First Union's Crutchfield: His Patience Is Paying Off

CHARLOTTE, N.C. - After all the abuse he's taken from Wall Street naysayers, Edward E. Crutchfield Jr. might be forgiven a mild I-told-you-so.

"I don't go around paranoid about it in the sense of waiting to feel vindicated ..." begins the chairman and chief executive of First Union Corp., struggling to be diplomatic.

"But ... the attention span of analysts and the media is so short."

For someone who has pursued long-term strategic goals at the expense of short-term profitability, vindication is sweet. First Union's government-assisted acquisition of Southeast Banking Corp. last month is expected to boost earnings. For Mr. Crutchfield, 50, it means more cheers from Wall Street that he's heard in a long time.

But doubts persist as to whether Mr. Crutchfield, nicknamed "Fast Eddy" for his aggressive, sometimes pricey acquisitions, can settle down long enough to focus on something mundane like earnings.

"He's going to have to prove himself," said Livia Asher, bank analyst with Merrill Lynch & Co. in New York. "He's been opportunistic in the past, so I wouldn't put it past him to be opportunistic again."

Mr. Crutchfield acknowledges he must now deliver the long-promised profits. "This management can't use |long term' anymore as an excuse," he says. "Long term is now here."

But leopards don't easily change their spots, and Mr. Crutchfield is careful never to say never. He acknowledges the possibility of future fill-in acquisitions in Georgia and South Carolina, two states where First Union has only weak market share.

Dismisses Speculation

And when it is noted that Atlanta's Bank South Corp. is still independent, Mr. Crutchfield responds in his laziest Southern drawl, "Well, who knows? Who knows?"

More emphatically, he dismisses speculation about a possible marriage of First Union and Barnett Banks Inc. in Jacksonville, Fla. "I doubt it," he says.

For the moment, Wall Street seems to think Mr. Crutchfield will rest on his laurels for a while. First Union stock has appreciated about 15% since rumors of the Southeast takeover first surfaced on Sept. 18, and most analysts, accepting the company's projections, are revising their earnings estimates upward.

"The transaction gives First Union a catalyst to energize what otherwise would have been lackluster earnings for the next 18 months or so," said Norman Jaffe, with Fox-Pitt Kelton in New York.

Government Protection

The reason is that Southeast, acquired with five years' worth of government credit protection, is expected to boost First Union's bottom line. Much of the earnings increase is expected to come from closing 120 overlapping branches and laying off 2,900 employees.

"To me, it looks pretty much like a lay-up," said J. Frederick Meinke, bank analyst with Raymond James & Associates Inc. in St. Petersburg, Fla.

The Southeast deal has the additional benefit of allowing First Union to make good on some earlier investments. The acquisition of Jacksonville-based Florida National Banks of Florida Inc. last year saddled the company with 350,000 square feet of underutilized space in addition to a heavy load of bad loans.

Abrogating Southeast's lease agreements will enable First Union to consolidate personnel in its existing vacant space while abandoning about 1.3 million square feet that had been occupied by Southeast.

"There's no way we could have done this deal if we hadn't done Florida National and a couple before that," Mr. Crutchfield says.

The point is important to Mr. Crutchfield because the Florida National acquisition and an earlier move into Georgia got bad reviews from Wall Street analysts. The earnings dilution from Florida National, combined with overall industry problems, sent First Union stock into a two-year slump from which it is only now recovering.

Interstate Strategy

Mr. Crutchfield defends the five-year strategic plan behind these acquisitions, which was designed to make First Union a survivor in the interstate banking free-for-all. With assets of $49.6 billion, First Union now ranks among the country's top 10 banks; in 1985, it was only the 22d largest, with assets of $12.7 billion.

But he does admit to some difficult moments. "I'm human, and there've been days when I felt, geez, is this really going to be worth it?

"But honest to goodness," Mr. Crutchfield insists, "there's never been a day when I came up and said, |This is the wrong thing to do; we should have sat tight in 1985.' Because I honestly think, that was a death trap."

The hangover from Florida National was still keenly felt at First Union early this year when Southeast began shopping itself around. Barnett and Charlotte-based NCNB Corp. took a look, but First Union held back.

"I was reluctant to go to the party," Mr. Crutchfield says.

Federal Aid Crucial

With its stock trading in the teens, First Union would have had to inflict unacceptable dilution on its long-suffering shareholders in order to buy Southeast without government assistance. "I didn't see how we could competitively finance the deal. Our cost of capital was going to be prohibitive," Mr. Crutchfield says.

But Mr. Stancliff, First Union's treasurer and acquisitions expert, kept after his boss to take another look. "On the surface, Southeast appeared to have too many problems to deal with," Mr. Stancliff recalls. "But clearly, they had the remnants of a good franchise and a real strong customer base."

One day in late April, after another inconclusive session with Mr. Crutchfield, Mr. Stancliff confided his discouragement to another top executive. "I told him it didn't seem like Ed had fire in his belly for this acquisition," Mr. Stancliff says.

It wasn't until early summer, when First Union joined the general bank stock rally, that Mr. Crutchfield felt the old fire returning. "What really got my attention was how much cost we could cut out of that deal," he says. First Union estimates it can shave $260 million off Southeast's annual $528 million in annual operating costs by 1993.

|Full Court Press'

By early June, First Union executives had decided to give Southeast what Mr. Crutchfield terms "a full court press" because "deals like this don't come along but maybe once in a lifetime."

The regulators were still talking about a transaction to preserve some value for Southeast shareholders, but First Union felt sure it would eventually come down to a regulatory takeover.

To prepare for the bidding, First Union sent three waves of due-diligence teams to Miami to pore over Southeast's books. The first and largest wave, in June, consisted of about 150 officers who transformed an entire floor of the Intercontinental Hotel into their command and control center.

Files in Bathtubs

The First Union officers replaced beds with tables and installed computer terminals and telephone networks. They stacked credit analysis files in bathtubs. They examined every commercial loan over $1 million and sampled large portions of the consumer portfolio.

"We really knew more about the bank than anybody else," Mr. Crutchfield says.

First Union's extensive due diligence gave Mr. Crutchfield confidence that he understood Southeast's true value.

No Answer for 5 Years

On Sept. 17, the FDIC accepted First Union's offer to take Southeast off its hands for $81 million. Barnett and Atlanta-based SunTrust Banks Inc., the other two bidders, decline to reveal their numbers. But informed sources say neither bank was willing to offer a premium to acquire Southeast.

Did |Fast Eddy' overpay again? The answer won't be known for five years. The strength and depth of Florida's recovery from its current recession will clearly be the deciding factor.

But Mr. Crutchfield, at least, has no doubts First Union got a bargain. "We're as happy as clams about it," he says.

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