If the pundits have it right, bank merger-mania may be back in vogue with this year's passage of interstate branching legislation.

But what would a boom in bank marriages mean to bank-managed mutual funds? In some cases, it could be the difference between just scraping by and making a comfortable living, judging by this year's most notable combo, Society Corp.'s acquisition of Keycorp in March.

The resulting entity, which kept the Keycorp moniker for the Cleveland-based holding company, has $63 billion of assets and nearly 1,300 branches in 13 states.

In mutual funds, the merger thrust Keycorp's proprietary assets up to nearly $5 billion, including $3.8 billion from the old Society, and $1.2 billion from the old Keycorp.

The added scale has proven crucial, by fattening profit margins that before the merger were perilously thin.

"It's very good," said R. Christopher Maxwell, the Keycorp executive vice president in charge of the funds. "We're now one of the top bank mutual fund companies."

Indeed, at the end of June, Keycorp was the 14th-largest proprietary fund manager among American banking companies.

The bigger scale has helped Keycorp's mutual funds on several fronts. For starters, the funds each now can be sold through vastly larger branch networks.

The combined branch network is nearly three times bigger than the old Society Corp. network, and 50% bigger than the old Keycorp network.

The merger also pumped up the number of Keycorp brokers selling investments to 268 registered reps. These brokers also sell other companies' mutual funds, including those from Fidelity Investment, Franklin Resources, Kemper Corp., Oppenheimer & Co. and Putnam Investments.

Keycorp's proprietary funds also are sold through the combined banks' sizable trust departments.

The combined funds offer a much richer menu of choices for investors. And the combination also has afforded some significant cost savings.

For example, investment management teams for similar funds are being combined, at a great reduction in personnel and research expenses. And bigger volumes have let the bank cut better deals with suppliers of such things as prospectus printing, Mr. Maxwell said.

The bottom line impact has been dramatic, and can be illustrated in these terms.

Before the merger Keycorp was collecting less than half of what it was entitled to charge for management fees. The reason was that Keycorp's costs were relatively high, and it didn't want to burden the funds with high expenses.

Mr. Maxwell can speak with confidence of this because, as chief investment officer for the old Keycorp, mutual funds reported up to him.

By contrast, the weighted average annual fee that Keycorp now charges all of its fund shareholders--a half of a percent of fund assets--is basically fully compensating the bank for what it is due.

Mr. Maxwell said that the $20 million of revenues Keycorp expects this year from these activities will make proprietary mutual funds a profitable endeavor for the bank.

But even with the positive developments, Keycorp's success in mutual funds is hardly assured. Indeed, troubling news came in the quarter ending in June. Keycorp's total assets declined by just over $300 million to $4.6 million.

The reason for the drop, Mr. Maxwell said, is that Keycorp., like other mutual fund managers, has suffered from the lagging performance of fixed-income funds. Bank customers, who tend to be conservative investors, have traditionally liked these funds. But losses in many of these funds due to rising interest rates have caused investors to bail out.

The drop is especially bad for Keycorp because the bank needs to grow its mutual funds, said Geoffrey H. Bobroff, a mutual fund consultant in East Greenwich, R.I.

He said that Keycorp's mutual fund complex has not yet achieved a scale that can assure steady profits.

"They aren't large enough, even on a consolidated basis," he said.

But the drop isn't raising too many alarms yet. The reason is that so far it only amounts to a blip. For the year, merger-adjusted fund assets are up 54%. Mr. Maxwell said he expects that assets will continue to grow.

Indeed, Mr. Bobroff points out that if Keycorp can move a big chunk of its sizable personal trust assets to mutual funds, it could get a solidly profitable franchise.

Help on that front could come out of Capitol Hill this year, if proposed legislation ending a tax penalty on the conversion of common trust funds into mutual funds is adopted. This would make conversions of personal trust assets easier for many banks, including Keycorp.

Mr. Bobroff also points to other advantages that Keycorp has. One is that Keycorp's banking franchise, which extends across most of the northern half of the country, is strongest in places where competition among hawkers of mutual funds is weakest. This includes states like Oregon and Maine.

Mr. Bobroff also said that Keycorp's funds have a respectable leader in Mr. Maxwell.

"Clearly, they have the potential to become quite successful," Mr. Bobroff said.

Before coming to the old Keycorp. in 1993, Mr. Maxwell was head of Chase Manhattan Corp.'s Vista Capital fund management unit.

He said he left that respected operation in 1993 because he hated working in New York City.

But in what may be good news for Keycorp, the 51-year-old executive said he and his wife are very happy in their new home city of Cleveland. They recently moved there from Albany, N.Y, where the old Keycorp was based.

"It's really a beautiful city," Mr. Maxwell said of Cleveland. "It has a tremendous amount of pride."

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