California’s Big Banks Begin to Arm Themselves for the Onslaught of 1991

In less than 3 1/2 years, California will open its doors to interstate banking. It has been billed as a sort of banking industry “High Noon,” with such Eastern gunslingers as Citicorp and Chase Manhattan taking aim at more than $450 billion in deposits held by their Golden State counterparts.

Who will be left standing after the dust of 1991 settles--and whether the shoot-out occurs at all--are the subjects of hot debate these days in banking circles.

A lot of the talk centers on who will lead the state’s biggest banks into the expected showdown. At least two of California’s four dominant banks, BankAmerica and First Interstate Bancorp, appear likely to have new chairmen in 1991. A change at the top is also possible at Wells Fargo & Co. Indeed, a new generation of banking leaders in California is waiting in the wings as their elders eye the sunset.

Although the answers to who will reign and which banks will remain after 1991 are years away, the state’s four biggest banks are arming now for confrontations that could dramatically alter the financial landscape through mergers and acquisitions.

“If California borders are opened to interstate banking, as is supposed to happen, then it is an event which, if you are in our business, you cannot ignore,” said Richard J. Flamson III, chairman and chief executive of Security Pacific Corp., parent of the state’s second-largest bank. “To ignore the possibility that there will be significant consolidations would be a big mistake.”

Joseph J. Pinola, chairman and chief executive of First Interstate, parent of the state’s fourth-largest bank, concurred: “All of us are obviously thinking about 1991. But none of us is going to tell you our strategy for confronting it, because of the competition.”

Despite Pinola’s disclaimer, bank officials and industry analysts offer an outline of the different strategies being pursued by the state’s four biggest banks to strengthen and reshape themselves for open competition with the outsiders.

They are strategies likely to change the structure of banking in the West well before 1991, as California’s big banks fight for a greater share of the lucrative California market and buy up smaller institutions in neighboring states in order to make themselves less inviting targets for the big New York banks.

And they are strategies that offer a contradictory picture for consumers in the coming years. Consumer advocates expect the California big four to close even more branches to pay for their expansion into other states. At the same time, the banks will be more competitive on loan rates and other services in an attempt to expand their customer base in preparation for full interstate banking. It is all part of the dramatic transformation of banking in the United States.

For decades, a host of federal laws and regulations has restricted the products that banks can sell and where they can sell them. But in recent years, the Federal Reserve Board’s permissive interpretations of what banks can do and sweeping technological changes have undermined those restrictions.

Simultaneously, calls for increased competition, with its potential benefits for consumers, prompted state legislatures to remove the historic barriers to interstate banking and open their borders to out-of-state banks. The result has been an increase in the number of bank mergers, but most of the deals so far have involved large outside banks buying up smaller institutions.

That merger pattern could change when California opens its doors. Because of the size and diversity of the state’s economy, big out-of-state banks might be willing to spend $1 billion or more to take over any one of the four largest banks here.

May Rescind Law

The stage was set in 1986 when Gov. George Deukmejian signed into law legislation that opened California last month to banks in 11 Western and Southwestern states, as long as they gave California banks reciprocal rights. The measure also allows banks from any other state with reciprocal laws to move into the California market in 1991--and that created the potential showdown with the big New York banks.

Yet some industry experts think that the drama surrounding 1991 is overblown.

Joseph T. Arsenio, an analyst at the San Francisco investment firm of Birr Wilson, believes that sometime before 1991 the California Legislature may rescind the law allowing full interstate banking.

“If the politics of banking shift, it is quite possible that there never will be a move from East to West,” he said. “All of the legislation put through so far is certainly capable of being reversed.”

Arsenio envisions the possibility of a political backlash if smaller states that have already adopted interstate banking, such as Arizona, decide that they are not well served by institutions located two states or 2,000 miles away. That backlash could reach Washington or Sacramento, he said.

Even if the California law remains in force, some analysts doubt that New York banks will have the capital to take over the big California institutions. They point out that Citicorp has shown no enthusiasm for buying up banks in other open states. But Citicorp, the nation’s largest bank, lobbied hard to open California.

