RICHMOND -- The words "Crestar" and "takeover" fit together as naturally as soup and sandwich in the minds of many bank analysts.

But Richard Tilghman, chairman and chief executive of the largest bank based in Virginia, thinks people have the formula backwards: Crestar Financial Corp. is going to do the acquiring.

In a recent interview, Mr. Tilghman showed no inclination to wave the white flag, even though his company has recently been overshadowed in its home state by intruders from North Carolina.

"We're going to keep on keeping on." Mr. Tilghman said in a recent interview.

Rallying the Troops

Nevertheless. the threat from giants such as NationsBank Corp., First Union Corp., and the quiescent but potentially dangerous Wachovia Corp. caused Mr. Tilghman to give a pep talk to employees late last month.

"These banks are not invincible," he said. "NationsBank and First Union may exceed Crestar in overall size and geographic scope, but where it matters to us, in our markets, we're right up there with them."

Indeed, Crestar, which has $12.2 billion of assets, has the potential to become so profitable that it would be extremely expensive to buy.

Its 307 branches in Virginia, the District of Columbia, and southern Maryland constitute the second-largest banking franchise in the region.

Loan Growth Seen as Key

"Their real challenge is to get out there and beat the bushes to grow some loans and increase their market share, primarily on the retail side," said Dean Witter analyst Anthony R. Davis.

Crestar's problem, however, is that it has been a sluggish earner and does not have much time to reverse its course. The company's push for profitability also faces a major handicap: a sluggish Virginia economy that continues to practice lackluster loan demand.

Mr. Tilghman, though, insists he has plenty of potential to exploit, even with the slow economy. His game plan: to invest nearly $30 million in branch automation equipment during the next two. years as 4 means to increased loan production and sales of mutual funds and trust services from Crestar's widespread branch network.

He says that all customer service representatives and tellers will be equipped, with personal computers. Crestar also intends to make major upgrades of its. mortgage and consumer loan systems.

Customer Service Drive

Another key tool in the strategy is a back-to-basics customer service and marketing effort. The company has laid out the following goals for its consumer sales efforts:

* A one-day turnaround on all loan applications in its consumer finance area. It currently takes at least two days for a customer. to learn if a loan has been approved.

* A new emphasis on telephone service. Telephone centers in Richmond and Norfolk will be expanded to 24 hour-a-day operation. Mr. Tilghman also said he will investigate telephone-and PC-based home banking.

* A push to sell mutual funds. in May, Crestar's securities subsidiary began selling its own family of funds, the CrestFunds, through its branches. The nine funds currently have $1.6. billion of assets, but are expected to grow rapidly.

Crestar also intends to maintain its traditional role as one of the biggest middle-market lenders in Virginia. But Mr. Tilghman is betting that retail banking is the key to competing against NationsBank and First Union.

"What we want to be is the bank to the household," Mr. Tilghman said, adding that he wants to push core checking, transaction, and savings accounts. "Our desire is to establish a basic business relationship with a family or business and take care of their core deposit and borrowing needs."

Disruption from Takeovers

Most analysts believe Crestar can make headway -- precisely because of the new competition. NationsBank bulldozed its way into Virginia and Washington in 1992 with the acquisition of C&S/Sovran Corp., Virginia's largest bank. First Union followed this year with its purchase of Dominion Bancshares Corp.

The disruptions caused in local operations by those acquisitions could be useful to Crestar if it moves quickly, analysts said.

"There's a good opportunity for the indigenous Virginia banks to take market share in the wake of the moves by NationsBank and First Union," said Dean Witter's Mr. Davis.

Crestar's target market for scoring gains lies in the relatively affluent greater Washington area -- the District of Columbia, northern Virginia, and southern Maryland. Median household income in the region is $54,000, compared with $33,000 for the U.S. as a whole.

