Former banking `boy wonder' learns to change

COLUMBUS, Ohio -- This will be the year that John B. McCoy shows whether he has changed as much as he claims.

Until a few years ago, Mr. McCoy was considered a boy wonder of banking. After succeeding his father and grandfather at the helm of Banc One at age 40, he charmed Wall Street investors and Main Street customers with a self-assured but easygoing sense of entitlement and a simple formula: Buy one small bank after another, tack up "Banc One" signs, and then let the local chairman run the show. Using that friendly approach, Mr. McCoy bought more than 100 banks and built Banc One into the nation's seventh-largest bank, stretching from Ohio to Texas, Oklahoma and Arizona.

But late in 1994, Banc One tripped over its troubled portfolio of derivatives. Its profit fell for the first time in a quarter-century. Its stock, the currency that had fueled so much growth, slumped. And the expense of maintaining a burgeoning network of quasi-independent banks began to bog it down. Analysts wondered whether its simple strategies were obsolete. Mr. McCoy spent that Christmas sunk in self-doubt, and then he did something uncharacteristic: He issued an executive order. He scrapped most of Banc One's guiding tenets, many of which had been formulated by his father, John G. McCoy. He stripped his 80 or so bank chiefs of much of their power and told them to expect more directives from headquarters. He showed some old-timers the door and brought in outsiders who had expertise that, he conceded, he himself lacked. He also leavened his gung-ho informality, toning down his bantering manner with many employees. The man who prided himself on a small-town friendliness oversaw the first major layoff in the company's history -- and endured the first harsh criticism meted out since his youth, when corporate wags called him and his father "John Boy" and "John God." "People would come to him and say, `Don't you realize what you're doing, that you're ruining this company?'" recalls Senior Vice President William T. Boardman. Concedes McCoy now: "It was a very difficult time. You end up taking it very personally. I thought, thank God I'm not Japanese. I'd put myself on a sword." McCoy's difficult transition illustrates what many bankers are enduring. Like him, they began their careers in a safe, highly regulated world, and they led by personality and a personal touch. But some of them, such as Edward Crutchfield Jr. of First Union Corp. and Hugh McColl of NationsBank Corp., were much quicker than Mr. McCoy to recognize that local banking had died. Banking has changed more radically in this decade than any other, reshaped by regulatory deregulation, an explosion of financial services, the dawn of brand-name marketing, the need for electronic systems, cutthroat competition and increasingly demanding institutional shareholders. Some bankers like McColl and Crutchfield steered their banks into national operations earlier and began growing much faster than Banc One. Once at the cutting edge, it fell behind its peers. For three years now, McCoy has struggled to catch up with a restructuring dubbed Project One. The 54-year-old chairman says he is reinvigorated and more focused, with a new sense of purpose infusing his company. He promises that clear signs of rebirth -- lower costs and higher returns -- will show up this year, the first full year that Banc One will report its numbers under its new structure. "I'm absolutely convinced this is the direction we have to go, and it's working," he says. "I believe we will get the same growth rate back that we had in the past." Investors whose skepticism has made Banc One's stock one of the weakest in banking in the past five years are watching closely. "They've talked about Project One now for years," says Nancy Bush, a Brown Brothers Harriman analyst. "This year, they've got to be able to say, `We're saving this much from Project One.' And the numbers have to be discernible." Many of McCoy's banking peers, meanwhile, see a company that has gone from a sure thing to an enigma. "I don't know where they're at today," says William A. Cooper, chairman of Minneapolis-based TCF Financial, who modeled much of his own bank's methods on the old Banc One. "I don't know what their philosophy is." Clearly, Banc One's former philosophy of growth through bank acquisitions has been, if not scrapped, severely curtailed. During a wave of bank mergers, Banc One has watched trophy franchises it once coveted, such as Boatmen's Bancshares, Barnett Banks and CoreStates Financial, signed up by McColl and Crutchfield, who were willing to pay higher prices and had stocks that gave them the purchasing power that Banc One lacked. Now, some of the big