Bankers have become quite adept at reducing expenses through layoffs, restructurings, and back-office consolidations.

But some bankers say meeting cost-cutting targets is the easy part when two institutions merge. The other part - the fear and anxiety of employees and the disruptions to customers - can be tougher to manage.

"I just can't overemphasize the people issues and how they really affect mergers," said Vincent A. DiGirolamo, president and chief executive of National City Bank Indiana.

"On the technical side, you do a lot of projections of expense savings and the conversions of systems," he declared. "That you can do and pretty well get done on schedule. The wild card in all of this is the people issues."

Mr. DiGirolamo speaks from experience. He took his job at the former Merchants National Corp. after it was acquired by Cleveland's National City Corp. in 1992. At the time, Merchants was operating under a regulatory memorandum of understanding because of poor asset quality.

For National City, which had just failed to win a hostile takeover bid for Cleveland rival Ameritrust Corp., there was a great urgency to make the Indiana deal work. A month after the agreement was announced in late 1991, National City's stock reached a low for the year, trading at just 11% above book value.

As Mr. DiGirolamo recalled, "There was pressure to get it done right, and to get it done in a hurry."

From the start, the new affiliate of $35 billion asset National City began to shed the weaker credits in its commercial loan portfolio. By the end of 1993, total commercial and industrial loans were $570 million, down from $718 million a year earlier.

While National City was able to free itself from the regulatory memorandum by mid-1992, and meet its expense savings goals, the bank faced one unanticipated problem.

"We underestimated the market disruption of working out some of the portfolio problems we had throughout the state in our corporate area," said Mr. DiGirolamo.

In a few short years, Indiana residents saw nearly all of the state's major banks get gobbled up by out-of-state institutions like National City, Banc One Corp., NBD Bancorp, and Norwest Corp.

So the loss of revenue from the contracting loan portfolio was compounded by business customers uneasy with their new bank.

"Anything that was changed, they really didn't like," recalled Mr. DiGirolamo.

He estimated that it took between 18 months to two years to "stabilize" the commercial loan portfolio.

Frank J. Barkocy, an Advest Group analyst, said that while the Merchants' acquisition was ultimately successful, National City's management had been overly optimistic about the time frame in which it could achieve its cost savings and revenue growth goals.

"National City, perhaps as other (banks), have learned their lesson and being more cautious" when they brief Wall Street on the timetable for reaping merger benefits, said Mr. Barkocy.

For National City, the effects of the problem-loan workout were mitigated by faster-than-expected growth in the Indiana unit's consumer business, which was given greater emphasis.

The affiliate's asset base, which fell from $5.5 billion in 1992 to under $5 billion at yearend 1993, began to grow again, reaching $5.18 billion at the end of 1994. At midyear 1995, assets were $5.73 billion.

In his first year on the job, Mr. DiGirolamo spent about half of his time meeting with clients - and fielding calls from anxious customers. Many of the changes customers faced resulted from a rapid back-office systems conversion. National City consolidated 16 Merchants affiliates into a single bank with common systems.

While the bank met its systems integration and expense goals in little over a year, it was often a difficult journey for both employees and customers.

"There is no way to make this invisible to the customer," said Mr. DiGirolamo. "I don't care what anybody ever says - 'We're going to do this and the customer is not even going to know about it.' That's baloney."

The changes were also wrenching for employees. After the merger, some 600 positions were eliminated in Indiana. And later, in 1994 and 1995, some 400 to 500 more jobs were cut.

And even for employees who remained, things weren't easy. "You come in and you change 100% of what they do," said Mr. DiGirolamo. "And they have to relearn everything they've learned over the last 20 years ... within a six-month period. That creates a high-anxiety environment - the toughest thing to manage through, by far."

National City executives say they try to limit "consternation and anxiety" by communicating openly with both staff and customers. Further, Mr. DiGirolamo said the bank avoids stringing out changes that affect the customers over a long period of time.

"I've found that once a customer goes through those three to four months (of change), it becomes history to them, it becomes the past," he said. "They start to get comfortable. But if you come to them every two or three months with some additional changes, and that happens consistently for several years, they may reach a point where they say: 'Enough!'"

Consultants agree Mr. DiGirolamo's approach is effective.

"These issues clearly come up in every merger because, by definition, a merger is going to create a new management structure and have an impact on individuals," said Lawrence A. Willis of First Manhattan Consulting Group in New York. "The only way to deal with that is to be as open and communicative as possible throughout the process."

The faster major decisions can be reached and communicated, he added, the faster those cultural issues can be put to rest.

Mr. DiGirolamo points to one tangible, though unscientific, measure of the bank's success. "I very rarely get calls from (anxious) customers" anymore, he said. "You know when things are coming together when there is a significant dropoff in that type of communication."

Mr. DiGirolamo said the blueprint followed by National City in its acquisition of Merchants and earlier mergers will be applied when the bank completes its acquisition of Integra Financial Corp., a $14.6 billion-asset institution based in Pittsburgh. The deal, announced in August, is expected to be completed in the second quarter of 1996.

"We have it down to a very precise program," he said. "We'll even hopefully integrate Integra faster than we did here in Indiana."

Integra, unlike Merchants at the time of the acquisition, has strong credit quality and has gone a long way toward consolidating back-office tasks throughout its markets. And, added Mr. DiGirolamo, National City "made a large investment eight years ago in redoing all of our systems so they would enable us to do acquisitions within a fairly short time frame."

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