The naysayers on megamergers have been proved wrong - so far.

The three big bank marriages completed over the last year have, for the most part, gone far better than observers had expected.

Since April 22, when it closed the biggest of the deals, Bank-America Corp. has made significant progress in absorbing Security Pacific Corp.

But with many operations already integrated and full consolidation scheduled by the middle of 1993, the key question is whether BankAmerica will keep most Security Pacific customers and maintain revenue streams. Rival banks are mounting concentrated efforts to pick those clients off.

Chemical Banking Corp., whose merger with Manufacturers Hanover Corp. made it a retail and wholesale powerhouse, faces a similar challenge.

It, too, must complete several major consolidation projects, including the closing of 80 branches in the New York metropolitan region and restructuring the merged companies' European operations.

NationsBank Corp.'s big task in 1992 was to digest its acquisition of C&S/Sovran Corp., which closed at the end of last year. With cost savings on track and nonperforming assets beginning to fall, the nation's fourth-largest bank slightly exceeded Wall Street's expectations.

Additional Efforts

Charlotte, N.C.-based NationsBank also managed to launch several new initiatives that bode well for 1993 earnings and beyond.

What follows is a yearend report card on how the three megamergers are faring and what lies ahead for 1993.

BANKAMERICA

Some of the toughest hurdles still lie ahead of BankAmerica as it continues its consolidation with Security Pacific.

A crucial issue is how many Security Pacific customers it is able to retain.

They are moving into a period that will be much more of an acid test," said Donald K. Crowley, an independent analyst based in Lafayette, Calif. "They may be facing attrition."

The New No. 2

The combination of BankAmerica and Security Pacific produced the nation's second-largest banking company, with $186.6 billion in assets.

BankAmerica is achieving savings at a pace faster than it predicted. But because of California's reeling economy, credit problems are more severe than expected.

"You've definitely got higher nonperforming assets than management envisioned," said Thomas H. Hanley, analyst with First Boston Corp.

And, as Security Pacific assets have been written down, goodwill on BankAmerica's balance sheet has risen more than expected. That has caused capital to fall somewhat below expected levels.

For their part, BankAmerica officials shrug off financial problems and are upbeat about the merger. "By and large, things are going amazingly well," said chief financial officer Frank N. Newman in an interview.

Mr. Newman cited the company's ability to earn $476 million for a return on assets of 1.00% in the third quarter. He claimed excellent results in cost efficiencies and systems and operations integration. And he said credit quality and capital concerns were readily manageable.

Customers Staying So Far

As far as customers go, "retention has been very good," Mr. Newman said. But he acknowledged, "realistically we have to expect some customer losses."

The best news so far has come on the cost side. BankAmerica previously forecast that within three years, branch closures, back-office combinations and reductions in the work force would produce $1.2 billion in savings each year. Today some analysts expect annual savings to reach as high as $1.5 billion annually.

Mr. Newman, said it was too early to tell whether savings will exceed the forecast, but he says that costs are coming down ahead of schedule.

BankAmerica officials say they completed the the integration of wholesale businesses and all retail operations outside California by the end of November. But California branch consolidations won't be finished until the middle of next year.

Bank of America

The company has confirmed it will ultimately shut about a quarter of the 2,300 branches it operated when the merger took effect. BankAmerica employed a full-time staff of 83,500 at the end of September, down about 11% from the work forces of the combined companies in mid 1991.

At the end of September, goodwill and other intangible assets totaled $5.37 billion, mainly due to the premium over book value paid for Security Pacific and writedowns of assets inherited from that company. The total jumped nearly 19% in the third quarter.

Goodwill Growing

With California real estate still declining in value, Mr. Hanley expects BankAmerica to take additional writedowns and add roughly another $1 billion in goodwill by the end of March.

That would effectively drive the premium paid for Security Pacific to stratospheric levels. But because of purchase accounting, which allows goodwill to be amortized over 25 years, damage to earnings is minimal. The main impact is on capital ratios.

BankAmerica's Tier 1 capital ratio was a satisfactory but not lavish 6.5% at the end of September. Analysts expect the company to build equity through retained earnings, a dividend reinvestment plan, and continued tapping of the capital markets.

Mr. Newman says BankAmerica will ensure that capital ratios remain above the threshold for "well-capitalized" banks. He says the company has no plans to issue common equity or convertible debt.

Not surprisingly in a merger of this scale, there have been some organizational glitches. Key executives have defected from the private banking and mortgage units, for example.

In addition, setting up a collecting bank to dispose of problem assets has proved to be more difficult than originally thought. Mr. Newman said he expected the unit to be chartered in the first quarter of 1993 and hold assets with a face value of roughly $1 billion to $2 billion, smaller than expected.

