An economist by training, CoreStates chairman and CEO Terrence Larsen leans toward the macro view. So it comes as no surprise that integrating the his bank with Meridian Bank is taking longer than expected while the two groups forge a unified vision of what the bank should be. In the grand scheme of things, according to Larsen, people come first.

MS: Can you describe the CoreStates culture?

Larsen: It's not a short answer, and it's not a static answer. Our culture is a work-in-progress...Part of our culture is a strong emphasis on diversity. For us, diversity is accepting differences in the way we do things, not just differences in the way we look or where we've come from.

MS: Are you talking about management and work styles?

Larsen: Absolutely. Results are important. Getting the right answer is important, not the path you follow to get there. We don't want a lot of rigid laws that dictate what steps get taken in solving a customer need. If (the method) is different in one market than in another, that's fine. If we bring in a bank such as Meridian that found other ways to meet customer needs, then we must bring them into our culture.

Differences are a strength for us, and we (must) constantly look to differences to add to our strengths. Our culture starts with our vision, which is to be the best bank in the country.

MS: What do you mean by the best?

Larsen: The major definition is that we're the best partner for each of our constituencies: our employees, shareholders, customers, and the communities that we operate in. Our customers should look to us as their preferred provider; employees should look to us as the employer of choice; communities should support our activities and want to see us as a strong member of that community. There is also a set of requirements for shareholders around stability, level of earnings and growth in earnings.

We operate within a value structure that puts a major emphasis on people and we typically put that as our highest value. All the values in our culture are equally important, but we usually list it first. There are six values in our culture: People, Performance, Diversity, Teamwork, Communication and Integrity. We have short and long definitions for each. We think that definitions need to be refined as the environment changes and new challenges come up. The definition of integrity will not change. But the specific implications of what we may want to highlight or that our employees may want to highlight for each other might change. This is driven by groups of people, not management passing down the ten commandments or the like.

The values are the setting for how we operate. We've said to the organization that if you have a question about an issue, and you think the values conflict with financial performance, go ahead with what the values tell you. If you did your financial analysis correctly, there is (no) difference between the values and the bottom-line impact. The values support our strong financial performance and our success.

MS: How do you plan to broaden this culture in your post-acquisition environment?

Larsen: We engage the new employees that join CoreStates in the definition and commitment to what we're about. We go through training sessions. A major element is to take each team that makes up our organization- with some old CoreStates people and some old Meridian people- and have them look at the vision, and see whether they have questions or anything they want to add.

MS: How do you do this?

Larsen: Each of the management groups that make up a team in CoreStates takes a week off-site to work through these issues. We are always doing various kinds of training, and this was the response to a major merger where we were introducing a lot of new people.

MS: How many groups and teams participate?

Larsen: Well, my group had five. Each of those five takes a week with all the people that report to them; then each of the people who report to them take a week with the people who report to them...all the way down the line. It goes a long way to ensuring that we're all on the same page. Obviously, it takes a long time. So here we are almost a year later still working it through the management chain. There's really no alternative because it has to cascade through the organization.

You need common communications to have each manager understand what the issues are. They need to live through that week of soul-searching and refining how these things that are so important to CoreStates are going to affect the way they do business within their group.

MS: Is this one of the reasons you say you need another year to complete the consolidation, and then maybe another?

Larsen: Certainly. We must have this organization be consistent in what it's doing. We're all one system. We converted all the banks. We've done the mechanics of putting together an organization. But getting the people things solid throughout the organization takes longer. And something this size should not be taken lightly or underestimated. If we were to take something else on in the interim and didn't get around to setting a common framework, we'd be opening a potential for problems in the future.

MS: How would you characterize the transition?

Larsen: It is going very well. Most importantly, there's been a high level of respect between the Meridian people and the CoreStates people working together. That's made a tremendous difference in terms of success as they move off and work for customers, whether internal or external customers.

MS: To what do you attribute this cooperation?

Larsen: Partly to the work our organization has done in accepting differences. It's also helped that Meridian was a strong bank in this marketplace, and targeted many of the same things as CoreStates. They had a lot of the same successes. If you see that three-quarters of what's going on overlaps and is consistent, you're probably more open to looking at the other 25 percent and thinking it might have value.

