Wells Fargo & Co. Assumes Unusual Role: Reassurer

Carl E. Reichardt, Wells Fargo & Co.’s blunt chairman and chief executive, finds himself in the “reassurance business” these days.

Investors are pounding the stock because of fears about risky real estate and leveraged-buyout loans. Employees accost him in the elevator to ask what the trouble is. Customers confront branch managers with negative press reports. Short sellers predict the demise of the dividend--and the eventual collapse of the bank holding company, a California institution since its founding in 1852 as a stagecoach express to carry mail to gold miners.

As a result, Reichardt is spending a goodly amount of time attempting to calm jitters by updating investment analysts and sending pep-talk letters to employees.

“When the company’s performance has been pretty good, and the industry is getting bashed in the press the way it has, and the company is getting painted with a very broad brush . . . you have an obligation with your constituencies to tell them how you feel,” Reichardt said last week in an interview at Wells Fargo’s San Francisco headquarters. “If the numbers aren’t reassuring, you have to resort to rhetoric.”

The numbers include solid third-quarter earnings--$162.6 million, or 6% more than in the same quarter of 1989. The boost resulted in part from a reduced reserve for loan losses, strong loan growth and a rising net margin. The company’s return on assets, the key measure of bank earnings, was 1.26%, and return on equity, another important guide, was 22%, both on the high side for major banks. Meanwhile, the earnings of many other large banks suffered in the quarter because of deteriorating loan portfolios and increased loss reserves.

So why didn’t Wells Fargo’s results assuage concerns of investors, who this year have driven the stock price down to $49.375 Friday from $86.

“The stock has gone to hell (because) Wells Fargo is a heavily loaned-up bank,” said Richard X. Bove, an analyst with Dean Witter in New York.

Bank stocks in general have been taking a drubbing from investors for a variety of reasons. According to Keefe, Bruyette & Woods, a San Francisco brokerage firm, major California bank stocks have fallen an average of 43% this year, compared to a decline of 15% for the Standard & Poor’s 500-stock index. Money center banks have dropped 50%.

Investors are anxious about the effects of the current economic downturn on commercial real estate and buyout loans. In addition, investors burned by the savings and loan crisis have turned sour on banks as well. Meanwhile, bankers are facing stiffer requirements from regulators and are being forced to reduce lending.

Of the major California banks, Wells Fargo is viewed by analysts as potentially the most vulnerable and BankAmerica the healthiest. In between are Security Pacific and First Interstate, both of which could suffer from exposure to real estate problems--primarily in states other than California, such as Arizona.

Ironically, Bank of America is benefiting now from its severe problems of four years ago, when its real estate department was in no position to make loans. The bank began getting back into real estate in 1988, but primarily in residential mortgages, which are viewed as safer.

Wells Fargo Bank--third-largest in California and 11th-largest in the nation, with assets of $51.5 billion--has unusually high concentrations of loans in commercial real estate, 70% of them in California, and debt-financed buyout deals, two of the areas of greatest concern for bankers. Of total loans of $44.4 billion, about $15 billion, or 34%, are in these risky areas.

The most bearish of the analysts and short-sellers (who profit when stock prices go down) figure that it’s only a matter of time before the slowdown in California real estate becomes a Texas- or New England-style land bust.

Soaring vacancy rates and plummeting house values, they say, could turn those risky loans into non-performers. And that, some extremists contend, could put Wells Fargo’s very survival in question.

If California real estate “craters off, it may not be over for the bank,” but the situation would be dire, said Tom Barton, a Dallas-based partner of Feshbach Bros., the big short-selling firm based in Palo Alto. The firm forecasts that the stock will continue sliding into the teens.

Among Wall Street analysts, the most pessimistic is George M. Salem of Prudential-Bache Securities in New York, who last month published a doomsday report about commercial and residential real estate that labeled Wells Fargo the most vulnerable of the California banks.

“Here’s an analogy for Californians,” Salem said. “Wells Fargo built a house for an earthquake of 6 on the financial-shock Richter scale, but we’re going to have a 7 or an 8.” If that happens, he predicted, Wells Fargo’s dividend “could deteriorate rapidly.”

