(FORTUNE Magazine) – IF A MAN'S DEMEANOR were enough to determine his world, Thomas Labrecque's universe would be an orderly, disciplined place. Snug in his office in a Wall Street skyscraper, the president of Chase Manhattan Corp. exudes a sense of confidence and calm. He is in many ways a banker of the old school: perfectly tailored, without a hair out of place. But the message Labrecque conveys is at odds with that apparent assurance. Says the man in line to be chief executive of the third-largest U.S. bank in assets: ''Whatever a corporate raider could do, I'll bet you that right now, in my drawer, I've got a strategy to do.'' The once orderly world of banking has become a jungle. Emerging as the new kings are so-called superregional banks, institutions that operate over more than one state from bases in what used to be considered the hinterlands. Their increasingly desperate quarry: the money center banks of New York, Chicago, and San Francisco, the leaders of the industry as little as ten years ago. The businesses that money center banks dominate -- lending to large corporations and serving customers outside the U.S. -- have grown so competitive that they offer only meager profits, not nearly enough to shore up balance sheets laden with shaky loans to Latin American countries. The superregionals, by contrast, are richly profitable. Their balance sheets are strong enough to let them write off what little Latin American debt they have, thereby putting pressure on the money center banks to do the same. What's more, the stock market loves the superregionals. Their strong stock prices give them an edge in the industry's haunting new game: hostile takeovers. Five years ago few dreamed that unfriendly overtures would ever be permitted by staid bank regulators. But in February the Federal Reserve Board let proceed what appears to be the industry's first big hostile takeover attempt, a bid for Irving Bank Corp. by Bank of New York Corp. Says Carl Reichardt, chief executive of Wells Fargo & Co., a very profitable regional bank based in San Francisco: ''We're all takeover candidates now.'' Though the superregionals may not be large enough to swallow Chase yet, they soon will be. That threat is impelling such money center banks as Chase, Chemical, and First Chicago to get out of unprofitable businesses and restructure what remains. Bankers have been bracing for dramatic change since the early 1980s, when the first wave of deregulation broke over the industry. Loosening Federal Reserve Board restrictions was supposed to make life easier by allowing banks to offer high-interest checking accounts and other products to battle the likes of Merrill Lynch and the money market funds. Instead, deregulation seemed to squeeze profits and intensify competition without reducing the oversupply of banks. With some exaggeration, J. Terrence Murray, president of Fleet/Norstar Financial Group in Providence, Rhode Island, a leading superregional, summarizes the changes: ''In eight years our money costs have doubled, our bricks and mortar costs have tripled, and our people costs have tripled or more, and at the same time our interest earned has not dramatically increased.'' Expect more turbulence in the decade ahead. As in the airline industry, deregulation is likely to bring price wars, with the big beneficiaries being consumers and small businesses, the clients that have been stoking the superregionals' profits. After a shakeout of weak competitors, three large money center banks -- Citicorp, J.P. Morgan, and Bankers Trust -- will almost certainly remain as global players, competing with other giant banks from Japan, Britain, and elsewhere. Some two dozen other U.S. banks will form a second tier, whose nature will depend on the outcome of today's mergers. ''We're just starting,'' says Reichardt of Wells Fargo. ''I would guess that in the next five years you are going to see massive mergers, not necessarily by size, but by numbers -- numbers of smaller institutions acquired by middle-size and larger institutions.'' In the global context, most of these second-tier banks will end up as niche players, with some very large niches indeed: the entire U.S. as a market, or one region of the country. The stock market is betting that a dozen or more well-run superregionals will take top honors among this group. With hyperefficient operations, balance sheets seemingly constructed by Brinks, and little or no exposure in Latin America, the superregionals can capitalize on the consolidation of the industry. Their challenge is to avoid missteps as they build and manage ever larger companies, at a time when many management consultants argue that most mergers do not work. WALL STREET is downright skeptical that many money center banks will even make the second tier (see table). A combination of heavy Latin American debt, small loan-loss reserves, and diminished capital continues to hobble them. The fun is gone from lending to large corporations both at home and overseas, mainly because such borrowers can find lower interest rates in the commercial paper market. So the money centers are restructuring. But their stock tends to sell at such low multiples that they cannot afford to buy up other institutions. Says an investment banker at a major Wall Street firm: ''The money centers are irrelevant.'' Yes, agrees James McCormick, president of First Manhattan Consulting Group, ''The world has just fallen apart for the poor old money centers.'' Analysis by McCormick's firm suggests that about 40% of money center bank business can still earn impressive profits: Credit card lending, securities trading, and managing money for the wealthy can return up to 25% on investment. The firm figures that probably 20% of operations earn an average return, say, 14%. But the remaining 