First Interstate Bounces Back; Net Sets Record

Rebounding from its worst year ever, First Interstate Bancorp reported Wednesday that the first three months of 1988 represented the most profitable quarter in its history.

The Los Angeles-based banking company said its $102.6 million in profit for the quarter amounted to a 27.3% gain over the same period in 1987 and a 14.8% improvement over its best previous period, the third quarter of 1986.

The strong earnings report appears to demonstrate that the far-flung company, which owns banks in 13 states, including California’s fourth-largest bank, has returned to solid profitability after a record loss of $556 million in 1987.

Moved Up a Notch

First Interstate also appeared to have taken on its newest acquisition, the troubled Allied Bancshares of Houston, without any unexpected negative effects on the balance sheet. The merger was completed Jan. 29 and the earnings of Allied, since renamed First Interstate of Texas, added $700,000 to the quarter’s profit.

With the addition of Allied’s almost $10 billion in assets, the company moved up a notch last quarter--past New York’s Bankers Trust--and became the eighth-largest banking company in the nation.

Like most big banks, First Interstate’s profits in 1987 were pummeled by large reserves set aside for potential losses on foreign loans. First Interstate also embarked on a costly restructuring effort to eliminate about $7 billion in businesses that were a drag on earnings and to trim operating expenses.

Joseph J. Pinola, First Interstate’s chairman and chief executive, is intent on improving the company’s profitability and raising its stock price to avoid a hostile takeover in 1991 when California adopts full interstate banking and opens its doors to possible acquisitions by big Eastern banks.

‘Very Positive Quarter’

Again like most of the nation’s big banks, First Interstate registered a strong showing in the first quarter of this year, based in large part on some early benefits from its restructuring and cost-control efforts.

“I consider this to be a very positive quarter and I think most analysts will feel this way, too,” said Donald K. Crowley, an analyst in the San Francisco office of Keefe, Bruyette & Woods, a New York-based investment firm that specializes in banks. “This should help to settle some concerns on Wall Street.”

Those concerns had centered on the impact of the Allied acquisition and the ability of First Interstate to cut operating costs, a recurring problem for the company in recent years.

The company said operating expenses for the quarter were down $33 million, or 5.7%, from the fourth quarter of 1987, and Crowley said he expects continued improvements in cutting overhead throughout 1988.

Compared to the first quarter of last year, however, expenses were up $15 million, or 2.9%. But the reduction from the fourth quarter was viewed by analysts as more significant because it reflected progress on the restructuring.

At the same time, the company reported an increase of $42.8 million in revenue from lending over the same period in 1987. Interest earned on commercial loans and real estate mortgages led the growth, the company said.

Big Tax Benefit

Non-performing loans, generally those overdue at least 90 days, totaled $2 billion at the end of the quarter, compared to $1.76 billion a year earlier and $1.5 billion at the end of the fourth quarter, the company said. Subtracting the impact of the Texas acquisition, however, brought the total down to $1.59 billion, an improvement over a year ago but still worse than the end of 1987.

Earnings also received a one-time boost from a $15-million tax benefit associated with the 1987 reserves. Profit from First Interstate’s five large retail banks in California, Oregon, Nevada, Arizona and Washington was up $10.9 million compared to the first quarter of 1987.

First Interstate reported improvement in two yardsticks of overall profitability for the quarter. Its return on assets was a healthy 0.75%, compared to 0.62% in the year-earlier quarter, and return on equity jumped to 20.3% from 11.7% in the same period.

PROFIT JUMPS AT FIRST INTERSTATE Net income or loss for First Interstate Bancorp; fiscal year ends Dec. 31. 1988 Net income or loss in millions

First quarter $102.6

1987

First quarter 80.50

Second quarter -469.79

Third quarter -74.91

Fourth quarter -95.01

1986

First quarter 79.03

Second quarter 84.71

Third quarter 89.34

Fourth quarter 84.84

Source: Company report