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Super Banker


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SUPER BANKER

Bennett A. Brown couldn't have made himself any clearer. Two years ago, the chairman of Citizens & Southern Corp. rejected a hostile takeover bid for his Atlanta bank from NCNB Corp., telling NCNB Chairman Hugh L. McColl Jr. to "go the hell back to North Carolina." Even though McColl told Brown that he had "launched his missiles," the brash, acquisitive McColl backed off with uncharacteristic meekness. Then, Brown led C&S into a merger with Virginia's Sovran Financial Corp.

How the tables have turned. Stung by unexpectedly heavy loan losses at Sovran and a resulting drop in C&S/Sovran Corp.'s stock price, a chastened Brown was waiting alone at the airport when McColl swooped into Atlanta on June 20 in one of NCNB's corporate jets. The two drove to Brown's home, where McColl did most of the talking. He outlined his plan to merge their companies in a stock-swap deal that would create a bank with more than $116 billion in assets--exceeded in size among U. S. banks only by Citicorp (table, page 119). McColl, of course, would be CEO. He would call it NationsBank.

NCNB's $3.8 billion opening bid for C&S/Sovran marks a turning point in banking history. "It radically redefines critical mass in terms of size," says consultant Robert B. Hedges of MAC Group. With vast economies of scale and regional market domination, "these deals will be so compelling that investors will want more of them." Hedges and others argue that the so-called super-regionals can compete directly with the large money-center banks, without the baggage of billions in bad overseas loans and a dependence on loans in maturing urban markets. To many, the combined C&S/Sovran and NCNB operations would be especially appealing because of their solid middle-market lending businesses and their awesome strength in retail banking.

With Congress likely to approve true nationwide banking this year, it's increasingly clear that the key players in the coming consolidation will be super-regionals in towns like Charlotte, N. C., and Columbus, ennett A. Brown couldn't have made himself any clearer. Two years ago, the chairman of Citizens & Southern Corp. rejected a hostile takeover bid for his Atlanta bank from NCNB Corp., telling NCNB Chairman Hugh L. McColl Jr. to "go the hell back to North Carolina." Even though McColl told Brown that he had "launched his missiles," the brash, acquisitive McColl backed off with uncharacteristic meekness. Then, Brown led C&S into a merger with Virginia's Sovran Financial Corp.

How the tables have turned. Stung by unexpectedly heavy loan losses at Sovran and a resulting drop in C&S/Sovran Corp.'s stock price, a chastened Brown was waiting alone at the airport when McColl swooped into Atlanta on June 20 in one of NCNB's corporate jets. The two drove to Brown's home, where McColl did most of the talking. He outlined his plan to merge their companies in a stock-swap deal that would create a bank with more than $116 billion in assets--exceeded in size among U. S. banks only by Citicorp (table, page 87). McColl, of course, would be CEO. He would call it NationsBank.

NCNB's $3.8 billion opening bid for C&S/Sovran marks a turning point in banking history. "It radically redefines critical mass in terms of size," says consultant Robert B. Hedges of MAC Group. With vast economies of scale and regional market domination, "these deals will be so compelling that investors will want more of them." Hedges and others argue that the so-called super-regionals can compete directly with the large money-center banks, without the baggage of billions in bad overseas loans and a dependence on loans in maturing urban markets. To many, the combined C&S/Sovran and NCNB operations would be especially appealing because of their solid middle-market lending businesses and their awesome strength in retail banking.

With Congress likely to approve true nationwide banking this year, it's increasingly clear that the key players in the coming consolidation will be super-regionals in towns like Charlotte, N. C., and Columbus, Ohio. Already, super-regionals such as Banc One and First Union have been running up huge market share gains by sticking to the business basics while gobbling up competitors. The trend makes sense. "The real core banking business is lending locally to consumers and commercial customers," says John B. McCoy, chairman of Banc One Corp. in Columbus.

HUGE RISKS. These "nationally active regional banks" are the wave of the future, concedes John S. Reed, chairman of Citicorp. He sees "four or five" money centers, including Citi, Bankers Trust, and J. P. Morgan, plus a few big securities firms, staying globally active and focusing on the largest companies. But even Reed recognizes that money-center banks will face stiffer competition from super-regionals in consumer lending and that the money centers have scant hope of catching the super-regionals in lucrative middle-market corporate lending.