Despite the rough patches, BankAmerica appears to have built an organization with formidable market strength and earnings power. But Mr. Newman said, "It would have been a lot easier to have done this in a strong economy."

CHEMICAL BANKING

For Chemical Banking Corp., 1992 was a year of hard work that paid off. Its merger,with Manufacturers Hanover Corp. was completed with nary a hitch, allowing it to emerge as a retail and wholesale powerhouse.

Several major consolidation projects remain, including the 80 branch closing and the restructuring of European operations.

What's more, Chemical must deliver promised post-merger earnings growth, improved credit quality, and cost savings in 1993.

Realizing the Potential

"Chemical very successfully portrayed itself as a company that could mesh the two banks' cultures and create a successful merger," said Judah S. Kraushaar, an analyst with Merrill Lynch & Co.

"The new issue for 1993 is, can they optimize the value of the franchise they've created?"

Chemical exceeded its objectives this year for merger-related cost savings, cutting $280 million, $60 million more than it had originally projected for 1992. The bank has targeted $750 million in total merger savings by the end of 1994.

Most of the cost savings come from layoffs and attrition. Chemical cut 5,438 employees, which represents more than 80% of the 6,200 total job cuts that it said it would achieve by 1994.

On the retail side, Chemical chose Hanover's technically superior back-office systems, and is in the process of developing a single check processing and demand-deposit accounting system.

Flood Delayed Process

The project was supposed to be finished in the fall, but was delayed when one of Chemical's data centers was damaged by floods from a broken water main in downtown Manhattan. This caused Chemical to delay the closing of some 20 branches until the first quarter of next year.

The delay will not impact cost savings this year, according to Chemical bankers, but it puts pressure on retail and operations staff to accelerate the branch closings next year. The bank intends to close more than 70 offices next year. About 10 branches were closed this year.

The operations consolidations are key to cost savings. Chemical has targeted $245 million in cost savings, for a cumulative total of $525 million at the end of next year.

Chemical's management told analysts recently that they expect strong revenue growth. The bank managed to retain most of its customers this year. But the real test will come next year, as branches close and competitors step up efforts to steal business.

Chemical's loan loss provisions and nonperforming assets are expected to decline next year. Net interest income will be flat, while noninterest income will grow moderately.

Controlling Overhead

Chemical has committed to improving operating efficiencies next year, and management projects that the overhead ratio will dip to 60% within the next two years. The ratio was 63.9% at the end of the third quarter.

Chemical executives say annual expenses will grow a modest 4% but observers think Chemical will have a hard time meeting that objective.

"Management has yet to fully reassure investors that expense discipline can be inculcated," said Mr. Kraushaar in a recent report on Chemical. "Chemical still needs to demonstrate an ability to correlate revenue and expense growth."

Mr. Kraushaar thinks that costs associated with further integration may eat into merger-related savings by 1993.

"Since targeted savings are less driven by staff reductions (over which management may have tighter control), we think the risk that the firm may not fully attain its 1993 savings is somewhat higher than that which was associated with the 1992 objective," wrote Mr. Kraushaar.

Meanwhile, Chemical's management is examining what businesses it wants to be in. An extensive profit analysis of business lines is under way, and it is likely that Chemical may divest some businesses that are not meeting a high return. Potential candidates include some areas of Geoserve, the bank's operating services division.

John McGillicuddy, Chemical's chairman, says expansion is a priority, especially in New Jersey, where the bank has a $5.5 billion-asset subsidiary. The bank is said to have made offers for several relatively small banks in the metro New York area, but was outbid on price.

NATIONSBANK

Doubters - and there are fewer of them now - still question whether NationsBank's management has enough depth to run a $118 billion-asset empire stretching from Maryland to Texas. But most analysts ended the year with increased respect for the company's disciplined approach.

"They have a dream franchise," said Jon Burke, an analyst with Robinson-Humphrey Co. in Atlanta. "There's still some debate about whether a company that big can be run successfully, but the numbers suggest NationsBank can."

NationsBank earned $911 million, or $3.59 a share, in the first nine months. The consensus estimate for 1992 is $1.2 billion, or $4.70 a share. Last December, most analysts were expecting about $4.35 a share.

Securities Gains Are Strong

Sales from NationsBank's massive bond portfolio - which totaled $24 billion as of Sept. 30 - provided most of that extra lift. "The biggest piece [of earnings] that was better than expected was securities gains," said Moshe Orenbuch, an analyst with Sanford C. Bernstein & Co. in New York.

