SAN JOSE - The San Jose office of Comerica Bank-California's chief executive, J. Michael Fulton, is nondescript except for one unusual touch: a giant oil painting of a gorilla stamping through the rain forest.
The artwork, says Mi Fulton, reminds him that the Golden State's banking market is a jungle ruled over by such prodigious primates as BankAmerica Corp. and Wells Fargo & Co.
In that thicket, Mr. Fulton and Detroit-based Comerica are pioneers. They are among the first out-of-state bankers to brave California's new world of interstate banking.
High Hopes Fizzle
The state lowered the barriers to non-california bank companies at the beginning of the decade. But tough competition and a rocky economy have made California's anticipated interstate banking blowout a lonely affair.
Besides Comerica, only U.S. Bancorp of Portland, Ore., has set up a sizable full-service banking operation in the state.
While others hesitate, Mr. Fulton vows to bring Comerica's brand of business banking to wider areas of California. From his base at the south end of San Francisco Bay, he hopes to acquire his way to a broader presence in the state's two major population centers.
"We're bullish on the greater Bay Area and are also interested in selected Southern California markets," Comerica's California chief said in a recent interview.
Asset Growth Target
Despite a statewide economic slump that has still not abated, Mr. Fulton hopes to expand Comerica-California from its current size of $900 million of assets to more than $4 billion in the next few years.
So far, the bank has ridden out California's downturn fairly well. Return on assets has hovered around 1%, while nonperforming assets have remained just a shade over 4% of total loans and foreclosed property.
With its pending acquisition of Pacific Western Bancshares, also based in San Jose, Comerica is taking a big step toward meeting its growth target.
Pacific Western's $1 billion of assets will double Comerica-California's size and give it a strong presence in the scenic Santa Cruz-Monterey region south of the Bay Area.
Even before the Pacific Western deal closes, Mr. Fulton is scouting for other prospects. He is well qualified for the task: Before moving from Michigan to California three years ago, Mr. Fulton was in charge of mergers and acquisitions for the parent company.
Mr. Fulton wants to buy business-oriented banks near San Francisco or Los Angeles with $500 million to $2 billion of assets. The ideal institution would offer Comerica new geographic locations, a strong commercial lending portfolio, and a solid core deposit base.
"I would be disappointed if we didn't do another deal in 1994," Mr. Fulton said. "But it would be presumptuous to say we have a dialogue going.on anywhere now."
Sunbelt Strategy
Comerica's foray into California was the product of a corporate strategy hatched in the 1980s to get up outposts in the Sunbelt. As Michigan's population topped growing, officials decided to seek locations in expanding parts of the country. The company entered Texas in 1988 and Florida two years later.
In California, Comerica already had a dealer-based automobile lending office in the state, one of the national business lines Comerica pursues.
"Our dealer floor plan people said, you've got to come out here - there are all kinds of opportunities," Mr. Fulton recalled.
In 1991, as soon as state law permitted, Comerica bought two California specialty business banks: highly regarded Plaza Commerce Bancorp, based in San Jose, with about $500 million of assets; and Inbancshares, parent of Bank of Industry, a $200 million-asset institution based in City of Industry near Los Angeles.
In California, Comerica's goal is to position itself as a "super community" business bank, occupying a niche between the state's major institutions and local independent banks.
Overall, the Sunbelt strategy has been a winner for Comerica. But some analysts are skeptical of the California expansion and eye the Pacific Western deal warily.
Though the San Jose bank has a strong franchise, it is loaded with more than $60 million in bad loans and foreclosed property. The purchase price, a stock swap worth roughly $125 million at Comerica's current share price of about $27, will equal close to 1.9 times book value after writedowns of problem assets.
Meanwhile, California is crowded with business-oriented independent banks, making the market exceptionally competitive.
Better Deals in Texas
"Comerica could be buying Texas banks for the same price without asset quality problems in a market where there aren't as many business banks," said Lehman Brothers analyst Mark Lynch.
What's more, Pacific Western brings a 23-branch retail network with a substantial portfolio of consumer business. But this may distract Comerica from its mostly business focus in California. Currently, Comerica has just four offices in the Bay Area and three in Southern California.
"It could be kind of messy to drop those branches into Comerica," warned James R. Kenny, the former No. 2 executive at Pacific Western, now CEO of rival San Jose National Bank.
CEO's Compensation at Issue
Finally there is the matter of Phillip R. Boyce, Pacific Western's controversial chief executive.
Mr. Boyce is a talented businessman who founded Pacific Western two decades ago and turned it into the most powerful independent bank in the region.
But Mr. Boyce has been criticised over the years for pay and benefits packages exceeding $1 million a year, rare for an executive of a bank with less than $2 billion in assets.
Mr. Boyce stands to collect well over $10 million in benefits from the sale of his bank, including a $5.8 million golden parachute, according to disclosure documents. In the past, he has defended his compensation, saying he deserves to be rewarded as a risk-taking entrepreneur rather than a buttoned-down manager.
His compensation became a contentious issue during merger talks. Eventually, Mr. Boyce and Comerica signed a side agreement spelling out precisely what the Pacific Western executive will collect.
One thing he won't get is an unusual investment banking fee that raised eyebrows in California banking circles several years ago when his agreement with the bank's board was disclosed.
In his more recent agreement with Comerica, Mr. Boyce specifically renounced the fee, which would have given him 0.5% of the purchase price if the bank were sold for more than two times book value.
Despite the questions about Mr. Boyce and his bank, Comerica officials said Pacific Western is a good fit for their California operation.
Focus on Businesses
Pacific Westerii's branches won't lure Comerica into making a big play for consumers. Instead, the offices will be used principally as platforms for serving small-business customers.
"We will have merchant windows, night depositories, and business banking officers in every branch," said senior vice president Michael J. Tierney, who will oversee the network.
Comerica executives said they have measured Pacific Western's credit problems and are pleased with the bank's recent moves to boost reserves and charge off problem assets.
The merger agreement allows Comerica to reduce its purchase price if Pacific Western's loan portfolio produces significant new problems.
Raiding Weaker Rivals
As for competition, Comerica officials noted that California's economic slump is taking a toll on many independent business banks. "We have taken advantage of the problems of some banks," Mr. Fulton said.
For example, Comerica has recently built a technology portfolio to seize an opportunity offered by the weakness of neighboring Silicon Valley Bank, which used to own the high-tech market.
Tactics such as these have helped Comerica expand its loan portfolio at a 10% annual rate so far this year. And that growth has apparently been achieved without undue risk.
Even competitors grudgingly praise Comerica's "midwestern" credit standards, which contrast with the more freewheeling style of some California bankers. "They have pretty conservative underwriting," said San Jose National Bank's Mr. Kenny.
Mr. Fullon doesn't dodge the question of Mr. Boyce's compensation. "It's certainly high relative to packages we've seen," he said. He added that the terms reflected prior agreements between Mr Boyce and Pacific Western's board.
But he also praised the tenacdity of Pacific Western's chief in building the bank and negotiating the best possible sales terms.
"Phil caused this deal to get done," Mr. Fulton said. "Overall, he has done a pretty good job for his shareholders."