buyers, such as NationsBank, are so much larger than Banc One that they threaten to hem it in geographically. Some investment bankers even whisper that Banc One itself could become a takeover target, albeit an extremely expensive one -- a possibility that McCoy grudgingly acknowledges, though he believes it is remote. Although many investment bankers say Banc One is rarely considered a serious bidder anymore for major bank franchises, it did do some deals last year. It agreed to buy First Commerce of New Orleans for $2.97 billion, its biggest bank deal ever. And it pulled off one blockbuster: the $7.3 billion purchase of credit-card issuer First USA. Banc One can use First USA's entree with customers to sell bank products. But critics called the deal too expensive -- and wondered whether Banc One was expanding its presence in credit cards just when the growth of that business seems to be topping out. So far, results are encouraging: First USA signed up 8.1 million customers last year, raising the total to 40.5 million. At the least, Banc One's aggressive purchase of First USA clearly reflected the change in Mr. McCoy's style. Never before had the bank bought a national business and put itself forth as a national company. It had shied away from buying businesses such as mutual-fund companies because Mr. McCoy acknowledges he wouldn't buy businesses he himself didn't understand. Building up the old Banc One one plain-vanilla bank at a time, McCoy went by what he knew: loans and deposits. It did only friendly deals and usually on the cheap. Under a system called the "uncommon partnership," each bank kept its own charter and ran more or less autonomously, setting its own certificate-of-deposit rates, handling its own marketing, developing its own products, devising its own computer system and doing its own hiring. Though performance targets were set at headquarters here, managers had a lot of leeway in meeting them. "We were thinking, `Hell, a bank's a bank. If you can beat the other two guys in town, you win,'" McCoy says. McCoy reviewed all loan portfolios and liked to pick up the phone and call local-bank presidents himself, employing a style some insiders describe as "management by suggestion." Most efforts at consolidation were subject to veto by local presidents such as Richard J. Lehmann, who joined Banc One when it bought his Valley National in Phoenix in 1993. "We started to evolve where we had six finance companies, we had 10 leasing companies, we had six mortgage companies, and we created this group to start to pull those together," Lehmann recalls. "And the poor individuals responsible for that basically went around hat in hand to people like me and said, `Hi, I'm here to take over your leasing company, and I have a note from the president of the company that says I'm here to do that.' And I said, `Go away, don't bother me.' You could literally at that stage get away with that." By 1994, some bank officers, including Lehmann, were complaining about the rising cost of maintaining so many separate systems and banks. For example, Banc One had 23 different telephone banking centers, too many to operate one common 800 number for all its customers. It maintained 32 offices to analyze commercial customers' numbers. Customers from Ohio couldn't use the Banc One branches they visited while vacationing in Arizona. Big, nonbank competitors such as FMR's Fidelity Investments and Merrill Lynch & Co. were peeling away Banc One's best customers. A $170 million loss in derivatives trading, an activity that previously had boosted the bank's performance, and the end of its string of record years crystallized a corporate debate in McCoy's mind. "I put together a lot of the facts" for the first time, he says, and realized "that we were the biggest regional company in the world." The bank announced a cutback that ultimately trimmed 5,500 to 6,000 jobs, more than 10 percent of its work force. After the holidays, McCoy spoke to his senior people. "He came in and he said something very uncharacteristic: `I'm telling you we've got to do it, and I don't want to hear anybody say we're not going to do it,'" Boardman says. Then came one of McCoy's hardest tasks: talking to his father. "I called him up and said, `I've got to come talk to you,'" McCoy recalls. "He said, `Great, what are you going to buy?' I said, `No, I've got to come out to the house.' Of course, I was nervous. He was sort of the godfather of the uncommon partnership that had worked wonderfully. I had no idea where he'd come from." But the senior McCoy gave his blessing. "Johnny had thought the thing out very carefully," he says. "I understood it, and the timing was right." He admits, "I couldn't have done it." Co-workers noted