MS: You have said that this is a good time for banks. Why?

Larsen: Banks look different from the way they did ten years ago. The banks that have been winning and growing have been finding ways to be customer-focused, responsive, selling organizations that provide good customer service. Five or ten years ago, we were talking about not being a bank any more. We considered giving up our bank charter.

MS: Why did you change your mind?

Larsen: We had a hard time figuring out how we would do that and still serve the same customer base and make it work. As we were looking at it for the second or third time, the regulatory environment started to change. Having a bank charter started to make more sense because we began to be allowed to do other things.

Deregulation began to really happen. We (got) the opportunity to offer insurance and investment banking products, and to reduce the cost of regulation by combining our banks across state lines, and getting everybody on one network. (Our) capabilities were broadened, so it made sense to keep the bank charter. Today the bank charter is probably the best charter.

I believe that a lot of our customers feel positive about banks. They didn't like some of the aspects of banks in the past, but they had a high regard for the capabilities and security and partnership that banks brought to them when things were working well. That's a solid base to build on.

MS: Except that nonbanks have been nipping at your heels.

Larsen: If you think about it-go back to credit cards, car loans, mortgages or ready asset trust accounts-people have been in our business for decades. Certainly, most of the change was already in place five years ago, and now we're finally getting the relief to allow us to compete with people who have started doing what had been traditional banking. Merrill Lynch was in the banking business; GE Capital was in the banking business. GMAC, Sears, and on and on. Now banks can compete with a complete product line.

MS: What opportunities do you see over the next five years?

Larsen: We are seeing dramatic changes in the approach that takes business off of our balance sheets-it's accelerating. On the consumer side, we'll be more of a personal financial advisor and manager of funds than a depository. That trend will continue and will be important. On the wholesale side, you'll see the same thing happen with respect to loans. Instead of loans being on the balance sheet, we will be a financial advisor and a sourcer of funds, an underwriter, a distributor. That trend will (increasingly) move down market; it's already in place for large corporations and parts of the middle market.

MS: Do you expect more partnerships in selling non-traditional products?

Larsen: Absolutely. There are going to be alliances-and partnerships will be critical. The drivers of that are being discussed already. Keeping control of the customer and the design elements of the product are important. If an alliance removed our ability to interface with our customer and dictate what the product would look like, we would be a major loser.

MS: Aside from technology, what significant changes to the financial services landscape do you see in the next five years?

Larsen: When we do longer term planning, to a degree we are starting new. In the longer term, you can go out of the businesses that we're in, take on new businesses and build them and target new customer bases. You weigh the existing efforts and the importance of maintaining those with what prospects there are under new efforts. We would look at underserved markets and underappreciated segments or activities. That comes to a contrarian approach that I tend to have.

MS: Why is that contrarian?

Larsen: I look for what other people don't think is worthwhile.

MS: Why do this?

Larsen: I think it has the best chance of success. When a majority of participants decide that an activity is important and should be done, the price of entry moves up, and the returns move down. Your energies are better focused trying to anticipate something that isn't being widely discussed.

MS: What are your competitive advantages?

Larsen: Having a strong values base is something that our customers appreciate. Decentralized decision making so that customers are dealing with people who have responsibility and can take action is very significant.

MS: How do you balance running banks by the numbers and earnings performance and keeping up community relationships?

Larsen: Our vision is that we will be the best partner for shareholders and our communities. They are consistent. The marketplace and our shareholders want us to have a high and stable performance. As I talk to shareholders, there is less emphasis on this quarter's number than Wall Street tends to put on it. I understand why Wall Street (emphasizes) the extremely short term, but our major institutional shareholders are more interested in two-year returns. How are you doing this year? Can you maintain this high ROE and ROA levels. Can you anticipate growth in earnings per share? A lot of Wall Street analysts have some longer term perspective as well. What they're more worried about is short-term surprises. The community supports us; our customers like the fact that we're committed to the community and that we're a visible and strong player. I believe we get business because of that. The outlook for banking is more favorable today then it's been in a decade. I'm very optimistic about the industry and our place in it.

bosco tfn.com

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