Gillespie's Mandate: Make Society's Big Merger Pay Off

CLEVELAND -- Robert W. Gillespie deeded a fortune to the owners of Ameritrust Corp. when he forged Society Corp.'s winning bid for his sickly rival. Now he's under the gun to do even better by his own stockholders.

The challenge is daunting: In pledging Ameritrust shareholders $1.2 billion - double the book value of their holdings - Mr. Gillespie is diluting Society's shares by 20%. That collapses Society's book value to levels not seen since late 1987.

But Mr. Gillespie, 47, is confident he can wring enough cost savings from the merger to more than recover the erosion. "We're not at zero on the learning curve," he said.

Indeed, Mr. Gillespie has rallied before. He won praise for reviving Toledo-based Trustcorp Inc., which Society bought in January 1990.

Fox-Pitt Kelton Inc. believes the $130 million of annual cost savings foreseen in the Ameritrust deal could boost Society's return on equity to 19% from 16.3% within two years.

Still, Mr. Gillespie accepts the cynicism of those who question the deal. "We expect people to be skeptical until they see results," he said.

The high stakes and long odds of Mr. Gillespie's takeover have made him a focal point in a debate over the propriety of this year's bank mergers.

One concern is that the rich bids paid for the acquired institutions will more than offset the cost savings resulting from the mergers. And, in this static economy, acquirers no longer can count on robust loan growth to bail them out of surprise problems.

"Bob Gillespie paid too much," said Stephen Puhr, a banking analyst with Roney & Co., Detroit. "In a flat market, that puts him in a tough position."

But supporters say Mr. Gillespie has an excellent chance at grabbing the brass ring: "This deal gives Society the potential to become one of the top-performing banks in the country," said Fred Cummings, a bank analyst with McDonald & Co., Cleveland.

Magnitude on His Mind

A strapping man who often takes weekend retreats on his 200-acre Ohio farm in the Amish country of north central Ohio, Mr. Gillespie had challenges of Ameritrust's magnitude in mind when shaping Society over the past few years.

For example, the executive earlier this year installed an elaborate central computer system capable of supporting a variety of different branch systems. One payoff is that Society expects to integrate Ameritrust's 212 branches within weeks after the merger is consummated next spring.

Then there's the new 57-story headquarters tower in Cleveland. The tallest edifice in Ohio, it plainly was designed with expansion in mind.

In fact, Society will be the nation's 24th largest banking company, with $26 billion of assets after the Ameritrust purchase. "We don't want to labor mightily and bring forth a mouse," Mr. Gillespie said.

Promises Kept

There's far more than bravado at work in Mr. Gillespie's outlook, analysts say. The Trustcorp buyout underscores the point.

Weakened by soured development loans in downtown Toledo, Trustcorp posted an $82 million operating loss in 1988. But Society restored it to a healthy 1% return on assets within three years. Along the way, Society slashed annual expenses $19.5 million.

"Society's credibility coming off its acquisition of Trustcorp is better than most," said Bear, Stearns & Co. in a research report written by bank analysts Mark Alpert and Mark Lynch. "It bought a troubled bank, gauged the extent of its credit problems and cut costs to the extent promised."

But what helped Mr. Gillespie with Trustcorp may be what works against him with Ameritrust.

Back when the economy and the Midwest manufacturing sector were roaring, there seemed to be a high floor on realty values and a low ceiling on default ratios. That helped minimize portfolio decay even at troubled bank companies.

|Double Dip' May Be on Horizon

Now the prospect of a "double dip" recession is looming large. Mr. Gillespie will be taking on $1.5 billion of commercial realty loans from Ameritrust and $500 million of loans to highly leveraged companies, all in a listless economic climate.

"If the economy weakens further, we can expect continued asset quality deterioration and slower balance sheet growth," said Mr. Cummings of McDonald & Co.

"This would offset the expected cost savings . . . and could delay [their] realization."

Ameritrust's high-risk realty and HLT assets will amount to 120% of Society's post-merger equity, estimates Christopher Kotowski, a bank analyst with Oppenheimer & Co., New York.

Purgative Loan Loss

For an insurance policy, Mr. Gillespie is counting on a $100 million special loan-loss provision, to be taken by Ameritrust prior to the merger. Coming on top of a review of 80% of Ameritrust's portfolio, the measure has the executive convinced that "the credit quality problems have been recognized."

In fact, Mr. Gillespie is counting on the Ameritrust deal to lessen Society's reliance on heavy loan volume for profitability. Society's 84.54% ratio of net loans to deposits at Sept. 30 "is a bit precarious," he concedes.

Ameritrust's huge trust operation is the new earnings engine Mr. Gillespie hopes to harness. It cranked out $68 million of revenues during the first six months of this year alone.

When combined with Society's clientele, the trust unit will be the nation's 13th largest, with $28 billion of assets under management. Fox-Pitt Kelton predicts the unit will boost Society's noninterest income to 30% from 25% of revenues.

Rapid Integration Needed

But the only way Mr. Gillespie can hope to achieve his goals is through a quick and seamless integration of Ameritrust. That's the ticket to the $130 million of expected annual cost savings underpinning the merger.

More than 2,000 out of 14,000 combined jobs will be eliminated. Ninety branches will either be closed or sold. And the executive has given himself only 90 days to merge Society's and Ameritrust's lead banks in Cleveland.

Expressing admiration for the superb results Banc One Corp. has achieved through decentralized management, Mr. Gillespie says he is proceeding along the same lines at Society, albeit with a swift kick here and there.

"I like to run an organization that challenges itself to achieve at its fullest capacity," said Mr. Gillespie. "I encourage my people to be creative."

A Productive Decade

Clearly, Mr. Gillespie has come a long way from the 1960s, when he worked as a part-time teller at Society while completing a master's degree in business at Case Western Reserve University.

He signed on as a credit analyst at Society after graduation in 1968 just to learn more about business and save up for a dream trip to Europe. Instead, Mr. Gillespie wound up making a career commitment to the institution.

Singled out as a rising star, Mr. Gillespie rose to become vice chairman and chief operating officer of Society's lead bank in 1981. By then, Mr. Gillespie had spent seven years working with the company's national corporate accounts, four years in middle-market lending in Ohio, and three years in retail and back office administration.

He was named chief executive of Society Corp. in 1987. Then 42, he was the the youngest CEO among the top banking companies in his home state of Ohio. The Trustcorp takeover was Mr. Gillespie's first handiwork following his assumption of the chairman's duties in 1988.

Mr. Gillespie has seen Society burgeon from $800 million of assets to what next spring will be $26 billion of assets.

The executive has precious little time to reflect on his achievements or even the risks he is undertaking, however. With $1.2 billion of his shareholders' wealth and his own reputation at stake, Mr. Gillespie is hustling to make good on the biggest deal of his career.

"Now we are competing with some of the biggest and most successful banking companies in the nation," he said. "I do believe we will be consumed 150% for the next 18 months." [Graph Omitted]

PHOTO : PORTRAIT OF A BELIEVER: Robert W. Gillespie, in Society's executive waiting area, is confident he can wring cost savings.

PHOTO : ROBERT W. GILLESPIE is thinking big these days, as evidenced by Society Corp.'s new headquarters, the tallest building in Ohio.

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