Still, there are huge risks in McColl's planto form NationsBank. There's the obvious problem of C&S/Sovran's condition. Bad loans now account for 3.3% of its total, up from a far more modest 1.15% at the beginning of last year. And earnings at McColl's bank also slumped badly in 1990 and would have been nearly nonexistent without the tax-sheltered profits fromits Texas operations (page 120). That raises some questions about McColl's ability to manage as assets soar past the $100 billion mark, especially since he is itching to slug it out with nonbank financial institutions on their own turf. It's a daunting challenge for a team that appears to be stretched thin already.

Yet if there's any banker willing to take a big gamble, itis McColl. Intense, seemingly fearless, and given to out-rageous pronouncements, the fourth-generation banker is the closest thing his industry has to Ted Turner. "He's intimidating," says an Atlanta banking consultant who has worked for NCNB. "McColl likes to say, `We don't meet, we have battles.' "

For years, the ebullient South Carolinian has encouraged the notion that NCNB was destined to be the next Citibank. When some began referring to NCNB as the Citibank of the South, McColl twisted it around and began calling Citibank "NCNB of the North." He specializes in takeovers: In his eight years as CEO, McColl has strung together more than 100 deals. His most dramatic, the 1988 takeover of Dallas' First RepublicBank Corp., more than doubled the size of Charlotte-based NCNB. Today, Texas accounts for much of its earnings.

McColl, 56, is purposely maintaining a low profile these days, hoping to avoid unleashing the kind of inflammatory comments that have antagonized adversaries and scuttled earlier takeover attempts in Georgia, Tennessee, and Florida. He once criticized Florida bankers for being lazy, and on another occasion, he told Georgians that he wasn't going to follow "every pig path" in the state to create a big bank there. McColl declined to be interviewed for this story. But his vision is clear--and it extends well beyond C&S/Sovran.

McColl is the most vocal proponent of a radical plan now being endorsed by a few other maverick bankers. He's pushing for NCNB to be allowed to operate a separate, freewheeling merchant bank that would not be protected by the Federal Deposit Insurance Corp.'s safety net. In exchange, NCNB would be permitted to compete head-on with investment banks such as Morgan Stanley and Salomon Brothers, insurers, and corporate-owned financial institutions such as GE Capital Corp. McColl sees this unit underwriting securities, selling insurance and mutual funds, and being a larger player in takeovers--all with funds raised from private capital markets.

MASTERSTROKE. McColl will have to cool his heels before implementing this vision, however. The core bank/merchant bank concept is not part of the bank-law overhaul legislation approved by the House Banking Committee on June 28 and is unlikely to pass this year. But if the bill does make it to President Bush's desk with the provision allowing for true interstate banking and interstate branches, there will be more than enough activity to keep McColl and his troops occupied. A regional compact already allows NCNB to acquire other banks in several Southeastern states, plus failing institutions nationwide. But now, a merger SWAT team reporting to NCNB Chief Financial Officer James H. Hance Jr. is studying several potential takeovers, including Southeast Banking Corp. of Miami.

For now, McColl's initial C&S/Sovran merger proposal calls for exchanging each of C&S/Sovran's nearly 137 million shares for 0.75 of an NCNB share, or about $27.75 a share based on NCNB's current stock price. Both banks have more than $1 billion in nonperforming loans on their books, so the final exchange offer might depend on how effectively each side can convince the other of the strength of its balance sheet. Also, NCNB can't exchange much more stock than McColl proposes or it could lose valuable tax benefits.

In strategic terms, the acquisition of C&S/Sovran, with its network of nearly 1,000 branches concentrated primarily in Georgia and Virginia, would be a masterstroke for McColl. Paired with NCNB's Southeast strongholds in North Carolina and Florida, C&S/Sovran would give NCNB dominance from Baltimore to Key West, Fla., complementing its No. 1 position in Texas and giving it an industry-leading total of more than 1,900 branches. The middle-market lending strengths of both banks would get a boost from NCNB's savvy in back-office productivity and C&S/Sovran's expertise in specialized receivables lending.

