The Philadelphia Inquirer from Philadelphia, Pennsylvania • Page 46

CoreStates major revenue sources imoki 12-D Monday. Sfpt. 19. 1983 Philadelphia Inquirer Bank searches soul, and profits CoreStates Financial Corp. Business: Banking Chairman: G.

Morris Oofrance Jr. No. of employees: 6,600 No. of stockholders: 20,000 Headquarters: Philadelphia Financial 1981 1982 Sales billions): 6.297 6.301 Income millions): 35 7 56.7 Per share: $6.13 $9 73 Dividends: $2.96 $3.24 Share price 34-26H 56'V24H SOURCE: CoreStates Financial Corp. NOTE: Financial data are for Philadelphia National Bank Corp.

only CoreStates Totd Income -1 $290.1 1111 1 XXW month! W. tt 1111 -1111 111 i i SM.4, 5M 1'. f'j J. SOURCE: ConSutts Financial C. ax 52 twlfci' til I 11 I CORESTATES, from I a severe worldwide recession that threw thousands of domestic businesses into bankruptcy and caused a number of large foreign borrowers to default or defer payments on loans.

Strong growth in "non-interest income" primarily fees for a host ''of services that Philadelphia and Hamilton perform for consum-'. ers, businesses and other banks. One success story is the MAC (Money Access Center) network of automat- ea Teuer macnines, wnicn is Degin- ning to repay a large investment by producing big increases in fees from about 115 member banks. Continued growth of income lending, despite an environ-- ment of weak demand for loans from 1 corporations and consumers. Core-States enjoys a wider net-interest spread the gap between its cost of 'Junds and the rates it earns on loans and investments than most com- petitors.

Through an aggressive cam-" paign to sell its credit cards, Core- States' Delaware subsidiary has rapidly expanded its consumer loans the profits from them. It doesn't show up in the financial reports, but another reason cited by insiders at CoreStates for the company's improved performance was "a "lot of soul-searching" by executives during the dreary days of 1981. Executives of the bank went on a i series of "retreats," sessions outside the bank at which the reasons for the bank's mediocre performance 'were explored and strategies for the future were hashed out. "I just took our officers off, and all 'of us rubbed our noses in this," Dor-; jrance recalled. "We' just said, 'For all the good people, for all the good Skills and all the resources we have, lions, even whprt I thought-those projections were The bank, trying to stay on top of the rapid-fire changos in banking technology, always has a number of -products and services in the works.

But many are tossed out before much is spent on them. "A bank this size can riot afford to make a great number.of $10 million research and development decisions," Dillett said. As competition has intensified in banking, the importance to banks of making the right choices on new products, services and markets has grown. At CoreStates, a key manager, 1 executive vice president Robert B. Palmer, has been put in charge of a new corporate planning group.

As CoreStates moves into new yen- tures or markets, Palmer will look for "a niche that fits naturally with our business; work off of what you are," he 'said. "If what you have is a good business and you're doing a good job, then we'll evolve out of that, play off the strengths we have." One venture discarded when its profit prospects seemed poor was -data-processing services for smaller correspondent banks. "It was a tough decision to make," Dillett said, because the was selling that service to banks while it was also trying to sell the MAC network of automated tellers. MAC services There was concern that the correspondent banks might shy away from the MAC services. had to con- vince.

them we knew what we're doing," he said. Another result of the self-analysis at CoreStates was a revamping of the bank's asset-liability the delicate job of balancing the maturities of the bank's loans and bther investments with the maturities of its deposits and other borrowings. problem loan as percent of total 4 true road to preeminent success in any line is to make yourself master of that line. was saying it then." "No big management shake-ups oc-i curred as a result of the self-exami- nation, but bank executives say there was a rededication of effort and a new determination to get better results. "Some specific moves were made, too.

For example, the bank emphasized cost-control. At the time, Dorrance said, were less careful, less thoughtful than we are today. "We thought about ourselves as a big national organization, and we seemed to think we could be all things to everybody. But from a resources standpoint, we clearly couldn't do that. "We recognized that we had scarce, resources.

We had to change the psy--etiology of this institution," he said. The company, which traditionally has had high levels of expense com-, pared with banks of similar size, "be gan spending money more carefully." Cost-cutting moves ranged from closing offices the bank's branch network was pared from 73 to 66 offices to eliminating slick quarterly reports to shareholders. Employment in the Philadelphia National part of CoreStates was cut by about 4 percent nearly 200 positions from top levels reached in 1980. Services or products developed at the bank now must aim to produce a minimum pretax return on investment of 30 percent, said chief financial officer Gregory C. Dillett.

