BankAmerica, 1st Interstate Merger Seen Leading to Cuts in Staff and Branch Closings
A merger of First Interstate Bancorp and BankAmerica Corp. would almost surely result in hundreds of branch closings and thousands of job reductions in California and other states but would produce a giant banking firm that could be highly profitable through cost savings, banking experts said Tuesday.
First Interstate’s $2.8-billion buyout proposal, announced Monday by the BankAmerica board of directors, could lead to the largest merger in American banking history and would combine two companies with sharply different corporate cultures. To make the merger work, the experts said, First Interstate Chairman Joseph J. Pinola--known as a tough, no-nonsense executive--would be likely to wield a sharp ax and to enforce tough cost-cutting measures that the management of staid and bureaucratic BankAmerica has been slow to enact itself.
However, some analysts and banking officials said First Interstate, based in Los Angeles, would have its hands full trying to solve San Francisco-based BankAmerica’s main problem: Bank of America’s bad loans in real estate, agriculture and the Third World. They have led to $1 billion in losses during the past year, sharply eroding the company’s stock price and employee morale.
Experts also differ widely as to whether consumers would be hurt by reduced competition and branch closings and whether regulators would look warily at such a combination.
“Of all the mergers in the banking industry, this would have by far the greatest antitrust consequences,” said Joel P. Friedman, director of strategic management at the San Francisco office of Arthur Andersen & Co., a major accounting firm. “It would result in tremendous concentration in California and Washington in the retail banking business.”
The combined firms would be the nation’s second-largest banking firm behind New York’s Citicorp and by far the largest bank holding company in California, with total loans and other assets of about $167 billion.
That would be more than three times the assets of second-ranked Security Pacific Corp., at $54 billion, and the $43.6 billion in assets of Wells Fargo & Co., which earlier this year acquired Crocker National Corp. in the largest banking merger in U.S. history.
The combined firms would have 42% of the deposits among commercial banks in California, far ahead of Wells-Crocker at 19% and Security Pacific at 15%, according to year-end 1985 data compiled by the Findley Report, a Brea-based banking newsletter.
The combined firms would also enjoy a commanding position in Washington state. Seafirst Corp., a unit of BankAmerica, is that state’s largest banking firm, while First Interstate Bank of Washington, one of several banks that First Interstate Bancorp operates in 12 states, is ranked third.
Some banking executives and consumer advocates said a merger of such behemoths would hurt consumers and others and may not win regulatory approval, at least not without some conditions. The deal, because it would combine bank holding companies, must be approved by the Federal Reserve Board, which regulates those types of firms.
“This is not the time for removing Bank of America as an independent organization from the California marketplace or as a leading U.S. bank around the world,” Richard J. Flamson III, Security Pacific Corp. chairman and chief executive, said in a statement. “The business and consumer market is the beneficiary of robust competition now, and we believe that should be enhanced, not diminished.”
Bank of America “is a great retail bank, and all efforts ought to be made to keep it intact,” said Anthony M. Frank, chairman and chief executive of First Nationwide Bank of San Francisco. “This state will be badly damaged (economically) by its loss.”
Consumer Group Opposed
“What we need in California is less concentration, not more,” said Carl Oshiro, attorney in the San Francisco office of Consumers Union, which publishes Consumer Reports magazine. He and other consumer advocates noted that Bank of America and First Interstate have consistently charged among the highest rates in the country on credit cards, and paid among the lowest rates on money-market deposit accounts.
Small banks, Oshiro said, generally offer the best rates on deposits, credit cards and loans, but none “can match the advertising of Bank of America and First Interstate.”
Other experts, however, said the combination would not reduce competition significantly and could in fact strengthen it by reducing costs. Even if some branches are closed, customers of the combined banks could still have more branches and automated teller machines available to them.
“I don’t think in terms of market share the two would end up taking over the world,” said Bram Goldsmith, chairman and chief executive of Beverly Hills-based City National Corp., parent of City National Bank. He said other California banks and savings and loan associations, as well as institutions from New York and Japan and other foreign nations, “are very aggressive and will remain so.”
Little Difference Seen
“What’s the difference between 42% and 34%?” asked Gerry Findley, editor of the Findley Report newsletter, referring to the difference between the California market share of the merged institutions and Bank of America alone. “I don’t see any significant difference.”
However, there was no doubt that a merger would result in major reductions in branches and personnel, because of the large overlap between the two companies.
