First Interstate Will Sell $6 Billion of Assets, Cut 1,000 Jobs, Mostly Local

In a major restructuring aimed at shedding weak assets and improving its position as a consumer-oriented regional banking company, First Interstate Bancorp on Wednesday announced plans to sell $6 billion to $7 billion in assets and eliminate 1,000 jobs, most in Southern California.

Under the plan, First Interstate will sell most of its so-called merchant bank--including all of its government securities trading operation--as well as its mortgage subsidiary and its commercial leasing and asset-based lending businesses.

Also on the block are the company’s 50% interest in its 62-story, 1-million-square-foot headquarters building in downtown Los Angeles and an office building in Denver.

Nearly 700 of the 1,000 jobs affected by the sale are part of the mortgage operation, First Interstate Mortgage, which is located in Pasadena. The company placed $4.1 billion in mortgages last year.

The remainder of the jobs will be cut from a variety of entities, including 100 from the securities trading operation. All but about 30 of the jobs are in the Los Angeles area.

Should Aid Profitability

First Interstate took a $95-million charge against third-quarter earnings to cover the restructuring. The one-time addition to reserves resulted in a $74.9-million loss for the quarter and left First Interstate $461.2 million in the red for the first nine months of 1987.

In another industry restructuring, Chase Manhattan said in New York on Wednesday that it will eliminate 1,000 jobs as part of a global streamlining effort. Chase set aside $50 million to cover costs of its restructuring.

First Interstate, which has 35,000 employees, is the parent of First Interstate Bank of California, the state’s fourth-largest bank, and banks in 12 other states. It had total assets of $50.4 billion at the end of the third quarter on Sept. 30 and was the nation’s ninth-largest banking holding company. The planned sale will reduce its assets by 12% to 14%.

J. Richard Fredericks, an analyst at Montgomery Securities in San Francisco, said the restructuring should improve First Interstate’s profitability by eliminating money-losing operations, such as the leasing and commercial sectors, and cutting back areas where profit margins were thin, such as the merchant banking.

“They have been growing toward more profitable consumer and middle-market areas and this is a dramatic acceleration of that effort,” Fredericks said.

Frederick J. Elsea, a senior vice president at First Interstate, said the restructuring had been in the planning stages for several weeks and was not related to the stock market drop this week. He said the company hopes to complete the asset sales in eight months.

Final details were approved by the board of directors Wednesday morning. Joseph J. Pinola, the chairman and chief executive of First Interstate, flew to New York late in the day with several other officials to explain the restructuring to securities analysts today.

In addition to the asset sales, First Interstate plans to transfer $400 million of past-due loans to a new company that will be traded publicly. The $400 million, mostly real estate loans, represents about 25% of the company’s nonperforming assets. Shares in the new entity will be passed on to First Interstate shareholders as a dividend in 1988.

Also, as part of the reduction in merchant banking, $2.8 billion of loans managed by First Interstate Bank Ltd., the merchant bank, will come under the control of a special unit that will try to dispose of them. Merchant banking covers such activities as lending to foreign businesses and securities and bond trading.

“What they’re doing is shedding bad assets,” said George M. Salem, an analyst at Prudential-Bache Securities in New York. “Why should that be anything but good? The paramount issue is that the wholesale business of investment banking and lending globally has deteriorated profitability.”

Pinola, First Interstate’s chairman, said the sale of the assets should improve the company’s earning power by $75 million a year once the deals are completed. The figure is the result of combining the savings in operating expenses with the expected profits from reinvesting the money made in the sales.

The restructuring is also designed to make First Interstate more competitive in the retail banking arena, particularly in California.

Acquisitions Expected to Close

“We are going to focus even more strongly on the retail customer, the middle-market customer and large corporate customer with operations in our territory,” Pinola said.

First Interstate said the changes will not affect its pending acquisition of Allied Banchares of Texas, the Houston-based banking company with $9 billion in assets. The acquisition, which has been approved by the Federal Reserve, is expected to close next month.

By cutting costs and concentrating its efforts, the restructuring should improve First Interstate’s balance sheet and defensive posture well before California opens its doors to full interstate banking in 1991 and Eastern banks begin shopping for acquisitions here.