For each new project, cost and profit goals are reviewed "At each point, you have to decide whether to pull the plug," he said. What Dillett calls "this regimenta- tion of scorekeeping" has proved to be an important discipline within the company, he said. "In almost every case, they outperformed projec- Gene H. Martenson, CLU Equitable New York. BUCKS COUNTY A MQetai' Gene H.

Martenson, CLU has been named Equitable's i ,1 East Central Region Honor Agent. year, The Equitable's Old Guard, an association of Agency Managers, designates an Honor Agent for each of our six sales regions. The individuals selected are those who, while achieving outstanding records in sales, have generously contributed their time and effort in service to their community, as well as providing expert help and advice to their clients. We salute Gene H. Martenson and are proud that he will represent The KarrBarth Agency and The Equitable as this year's Regional Honor Agent.

The honor tops an already outstanding record of awards and achievements. Congratulations Gene! Your future holds many more honors in store for you! we're sure doing a lousy job of pulling together and producing the kind of results that ought to. The bank's executives concluded that Philadelphia National's ability to acquire other banks and to avoid being acquired would be limited unless it improved its financial performance and the price of its stock. In May 1981, after receiving a particularly grim earnings report for April, Dorrance, who has been chief executive since 1969, appointed a committee of four senior managers and told them to come back to him with a no-holds-barred assessment of the bank's situation and the things: needed to improve profitability. "It's easy now, when we're doing; well, to say we were doing badly then," said Roland K.

Bullard 2d, one of the four on the committee. "But he hie Lite Assurance Society ot the United Stales. U. iiiili A well Factory responsible retail We are riependanle Your and are our Ilj -4--vr I CfjJ A kXtmjK i The KarrBarth Agency 2040 Market Street Philadelphia, Pennsylvania 19103 (215)561-4000 The Equitable 1 CoreStates lending DomMticfWdd iratrMtiom SOURCE: CoreStatet Financial Corp. Profitability ratios Return on equity SOURCE: CoreStates Financial Corp.

with key banks worldwide, along with a variety of electronic services, for international banking, Philadelphia National was able to speed the collection of export payments. Heldring, who is given much of the credit for the bank's international strategy, said that the bank decided it cquld not afford the risk of large loans to foreign nations years ago well before the international debt crisis created doubts about whether some nations will ever repay their debts. "1 always rejected the notion that a country is a country is a country, and it never goes bankrupt," Heldring said. "But somehow that theory pervaded the banking industry." Delinquencies CoreStates did not escape entirely from damaging overseas loans, but less than a tenth of its loans are outside the United States, and it has less than $10 million in delinquent foreign loans on its books. The reliance on income from services in its international business is a reflection of CoreStates' general strategy in other areas as well.

Although its main business, is still the traditional banking function of lending money, an increasing share of CoreStates' earnings comes from the sale of various services. In effect, CoreStates is part bank, part factory. In an average day, it processes 3.9 million transactions, everything from the processing of a paycheck to -the electronic transfer across the country of millions of dollars. It performs services, such as check processing, for hundreds of correspondent banks. Each day it sorts and sends on for collection more than one million checks.

The MAC (Money Access Center) system of automated teller machines, a network of more than 430 machines shared by more than 1 IS financial institutions, is operated by Philadelphia National Bank. The high start-up costs of the system made it a money-loser until this year. But the system is now solidly profitable and should become an even bigger money-maker as more banks join the network and more consumers use iv spreading the costs of the system over more and more transac- 1 Nationil E.J comrmrcial Coniumr y20.0 25.2 Regional commercial 1 Return on average 0.72' 0.68 I 1.09, 78 79 '80 '81 '82 '83 first SET Asset-liability management isn't one of the sexiest subjects in bank ing, but in the volatile economic world of recent years, it is crucial to the nrofitabilitv even the survival of financial 1f a bank's assets come due at a different time than its liabilities, it can get hammered when Interest rates change. In CoreStates' xase," it guessed wrong on the direction of interest rates in late 1980. Figuring that rates would increase, the bank's managers increased the maturities of some of its borrowings.