“With the exception of Citicorp, the New York banks are so weak right now that they are not in a position to do anything,” an industry analyst said. “The question is, will that change?”

Pushing for Growth

Citicorp may have answered that question Aug. 18 when it announced plans to issue $1 billion of new equity to strengthen capital and possibly create a war chest for acquisition plans. Other major banks are expected by many to follow suit, as they did when Citicorp added $3 billion to loan-loss reserves in May.

Whether the New York banks move on California or not, analysts and bankers agree that three of California’s banking giants are making changes now that they hope will leave them potent enough to defend against an unwanted takeover or to negotiate a friendly merger from a position of strength.

The exception is BankAmerica, which, most analysts agree, is simply too busy fighting for survival to spend much time worrying about 1991.

A key tactic in fighting a takeover is to grow. First Interstate, Wells Fargo and Security Pacific have all expanded in the past two years by acquiring other banks, and all three are expected to continue to seek acquisitions, most likely outside California. BankAmerica, on the other hand, has been forced to sell off assets and lacks the financial base to acquire another institution.

Yet the corporation’s Bank of America subsidiary remains an enormous force in California banking, and one element of its fight to recapture momentum is the reassertion of its traditional role as the dominant retail, or branch, bank in the state. Success would make it a tough competitor in the coming years.

“My feeling is that the worst has been seen at Bank of America, but that it is going to be a very gradual period of improvement,” said Dan B. Williams, an analyst at Sutro & Co. in San Francisco. “I think you’ll see a greater emphasis in the next quarters on the marketing side. As a result of their asset-stripping, they have got to begin to rebuild their revenue base and try to reassert themselves in California through new packaging and new products.”

A Marketing Genius

BankAmerica’s board summoned 64-year-old A. W. Clausen from retirement last year to try to save the sinking ship. In a symbolic move, Clausen took the job at an annual salary of $575,000, identical to that of the man he replaced, Samuel H. Armacost. Although he is expected to stay on another year or two in an attempt to staunch the leaks of red ink, few expect Clausen to be the boss in 1991.

The emphasis on rebuilding in California may decide his successor. Among the candidates named by analysts and industry insiders is Richard M. Rosenberg, 56, a vice chairman and head of the parent company’s California banking group.

Rosenberg, who joined BankAmerica last April 4, is considered a marketing genius whose energy and enthusiasm are badly needed by his new employer. After spending most of his career at Wells Fargo Bank, Rosenberg was president of Seattle’s Seafirst Bank, a BankAmerica unit, when he was lured to the parent outfit by a $400,000 salary, a guaranteed bonus of at least $450,000 over three years, and the challenge of a major role in rescuing the bank.

A close friend and fellow banker said Rosenberg was also promised a shot at the chairmanship of BankAmerica, something that Rosenberg and a bank spokesman refused to discuss.

Rosenberg’s chief rival is thought to be Frank N. Newman, who joined the parent company last October as chief financial officer and vice chairman. He, too, is a Wells Fargo alumnus who was well compensated by BankAmerica. His salary last year was $275,000 and he received bonus entitlements totaling $650,000.

Newman, 44, played a key role in Wells Fargo’s acquisition of Crocker National Bank before joining BankAmerica, where his first task was to lead the opposition to an audacious hostile takeover attempt by First Interstate. His success marked him as a key figure in the bank hierarchy.

Using Different Strategy

“There are other people who are well regarded there, but Rosenberg and Newman would certainly be the leading candidates within the bank,” analyst Williams said. “I suppose that, if over the next couple of years, one of these individuals became a clear leader that would solve the board’s problem of replacing Clausen.”

If Rosenberg and Newman falter or leave the bank, there are others to take their places. In the same vein, if B of A stumbles in the retail market of consumer deposits and loans, mortgage banking and credit cards in California, the other three banks are poised to grab the pieces.

The bank best positioned to benefit is widely regarded to be Wells Fargo, B of A’s scrappy neighbor on California Street in San Francisco.

