In banking, size can be an advantage, at least in terms of economies of scale.
But executives at some community and small regional banks are scratching their heads at one of the reasons offered to explain the latest round of big bank mergers - that such enormous scale is needed to be able to afford systems.
"We see $100 billion banks being formed because they can't afford the technology as a $50 billion bank," said James J. Giancola, president and chief operating officer at CNB Bancshares, a $3.6 billion-asset banking company based in Evansville, Ind. "I'm really not sure what technology they are talking about."
Disagreement persists in the industry about whether the ability to invest large sums in new technology will prove to be a barrier for smaller banks to compete against leaner and more efficient giants. Bankers like Mr. Giancola argue that the falling cost of technology, the availability of off-the-shelf software packages that are priced according to a bank's asset size, and the option to outsource, which provides access to a third parties' economies of scale, mean that smaller banks aren't at a technological disadvantage.
But others say that with mergers creating not only superregional but national institutions, the biggest players will be able to use technology to gain the upper hand in sophisticated target marketing and bringing products to market faster.
David Berry, director of research at Keefe, Bruyette & Woods Inc. in New York, also noted that as a group large banks have become more efficient than small institutions. "That was not true for a long time," he said. "To me, that is an argument in favor of getting bigger."
Only time will tell who's right. But bankers at smaller institutions readily agree they must make wise technology investments to compete effectively.
Take CNB. The bank, which operates 93 branches in Indiana, Illinois, and Kentucky, has doubled its size since 1990.
But executives now say that while CNB pursued an aggressive acquisition strategy, it didn't move fast enough to reap back-office savings.
"We felt success in that we were able to turn them around," said chairman and chief executive H. Lee Cooper. "We just didn't realize that taking two or three years to turn them around was too long."
Mr. Cooper said that while the lead bank was a superior performer, many of the community banks it bought were posting less-than-stellar results. And he conceded that CNB overpaid for some banks in its battle to gain a top position in several markets. Together, that dragged down overall earnings growth and profitability ratios.
Mr. Cooper is candid about the bank's record of dilutive deals. "In the past, I think we felt we just needed to grow. And frankly, we didn't know anything about buying banks."
But officials boast that each of CNB's last three acquisitions was converted to its systems on the day the deal closed. That enabled it to rapidly cut out 35% of expenses from in-market deals.
"Until we got on a superior data processing system, we just couldn't make these conversions work," said Mr. Cooper. "Our system was just simply too out of date to do that."
Two years ago, the bank entered into an outsourcing arrangement with Alltel Information Services, which has systematically converted 28 affiliate banks to a common data processing system. The bankers say they are pleased to have established performance standards in their contract with the Little Rock-based company - and let it worry about the technology.
"It's their responsibility to provide the level of service that we contractually agreed to," said Mr. Giancola. "How they do that is a technology problem for them to solve."
M. Arthur Gillis, president of Computer Based Solutions Inc., New Orleans, said that outsourcing is often an attractive choice for banks that have fallen behind in maintaining and upgrading their systems. "There is no need to apologize today for using an outsourcer," said Mr. Gillis. "Today these judgments are made with good business sense."
He also said that technology today can be fit to any size institution.
Other industry experts go even further, saying that smaller banks can have a technological edge over their larger brethren. "To do check processing through image is a hell of a lot easier for a $300 million bank in Oklahoma than it is for BankAmerica," said Paul Allen, president of Aston Limited Partners, a New York-based consulting firm.
The big banks that pointed to technological economies of scale when they merged, said Mr. Allen, were doing so largely to "manage shareholder and analyst expectations."
For his part, Mr. Giancola noted that the bank uses the same core accounting software as Chemical Banking Corp., which has an asset base 50 times CNB's size. And the Indiana bank, like some of its bigger counterparts, is also part of the MAC automated teller machine network and has a "home page" on the Internet's World Wide Web.
"We are just not seeing the cost of technology being a prohibitive factor in our ability to compete," said Mr. Giancola.
Mr. Cooper said he wants CNB to reach between $7 billion and $10 billion of assets by the year 2000.
"You have to be able to provide your shareholders with solid returns. And it's hard to do that unless you are of a certain size that the market recognizes your stock," said Mr. Giancola. There are also benefits of spreading fixed costs across a larger asset base.
"We feel that to be successful long term - that is, to generate above- average returns to shareholders - a certain size is significant," said Mr. Cooper. "If not for data processing, then for marketing and for products and services."
CNB's growth strategy involves making between two and five acquisitions a year for the foreseeable future.
But Mr. Cooper cautions the bank won't be buying at all unless the price is right.
"There are not going to be any unless ... they are really going to add to shareholder value," he said. "If it works, we're going to do them. But otherwise, our main focus is going to be to drive earnings per share."
The faster systems-conversion schedule, possible with its facilities management outsourcing contract, has also enabled CNB to keep down expenses. While the bank's asset base grew 10% in the last year, the number of employees declined by 6%. The bank's efficiency ratio, or the percentage of a dollar it costs to generate $1 of revenue, declined to 62% for the third quarter of 1995 from 64% a year earlier.
And executives expect the efficiency ratio to decline further next year, as the benefits of the back-office consolidation, along with internal process redesign, accrue. While Mr. Cooper declined to offer a specific timetable, he said the bank needs to post an efficiency ratio in the mid- 50s.
But, Mr. Giancola added, "The company is simply more efficient and profitable."