DAUNTING TASK. There would be lots of room for cost savings as well. Bear Stearns & Co. analyst Mark Alpert estimates that NCNB could chop at least $130 million in yearly overhead by eliminating duplicate branches in South Carolina and Florida and perhaps as much as $150 million more by consolidating headquarters and back-office operations. Assuming that McColl's troops could pull off the daunting task of integrating the two companies smoothly over the next few years, NCNB would be ideally positioned to march north and west by 1994, when full interstate banking is expected.

But that's a towering "if." The soured pairing of C&S and Sovran illustrates how difficult bank mergers can be. Management has wrung out few if any inefficiencies. Instead, executives have been forced to concentrate on trying to stanch the hemorrhaging from Sovran's problem real estate loans. The culture clash at NationsBank could be just as troublesome. NCNB is a competitive environment where employees are encouraged to take risks. C&S/Sovran is a far more genteel, careful company. Consultant David C. Cates of Ferguson & Co. in Washington worries that McColl may be biting off a bit too much this time. "NCNB has a very special and superior culture," he says. "They are the best and the brightest. The thing is, C&S is the same way. The chemistry challenges are enormous here."

McColl and his managers haven't exactly been subtle when it comes to dealing with culture clashes. NCNB gained a reputation for toughness when it ousted line officers at banks it acquired in Florida in the 1980s and replaced them with hard-charging young McColl clones. NCNB officials say they've learned from their mistakes, but McColl's rivals aren't about to let him--or anybody else--forget it. NCNB's archcompetitor, Wachovia Corp., based in Winston-Salem, N. C., recently agreed to acquire $7.1 billion of South Carolina National Corp.'s assets in a stock swap that will boost Wachovia's assets to $32.7 billion. Discussing the deal, Chairman John G. Medlin Jr. took a pointed swipe at McColl and NCNB: "For now, we'll continue to follow a gradual expansion plan across the Southeast at a pace that allows for quality mergers done in a humane manner."

NCNB's reputation may yet derail the NationsBank idea. According to one C&S/Sovran director, a sizable contingent on the 29-member board wants to stay independent. "Who knows what the value will be of the paper NCNB stock we'll be getting if we say O. K.?" asks the board member. "If we can put our real estate problems behind us, in three years, we'd be in the catbird seat with the market franchises we have." But Brown may take a more bottom-line approach. Brown, who declined to be interviewed for this story, gave a crisp, unemotional presentation at a special June 27 board meeting at which he was given the go-ahead for formal negotiations with NCNB. Brown repeatedly told the board that his recommendation will be based on what is best for the shareholders.

While both sides say they have put no time limit on the due-diligence process, C&S/Sovran's next scheduled board meeting on July 16 looms as a practical deadline. That's when the board is slated to decide whether to slash the quarterly common stock dividend because of continuing loan losses. Second-quarter earnings have not been released yet, but C&S/Sovran has already publicly confirmed that nonperforming assets--loans not expected to be paid back in full--will rise in the period, albeit by less than the first quarter's $403 million increase. If the worsening loan situation forces the board to cut its dividend and C&S/Sovran's stock price plunges sharply, McColl's lifeline may be the only practical alternative.

For McColl, that victory would be especially sweet. He and Brown are natural rivals--both are South Carolinians and have known each other for almost three decades. McColl was born six years after Brown and 60 miles north, in Bennettsville, S. C. His great-grandfather organized a bank there after the Civil War and built a railroad with the lofty name South Carolina & Pacific. It ran all of about 50 miles. McColl's father eventually liquidated the bank and concentrated on cotton farming, but banking remains in the family's blood: Both of McColl's brothers are bankers. (One works for C&S/Sovran in Columbia, S. C.) Both of McColl's sons are in the business, too. His oldest, Hugh III, is an investment banker at Bear Stearns in New York. Hugh III was pitted directly against his father during the 1988 battle for control of First Republic. Dad won.