In recent years, Wells Fargo has differed from its colleagues by concentrating on California and stripping itself of most international assets and many national ones. The focus paid off handsomely last year, when Wells Fargo engineered a major coup by acquiring Crocker.

Not only did Wells get Crocker at a bargain price of $1 billion, as much as $500 million under what analysts regard as Crocker’s true value, but the deal also gave Wells Fargo a stronger presence in fast-growing Southern California and doubled its California assets, catapulting the bank firmly into third place.

In terms of domestic assets, virtually all in California, B of A remained first at the end of 1986, with $64.8 billion, according to figures compiled by the California Bankers Assn. Second was Security Pacific National Bank, with $38 billion. Wells Fargo Bank was third, with $36.8 billion, and First Interstate Bank of California was a distant fourth, at $20.5 billion.

Wells Fargo and its $1.2-million a year chairman, Carl E. Reichardt, have their eye on further expansion in Southern California, partly out of the defensive “buy or be bought” posture and partly out of a belief that California is the best banking market in the country.

Would Have Premium Price

“One can never be surprised at what Wells does next,” Williams said. “But they have made it very clear that they are looking longingly at Southern California. If they are going to make another move into Southern California, something like Union Bank would be a great coup, but it would be very expensive.”

Los Angeles-based Union Bank, the state’s fifth-largest bank with assets of $9 billion and a strong position as a business lender, is owned by the Standard Chartered banking company of Britain. The parent company is trying to raise capital to bolster loan-loss ratios, and its managing director said recently that all of its assets, including Union, were for sale. But officials at both Wells and Union denied that any talks are under way.

Paul Hazen, president of Wells Fargo, acknowledged a desire for further expansion in Southern California, but said Wells is reluctant to pay the premium price that Union Bank would be likely to command.

“We’re trying to run a more simple, focused and directed organization,” Hazen said in an interview. “We’re clearly concentrating on our base of California business. In a predatory way, we intend to take market share from others both by acquisition and moving it from others.”

Hazen, like colleagues elsewhere, acknowledged that luring customers from other banks in the retail arena is difficult because of the intense competition. Instead, the bank hopes to increase its portion of the wholesale, or commercial, sector while prospecting for an acquisition in a bordering state.

Reichardt has exerted an iron will at Wells, and age is not a factor in whether the 56-year-old chairman will continue to lead the organization into 1991. Boredom might be. Last month, he told American Banker that he might be interested in a position on the Federal Reserve Board.

Big Changes at Security

“I don’t know that I really have any aspirations,” he said. “But I don’t know that I want to spend the rest of my life doing what I am doing.”

The unquestioned designated successor is Hazen, 45, who earned $850,000 in cash compensation last year as Reichardt’s right-hand man, a position he has grown familiar with during the past 20 years. As Hazen put it: “I’ve typically assumed the posts Carl has vacated.”

But when asked about his status as future chairman of Wells Fargo, Hazen said: “You never know. It’s a changing world.”

Nowhere in California has banking changed more rapidly than at Security Pacific Corp., the Los Angeles-based holding company that has stretched the boundaries of financial services to include securities and options trading and other products. Just last week, in a deal characterized by one analyst as another “logical step” in Security Pacific’s “wide-ranging expansion program,” the company announced its agreement to buy 30% of Burns Fry Corp., one of Canada’s largest securities firms, for $75.8 million.

“Security Pacific has developed a multifaceted strategy that is bold and thus far successful in that it is trying to serve many markets, sort of like a Citicorp on a smaller scale,” said George M. Salem, senior banking analyst at Prudential-Bache Securities in New York. “I give them pluses and minuses on that. On the one hand, they are orchestrating it well. On the other hand, people wonder whether you can be successful in so many types of financial services and in so many places.”

At the same time Security Pacific expanded into new areas of financial service, the company built itself into a strong regional bank--though not without a price. When Security Pacific agreed to pay $1.1 billion to acquire Seattle-based Rainier Bancorp earlier this year, some analysts said the deal was too expensive. But the bank defended the transaction as integral to its goal of being in the strongest possible position to compete with the anticipated invasion of Eastern competitors.