40% -- all those foreign and large corporate loans -- are so unprofitable that they drive down the market value of the company. Says McCormick: ''This is a classic case for a restructuring artist. As a manager, you should wind down or sell the 40% of the business that is dragging down your stock price.'' Why aren't the major banks moving more swiftly in this direction? Because while writing off their $86 billion of loans to less developed countries would leave them in more profitable lines of business, it would also make them smaller, more attractive to raiders, and more vulnerable. ''If the LDC debt went away tomorrow, I think most money center banks would be forced to restructure fairly aggressively because they would be sitting ducks if they didn't,'' says McCormick. ''The reason they are not under attack now is that LDC debt is a wild card.'' Managers of money center banks are in for some soul-searching. Where is the bank actually earning a decent return? What businesses are essential to its future? And how fast can the bank shrink and not be capsized by its LDC troubles? Such banks as Chase, Chemical, First Chicago, and Manufacturers Hanover have begun to address such questions and to take action: They are closing overseas branches, moving out of many low-profit businesses, and strengthening their profitable consumer and small-business lending. The question is whether they can move fast enough to survive. ''If you ask me, 'Are the money center banks going to become irrelevant?' I don't think so,'' says Chase's Labrecque. ''If we look ahead five years, I think we're going to be looking at a different financial services landscape: I think we're going to find that the money center banks -- the good ones -- have restructured and are a hell of a competitor.'' Labrecque obviously has a bias. | But he has been thinking about these matters for much of the past two years. Chase's introspection began when its management ordered a study on whether the institution should give up its banking charter. Frustrated by the restrictions that keep banks out of insurance and investment banking, Chase explored the alternative -- breaking the company into nonbank pieces that would be allowed into these businesses. As most observers expected, Chase decided not to abandon its charter, but the year-long review had an effect. ''We are not shooting from the hip in 15 different directions,'' Labrecque says. ''We're aimed at two places, and they are traditional lines of business.'' Chase has redefined what it wants to do in corporate and international banking. It has begun to avoid traditional, plain-vanilla lending to concentrate instead on complex credits, loans or financings that require better than usual analysis and judgment. Chase is also investing heavily outside New York in its second basic business, consumer financial services. It has been expanding its discount brokerage business, building a huge credit card operation, and buying savings and loans in Maryland and Ohio and converting them into banks. In overbanked New York City, meanwhile, the bank has closed 50 branches, probably with more to follow. The restructuring is working, though Chase ran a loss last year after bolstering loan-loss reserves. Retail trade -- serving individual consumers -- provided a third of total profits last year, before taxes and the creation of the special LDC reserves. Cost cutting has eliminated 7,000 of the company's 49,000 employees. ''I want to get this place back to 15% return on equity,'' Labrecque says. ''We don't invest in anything anymore unless it can make it over that hurdle rate.'' While Chase's moves have won a measure of respect from analysts on Wall Street, the company's stock price has hardly budged. Owing to the LDC discount, Chase's shares sell at a price that an insider describes as ''a few cents above fire-sale liquidation value.'' One reason: Unlike some competitors, Chase refuses to commit to a long-term retreat from international banking. True, the bank has closed more than 100 overseas branches and pulled out of 13 countries. But it plans to keep offices in 56 others open, going up against giant banks from around the globe. Though Chase has so much invested overseas it would be hard for it to completely abandon the international business, banks with less at stake find that possibility intriguing. The strategic planner at a money center figures: ''If we announced tomorrow that we were selling our international branches, our stock would jump to 160% of book value.'' ONE COMPANY that is listening closely to the stock market is First Chicago Corp., a money center bank well on its way to becoming a superregional. Though First Chicago won't get out of international banking entirely, Barry Sullivan, its chief executive, has let investors know he has no stomach for ever again making loans to foreign governments keyed to trade balances between their countries and the U.S. First Chicago participated in Mexico's recent program to swap debt for 20-year bonds backed by U.S. government securities because, Sullivan says, ''We think it is important that the shareholder have the perception that long run we want to be out of that kind of game.'' Sullivan helped drive the point home late last year by raising First Chicago's reserve against loans to troubled Latin American debtors to around 40%, a significantly higher percentage than other large banks had set aside. With the LDC debt discount mostly gone, First Chicago's stock recently traded at just under book value -- a respectable price for a big city bank. The rest of the First Chicago story would delight proponents of restructuring. Sullivan has accepted the gospel of ''value-based planning,'' the idea that firms should eliminate lines of business that don't help the stock price. He argues that his company