First Interstate to Lay Off 3,500 to Cut Costs : * Banking: Half of the reductions may be in California. The Los Angeles-based bank also expects to lose $200 million in the third quarter.
First Interstate Bancorp, feeling the effects of the soft California economy and a continuing slide in the state’s real estate market, said Thursday that it is cutting its work force by 3,500, with as many as half of the layoffs expected in California.
The layoffs are part of a companywide restructuring that will result in a $200-million loss in the third quarter. The bank will take a $90-million third-quarter charge, mostly for severance pay. The company also said it would report a loss for the year.
The disclosures by the nation’s 11th-largest bank are another sobering development for California banks, many of whom until a few months ago were insisting that the state would be immune from the real estate problems that have swept through other regions, such as the Northeast.
Thursday’s move is an attempt by First Interstate to deal with one of the chronic problems that has plagued it over the years: bloated overhead costs that far exceed costs of leaner competitors such as Wells Fargo & Co. First Interstate said it hopes its actions will save $250 million a year next year as it trims its overall work force of 33,500 by more than 10%.
The bank said 1,500 of the jobs are being cut with its largest bank, First Interstate Bank of California. An additional 400 jobs will be cut at Los Angeles-based First Interstate Bank Ltd., an investment banking-style unit with operations worldwide. In addition, it will close or consolidate up to 15 of its 330 branches in California.
First Interstate also said its problem loans will increase as much as $350 million in the third quarter, most related to California real estate loans. The bank noted that many of those loans are “contractually performing,” meaning interest is being paid even though the loan appears troubled.
“These restructuring steps reflect the economic and competitive realities of the current and anticipated financial services environment,” First Interstate Chairman and Chief Executive Edward M. Carson said in a statement. The company’s top executives were unavailable to comment further.
The revamping at First Interstate comes as the banking industry is under intense competitive pressure. Mergers and consolidations have resulted in thousands of layoffs in the shrinking business.
The recession has made matters worse. In California, the commercial real estate market in some areas is the softest it has been in years, with one in five offices empty in some cities. Sales by home builders have not recovered as fast as some had hoped, despite a steep slide in interest rates. Unemployment remains stubbornly high, and business lending remains soft.
First Interstate’s moves drew a mixed response from securities analysts and shareholders. Some believe that the bank is finally facing up to what it should have done long ago and is setting the stage finally for a strong recovery next year.
Still others said they are growing weary of the continued string of bad news from the bank over the past two years despite efforts to restructure itself. “They always seem to take two steps forward, and one step back,” said Thomas K. Brown, a bank analyst with the New York firm Donaldson, Lufkin & Jenrette.
The announcement came after the stock market closed. First Interstate closed at $30.875, up 25 cents. Separately, First Interstate’s directors, as expected, slashed the bank’s quarterly dividend to 30 cents a share from 75 cents.
First Interstate’s ongoing problems, coupled with the BankAmerica-Security Pacific combination, have sparked increased speculation of a possible merger with San Francisco-based Wells Fargo.
Wells Fargo’s acquisition-minded chief executive, Carl E. Reichardt, has publicly said he believes that a merger of the two banks is a good idea. Reichardt is known to have felt out the bank’s management from time to time--including at least once this year--to gauge interest in a merger. But First Interstate’s executives the past few years have consistently spurned overtures from prospective suitors, electing instead to try to restructure the bank themselves rather than have an acquirer do it for them.
“There is enormous pressure,” said analyst Donald K. Crowley of Keefe, Bruyette & Woods. “At the same time, management is saying, ‘What do we get from a merger with someone else that we can’t get doing it ourselves.’ The question you hear is whether they are capable of performing surgery on themselves.”
A merger, however, could be hampered somewhat by Wells Fargo’s own growing problems, especially in its extensive portfolio of real estate loans. Still, analysts believe that a combined bank could save huge amounts of money in overhead, even taking into account the latest round of cuts at First Interstate.
Wells Fargo declined comment. A First Interstate spokesman said that the bank is aware of the pressures mergers are bringing on banks but that its management is focused on the bank’s loan problems and successfully carrying out its restructuring program.
Another First Interstate problem has been that its extensive interstate banking system spread across the West often functions like an engine in which some cylinders work and others don’t. Two years ago, First Interstate’s Texas and Arizona banks were losing hundreds of millions of dollars while its banks in California, Nevada and Oregon were strong. Today, the reverse is true. The bank’s most consistent performer has been in Washington.
In an effort to address the problems of its interstate banking system, First Interstate said it will reorganize the banks it owns in 13 states. The bank will create a Southwest region for banks in Arizona, Nevada, Utah, Colorado, Wyoming and New Mexico and a Northwest region for Oregon, Washington, Idaho, Montana and Alaska. First Interstate’s California and Texas banks will stand alone.
For First Interstate employees, the severity of the layoffs was surprising, but at least it ended some of the suspense. Rumors of pending cutbacks and layoffs had been swirling through First Interstate’s downtown Los Angeles headquarters for nearly two weeks.
“Even though we knew something was coming, this is more serious than we imagined,” one employee said. “Even though it would be horrible to be told today that I was going, I think it’s almost worse not to be told. We still don’t know what else might be coming.”
Times staff writer Carla Lazzareschi contributed to this story.
First Interstate’s Restructuring
* Reduce expenses by $250 million annually, beginning in 1992.
* Lay off 3,500 employees; as many as half may be in California.
* Close 10 to 15 of its 330 California branches.
* Consolidate facilities of its merchant banking arm.
* Develop a new structure with four regions: Southwest, including banks in Arizona, Nevada, Utah, Colorado, Wyoming and New Mexico: Northwest, including banks in Oregon, Washington, Idaho, Montana and Alaska; California, and Texas.
* Projects a third-quarter loss of $200 million.
* Increase non-performing assets at the California bank from $441 million to $750 million to $800 million, largely due to bad real estate loans.
* Reduce quarterly dividend from 75 cents to 30 cents a share.
First Interstate Bancorp
Quarterly earning and losses in millions of dollars
Source: First Interstate Bank
