Leaner Isn't Always Meaner

Cost-cutting has been the mantra of bank CEOs for the past several years. Get expenses down, they have figured, and investors will push their stock prices out of the reach of acquisitive rivals.

But wielding a budget ax can only get a bank so far. Just ask First Fidelity Bancorporation CEO Anthony P. Terracciano: On June 19, he agreed to let First Union Corp. in Charlotte, N.C., acquire his bank in a $5.4 billion transaction--the biggest bank deal ever.

AN EDGE. During his tenure at Newark (N.J.)-based First Fidelity, Terracciano slashed costs and streamlined operations. But after fixing the bank, he had little to spend on new products that could give First Fidelity an edge with customers. The result: the sale to the more innovative First Union, led by Edward E. Crutchfield Jr.

It's a story that will be repeated. Dozens of regional banks, including Michigan National and Shawmut National, have tied their hopes to cost-reduction and little else. Now, absent competitive products and services, many regionals are being eyed as takeover candidates. "This [deal] is going to open up some floodgates," says James McCormick, president of First Manhattan Consulting Group Inc.

First Union represents a new banking paradigm--a focus on clearly defined customer groups combined with the financial heft to invest to stay competitive. First Union, for example, actively develops products, such as mutual funds and capital-markets services, designed for its core customers: consumers and businesses with sales under $250 million. Crutchfield already is thinking about more acquisitions. He calls the Northeast "a fat, juicy target for deals."

For bank CEOs, merely slashing costs just isn't enough anymore.

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