No Predators Need ApplyAmy Barrett
When BankAmerica Corp. announced a year ago that it would acquire ailing Security Pacific Corp., bankers and Wall Street pundits began counting the days until First Interstate Bancorp. would also fall to some hungry predator. After all, they reasoned, the ailing Los Angeles bank was no match for the growing BofA empire. Then, there was Kohlberg Kravis Roberts & Co.'s 9.8% stake in the bank. The buyout firm, it was thought, would favor a deal.
Finally, First Interstate's 995-branch network, spread over 13 Western states, was said to have caught the attention of such acquisitive banks as San Francisco-based Wells Fargo, Norwest of Minneapolis, and Banc One in Columbus, Ohio. Everyone seemed to agree that a takeover of First Interstate, which has $50 billion in assets, was inevitable. Everyone, that is, except Edward M. Carson.
First Interstate's chairman and chief executive is not only determined to go it alone but he's planning to expand. Although he says he will entertain any offers, Carson argues that his shareholders stand to gain more in the long term from a strong, independent First Interstate than from a merger with a more powerful institution. "I don't subscribe to the notion that bigger is better," Carson says.
EMPIRE SHRINKER. At first glance, Carson doesn't appear to be the kind of CEO who can fend off well-heeled buyers. At 62, just three years away from retirement, Carson has a reputation as a low-key manager, a sharp departure from the feisty style of his predecessor, Joseph J. Pinola. Still, he is known as a tough cost-cutter. That's a big reason why the board tapped Carson to succeed Pinola in 1990. At the time, First Interstate was staggering under the double whammy of runaway costs and bad real estate loans.
Carson has been quick to put his talents to work. He has attacked the bank's bloated cost structure with a vengeance. Most dramatically, he has been methodically dismantling much of the far-flung empire his predecessor had assembled in the 1980s. Gone are small banks in Oklahoma, New Mexico, and Colorado. He is also backing off from Pinola's global ambitions by selling the bank's volatile $1.3 billion international corporate-finance and trading business. The result has been dramatic savings that many critics would have thought possible only through a merger. Carson has cut the bank's staff by more than 7,000, or 20%. Overall, he predicts that $280 million this year will be lopped off the bank's $2.3 billion operating budget.
Carson has also gone to work on First Interstate's loan portfolio, still heavily exposed to California's shaky real estate market. He slashed nonperforming assets to $1.2 billion at the end of the second quarter, from $2.1 billion in 1989. To guard against future surprises, all of the bank's 1,500 loan officers were put through a retraining course, which stressed prudence rather than loan growth.
These moves are already showing up on the bottom line. First Interstate climbed back into the black in the first half (chart). And while profits have no doubt been helped by lower interest rates, Carson believes earnings will steadily improve. Indeed, last January, he tried to dispel Wall Street's negative prognosis for First Interstate by issuing an unusual public forecast that the bank would earn about $230 million in 1992 and in the neighborhood of $440 million next year.
Carson is now gearing up to take on bigger competitors, such as BofA, which has 1,400 branches throughout California. "The size doesn't intimidate me," he says. He is looking to expand his bank's presence in Southern California and Washington, as well as Texas. But he vows not to repeat Pinola's mistakes, such as the disastrous acquisition of Houston's Allied Bancshares Inc. just before Texas' real estate market crashed. Carson pledges that he's bargain hunting and would buy only with federal assistance. Thought to be on his list are HomeFed Corp., the San Diego thrift seized by the government in July, and the struggling First City Bancorp of Texas.
PRICEY. To help bankroll acquisitions, Carson is counting on KKR, which has proven a lot more patient with First Interstate's travails than Wall Street once thought. KKR declined to comment on its ties with First Interstate, but in April the firm notified the Securities & Exchange Commission that it wants to explore potential joint acquisitions with the bank. Any deal, possibly similar to the successful Bank of New England Corp. buy KKR made with Fleet/Norstar Financial Group Inc., would be a vote of confidence for Carson.
Maybe. But with too many banks and not enough business to go around, the consolidation trend is tough to resist. Many analysts believe First Interstate would have already fallen prey if it weren't for California's weak economy. Wells Fargo & Co., for instance, is preoccupied with bad loan problems. First Interstate's share price has probably also given would-be suitors some pause. Now at 37, more than double what it was in 1990, the bank looks a bit pricey.
Still, given Carson's rapid rehabilitation of his bank and his ambitious game plan to make the institution again worthy of its name, First Interstate's future may be more likely that of an acquirer than an acquiree.