Driving That Stagecoach : Reichardt Steers Wells Fargo to Post-Recession Expansion

In the staid world of commercial banking, Wells Fargo Bank Chairman Carl Reichardt stands out like a longhorn bull on an arid Texas plain.

A gruff, aggressive native of Houston, Reichardt is known as an innovator widely followed by bank leaders and investors and feared by subordinates. He is regarded as a ruthless cost cutter, a consumer banking innovator and a skilled navigator who successfully guided Wells Fargo through California’s bumpy recession.

His image today stands in stark contrast to what it was in the early 1990s, when Reichardt came under heavy fire because it appeared that the bank might topple under a welter of bad real estate and corporate loans. Wells Fargo is California’s second-largest bank, with more than $52 billion in assets.

With profits on the rise and problem loans in decline, Wells Fargo is robust again and poised for major expansion. Reichardt, 62, has openly lusted after Los Angeles-based First Interstate Bank, which has so far shown no interest in a union with Wells.

“It takes two to tango,” Reichardt said in a recent interview at his San Francisco office, “and we’re alone on the dance floor.”

Wells Fargo President Paul Hazen, Reichardt’s heir apparent, says it is more likely that Wells will use its surplus resources to buy back large quantities of its stock on the open market, though no plan to do so has been announced.

Meanwhile, Reichardt has ordered loan officers to start a lending push aimed at businesses and consumers. The goal is a 9% increase in loans this year. Well Fargo’s loan portfolio has shrunk 30% since the recession began three years ago.

The “go-forth-and-lend” edict amounts to a wager that California’s economy is poised for revival. It also represents a formidable challenge to a bank that does business only in California while employment growth and business activity remain flat.

Other banks, including archrival Bank of America, are not so optimistic about economic prospects. Bank of America Chairman Richard Rosenberg has said he expects any expansion of B of A’s loan portfolio in 1994 to come from outside California.

Reichardt, interviewed in his office adorned with original Frederic Remington drawings, confessed that his upbeat view of the future is based less on what economists say than on “anecdotal evidence from the business men and women I talk to.”

Regardless of whether they may agree with him, bankers invariably take note of what Reichardt is saying and doing. A cigar-smoking wine connoisseur, he enjoys an elevated status among his colleagues because of his 38-year track record in California banking.

“He’s a man’s man . . . who thinks like a shareholder,” said billionaire Warren Buffett, whose investment company has made hundreds of millions of dollars from its 12.2% stake in Wells Fargo. “I’m very happy he’s running the bank.”

Others have not always been so kind to Reichardt. Four years ago, when it appeared that the bank’s commercial real estate loans and risky commercial loans could be its undoing, Reichardt was the target of brickbats from Wall Street and unwanted scrutiny from banking regulators.

When Wells Fargo halved its dividend in late 1991 and added heavily to its reserves for loan losses, some braced for the worst, said Larry Vitale, a bank analyst with Bear Stearns & Co. Applying the experience of Eastern banks, bears feared that Wells would lose 25% of its $13-billion commercial real estate loan portfolio.

Now, with the bank back on track, the dividend restored and just 7% of the bad loans written off, Reichardt apparently has been vindicated.

“Wells’ experience turned out to be better than other banks,” said David S. Berry, director of research at Keefe Bruyette & Woods. “Why? Not because Southern California real estate held its value any better than New England. It didn’t. It was because, at the end of the day, Wells was underwriting its loans better.”

*

Reichardt learned how to make loans at Union Bank, which he joined in 1960 after serving in the Navy during the Korean War and earning an economics degree from USC. He quickly rose through the ranks, and headed Union’s commercial real estate loan operation in Orange County before joining Wells Fargo in 1970.

Though conservative, Reichardt has been an innovative manager. His bank was an early pioneer in offering mutual funds to keep depositors. He also resisted the common wisdom that bad loans should be sold in bulk at big discounts. He chose instead to nurse them back to health, and avoided the huge write-offs that such bulk sales invariably required.

“Carl’s like the head of a small-town bank in Nebraska who knows the borrowers, controls his expenses and knows the nuts and bolts of the bank,” Buffett said.

Yet Reichardt raised eyebrows by fighting public battles in the early 1990s with bank regulators, whom most executives avoid antagonizing. He fought a losing, highly visible skirmish in 1991 with regulators who insisted Wells Fargo write off a $100-million corporate loan while the borrowers were still making the payments.

Reichardt’s obsession with cost control has made Wells Fargo the most efficient major retail bank in the nation, but the changes have been painful internally. About 1,000 branch jobs have been eliminated in the last year alone. Executives either meet sales goals and adhere to budgets or they are shown the door.

Reichardt can be abrasive. He is known for yelling at subordinates who don’t measure up. “When he believes in you, he gives you a lot of rope,” said Jack F. Grundhofer, a former Wells Fargo executive who is now chairman of First Bank System in Minneapolis. “But he’s tough, and he expects results. You have to earn what you get, you’re not entitled to it because you have a job.”

Reichardt sees himself as an entrepreneur whose main goal is to improve profits for shareholders, including himself. Including options, he owns nearly 548,000 shares of the bank’s stock, currently worth more than $75 million.

“I’ve always thought of myself not as a banker, but as a businessman who happens to be running a bank,” Reichardt said. “The average banker who has been around a long time has the mind set of a civil servant, in terms of cost control and having a guaranteed income for life.”

The approach seems to be working. The bank earned $612 million in 1993, and Wall Street is predicting profits of up to $850 million for 1994. That’s quite a rebound from 1991, when Wells Fargo posted a meager $21-million profit.

Wells’ burden of problem assets has been reduced sharply, to $1.5 billion last December from $3 billion in September, 1992. Most encouraging to analysts, Wells Fargo was able to reduce bad loans dramatically in 1993 without having to take enormous additional loss provisions.

*

Investors have bid up Wells Fargo stock to more than $140 a share, double its price just 15 months ago. In addition to Buffett’s profits, the jump has also meant a huge windfall for investor Walter Annenberg, who owns 7.2% of Wells stock.

Hundreds of Wells Fargo employees have also gotten rich, due to a wide-ranging stock option program and an employee stock ownership plan begun in 1984, when Wells stock sold for $9 a share.

“A lot of people here have a million bucks in stock,” Reichardt said. “I think it’s good to have senior managers of a company be substantial shareholders. That way, they think like owners, not hired guns.”

After three years of avoiding interviews while the bank grappled with its massive pile of bad loans, Reichardt said he now feels freer to talk. The discussion in his office was centered on his favorite themes: cutting costs, shareholder value and spreading ownership of the bank among employees.

“If shareholders do well,” he said, “then employees are happy, because they are big stockholders around here. Happy employees treat customers better. . . . So, if those three constituencies are served, the company as a whole is going to do well.”

Wells Fargo’s Road to Recovery

PROBLEM ASSETS

Problem assets have been falling from a high of nearly $3 billion at the end of September, 1992 (quarterly, in billions of dollars):

1990: 1Q: $1.159 2Q: $1.269 3Q: $1.209 4Q: $1.429 1991: 1Q: $1.592 2Q: $2.011 3Q: $2.287 4Q: $2.405 1992: 1Q: $2.529 2Q: $2.955 3Q: $2.991 4Q: $2.692 1993: 1Q: $2.510 2Q: $2.319 3Q: $2.074 4Q: $1.563

ANNUAL PROFIT

Over the last 10 years, profits have fluctuated wildly, particularly since 1990 (in millions of dollars):

1984: $169 1985: $190 1986: $274 1987: $51 1988: $513 1989: $601 1990: $712 1991: $21 1992: $283 1993: $612