is doing just that: ''When I joined here in 1980, we were over 90% a corporate global bank,'' he says. ''Today we're 70% global corporate and 30% superregional. Over time I'd like to get to a fifty-fifty split.'' Shareholders should cheer him on, though it may be a while before they see the benefits. ''Our superregional bank makes a 25% return on equity,'' Sullivan boasts. ''If it were standing on its own, that would be the highest return on equity of any superregional in the U.S.'' What hides its success is the mediocre profitability of the rest of the bank, particularly its foreign operations. Even before last year's reserve for LDC loans, Sullivan says, First Chicago's other operations earned a mere 6% on equity. Like Chase, First Chicago has been pulling out of marginally profitable businesses, pruning staff, and closing offices. In the third quarter of 1987, the bank shuttered many of its offices in Europe, taking a $38 million charge | against earnings to cover the costs. More cuts may be in store this year because even after slashing costs, Sullivan says, ''we're not sure the international side of the business can make 15% returns over time.'' The company's growth is now coming in consumer and small-business lending, where profits are good, and in specialized U.S. corporate lending, such as financing leveraged buyouts, where Sullivan expects to make an 18% return on equity this year. If the stock market rewards First Chicago's efforts, driving up its share price relative to other Midwest banks, Sullivan will be able to join the rush to merge. He has his eye on large banks in adjoining states with strong business loan portfolios. PERHAPS THE BOLDEST reorganization yet announced by a major bank came last September when First Interstate Bancorp of Los Angeles decided to stop trying to straddle the fence between being a money center and a superregional. With banks in 18 states, First Interstate already qualified as a superregional. To be less a money center bank, it closed foreign offices and got out of the business of lending to large corporate customers outside its regional base. It also focused its attention on five Western states, where the emphasis is on retail and small-business lending. The company spun off $2.8 billion of assets -- including its LDC debt -- into a separate subsidiary, where the loans are to be sold or worked out. Says Joseph Pinola, First Interstate's chief executive: ''Now we're 75% superregional and 25% money center.'' So far, though, the stock market has not awarded First Interstate any accolades. The market crashed two weeks after Pinola announced his plans to restructure, making it more difficult for him to sell assets. Some of his banks do business in such oil states as Texas, Oklahoma, and Colorado, whose economies are still suffering. First Interstate also has a nagging portfolio of problem real estate loans. As a result, investors continue to treat it like a troubled money center bank: Its stock sells at a steep discount to most superregionals. What permitted First Interstate to attempt such an aggressive restructuring was its relatively strong capital position. Pinola took dramatic write-offs, but still ended up with equity capital equal to just under 4% of assets. Weaker banks cannot afford such steps if they hope to meet the capital guidelines proposed by bank regulators. Under those strictures, by 1992 banks will need minimum equity capital of about 4% of assets. Meeting that requirement will force many large banks, including perhaps all the money centers except J.P. Morgan and Bankers Trust, to sell stock to the public, perhaps at prices that will dilute the holdings of existing shareholders. As the table shows, the well-run superregionals have ample capital, few problem loans, and large reserves against losses -- what analyst J. Richard Fredericks at Montgomery Securities calls ''fortress balance sheets.'' The only immediate glimmer of hope for hard-pressed money center banks is that the men who run the superregionals are a cautious, penny-pinching bunch. The pace of mergers is less rapid than many in the industry expected, in part, suggests Pinola, because superregionals are running out of large acquisition targets free of the money center taint. ''The superregionals got to be among the banks with the top market capitalization because they didn't have any international loans and they didn't have any low-yielding, blockbuster, high- risk commercial credits that have gone broke,'' he says. ''If they were smart enough to do that, why would they get in our business through acquisition?'' Not surprisingly, executives at many superregionals agree with Pinola. One of the largest and most admired of the superregional breed is PNC Financial Corp. of Pittsburgh, by market value the third-largest banking company in the U.S., just behind Citicorp and J.P. Morgan. If the name sounds unfamiliar, don't be surprised. A decade ago PNC, then called Pittsburgh National, was a well-managed bank of middling size that specialized in lending to small businesses. Since 1983, PNC has acquired five very profitable banks in Pennsylvania and nearby states. PNC's climb set it among the nation's 25 largest banking companies in assets. It is still growing. Whether PNC buys another bank or not, its chief executive, Thomas O'Brien, expects the company's assets to grow about 10% a year for the foreseeable future, down from the 15% a year in the early 1980s, but still fast enough to keep gaining on the money centers. For all of PNC's go-go growth, O'Brien sounds downright conservative: ''People ask, 'What are you going to do next?' Well, we're going to manage what we have.'' He hopes to build or buy banks in neighboring New Jersey and Maryland but thinks that prices are too high for now. ''They may never come down