POKER MARATHONS. At the University of North Carolina in the 1950s, McColl was an indifferent business major. C. R. May III, a fellow member of Beta Theta Pi fraternity, recalls that McColl was noted for presiding over round-the-clock, penny-ante poker marathons that he usually won. "Money was never the motivation," says May. "Making you quit first was."

After graduating in 1957, McColl volunteered for a two-year stint in the Marines. He has often said it forever changed his life. Talking to a reporter in 1990, McColl remembered what it was like to live with non-Southerners for the first time. "I hated Yankees growing up," he said. "I was raised to believe they burned our fields and houses, raped our women and destroyed our economy, and held us in involuntary servitude for 100 years--some of which is true."

More than anything, though, McColl has said that the Marines taught him to take care of his troops at all cost. That's why NCNB was one of the earliest proponents of flexible-benefit programs that help reduce turnover among young mothers in clerical and teller jobs. And it's also why he stood by Timothy P. Hartman in 1985 when Hartman was forced to take a leave of absence while the Securities & Exchange Commission investigated his role as chief financial officer in the bankruptcy of Baldwin-United Corp. Hartman was cleared, and two years later, he helped come up with the tax-saving gambit that helped NCNB win the bidding for First Republic. Today, he's vice-chairman of NCNB.

'MILITARY-LIKE.' Luckily for McColl, his mentors at NCNB encouraged him to break the mold. Perhaps sensing that he would get this kind of freedom, McColl politely spurned an offer from his father-in-law to work at a small family-owned bank when he got out of the Marines and instead let his father arrange an introduction at what became North Carolina National Bank. Wachovia Bank & Trust Co. had long had a lock on corporate lending in North Carolina, so the upstarts at NCNB had to blaze their own trail.

Early on, McColl caught the eye of NCNB Chairman Addison Reece and his successor, Thomas I. Storrs. McColl was named president at the age of 39. Once he made it to the top nine years later, McColl wasted little time in stamping his imprint. "He doesn't mind stepping on egos, arms, or legs to reach his objective," says a former NCNB executive.

McColl accelerated a program of hiring legions of MBAs, effectively bringing in nonbankers to challenge older staff officers. Gordon W. Campbell, who was CEO of Florida-based Exchange Bank when NCNB acquired it, calls McColl's recruits "very military-like. They'll run through walls if McColl tells them to. He doesn't have a lot of tolerance for incompetence."

Once, a colleague recalls, McColl visited a department at headquarters and noticed a young employee sitting in a broken chair. He inquired, and she told him she had put in an order almost two months earlier. McColl picked up a nearby phone, dialed a senior executive in charge of purchasing, and told him: "If you can't get her a chair in the next 15 minutes, bring her yours."

Imagine the reverse image of McColl's supercharged style, and you have the approximate measure of Bennett Brown. A former bank examiner, Brown took over Citizens & Southern on an interim basis after the 1975 recession decimated its portfolio of real estate loans.

Brown's housecleaning saved the bank and earned him a full-time job as CEO. But former executives criticize Brown for failing to reenergize the bank in the 1980s, virtually guaranteeing that it would be a takeover target. Worse, in running away from McColl and into a hasty marriage with Sovran two years ago, Brown and C&S ended up getting blindsided by a real estate loan mess that was brewing at Sovran's three banks in the Washington area.

NO BRAKES. Analysts at Atlanta brokerage Robinson-Humphrey Co. pin the blame on a lack of strong centralized credit controls at Sovran, itself the product of a 1984 merger of banks in Norfolk and Richmond. As a result, when Sovran's Washington-area banks went on a commercial real estate lending binge starting in 1987--about the time that even Texas savings and loans were exiting that overheated market--nobody put on the brakes.

McColl ought to be somewhat sympathetic to Sovran's plight. For years, NCNB has been willing to make loans to customers that other banks viewed as too risky. It almost ensured that a higher percentage of loans would go sour, but at the higher rates the bank was charging, the net effect was worth it--especially since NCNB was an industry leader in back-office productivity improvements. The formula came unhinged last year, though, when losses on real estate loans began to mount.

