A Grim Year for Joe Pinola : Fire at Headquarters, Problems With Texas Unit Leave 1st Interstate Chief Humbled but Not Dispirited
Last spring, Joe Pinola was ready to grab the brass ring that had eluded him so publicly in his bruising and unsuccessful fight to take over BankAmerica in 1987.
His First Interstate Bancorp was slimming down. Unprofitable businesses were on the block. A thousand jobs were being cut. The sale of the bank’s half interest in its Los Angeles headquarters building would net $50 million to $75 million.
Although Pinola’s bid for BankAmerica had failed narrowly the year before, he had rebounded in 1988 with the daring acquisition of Allied Bank of Houston, an $8-billion institution that had fallen on hard times after several years as the nation’s most profitable bank.
Analysts were praising the Texas buy: Pinola had bought shrewdly at the bottom of the state’s economy. The transaction was designed to shield First Interstate shareholders if Texas deteriorated further. “Nearly bulletproof,” boasted an investment banker involved in the deal.
Then on May 4, a fire swept First Interstate’s 61-story headquarters. Pinola stood in the street below watching the flames that drove key bank operations into temporary quarters for months.
But the fire was only the most visible of a series of calamities that, as 1988 draws to a close, leaves Pinola empty-handed once again.
At 63, with mandatory retirement looming, there are few opportunities left for Joseph J. Pinola to pull off the kind of corporate triumph that keeps slipping through his fingers.
And with California opening its doors to banks from other states in 1991, First Interstate does not have much time left to get its house in order. Interstate banking will mean new competition from the East Coast giants and expansion-minded, regional institutions from the Southeast, Midwest and New England.
Interstate banking will also bring the possibility that First Interstate could become a takeover target itself.
So Pinola was understandably grim when he faced Wall Street analysts at the Grand Hyatt Hotel in New York on Nov. 22. He had appeared before the group in previous years, using his blunt style to deliver optimistic predictions that had an unfortunate habit of not coming true.
Last month, the analysts saw little of the characteristic optimism.
To be sure, some things are going very well at First Interstate. Its major banks in California, Washington, Oregon, Nevada and Arizona are running smoothly and profitably. The return on assets for the banks was 1.08% for the first nine months of the year, well above the national average of 0.66%. Its banks in Colorado, Utah, Wyoming and New Mexico are weak but improving.
First Interstate ranks among the best big banks in disposing of its troubled Latin American debt, and it has limited exposure to risky leveraged buyout loans. Plus, 2,500 jobs have been eliminated this year--a 7% reduction.
But First Interstate still lost $214 million in the third quarter, and Pinola had a long list of problems to air before a tough-minded audience that morning in New York.
“He was very humble, and I felt sort of sorry for him,” said Stephen Berman, an analyst with County Securities, who attended the session. “It was rather dreary.”
Thomas K. Brown, bank analyst at Smith Barney, Harris Upham, was more charitable: “Maybe his pride was wounded. The company has been a perennial disappointment, and Joe Pinola is an optimist.”
First Interstate is one of the nation’s most complex banking companies. Because of a grandfather clause in federal bank regulations, it is the only big, truly interstate bank. The company owns banks in 13 Western states and franchises its name and products to banks in eight other states and the District of Columbia. Altogether, these banks have 1,150 offices in 650 communities. It is the eighth-largest banking company in the country, with assets approaching $57 billion.
Pinola has been the architect of that expansion. But running the far-flung empire he has built has always been expensive. Because of persistent difficulties in consolidating duplicate operations among its banks, overhead traditionally runs well above the industry average.
The simplest measure of productivity is comparing expenses with revenue. In doing so at 47 big banks, the New York investment house of Goldman, Sachs & Co. found First Interstate in a miserable 43rd place.
In October, 1987, the bank announced an ambitious restructuring plan to trim fat. Operations that were losing money or were only marginally profitable were to be sold, and 1,000 jobs were to be shed. That is also when the headquarters building was put on the market. But the plan was unveiled two days after the stock market crash, and selling the businesses turned out to be tougher than it would have been a month earlier.
Fire Delayed Sale
In his talk with the analysts last month, Pinola said the company had gotten $30 million less than expected from selling its government-securities trading operation. It failed to sell its mortgage banking subsidiary. So instead of pocketing $50 million on that deal, the bank has been struggling to turn the money loser into a scaled-down profit center.
Although the bank is the first occupant to have returned to its headquarters building, the effects of the May fire will keep the tower off the market for several more months, delaying the collection of the anticipated profit of $50 million to $75 million.
Some of these setbacks were outside the bank’s control.
But Texas is a different story. First Interstate went into Texas of its own free will, gambling that the economy there had hit bottom and that the bank could ride the coming upswing in the nation’s third-biggest consumer market.
Yet a month before Pinola’s visit to New York, the company had announced the $214-million third-quarter loss. The loss was primarily the result of setting aside $180 million to cover potential losses on loans at First Interstate of Texas (the new name for Allied), which lost $186 million in the period.
“Nobody likes surprises,” Pinola said recently in an hourlong interview in his office. “The Texas thing surprised everybody. We had shown several quarters of beginning to return to pretty good profitability. But when you have a quarter like we had in Texas, you have some people who are not happy.”