Similar overlaps between Wells Fargo and Crocker are resulting in Wells Fargo’s elimination of 120 of the combined institution’s 620 branches and 5,000 of the 26,000 employees, most by the end of 1987. The cost savings that resulted already have sharply boosted Wells’ profits and stock price.
A combined Bank of America and First Interstate would have 1,215 branches in California, with Bank of America contributing 895 and First Interstate adding 320. The two firms would have combined statewide employment of about 67,730, with Bank of America contributing about 56,170 and First Interstate about 11,560.
Salvatore Serrantino, president of California Research Corp., a Santa Monica banking consulting firm, said thousands of employees are likely to lose their jobs in a merger. The expected closings “will be very dramatic,” Serrantino said. “It will be the same kind of branch surgery that went on with Wells Fargo and Crocker.”
A merger would force the elimination of at least 200 branches in California, predicted George Rutland, chief executive of the parent company of California Federal Savings and a former executive at both Citicorp and Crocker.
Morale Problems Feared
Such cuts could lead to morale problems at both banks and reduce customer service, possibly leading to a loss of market share, suggested one top executive of a major California bank.
However, Paul H. Baastad, a banking industry analyst with S. G. Warburg & Co. in San Francisco, said the reductions may not be as great, percentage-wise, as those experienced in the Wells Fargo-Crocker marriage, because Bank of America and First Interstate have less overlap.
Wells and Crocker, Baastad said, were both of similar size in California and had more branch overlap, as each had more branches in Northern California. However, Bank of America is far larger in the California market than First Interstate, and most of First Interstate’s branches are in Southern California. Bank of America’s branches are more evenly distributed throughout the state, he said.
However, while First Interstate Chairman Pinola might relish the opportunity to cut costs at Bank of America, his main challenge would be to reduce the larger bank’s problems loans.
“Nobody knows how bad those loans really are,” a top executive of a large California bank said, echoing a view commonly held by outsiders.
Several banking executives said First Interstate’s strong capital position would give BankAmerica a financial cushion against which it could write off or sell those bad loans. Also, the addition of First Interstate’s better financial position and higher debt-quality ratings would improve BankAmerica’s ability to raise capital from investors, banking executives said.
However, First Interstate has relatively little experience in dealing with international loans, “and so I’m not sure what kind of expertise they could add” to help with Bank of America’s troubled loans to Mexico and other Third World nations, said Dan B. Williams, banking analyst at Sutro & Co. in San Francisco.
“I don’t think they have any magic wands,” Williams said of First Interstate’s management. “It will take time to get Bank of America healthy again.”
Samuel H. Armacost, 47, has been president and chief executive of BankAmerica Corp. since 1981 and is also chairman and chief executive of its subsidiary, Bank of America. He joined the bank as a credit trainee in 1961 after graduating from Denison University, but left the next year to attend Stanford University, where he earned a master’s degree in business. After returning to the bank in 1964, he put in three tours in London and one in Chicago, as well as serving as a member of President Richard M. Nixon’s Executive Exchange Program.
Assets as of June 30, 1986 . . . $117.3 billion
Deposits as of June 30, 1986 . . . $94.3 billion
Net income (loss): 1983 . . . $390 million 1984 . . . $346 million 1985 . . . ($337 million) 1986 (first six months) . . . ($577 million)
Branches . . . 1,162
California branches . . . 895
Employees . . . 83,299
12-month stock price range (NYSE):
High: . . . $18.50
Low: . . . $9.50
Tuesday’s close . . . $14.875, up $2.625
First Interstate Bancorp
First Interstate Bancorp Chairman and Chief Executive Joseph J. Pinola, 61, joined the bank’s predecessor, United California Bank, as its president in 1976. Previously, he had worked for Bank of America for nearly 25 years and had risen to executive vice president. In 1978, he became chairman and chief executive of Western Bancorporation, United California’s parent. The company changed its name to First Interstate in 1981. Pinola is a graduate of Bucknell University and did graduate work in finance and business administration at Dartmouth College and Harvard University.
Assets as of June 30, 1986 . . . $49.2 billion
Deposits as of June 30, 1986 . . . $35.5 billion
Net income: 1983 . . . $247.4 million 1984 . . . $276.3 million 1985 . . . $313.1 million 1986 (first six months) . . . $163.7 million
Branches . . . 990
California branches . . . 320
Employees . . . 34,303
12-month stock price range (NYSE):
High: . . . $67.375
Low: . . . $46.25
Tuesday’s close . . . $53.25, down $1.50