enough for us to go in there,'' he says. ''We're not going to force our way in at massive costs to shareholders.'' Superregionals have not been the only banks to successfully consolidate their positions through combination. Over the past 2 1/2 years, Carl Reichardt of Wells Fargo has completed three strikingly successful mergers, all within the confines of California. The largest of deals, the acquisition of Crocker National Corp. from Midland Banks of London, was the best. Not only did the purchase nearly double Wells Fargo's size, it came with no bad international debt -- Midland swallowed that -- and at a rock-bottom price, just about book value. The merger has worked superbly, thanks largely to Reichardt's ruthless elimination of employees and branches. He closed most of Crocker's international offices, just as he had closed Wells Fargo's overseas offices a few years earlier. After streamlining the California branch system of the two banks, he ended up with an average of more than $100 million in deposits per branch -- more than any other bank in the state. Sounding more like a retailer than a banker, Reichardt brags that his ''sales per square foot'' make him one of the most efficient operators in the business. MOST BANKERS expect more big mergers along the line of the combination of Crocker and Wells, especially now that people like Reichardt have proved how economical they can be. ''You get more bang for the buck where you have overlapping systems,'' he says. ''Our view is that the action is going to be in the constant acquisition of these inefficient operators and a lowering of their expense ratios to efficient levels. It doesn't take a space scientist to do that.'' Not all bankers -- even good ones -- have the stomach for such deals. Says O'Brien of PNC: ''I personally don't like the idea of taking a bank and putting 2,000 people out in the street in the name of efficiency.'' But what fuels much of the bank merger binge is a spreading perception that you can both grow and make money by rationalizing operations. The best-run superregionals share one overriding characteristic -- an ability to run low-cost, efficient banking operations. Banc One, for example, has made a bundle turning small, not particularly well-managed Midwest banks into highly profitable institutions. The Columbus, Ohio, company buys a bank, streamlines its data processing, sheds unprofitable customers, puts in strong financial controls, and shortly has an institution that is earning a nifty 1% or more on assets. The holding company last year produced a return on equity ! of around 11%, but this reflected a big addition to its reserve against loans to Latin America. Without the reserve, Banc One would have posted a return on equity of nearly 18%. Few superregionals are in a rush to build a nationwide bank, and Banc One's slow but steady expansion plan is typical. ''We're a little bit like McDonald's was 30 years or so ago,'' says John B. McCoy, Banc One's chairman. ''It doesn't make sense to open a stand 5,000 miles away. We'll own about 62 banks by the end of the year; there are 14,000 left.'' Of late, the pace of large interstate mergers has slowed. For one thing, the stock market crash made deals for stock less appealing. Another reason, say bankers, is that mergers of companies of nearly equal size across state boundaries are beginning to test the managerial skills of superregional executives. First Union Corp., a North Carolina bank on the fast track, saw its results flag after a string of acquisitions. So did First Wachovia Corp., another North Carolina bank, following the combination of Wachovia Corp. and First National Corp. Many of these banks now talk cautiously about the future. John Medlin, chief executive at First Wachovia, says he'll probably spend the next ten years gradually expanding through the rest of the Southeast. Ten years is long enough for the balance of power in the industry to shift once more. Some bankers in New York predict tough times ahead for the superregionals. The critics' strongest argument is that the profitability of the superregionals' best lines of business -- lending to consumers and medium- size businesses -- is likely to decline. With so many money center banks getting into the fray, price wars are likely. Credit card interest rates have already softened. But even if the superregionals do run into trouble, it seems unlikely that the money center banks will regain their dominant position. While the big money center banks restructure to cope with one wave of deregulation, Washington is preparing the next. This time Congress looks ready to tear down the barriers between commercial and investment banking, a step likely to fuel a new round of consolidations and price wars. Welcome to banking's brave new world.

CHART: NOT AVAILABLE CREDIT: SOURCE: FIRST MANHATTAN CONSULTING GROUP CAPTION: DWINDLING RETURNS Last year's reserves against Latin loans slashed the profitability of U.S. commercial banks. Even without the one-time charges, returns would have been unimpressive (dotted line). DESCRIPTION: Return on equity of United States commercial banks, 1979-1987; return for 1987 is also shown as it would have been without charge-offs due to Latin American loans.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: THE MIGHTY FALLEN The table at right orders large commercial banks according to a risk indicator: the sum of problem loans (including those to less developed countries) as a percentage of the total of shareholders' equity and reserves for bad loans. The stock market has not failed to recognize which banks are in trouble or don't have sufficient reserves to cover LDC loan losses. DESCRIPTION: Three charts: Banks ranked according to risk indicator; largest banks of 1980 and 1988 are listed by market capitalization.