Walter Shipley of Chase Manhattan Corp. has got the religion. So does Hugh McColl of NationsBank Corp.
Terrence Larsen of CoreStates Financial Corp. at first resisted, but he converted fast after a few conversations with Edward Crutchfield of First Union Corp.
These chief executive officers, among others, worship at the altar of bigness. As Mr. Crutchfield gave witness in a speech last year, "I don't like bigness ... but they don't pay me to be nostalgic."
A lot of bankers just below those rarefied rungs of the asset ladder do not buy such lines. What makes these contrarians tick-what keeps them on their independent course-is the subject of this three-part American Banker series.
To these proud-to-be-regional bankers, second-tier status is neither self-delusion nor handicap. Their purpose in life is not to wait around for a rich buyout bid.
They are convinced their future is bright, but instead of making a lot of argumentative noises, they stick to their knitting and let their performance do the talking.
Fine for now, say the apostles of bigness, but the smaller and more regionally focused competitors may only be denying the inevitable.
These are the banks that, it has been alleged, are "too big to be small," thereby lacking community banks' customer intimacy and dominance of local market niches; and "too small to be big," lacking the necessary technology bases and economies of scale.
Such irony does not wash with the top executives of the biggest banks in Cincinnati, which may be the quintessential second-tier city of American banking.
"In some areas, size counts," said George A. Schaefer Jr., chief executive officer of Fifth Third Bancorp. "If you're a credit card bank it counts. If you have a global custody business it counts.
"But if I'm operating an office in Columbus, Ohio, it doesn't matter if I'm a $100 billion-asset bank or a $2 billion-asset bank or a $40 million- asset thrift, as long as I provide good service."
Mr. Schaefer's $20.9 billion-asset company looks takeover-proof. Fifth Third's stock trades at an industry-high multiple of 28 times estimated earnings for 1998. It is the 37th-largest bank holding company, but 20th in market capitalization.
Any acquirer of Fifth Third would likely require enormous cost-cutting to justify the extremely high premium it would pay. It would not find much fat to cut at one of the tightest ships in banking.
More important than size, said Mr. Schaefer, are such fundamental principles as credit quality and cost control.
"Things have been going so well, people have forgotten about that," Mr. Schaefer said. "We think we're ready for anything that comes down the pike."
Leaders of the other mini-titan of Cincinnati, $11 billion-asset Star Banc Corp., talk much the same way. They claim they can do anything their largest competitors can.
Chief financial officer David M. Moffett said technology costs have not been a hindrance. In some cases the company turns to outsourcing. Its attention to costs has put Star Banc alongside Fifth Third and a few others regarded as the most efficient of all banking companies-an elite group that megabanks have a hard time fitting into.
"We don't adhere to the belief we have to be bigger to be better developing products and delivering products," Mr. Moffett said. "If you're cost-effective, you can compete on a national basis."
The option of selling out does not make sense to Mr. Moffett.
"We can grow faster than potential acquisition partners," he said. "So we don't see any reason to swap stock with a company that is growing slower than we are."
Consultants and other observers view Fifth Third and Star Banc as worthy standard-bearers of the high-performing middle tier. But they are also considered a breed apart.
"The guys in the middle get squeezed because they don't have the dollars to invest, nor do they have the intimacy of community banks," said Charles Wendel, president of Financial Institutions Consulting of New York. "They are neither fish nor fowl."
Size helps, Mr. Wendel said, because big banks have more latitude to spread their costs for product development and technology. They have the heft to diversify both geographically and along lines of business, and with diversification comes both flexibility and an ability to sustain the unforeseen hit.
Many banks, Mr. Wendel maintained, are staying alive on the strength of their regional economies. A downturn could prove disastrous for some that seem to be thriving today.
"Don't negate the impact of a very strong economy and being in a strong corridor of the country," Mr. Wendel said. "It makes everyone look very smart."
"It's hard to look bad when the economy is this way," said Benton E. Gup, professor of finance and chairman of banking at the University of Alabama.
There are about 30 U.S. banks with between $10 billion and $30 billion of assets. Some could grow, becoming the next wave of superregionals. Others will sell out.
"Consolidation is going to increase, but there is still a viable market for some of these regional banks," said Mr. Gup.
He contends that midsize regionals can preserve the personal touch as bigger banks move toward offering the commodity products that are easiest and most economical to distribute nationally.
Some regional bankers with an independent streak have been blessed by their location.
In Alabama, for instance, are four sizable regional banks. They have faced relatively little pressure to sell because larger banks have shown little interest in their markets, Mr. Gup said.
"Alabama banks are less attractive as targets than banks in Florida, Georgia, or even Tennessee," he said.
Michael Plodwick of Lehman Brothers has made banking mergers a focus of his research. The analyst publishes a report at least once a year giving rationales for hundreds of possible combinations. The underlying assumption is that every bank is for sale and, with the exception of the two or three largest, could be bought.