When rates in early 1981 declined sharply, the bank's earnings suffered because its cost ol money declined at a slower pace than the rates on its loans. Executive vice president Terrence A. Larsen was put in charge of managing the bank's asset-liability mix. "We did an awful lot of work on it, because we were thoroughly dissatisfied with our information systems on it," said deputy 'chairman Frederick llcldring. 4 Closely matched Larsen has kept the assets and li- abilities closely matched, a strategy from which "we have gained a lot of benefit," Heldring said.

In the future, if management feels confident about the direction of interest rates, the bank "might take' a modest mismatched position." But in today's uncertain economy, Heldring said, the bank won't'take the gamble. Not all the improvement in Core-States' fortunes can be credited to the rigorous "know thyself" process that management went through In 1981. Some decisions and policies made well before hat have contributed to strong recent results at CoreStates. Philadelphia National, like' scores of other banks, was hurt in the mid-1970s by bad loans made to real estate investeent trusts. That experience, says Dillett, "taught us we wanted to avoid major concentrations of credit in any industry or even in any single component of the economy." It was a lesson that has stood Core-States in good stead.

Conservative lending policies may have made its lending growth seem stodgy in years past, but they look smart now. Problem loans those on which interest payments have been halted or reduced have steadily declined as a proportion of total loans, despite the addition of $18.6 million in problem loans through the acquisition of Hamilton Bank. CoreStates has a. smaller ratio of problem loans to total loans than any other large Pennsylvania commercial bank. The interest income lost to Core-Slates in the first half of this year because of loan problems was $1.5 million, a reduction of nearly 50 percent from the first half of 1982.

Long-standing policies CoreStates executives attribute the lending record to long-standing credit policies strictly applied. "It can't be said deputy chairman Richard S. Ravenscroft. "It's never luck when you do some: thing stupid, so I guess the reverse is true. Credit, judgment is an ongoing area you just cannot ever take for granted.

"Our record has not been uncheck-ercd," he said. "We always will have loans that are delinquent, and we should. But what you have to do is assess risks and keep them manageable. They are at the moment manageable." Another reason bad loans haven't piled up at CoreStates is the nature of the bank's international business. While major U.S.

banks were throwing loans at countries in Latin America, Eastern Europe, Asia and Africa in the last decade, Philadelphia National stressed another business entirely. Instead of seeking profits through, loans to eager developing nations, Philadelphia National worked to at- tract deposits from foreign banks, in exchange for helping those banks collect trade payments around, the world. By developing relationships 3.27 i.n 134 2.13 1.82 1.58 '79 '81 '82 Phnadelghia InquiarCHARiES CHAtBERiN Philadelphia InqmwF RANK U. PONTARIMICHAEL VIOLA tions. "The cost per transaction in MAC is one-tenth of what it was when we started," said Bipin C.

Shah, executive vice president and head of computer and processing operations. For corporations, the bank provides, several services designed to speed up collection of funds and. to enable the companies to put otherwise idle funds to work, earning interest. Customers may pay either directly in fees or indirectly by leaving balances on deposit with Core-States, which then lends the funds. 'Factory' costs The costs of running its "fact6y" is one reason for CoreStates' relatively high level of non-interest salaries, building and equipment costs, and so on.

But because the factory's processing services produce fees, CoreStates; also has relatively high non-interest income. And the "free" balances that the bank gets for performing services for corporate clients allow Core-States to earn a higher spread bh the money it lends out than most other large banks. In 1982, for example, CoreStates enjoyed a net-interest spread of 5.46 percent, compared with Pennsylvania giant Mellon Bank's spread of 3.20 percent. Thanks to the improved financial performance at the bank's managers are in a strong pdsi-tion to take the next step he bank's expansion. Dorranceahd CoreStates president Wilson D.

McEl-hinny, who still is in charge OtHajn-ilton Bank, have been scouting Jor a third member bank for CoreStates. The acquisition prdbably will'W a bank in the Allentown-Rethlehejn-Easton market or in the Scrantpn and Wilkes-Barre area. McElh'inny said the fact that the Hamilton-phfja-delphia National marriage has proceeded smoothly and that Hamilton executives have important roles-at CoreStates would help in wooing a third bank. "A lot of people are going to he looking at us to see not only what the earnings of the corporation are but also how we are going through the merger," he said. 9- ft tPl ITJm' 7 PRIME LOCATIONS AVAILABLE IN 700,000 SQUARE FEET SHOPPING CENTER.

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