But that wasn't the whole story. NationsBank also fulfilled promises made earlier in the year about extracting cost savings from the C&S/Sovran merger and reducing nonperforming assets.

NationsBank predicted it would be able to slash $450 million from its annual expenses, pretax, by 1994. And it seems well on its way to achieving that goal.

The company claims $120 million in savings this year, with employment falling by 6,000, to 52,000. NationsBank is more than halfway to its target of eliminating 9,000 jobs in three years.

Meanwhile, all the C&S/Sovran banks were operationally merged into the NationsBank system. Even Hurricane Andrew couldn't delay the integration of the Florida bank, which was accomplished on Oct. 8.

Some Rough Spots

There have been occasional glitches, however. A computer failure at the South Carolina bank in early December caused a two-day delay on recording deposits and withdrawals.

A few high level C&S/Sovran executives retired or drifted away to other opportunities. But so far, there has been no mass exodus of middle management.

Of the 30% of merger projects still to be accomplished, most involve specialty operations such as trust, which will not be integrated until the end of next year.

In the third quarter, NationsBank's nonperforming assets fell to $2.5 billion, down 9% from the level in the year-ago quarter.

That is less than the double-digit declines reported by other southeastern banks, but NationsBank's bad realty loans are concentrated in the Washington, D.C., market, one of the nation's worst.

Even so, NationsBank did follow through on its announced plan to sell off nonperforming real estate in bulk sales. The bank shed $350 million worth in the fourth quarter, which will reduce nonperforming assets by another $200 million. An additional $200 million in bulk sales is expected soon.

"I can't see a reason they should not be able to effect the same kind of decreases in nonperforming assets that we've seen at some other companies," said analyst Nancy Bush, with Brown Brothers Harriman in New York.

Consumer Side Grows

NationsBank also made progress on its plan to increase the percentage of consumer loans in its portfolio to 50%, up from 39%.

In November, the company bought Chrysler Corp.'s consumer finance unit for a $100 million premium over book value, adding $2 billion in consumer loans, which bumped the percentage to about 41% of the total.

"I can't think of a year in which they have more consistently laid out a game plan and then stuck with it," said Frank Anderson, a banking analyst with Stephens Inc. in Little Rock, Ark.

NationsBank managed to pull a few surprises in 1992 as well. Chief among them was the July announcement that it planned to invest $200 million in Baltimore-based MNC Financial Inc., with the option to buy the can make acquisitions on favorable terms," said Mr. Orenbuch of Sanford C. Bernstein.

Another surprise: in October, NationsBank disclosed a joint venture with Dean Witter Fianancial Services Group Inc. to sell mututal funds and other investment products in NationsBank branches.

Analysts don't expect this arrangement to produce discernible bottom-line results for several years, but they applaud $16.8 billion bank within the next five years.

Wall Street reacted favorably to the news because the agreement shields NationsBank shareholders from MNC's credit problems. "They showed that banks that have access to capital NationsBank's innovative attempt to build fee income.

Core Earnings Strong

Meanwhile, behind the razzle dazzle, NationsBank was grinding out improved core earnings through higher net interest margins, steeper service charges, and a revival in loan demand.

The company will begin paying more taxes in 1993, when it loses tax-loss carryforwards received from a 1988 acquisition in Texas, but the bottom-line impact is expected to be minor.

Earnings should continue to improve in subsquent years as NationsBank implements its ambitious Vision 95 program, which calls for common operational systems, products, and service procedures at all the company's branches by 1995. A similar program is in the works at the company's corporate bank as well.

With earnings ramping up, and a market capitalization third-largest in the country, NationsBank is once again in a position to consider new territories to conquer. Chairman Hugh McColl created a stir recently when he told The Economist he had his eye on California.

Wall Street has also been abuzz with talk that NationsBank might make a bid for Jacksonville-based Barnett Banks Inc., the largest bank in Florida.

Flotation Is Filed

Backing up the speculation is NationsBank's November filing of $2.5 billion in debt securities and preferred stock, which analysts assume is gunpowder for future acquisitions.

That leads to the question whether NationsBank is getting ahead of itself. Analysts have noted that Mr. McColl continues to rely on the same small cadre of top executives that used to run the predecessor bank, NCNB Corp.

It is easy to forget now that NCNB had only $28 billion in assets before it entered Texas in late 1988, less than one-third NationsBank's current size.

"The more they keep moving ahead in giant leaps, the more you can be concerned that even they may have bitten off more than they can chew," said Richard I. Stillinger, an analyst with Keefe, Bruyette & Woods Inc. in New York. "But so far, at least, that worry has turned out to be exaggerated."

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