit of Cardinal Bancshares in Kentucky.

Trying to be all things to all people will be disastrous for midsize banks. The megabanks are an object lesson in this regard.

Banks that triple or quadruple in size within a short period of time will not necessarily outgrow the business philosophy upon which they originally were built. They will possess neither the talent nor high-level management strength to take the actions required to change their policies and cope with the new realities.

For continued success, they will need a new definition of their mission, a set of core competencies. The net outcome will be the failures of some of these megabanks in the next four to five years.

Hence, for the alert midsize banks that are not the lemmings of this merger craze, this will be an opportune time to pick up the pieces of the megabanks' problems at bargain-basement prices.

There is a place for thoughtful, well-planned mergers, those that search for real versus illusory value. They will succeed when a bank buys another to fill a void in its markets, to strengthen or expand a core product line, to extend its geographic reach, or to leverage the capabilities of an acquired bank in special niches, systems, or processes.

I can boil down the midsize banks' success factors to these:

*Quality at the top, with the ability to manage change, a willingness to take calculated risks, and an emphasis on focus.

*Fanatic attention to profit and risk measurements, including a clear understanding of product costs and per-customer profitability.

*Managers who are treated as - and work together like - partners.

*Strong sales culture comparable to that of a retailing organization, with a reliance on technology to reduce costs, identify prospects, and enhance sales.

*A reconfigured delivery system that relies increasingly on nontraditional and electronic channels, as in loans by phone or fax, telebanking and other self-service methods, and advanced card technologies.

*Greater emphasis on credit quality than on asset growth.

*Greater emphasis on execution - and on the ability to accomplish goals quickly - than on mere plans and vision.

*A work force hired for its commitment and cohesiveness, and paid for its performance.

*A long-term commitment to training and staff development.

Our studies reveal that many employees lack yesterday's loyalty, due to the industry's bulking up and the consequent dislocations. Senior management attitudes will trickle down in an organization, and the front- line people will then pass them on to customers.

The well-treated employee will make a transaction a positive experience, resulting in greater customer retention and profitability for the bank. And when midsize banks go the merger route, bringing the merger partners' "families" in at the outset will ensure a positive restructuring.

Mr. Thamara is a principal of FSIC Associates, a bank consulting and research firm in North Andover, Mass.

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