Are Bigger Banks Badder?

By Bernard Baumohl and John Greenwald

A fiery ex-Marine and an avid mountain climber, Hugh McColl Jr. has scaled the Swiss Alps and Tanzania's Mount Kilimanjaro. But his loftiest goal is to lead NationsBank, the Charlotte, N.C., company he has run since 1983, to the summit of American banking. Through more than 50 acquisitions, McColl has turned NationsBank into the third largest U.S. lender (behind Chase Manhattan and Citicorp), with branches in 16 states and $316 billion in assets. And NationsBank stock, which has swelled to $65 billion in total value, makes the bank No. 1 in market capital. "In most of life's endeavors," declares McColl, 62, "you are either growing or dying."

Just last week Republican leaders in Congress, acknowledging the changes sweeping Main Street and Wall Street, proposed a way to end Depression-era barriers that formally separate banks, investment firms and insurers. Already, though, hard chargers like McColl are overrunning the crumbling regulatory barricades. "Hugh McColl is the General Patton of the consolidation process," says Michael Ancell, a banking analyst with the Edward Jones investment firm.

McColl's conquests have enriched the shareholders of NationsBank and the banks it has bought--shareholders that include many bank employees, from tellers to vice presidents. But the growing profits of NationsBank and other expansionist lenders have come in part from new and higher fees charged customers, shuttered branch offices and a decrease in traditional services at teller windows and by telephone. How long can any business keep increasing profits if many of its customers feel neglected? One answer can be found in a state that McColl has targeted for expansion: California. There, Wells Fargo, after its hostile 1996 acquisition of a large competitor, drove away so many customers with annoying fees, computer glitches and long teller lines that the exodus contributed to a profit plunge.

In a 1997 study of 419 banks, the U.S. Public Interest Research Group found a widening gap between fees charged at the 300 largest banks (which account for most mergers) and at small banks and credit unions. "You used to be able to walk in without a deposit slip, and they'd just hand you one," says Skip Shipman, a florist in Woodstock, Ga., whose local bank was acquired by McColl in 1996. "Then NationsBank started charging a dollar for a deposit slip." After a wave of protests, the bank halted the practice last year. But complaints persist about other fees and services.

NationsBank and its big competitors emphasize new services, offering everything from mortgages to mutual funds via round-the-clock banking. "When we acquire a company in a new neighborhood, then obviously some of the things that customers have been accustomed to will change," says Lynn Drury, a NationsBank spokeswoman. "Some services can be added and some taken away. Some fees may go up and some go down. And because some people are uncomfortable with change, they might choose to go to another bank." Indeed, such refugees are enabling new local banks that stress service to customers to blossom in the shadow of the giants (see box).

So far, though, NationsBank has gained far more profit than it has lost through acquisitions, earning a record $3.08 billion in 1997. Its shareholders have enjoyed an average gain of 26% a year over the past decade, handily beating the 18% annual return for the benchmark S&P 500 stock index.

With buyers like McColl bidding up their prices, bank stocks overall rose 50% in 1997, marking the third straight year in which the sector outperformed the rest of the market. Does that make new acquisitions too costly? "I suppose that depends," McColl drawls, "on how skilled you are at taking costs out of the new combined company." Last year saw a record 72 bank acquisitions valued at more than $100 million apiece. The big gulp: a $16.5 billion deal by First Union--McColl's crosstown Charlotte rival--to acquire Philadelphia-based CoreStates Financial. That topped McColl's $15.5 billion buyout of Barnett Banks in Florida.

But banks are not just snapping up one another at a time when even firms like Merrill Lynch can offer federally insured deposits. "I know people who do not have a checking account with a bank anymore. They just use their brokerage accounts," says Kevin Timmons, a senior banking analyst for the First Albany investment firm. A recent survey by McKinsey & Co. found that only 49% of Americans now view their bank as their primary financial institution, down from 59% in 1992.

To reverse such trends, banks acquired securities brokers at a record pace last year. McColl shelled out $1.2 billion for Montgomery Securities of San Francisco. "Today we do almost everything Merrill Lynch does," he says. "We compete with them in investment banking and the brokerage business." Would he like to own Merrill? "We could," he replies, "but it's not for sale, and we are not interested." Then he adds with an alligator grin, "But nothing is forever!"

Nothing, that is, but his fierce desire to win--and have fun doing it. McColl was famed for his success at poker when he was stationed at Camp Lejeune Marine base in North Carolina. More recently, he helped bring a National Football League team, the Carolina Panthers, to Charlotte. And he dramatically opened the new 60-story NationsBank headquarters in 1992 by having soldiers rappel down the building on ropes. (Local wags dubbed the structure the Taj McColl.) He went in the opposite direction on his 60th birthday, trekking up Kilimanjaro.

McColl's buyouts, like his climbs, have been strewn with rocks. After spending $9.6 billion for Boatmen's Bancshares in St. Louis, Mo., in January 1997, he waited barely a year to announce a $15.5 billion deal to buy Barnett. Then he backed away from a pledge to cut $450 million out of Barnett's costs this year because of difficulty digesting the earlier acquisition. Nonetheless, NationsBank is shedding 200 branches in Florida (including 124 that state regulators have ordered it to divest) and reducing the merged workforce from 30,000 to 22,000. Gleeful local rivals have launched an ad blitz that analysts say could persuade about 10% of Barnett's customers to switch their accounts.

Despite the rapid mergers of existing banks, more and more new ones are being launched. The number of applications for community bank charters has quadrupled, from 49 in 1994 to more than 200 last year, with much of the activity coming in states like Florida and California, where giant banks predominate. "The large banks just don't do a very good job of serving the niche that community banks have," says Bob Colvin, a banking expert for Sheshunoff Information Services.

Big banks have little interest in competing on price for the basic services that many households prize. Consumers had to pay an average of 15% more a year, or a difference of $27.95, to maintain a regular checking account at a large bank instead of a small one, according to the U.S. Public Interest Group. The gap grew to 100%, or $110, when large banks were compared with credit unions. At the NationsBank branch in Woodstock, Ga., a personal checking account costs $10 a month without a minimum balance, while a similar account at the locally owned Bank of Canton costs $8.

Few banks have suffered more painful defections than Wells Fargo, a San Francisco behemoth that paid $11.6 billion for First Interstate in 1996. Wells Fargo laid off thousands of managers, tellers and computer experts and started charging for services that had been free, like giving account information over the telephone. A computer crash knocked out phone banking for days. For a time, frustrated customers bolted at the astonishing rate of 1.5% a month.

Despite such horror stories, the pace of bank mergers is likely to accelerate as McColl and his rivals battle for market share. "The next five years will make the past five look tame," says Lenny Mendonca, a senior partner at the McKinsey consulting firm. Mendonca says that the number of large national banks could shrink from about 40 today to as few as six or eight shortly after the turn of the century.

Whatever the tally, McColl insists that NationsBank will be among the survivors. And he's currently eyeing California, where NationsBank has no branches as yet. "Will we ever stop expanding our company and be satisfied with what we have?" he asks. "No! We're interested in California, and we're interested in a lot of things." The trick will be to keep the bank's customers interested as well.

--With reporting by Leslie Everton Brice/Atlanta

With reporting by LESLIE EVERTON BRICE/ATLANTA