But practically speaking, Mr. Plodwick said, a bank like Fifth Third would be extremely difficult to take over. A prospective suitor would be hard-pressed to convince Fifth Third's shareholders it could do a better job managing the company.
The same is true for a handful of others, including Star Banc, Marshall & Ilsley Corp. of Milwaukee, and Northern Trust Corp. of Chicago.
"They have top-line revenue growth. They control their destiny," Mr. Plodwick said.
Growing specialty businesses have increased the value of companies like Northern Trust, which is strong in personal and corporate trust, and Marshall & Ilsley, which owns a lucrative data processing business. Fifth Third, too, is distinguished by its ownership of Midwest Payment Systems, a revenue-rich transaction processing company, as well as a growing portfolio of financial subsidiaries.
Star Banc, on the other hand, has made money on bread-and-butter consumer banking and business lending.
Size diminishes in importance, Mr. Plodwick said, when a company has a well-developed geographic or business niche. "If you're a plain vanilla bank, it's more of an issue," the analyst said.
Three southern banks that do not need to sell, according to Mr. Plodwick, are BB&T Corp. of Winston-Salem, N.C.; First Tennessee National Corp. of Memphis; and SouthTrust Corp. of Birmingham, Ala.
The two biggest Salt Lake City holding companies, First Security Corp. and Zions Bancorp., are often put in that category. Whether for geographical uniqueness or consistent profitability that stokes their share prices, these banks profess to be off-limits even as they appear on analysts' target lists.
Scott C. Ulbrich, chief financial officer of First Security, conceded recently that his institution cannot match a megabank in technology and related resources. But he said the Utah banks have some unmatched intangible assets.
"Who better understands a community than a bank based in that community?" he asked. "Some of those big guys are lower-cost producers than we are, but they sometimes get lost in the communities they are serving."
"Zions has almost as much history here as we do," he added. "It is good to have a good competitor close by. Neither can afford to be complacent, and the community benefits by the competition."
But there are other opinions.
"Every bank has its price. Period," said Kenneth Thomas, a Miami-based banking consultant. "No matter what they say or what they do, in the back of every banker's mind is a multiple they would take."
James Brock, professor of economics at Miami University in Oxford, Ohio, does not believe banks should feel compelled to sell out.
He says bigger is not better, and views consolidation waves in banking and other industries as part of a cycle that eventually comes to an abrupt end. Though mergers may seem sensible at a particular time, many do not work out as well as promised.
Studies by academics and consultants time and again have failed to find conclusive proof of economies of scale, at least in the way banking has traditionally been defined. And bankers' historical record has been less than impressive when it comes to boosting efficiency or enhancing shareholder value through mergers.
Stephen A. Rhoades, a Federal Reserve Board staff member, has provided plenty of data to support skepticism about bigness in his many years of studying bank merger performance. But in a 1996 study of the previous waves of industry combinations-between 1980 and 1994-Mr. Rhoades concluded that the seeds of even further consolidation had been sown and would proliferate regardless of antitrust or other restrictions. He was right.
Many of the recent megadeals were said to be motivated by the benefits of scale and the ability to "leverage" technology investments. Some observers say the year-2000 computer programming problem may have led some bankers to sell out before they had to face a significant remediation expense. Others say the coming preoccupation with year-2000 will bring the latest merger boom crashing back to earth.
Whatever the cause, Mr. Brock believes the consolidation wave of the 1990s will go the way of others, leading to some disappointing results. As companies seek to justify their acquisitions by massively cutting costs, they will in turn jeopardize revenue streams.
Meanwhile, globalization beckons. Karen Wendel, a globetrotting vice president with Gemini Consulting of Morristown, N.J., said any company that remains regional is in big trouble because of the way technology and payment systems are evolving.
"Business is becoming transactional," she said. And the customers most important to commercial banks "will want to deal with one bank"-an institution that will have to be able to play in a global league that puts premiums on speed, efficiency, responsiveness, and risk-management capabilities.
In Ms. Wendel's scenario, a handful of banks-maybe three of them American-are getting in position to meet those needs. They are getting there through large-scale operations, global in scope, that will be capable of plundering any mere regionals in their path by luring away their most valued accounts.
"Get big, partner big, or get out," she advises regionals. "You need scale-or a very tightly differentiated offering."
Anything approaching that extreme could leave the consumer banking market underserved by impersonal monoliths.
Robert E. Hall, chief executive officer of Action Systems, an influential bank marketing consulting firm in Dallas, said size can cut two ways. Smaller institutions can be more nimble in grabbing for a local or niche advantage, bigger competitors can bring more technology and other resources to bear. But all face the hazard of depersonalization, losing the touch with customers and their special needs that historically set banks apart from other financial companies.
"It is not so much large or small," Mr. Hall said. "It is how committed an organization is to speed. It is possible for a small or large organization to win if it is committed to moving quickly."