The “nearly bulletproof” transaction had shot down First Interstate’s progress, although even without it the restructuring snags would have kept earnings below expectations.
The simple answer to what happened in Texas is that the economy had not hit bottom after all. The loan portfolio continued to lose value, requiring more reserves against potential losses.
Some Blame Texas Bankers
“We were not the envy of the world, but we looked pretty damn smart buying Allied,” Pinola said. “Now the economy has made us look pretty damn--certainly not dumb, but certainly it has invalidated the degree of insight we thought we had.”
Privately, some First Interstate executives blame their counterparts at Allied. In assessing the real estate loans, they say, the Texas bankers were overly optimistic. Pinola refused to blame the managers.
But the effusive praise for Allied’s executives that was evident in the flush of the acquisition is gone, and First Interstate is installing its people in the senior spots at the Houston-based unit.
A new president was brought in from First Interstate of California last month, and a new chief financial officer and a new commercial loan chief came from affiliates in Washington and Oklahoma.
Pinola said the troubled loans will be segregated from the healthy portion of the bank and tough-minded loan officers will try to clean them up or get rid of them. The remainder of the bank will try to increase its share of the consumer market while awaiting the long-predicted Texas recovery.
Whether First Interstate begins to fulfill its potential in terms of profitability in 1989--and some analysts are bullish on the prospects--depends heavily on avoiding another round of problems in Texas.
“Texas is clearly the big question mark,” said Donald K. Crowley, an analyst in the San Francisco office of Keefe, Bruyette & Woods, an investment firm specializing in banks. “If Texas remains benign or (just) a modest drag, it should be a fairly decent year for the company.”
Heavy Job Cuts
The necessity of slashing overhead, however, extends beyond Texas, and First Interstate is trying to consolidate operations across its 13-state empire. In addition to the 2,500 jobs eliminated this year, Pinola said the company will continue cutting jobs in 1989.
Among this year’s cutbacks, the administrative staff of the holding company has been cut about 30%, from slightly more than 450 to less than 350, and 13 marketing centers for its auto-financing arm are being closed in California, eliminating about 200 jobs.
Where First Interstate stands to benefit the most from cutting jobs and consolidating functions is in its affiliated banks.
“There is no reason why certain (of First Interstate’s) banks can’t essentially merge with another bank, reducing the overhead by half,” Pinola said. “Those kinds of things are now going on here at an accelerated pace.”
They are also going on quietly. Much as Pinola and other First Interstate executives would like to trumpet them in hope of pushing up the sagging stock price, they are taking a low-key approach for fear of upsetting the communities that will lose jobs.
About 140 jobs will be cut early next year when a Denver data processing center that serves First Interstate banks in four states is closed and its functions are assumed by an affiliate in Portland, Ore.
Similarly, data processing for First Interstate banks in Utah and Nevada is being moved to Arizona. The company declined to say how many jobs are involved.
Consolidation of back-office functions occurs frequently when banks merge, but the task has proven difficult for First Interstate. But Brown of Smith Barney sees early signs of success.
Many Investors Wary
“While Wall Street remains incredibly skeptical, this is the area where they are finally beginning to make some progress,” he said. “They are going to be managing these banks like one bank. What that means is lower costs and fewer people.”
Yet many investors remain wary of First Interstate because of the uncertainty over Texas and the restructuring delays.
“If you are a shareholder in the company, it doesn’t matter too much which hole they are bleeding from,” analyst Crowley said.
The unanswered questions, then, are when the consolidation and Texas clean-up will show results and whether it will come before Pinola is scheduled to retire in 1990. While the board may ask him to stay on, Pinola wants badly to put up some strong numbers in 1989.
“Joe is keenly sensitive to the fact that results have not met expectations at First Interstate, and I think that he’d really like to go out with the company performing to its potential,” Crowley said.
For his part, Pinola is cautiously avoiding predictions on earnings next year and beyond. But he could not resist a dose of optimism as he leaned back in chair on the 59th floor of the First Interstate building.
“I am not sitting here in the very best of moods, but I sure as hell tell you I am not sitting here in the worst of moods,” he said. “I think we have our bank positioned to override the surprises and the skeptics.”
FIRST INTERSTATE: THE BOTTOM LINE Assets and income in millions; return on assets, 1988 figures for first nine months only.
1987 1988 Average Net Average Net Units Assets Income ROA*** Assets Income Retail $31,736 $346.0 1.09% $32,277 $260.9 Wholesale 11,221 18.1 0.16 5.645 31.7 Rocky Mountain 6,974 12.9 0.18 6,781 22.9 Non-Bank 4,453 (16.0) (0.36) 2,528 21.8 SUBTOTAL 54,384 361.0 0.56 47,231 337.3 Texas 6,458 (187.6) Restructuring Units 5,144 (127.3) Parent Borrowing (44.7) (37.0) FIRST INT. BANCORP $51,562* $316.3** 0.61% $56,791* $(14.6)
Units ROA*** Retail 1.08% Wholesale 0.75 Rocky Mountain 0.45 Non-Bank 1.15 SUBTOTAL 0.95 Texas (3.88) Restructuring Units (3.31) Parent Borrowing FIRST INT. BANCORP (0.03%)
* Includes eliminations ** Excludes special provisions *** Parent company operating overhead allocated on a pro-rata asset basis.
Source: First Interstate Bank