Wells’ defenders contend that it’s unlikely that the decline in California will equal the real estate debacles of New England and the Southwest. They also point to a decision by an investment group led by Warren E. Buffett to buy a 9.8% stake in the company. Buffett has a reputation as a long-term stockholder who values solid fundamentals.

Then there is Wells’ track record of managing risky loans.

“In my judgment, Wells Fargo is one of the best lenders around in the real estate area, dealing with the top tier of developers,” said Donald K. Crowley of Keefe, Bruyette & Woods in San Francisco. “Quality (of the loans) in the end is what will make the difference.”

Although Reichardt admits to having some “sleepless nights” over the bank’s loan portfolio, he noted that management has successfully weathered previous downturns, including the recessions of 1973-75 and 1981-82.

“Nothing we’re going through is new; there’s nothing we haven’t experienced,” said the barrel-chested Reichardt, 59, a Houston native who joined a real estate subsidiary of Wells Fargo in 1970 after a decade of real estate lending with Union Bank. Paul Hazen, Wells Fargo’s president, also joined Wells in 1970.

Crowley agrees with Wells management that real estate problems in California will be eased by the state’s diversified economy and job and population growth.

He cited Andrex Point, an office complex near Gardena that Wells repossessed. The bank’s only troubled California property, it has a good location off the San Diego Freeway that should make it easier to rent or sell, he said.

But the downturn is taking a toll. Irvine Co., the big Orange County developer, said last week that it will curtail new projects and cut 11% of its work force. The company cited “onerous credit restrictions” on banks and savings and loans by federal regulators, who have been stung by criticism about the S&L; debacle.

Wells won’t disclose its corporate customers. Reichardt, however, is a member of Irvine Co.’s board of directors.

Concerns about an increase in loans on which borrowers were no longer paying interest prompted Moody’s Investors Service in June to lower Wells’ senior long-term debt rating a notch to A1 from Aa3.

As of Sept. 30, nonperforming and restructured loans, plus the value of foreclosed properties, had dropped slightly from June levels to $1.2 billion, or 2.7% of total loans and foreclosed properties. That is a smaller level than most other banks, but one that Wells Fargo acknowledges is likely to rise.

Clyde W. Ostler, vice chairman of Wells’ branch banking group, acknowledged that “with perfect hindsight you would not have necessarily built up these concentrations. But I still think they will prove to be good moves when the dust settles.”

Wells’ loans to companies that financed buyouts with debt are also of concern, even though the bank is widely viewed as a careful lender.

“They have been quite conservative,” said Katharine Rossow, a Moody’s bank analyst. “The (leveraged-buyout) portfolio is very well diversified by industry and borrower.” About half the loans are in businesses such as retailing and manufacturing that could suffer in a recession.

One of Wells’ largest borrowers was Revco, a discount drugstore chain for which Wells Fargo provided an estimated $102 million in senior debt. Revco, now in reorganization under Chapter 11 of the federal Bankruptcy Code, is expected to repay Wells 100 cents on the dollar.

Also on the plus side, Wells was one of the first major banks to recognize the growing troubles with loans to developing countries, and in the last few years has sold or written off those loans. Many other banks are still burdened with bad credit, particularly loans to Latin American nations.

Reichardt and other Wells executives say that, with all the doom-and-gloom attention being paid to real estate and leveraged buyouts, not enough credit is being given to the retail operation, which uses 37% of the company’s assets but accounts for 67% of profit.

The retail side, with 486 branches, has been in the vanguard of such innovations as automated teller machines, 24-hour phone banking, extended daily hours and Saturday hours, all of which have helped Wells build a bigger deposit base. Wells is also poised to purchase 130 branches from Great American Bank, based in San Diego.

But could the retail side carry the bank in the event of a serious recession?

“Sure, with the caveat that California doesn’t sink into the Pacific,” said William F. Zuendt, vice chairman of the retail banking group.

Far from being sanguine, Wells Fargo officials acknowledge that lending is risky business in a faltering economy.

Reichardt, for one, is reluctant to gaze into a crystal ball, citing the Persian Gulf crisis as a wild card that makes forecasting more foolish than usual.

“If (the value of California real estate) plummets off the face of the Earth, that’s going to create problems,” Reichardt said. “Do I think that will happen? No.”