HOW BANK MERGER FOILED FINE FUNDS

Back in December, when National City Corp. revealed its planned acquisition of First of America Bank Corp., the press release trumpeted National City’s pledge to keep at least 700 jobs in the target’s home base of Kalamazoo, Mich.

Those 700 people, it’s now clear, won’t include the staff of First of America’s investment operations.

Much of the back-office and wholesaling force for the Michigan bank’s Parkstone mutual funds already has gone, and the rest of the jobs will disappear at the end of this month. A few of the employees have been offered positions with National City in its Cleveland headquarters, where asset-management operations are located, or in Columbus, Ohio, where the shareholder-services staff is based.

Meanwhile, Parkstone’s most prominent stock portfolio managers, including equities director Roger Stamper, have left. Mr. Stamper, whose last day at First of America Investment Corp. was April 30, has started his own money-management firm, Spyglass Asset Management, in Toledo, Ohio. With him is Steve Wisneski, who played the lead role in running Parkstone’s Mid-Cap fund, and Richard Sutterfield, a Parkstone stock trader and investment officer.

Large-cap specialist Ed Knox also has left, but his plans couldn’t be determined.

Other refugees, as well as outside observers, are surprised at the swift dismantling of a $6.6 billion mutual-fund complex which, unlike most other bank-run funds, had done well selling through outside brokers.

“We had something very good going on, and these guys (at National City) were screwing it up left and right,” says a former Parkstone sales executive, who spoke on condition of anonymity. “Their attitude was, ‘We’re National City, we bought you, we’re doing it our way — it’s that simple.’ I just cringe when I see what happened.”

armada takes over

Now, two of Parkstone’s equity funds, the Mid-Cap and Large-Cap portfolios, are being run by managers with National City’s relatively obscure Armada family of funds. Mr. Stamper’s Small-Cap Fund has been taken over by Bill Newberry, who served under him on the small-cap team at First of America.

Moreover, it’s clear National City has another agenda for the Parkstone complex. National City is scrapping Parkstone’s external focus (in recent years, more than half of Parkstone’s $500 million or so in annual retail mutual-fund sales came through outside brokers) and reverting to a traditional banking strategy of selling to bank customers.

National City has made no decisions on whether to merge the two fund groups, and if so, whether to keep the better-known Parkstone name, spokesman Dan Shingler says. Other sources close to the situation, however, say National City executives have told them the families will be merged when key vendor contracts expire at the end of next year and that the Parkstone name will continue.

“Parkstone was a little jewel that was doing very well,” says Marco Hanig, managing director of First Chicago NBD Corp.’s Pegasus Funds. “For a bank that was the size of First of America, they were doing amazing things.”

In particular, the $21 billion-asset bank fielded a force of eight wholesalers who managed to secure selling agreements with more than 300 independent and regional broker-dealers around the country. It’s a strategy that numerous banks are adopting today, but First of America undertook it several years ago.

“Most banks have focused on using their internal distribution opportunities,” says David Huber, president of Bisys Group Inc.’s Columbus-based fund services division, which distributes the Parkstone funds. “Parkstone got into the game very quickly. Most banks have not moved up the learning curve as fast.”

National City maintains that it has vast opportunities within its own customer base. It plans to continue moving its funds, as well as the Parkstone products, through its brokerage, which at more than 300 reps dwarfs First of America’s force of 120.

“External sales growth is certainly a good thing,” Mr. Shingler says. “But there certainly is a difference (in internal sales capabilities) when you’re First of America by yourself than when you’re First of America as part of National City. You’ve got to allocate your resources.”

Also, Mr. Shingler adds, Parkstone’s internal sales peaked in March 1997 — fully a year before National City’s acquisition closed — and declined significantly thereafter.

Indeed, Parkstone suffered net cash outflows of $86 million in its stock and bond funds last year as several funds were mired in performance problems, according to Boston-based Financial Research Corp. But that paled next to outflows for just the first five months of this year, which stood at $253 million, nearly 40% of which came from the Small-Cap Fund — whose assets have shrunk to $747 million.

The Armada stock and bond funds, by contrast, have seen net inflows of $254 million through May of this year, bringing assets in the family to $7.6 billion.

Still, while the sizes of the two families are comparable, most assets in National City’s funds are in short-term money market funds. First of America, even after the redemptions, has more than twice the assets National City does in the much more lucrative stock and bond funds.

Not helping Parkstone’s recent sales is the fact that Mr. Stamper’s Small Cap Fund had a horrendous year in 1997, actually losing 6.3%. But he had a devoted following that expected volatility given his aggressive-growth style. In 1996, for example, the fund returned 27.6%, beating the Standard & Poor’s 500 stock index by nearly 5 percentage points.

One of those fans, a Pittsburgh broker, yanked all of the approximately $10 million he had in the Small Cap Fund after Mr. Stamper departed.

The broker, Jim Browne, president of Allegheny Financial, which supports about 150 reps, mostly in Pennsylvania, says “He left. The money is leaving. It’s that simple.”