the strain on the younger McCoy. "It was gut- wrenching," Boardman says. "You could see it in his face. I know he wrestled with it in the middle of the night, over and over, for it, against it." Two months later, McCoy mounted a podium in Atlanta and told his assembled chieftains that the uncommon partnership was dead. He read from a Teleprompter to make sure he got the speech right, and immediately afterward had copies of it distributed. "I wanted everybody to understand every word so there would be no questions," he says. Many executives, tired of all the confusion, agreed with McCoy, but some balked in discussion groups that afternoon. One, Malcolm Chancey, had sold his Louisville, Ky., bank to McCoy just weeks earlier after eight years of hearing his pitches for the uncommon partnership. Now he was being told that the relationship he had been promised would vanish. Yet Chancey says he understood McCoy's logic. "I could see John was going through a learning process," he says. In the following months, some executives left the company; among them was its president and a longtime veteran, Donald L. McWhorter. Instead of promoting old friends, McCoy brought in outsiders. For his new president, he named Mr. Lehmann and asked him to reorganize the company along the lines of his own operation in Arizona. Lehmann set up five lines of business at the top of the company; each bank used to do its own marketing to consumers, for example, but now all consumer operations report to Kenneth T. Stevens, the former No. 2 executive at what was then PepsiCo Inc.'s Taco Bell unit. In addition, Banc One slashed expenses in earnest. It trimmed its telephone-banking centers to two and the data-analysis offices to one. It cut its computer-operating systems to one from four. From 92 offices where checks were cleared, Banc One went to 17, with plans to cut further. Marketing, public relations and internal communications all used to be handled by one person; the three functions were split. For customers, the makeover is supposed to provide seamlessness: uniform products, spread across all branches, in all states, linked by one computer network, so that Banc One branches are as alike as McDonald's restaurants. The company promises many loan decisions still will be made locally. But as it pushes to increase its revenue, customers also can expect to be targeted by a far more aggressive and impersonal sales effort by anonymous bankers pushing an array of products and may not have the chance to establish close ties with a local banker as they once did. But Banc One says it hasn't seen any shrinkage in its customer count. These days, McCoy rarely calls a local-bank officer; instead, he relies on his executive team, explaining: "We hired higher-caliber people. You can't micromanage them. I can do strategy; I can do deals. But they've got to run the businesses." And he no longer reviews loan portfolios; they are gone. Now, Banc One keeps national portfolios. "If you had come in here four years ago and said which is your best automobile-loan portfolio, I could tell you," he says. "But now the automobile portfolio is just one huge mother." He tried to be more patient, humbled as he was by seeing Banc One regarded as an industry laggard and by the task of turning it around. In the past five years, the stocks of major regional banks have risen 162 percent, while Banc One's is up just 80 percent. "I didn't see how hard it would be to get back our stock," he says. "The worst thing is, it takes time. You just can't go from 26 call centers to two. It's been three years of very intense change." Despite all the pressure, McCoy claims to be recharged. "In the old model, almost everything had already happened," he says exuberantly. "Well, now I'm into new ground. I ain't been there before. And that's what's fun." At the office, he adds, "I'm more focused, more directed." Says golfing buddy Louis Gerstner Jr. of International Business Machines: "I see John really excited and turned on by what he's doing." Nevertheless, the bank's remaining veterans wistfully recall its once-easygoing pace and the sure-fire successes executives racked up. "Boy, it was great," says Boardman, who handles the bank's acquisitions and is the sole holdover among top managers. "Going and calling on $50 million banks and trying to get them to join us was a hell of a lot more fun than reading books on investment banks." Says McCoy, "You always look back and say, `Boy, that was fun.' Five years ago, for instance, I would have been the guy in the field. I don't get to spend much time in the field anymore. It is difficult. But if you don't change, you're never going to get to the next level."

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