NEWNAN, Ga. -- First Union Corp. has provided a textbook lesson on how a super-regional bank's quest for efficiency can alienate a small town.
The Charlotte, N.C.-based powerhouse last month announced it would close two of its three branches in this bedroom community (pop. 11,500) southwest of Atlanta.
A Failure to Communicate
Adding insult to injury, First Union never discussed the branch closings with the local advisory board it set up to act as a liaison between the company and the community.
Outraged that they were not consulted, all 12 people on the board resigned, and many of them bad-mouthed First Union in the local newspaper. The controversy was also picked up by Atlanta's daily newspaper.
Then First Union's competitors jumped into the fray.
Bank of Newnan, a local institution with $46 million in assets, put an ad in the town paper highlighting the fact that it is "locally owned and operated, where final decisions are made by local officers and a board of directors from your hometown."
Another Competitor Runs Ad
Rival Newnan Savings Bank, with assets of $132 million, introduced a similar ad emphasizing its local ownership and control.
"There's been a lot of resentment building up against First Union," said Harold S. Hammond, Bank of Newnan's president and chief executive officer. "They don't give a damn about the community."
Harald Hansen, chairman of First Union's Georgia bank, insists the branch closings were justified. He also notes that First Union has closed 56 branches in Georgia, without controversy or opposition, since entering the state six years ago.
Newnan "is the only place where branch closings have caused any board to resign," Mr. Hansen said. "It says there's something unique about this board, as far as I'm concerned."
Centralization Poses Risks
First Union's problems in Newnan underscore the dilemma that large, centralized banking organizations can face in small towns. First Union has $48 billion in assets and a presence in five states.
Wall Street approves and rewards draconian cost cutting, and First Union had good financial reasons for closing the two branches. But banks that adopt such policies may face a local backlash.
The bad blood between First Union and its Newnan board dates back to 1986, when the company acquired First Railroad and Banking Co., a loose confederation of community banks headquartered in Albany, Ga.
First National Bank of Newnan, which had about $100 million in assets, was one of the banks in the First Railroad chain.
Directors Lose Power
After the November 1986 acquisition, First National of Newnan's managers and a few directors left to form Bank of Newnan. The remaining directors lost most of the powers they had enjoyed under the First Railroad regime.
In First Union's system, they became an "advisory board," which meant they were to be consulted but exercise no real authority.
Disagreements quickly surfaced. The directors wanted the bank to keep growing in Newnan. But First Union, alarmed by credit quality problems, put on the brakes and actually began to shrink the portfolio.
In early 1987, the Newnan bank was the second-worst performer in First Union's entire Georgia network, with a 0.47% return on assets.
Assets Cut in Half
By the second quarter of this year, First Union's Newnan assets had shrunk to $45 million, half what they were when First Union bought the bank. Deposits were $65 million, according to the company.
"They've chosen to shrink, shrink, shrink to get their financial ratios in line," said Malcolm Harvey, former chairman of the advisory board.
Mr. Harvey and several other board members became so irate that several years ago they offered to buy the bank back from First Union, which brushed them off.
Then, at a spring meeting of the advisory board, First Union told the directors it was considering closing at least one of its three branches in Newnan.
Early Resignation Threat
Mr. Harvey, a retired businessmen, objected and threatened to resign. The topic lay dormant until Oct. 8, when Terry Wall, First Union's new manager in Newnan, called a special board meeting to announce plans to close two branches in January. The move would cut First Union's 30-person staff in Newnan by one-third.
Mr. Harvey immediately followed through on his threat to resign, and the 11 other directors joined him. "The intent was to show dissatisfaction and displeasure with the bank's position," said Neil Shepard, one of the directors who walked out.
The Thursday night walkout became big news in Newnan and was even picked up by the Atlanta Journal and Constitution on Saturday.
Rivals Expect to Win Share
"People in town are talking about it because so many jobs will be lost," said Marianne Thomasson, managing editor of the biweekly Newnan Times-Herald
"We're all disappointed and concerned," said Inez Slaton, executive director of the Newnan Chamber of Commerce.
Competitors feel certain they'll pick up some business from First Union customers who are inconvenienced by the branch closings, though they haven't yet noticed a surge of deposits.
Mr. Shepard, who owns an insurance agency in Newnan, says he will definitely take his business to another bank.
"First Union has done nothing but drive business away," Mr. Shepard grumbled.
Mr. Wall, who joined First Union in June, knows he's in a tough spot because of all the negative publicity. "I'm not concerned to the point where we can't overcome that," he said.
Mr. Wall, 36, has plants to reorganize his team and add commercial lenders and customer service representatives at the headquarters office.
He argues that the branch cut-backs are essential to restore First Union's competitiveness in Newnan by bringing expenses in line with the bank's current size.
"We feel this is the first step in getting us where we want to be," said Mr. Wall, who had previously managed Bank South Corp.'s supermarket branching program in Atlanta.
Mr. Wall may, over time, be able to rebuild First Union's bank in Newnan. But questions linger as to whether big-bank centralization is always appropriate for smaller communities like Newnan.
NationsBank Also Criticized
Charlotte-based NationsBank, which operates three branches in Newnan, has also caught some local flak for moving its mortgage origination activities out of town.
"It's well known in banking circles that a lot of these banks First Union acquired in Georgia have lost big parts of their market share because of the centralized way in which they operate," said T. Stephen Johnson, an Atlanta-based consultant.
In its zeal to cut costs, First Union has established rigid companywide guidelines on branch profitability that take into account an officer's overhead ratio, deposit growth, loan growth, customer traffic, and transaction volume. Branches that don't meet those guidelines may be axed.
Branches Under Review
Mr. Hansen said First Union's remaining 101 branches in Georgia are under "continuous review."
First Union will gain another 33 branches early next year when it completes the acquisition of an Atlanta thrift, but it is expected to sell or close about 10 of those branches, laying off several hundred employees.
Thomas Moat, president of Newnan Savings Bank, says he understands why First Union has to eliminate branches. "They've got to cut costs somehow to make money," he said.
But the 45-year-old community banker also believes this policy leaves an opening for banks like his, which concentrate almost exclusively on consumer business.
"First Union wants the large deposits and commercial business, but when it comes to servicing the consumer, they're not going to be there," Mr. Moat said.