Expected to Remain

“If we are going to be involved in a significant event, we want to be sure that our company is as strong as possible in every way at that time,” Flamson said in an interview. “You want to build to a point, year by year, so that you are not in the middle of something when 1991 hits.”

Flamson avoids talking in tough terms about takeovers and acquisitions, preferring to discuss mergers among equals. And he appears at least open to the possibility of such a “significant event,” if he deems it in the interests of the shareholders.

“We have not adopted a strategy that says, come hell or high water, Security Pacific in its present format will continue to exist,” he said.

One thing that is unlikely to change is the man at the top. At 58, Flamson seems certain to stay on in the $1.1-million a year position until beyond 1991, partly because he has aggressively shaped his bank for several years to confront the world of deregulation embodied in that date.

When he does leave, Flamson’s blueprint for regional and retail strength in addition to growth in such non-traditional areas as securities trading is shared by the man acknowledged to be his successor, Robert H. Smith, 51, president of Security Pacific National Bank.

While Flamson talks in terms of consolidations and “significant events,” the language is blunter down the street on the 59th floor of the First Interstate building.

“Clearly we are the best takeover target because the parts are of so much greater value than the whole,” Joseph Pinola, First Interstate’s chairman, said in an interview.

The parts that he is talking about are First Interstate’s banking operations in 12 Western states and franchises in 10 others. While the regulators probably would not allow an acquiring company to sell off assets to pay for the deal the way raiders sometimes do in other industries, the prospect of buying such enormous geographic reach and getting rid of some to pay for it tantalizes competitors. Indeed, Citicorp already owns 5% of First Interstate.

Expanded Into Texas

The vulnerability to takeover was part of the motivation for Pinola’s bold bid to acquire BankAmerica last year. Their combined size would have made the new company virtually invulnerable to a takeover. B of A’s 887 branches also would have given First Interstate the statewide reach it lacks.

But Pinola and First Interstate were snubbed, and his California flagship bank appears destined to remain a distant fourth. Instead, First Interstate recently made a deal to acquire Allied Bancorp of Houston, which will give the company its first foothold in Texas.

While Pinola said he intends to pursue a larger share of the California market, he will probably concentrate on a more realistic goal of making First Interstate banks No. 1 or No. 2 in most other Western states while cutting operating costs systemwide in an attempt to improve anemic earnings.

And if someone does come knocking in 1991?

“If somebody walked in here today and offered $120 a share, the show would be over,” Pinola said. First Interstate’s stock has been selling in the $62 range recently.

The show might end before then for Pinola. At 62, he faces mandatory retirement immediately after his 65th birthday on May 13, 1990. He maintains with some humor that he will have to carried out “kicking and screaming,” and the policy could be changed by the board.

And for now, Pinola, who earned $985,000 in salary and bonus in 1986, shows no signs of relinquishing the strong grip on First Interstate that has left most observers at a loss to pick his likely successor.

Edward M. Carson, the well-regarded president of the holding company, is one candidate, but he is already 57. Another name mentioned by analysts is William E. B. Siart, 40, who was promoted last year to president of First Interstate of California.

“Joe (Pinola) is a strong, hands-on, powerful man, so the next one might not be like that,” said Salem, the analyst. “There may be more of a division of responsibilities. God knows the organization can use it, the way it is becoming so large and complex and diverse.”

CALIFORNIA’S BIG FOUR BANKS

California Total assets assets* California Institution June 30, 1987 Dec. 31, 1986 branches BankAmerica Corp. $96.9 billion $64.8 billion 887 Security Pacific Corp. $74.0 billion $38.0 billion 600 First Interstate Bancorp $51.8 billion $20.5 billion 319 Wells Fargo & Co. $43.7 billion $36.8 billion 450

* Assets of principal California bank subsidiary Source: California Bankers Assn; bank annual reports