Business Goal Set

James Wells 3d, president of Crestar, is heading a task force aimed at bringing Crestar's share of loans, trust fees, and securities-related businesses in greater Washington up to the 9.4% level of its deposit share there. (Crestar's deposit market share is second only to NationsBank,)

The task is harder than it sounds. Although nearly half Crestar's branches are located in greater Washington, many were acquired from insolvent thrifts, which provided deposits but few assets.

Washington also has contributed the largest share of Crestar's problems. Like most of its competitors, the bank got caught up in the overheated real estate market in the nation's capital in the mid-'80s.

Ahead of the Curve

By the third quarter of 1991, Crestar's nonperforming assets soared to $417 million, or 5.7% of loans and foreclosed realty.

In the past few years, credit Problems have come under control. Nonperforming assets totaled $163 million at the end of this year's second quarter, representing 2.24% of loans and foreclosed real estate.

Profitability has improved too, though it's still not up to pre-recession levels. After posting a return on assets in 1992 of 0.67% -- down from 0.97% in 1989 -- Crestar has rebounded. in the second quarter of this year. it earned $33.7 million. for a 1.09% return on assets.

Throughout the crisis of the last few years, Mr. Tilghman, 52, a career Crestar employee, has maintained a steady hand on the bank's tiller. Analysts credit him with initiating a smart strategic shift in 1987, the year he became chief executive.

Shift to Retail

At that time, under its former name, United Virginia Bankshares Inc., Crestar was known as the leading commercial lender in the Old Dominion, Mr. Tilghman, unhappy with the company's reliance on wholesale funding, steered the company to the retail side.

He also pushed for more consumer loan production out of the bank's expanding branch network in Washington.

"The shift in strategy toward retail, and the diversification, was the correct thing to do." said Sandra J. Flannigan, an analyst at Merrill Lynch & Co.

"If they had stayed as commercially oriented as they were, given the current lack of business loan demand, they would not have been able to deal as effective as they have with the commercial real estate problem."

Mr. Tilghman. who came up through the commercial lending rank's, imposed the shift in a typically cautious and deliberate manner, according to bankers and analysts. "He is very prudent and detailed in his analysis," said Mr. Davis, who followed Crestar for many years as a Richmond-based analyst.

The new strategy's success is demonstrable. Core deposits now fund 140% of Crestar's loan portfolio, compared with 86% in 1987. Consumer loans (including credit cards) as a percentage of the entire portfolio rose to 54% from 41%.

But Mr. Tilghman concedes that more work needs to be done. Consumer loans as a percentage of assets are only 10.7% excluding credit cards), ranking the company in the third quartile of regional banks followed by Lehman Brothers.

Its average loan-to-deposit ratio remains a relatively low 71%. And its return on equity of 13.36% for the first six months lagged its regional peers.

Those numbers and the slow economic recovery in Virginia mean that Crestar cannot expect soaring loan demand to pull it to new heights anytime soon. Instead, analysts said. Crestar's best protection against takeover may be making its own acquisitions.

Capital Raised

The company raised $97 million in new capital last October just for that purpose, boosting its equity-to-assets ratio to a sturdy 8.22% Robinson-Humphrey estimates Crestar could support $2 billion in additional assets without having to raise any more capital.

Although Crestar was outbid by First Union for $4.6 billion of assets sold by Washington's First American Banks Inc. earlier this year, it continues to wage acquisition battles.

"We're in a target-rich environment," said C. Garland Hagen, executive vice president of the company's investment banking operations and its point man for acquisitions. He said there are 80 banks and thrifts controlling $15 billion in deposits in the greater Washington area alone.

In the meantime. Crestar must continue to dodge the inevitable over speculation, which most commonly pairs it with Wachovia, the only North Carolina superregional that has not yet entered Virginia.

Crestar, with its excellent branch network, "remains a logical entry vehicle into Virginia," said John Coffey, an analyst at Robinson-Humphrey in Atlanta.

Mr. Tilghman dismisses that kind of talk.

"I would think that people who speculate about us as a takeover target are basically analyzing the financial feasibility of such a transaction and not necessarily its desirability," he said.

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