Once the staggering size of the problem became clear--$1.03 billion in nonperforming loans--McColl moved quickly. He borrowed a page from the Texas playbook and set up an asset-disposition bank in the Southeast headed by William P. Middlemas, the president of Southeast banking. He was told to get rid of the problem fast--and not to worry unduly about offending longtime customers.

Owning up to the mess hit McColl directly in the pocketbook. Higher loan-loss provisions contributed to an 18.2% plunge in 1990 net income, to $365.7 million. So McColl and most other top NCNB executives didn't get a bonus for the year. (In 1989, McColl's bonus was $875,000.) There was a small consolation, however: His base salary rose from $625,000 in 1989 to $700,000 last year.

HUMBLED. Particularly embarrassing is the fact that most of the problem real estate loans are in Florida and North Carolina, where NCNB lenders presumably know the local markets best. Humbled ever so slightly, McColl now says his goal is to generate half of NCNB's future loan demand in what he calls the "core bank"--from the relatively mundane businesses of home mortgages, credit cards, car loans, and other consumer offerings.

Out of the office, McColl is equally intense. Whether it's drinking beer with trainees, playing on the company softball team, or serving on the board of small Queens College in Charlotte, colleagues say he's always "on." His friend V. Rietzel Snider, a Charlotte real estate investor, has played racquetball with him and lived to tell the tale. "Hugh is a white-hot blowtorch as a competitor," says Snider. "He plays with absolute abandonment, crashes into a wall, bleeds awhile, then gets up."

As for the future, McColl hasn't let on how long he'll stay on as chairman. If he imitates his predecessor, retirement is at least nine years away. That hasn't stopped NCNB-watchers from trying to handicap the succession race. The death from a brain tumor of onetime heir apparent Francis "Buddy" Kemp in 1990 has turned the spotlight to Kenneth D. Lewis, who was running NCNB Texas and is now back in Charlotte as president of General Bank, overseeing NCNB's seven state banks.

But a lot is sure to happen before McColl walks away. It's possible that an executive from C&S/Sovran could even percolate to the top if the deal goes through. That would assuage only somewhat the wounded pride of C&S veterans in Atlanta, who were looking forward to moving into a new, 55-story headquarters building next year. The thing is, McColl is overseeing construction of a new 60-story headquarters in Charlotte that the locals call the Taj McColl. Like it or not, C&S/Sovran may soon have to call it home.

THE

MAKING OF

A MAVERICK

1959

Hugh McColl, fresh from the University of North Carolina and the U.S. Marines, joins predecessor of North Carolina National Bank as a trainee

1973

After working his way through various posts, including a prodigious stint as a loan officer in the early 1960s, the aggressive executive becomes vice-chairman of the bank and a director. He is named president of the bank the next year

1983

McColl, who became president of the parent company the year

before, takes over as chairman and chief executive. He kicks off a brash acquisition campaign that will spread NCNB throughout the South--and cement his reputation as a dealmaker

1985

NCNB tries to buy First National Bank of Atlanta, but its directors accept a slightly lower offer from Wachovia Corp.

1988

Sensing a bargain, McColl snares deeply troubled First RepublicBank Corp. of Texas, with $32.5 billion in assets. Huge tax benefits shelter future earnings, and the FDIC scoops up billions in bad loans

1989

McColl tries to buy genteel Citizens & Southern, Georgia's largest bank. It shoos him away and merges with Virginia-based Sovran Financial at a price lower than NCNB's offer

1991

He's back. When C&S/Sovran stumbles on some bad loans, McColl resurfaces ready to talk merger again. C&S Chairman Bennett Brown, no great fan of McColl's, agrees to merger discussions

DATA: BWWHERE McCOLL'S

'NATIONSBANK'

WOULD FIT IN

Total assets as of Mar. 31

Billions

CITICORP $216

NATIONSBANK 116*

BANK OF AMERICA 112

CHASE MANHATTAN 98

J.P. MORGAN 94

SECURITY PACIFIC 83

*Combined assets of NCNB and C&S/Sovran

DATA: COMPANY REPORTS, BW

Chuck Hawkins in Atlanta and Dean Foust in Charlotte, with Zachary Schiller in Cleveland and Peter Finch in New York


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