CoreStates Rx: Add Capital, Boost Profits, Buy Up Banks

Recent moves by CoreStates Financial Corp. to amass a war chest for acquisitions are making bankers nervous in neighboring markets.

The Philadelphia banking company has ambitious growth plans and is positioning itself to carry them out. CoreStates is particularly eyeing weaker institutions in Pennsylvania and New Jersey.

Ready at the Starting Gate

Like many of his peers, CoreStates' chairman, Terrence A. Larsen, predicts rapid consolidation in the industry. A handful of strongly capitalized regionals, however, are the most likely to jump-start the buying. And he is ready to pounce.

Mr. Larsen says that by 1995, CoreStates wants to increase its assets to $100 billion and its annual earnings to $1 billion. That would represent a quantum leap from its current $22.8 billion in assets and profits of $114 million last year.

He recently made several significant moves to raise capital. CoreStates has begun issuing long-term debt under a $1 billion shelf registration. And last month the bank announced plans to issue up to $400 million in preferred stock.

At the same time, CoreStates is trying to improve its image with investors by returning to the high profitability it sustained in the late 1980s. It decided last year not to raise its stock dividend. Then, in May, it announced plans to sell the least profitable half of its $2 billion credit card portfolio, although no takers have stepped forward.

Slimming Down to Gain Speed

Analysts expect the bank to try to shed other businesses, as well, to further bolster its capital.

"We are moving to strengthen the organization to position it for what we consider to be strong opportunities ahead," Mr. Larsen said. "We will see further consolidations at a faster pace in the industry."

CoreStates is not the only bank surveying a supermarket of weaker institutions waiting to be plucked. A parade of banks raised $5 billion in capital in the first half of this year, said James J. McDermott Jr., an analyst with Keefe, Bruyette & Woods in New York.

CoreStates is among the dozens of banks that have asked permission of the Securities & Exchange commission to issue stock. Most of the resulting capital will be used for acquisitions.

Upgrading Information

"The equity markets are open to banks," said Dennis F. Shea, an analyst with Morgan Stanley Group Inc. Other banks, as well, are trying to improve their balance sheets - aided by sophisticated information systems. For the first time, these banks can measure the profitability of individual business lines.

Such an exercise, undertaken more than a year ago, is behind CoreStates' planned exit from offering credit cards nationally and instead concentrate on consumers in the Northeast.

"Everyone is doing a hard examination of their balance sheet and businesses, trying to make the pieces fit better," Mr. McDermott said.

"CoreStates is in a good position to acquire other banks," said Mr. Shea of Morgan Stanley. "They have the capital strength, a good back-office system, and experience in acquisitions."


At the end of 1990, it was the 16th-biggest bank in market capitalization, higher up than many banks of larger asset size.

The bank is also rebounding from the credit problems that have hamstrung much the industry. A recent Salomon Brothers report noted the bank's control of loan losses and the fact that the bank earns 40% of its income from fee-based businesses, some of which are national in scope.

The bank reported a $51 million increase in nonperforming loans in the first quarter - $10 million below Salomon's expectation.

The report said CoreStates' 0.91% return on assets and 14.8% return on equity for the first quarter indicate the bank is returning to its high levels. Salomon predicts above-average earnings growth through the 1990s.

Back Office: Combat Ready

From the standpoint of its back-office operations, CoreStates is ready to buy. It is moving to consolidate the operations of local rival First Pennsylvania, which was acquired in March 1990. The acquisition, however, was difficult. Mr. Larsen was surprised by the bad loans that came along with the bank.

Nonetheless, Mr. Larsen is committed to the idea of "in-market" mergers - buying a banking company with a geographic overlap in markets.

"Pennsylvania and New Jersey would fit into the category of top priority," Mr. Larsen said. "It is easier to make a merger work when there is an overlap in markets: There is more to work with."

New England Reticence

Mr. Larsen said he looked at expanding the bank's market by acquiring the Bank of New England. But the deal would have drained manpower during a recession, he noted, making the seized bank less attractive.

Mr. Larsen said the goal of growing to $100 billion in assets is "conservative," given the weak financial state of the banking industry.

"That's not out of the question," Mr. McDermott said.

But acquisitions now must be done under more financial rigorous controls. "The acquisition needs to be beneficial to the shareholder immediately," Mr. Larsen said. "You can't afford to weaken the institution; you can't take six months to a year to get back to where you started."

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