At First Interstate, Carson Is Suddenly on the Hot Seat

LOS ANGELES - Edward M. Caron's reputation as one of America's most unflappable bankers will be sorely tested over the next months.

Mr. Carson, the chairman of First Interstate Bancorp, learned last week along with the rest of the world that BankAmerica Corp. would be merging with Security Pacific Corp. in the largest bank merger in U.S. history. But for him it had special significance: The two merger partners are his company's fiercest rivals.

Judging by internal memos, Mr. Carson plans to go about his business as usual.

Mr. Carson and other First Interstate executives would not make themselves available to discuss their plans after BankAmerica announced its merger. But in the memo to employees, Mr. Carson said the merger would not distract First Interstate from its plans to streamline, strengthen capital and profits, and pare nonperforming assets.

Avoiding Distraction

"Our best response is simply to stay on the course we've set and turn our attention to what we know we need to do - and not get distracted by what others are doing or saying," the employee memo said.

Indeed, the 62-year-old executive has a reputation for not being easily distracted from the task at hand. Since taking over the helm of the nation's 11th-largest banking company 14 months ago, Mr. Carson haas been struggling to pump hefty profits out of his vast banking empire.

Now that BankAmerica-Security Pacific merger leaves Mr. Carson two options: Either he has to deliver the superior profits that have long eluded First Interstate or find a merger partner.

Wells Fargo & Co. is widely cited as the most likely mate for First Interstate because both companies will most directly compete with the behemoth that will result when BankAmerica and Security Pacific join forces.

"The heat is on First Interstate and Wells," said one senior executive of a California bank.

Wells Fargo would not be such a snug fit for First Interstate, analysts warn, and possible out-of-market acquirers -say from the East Coast - could not hope to get enough cost savings from a merger to reward First Interstate's shareholders as richly.

A Chilling Effect

Though Mr. Carson inspired investor confidence early in his tenure as chief executive of First Interstate.

But that confidence was shaken by the annoucement last month that First Interstate would report an unexpected $80 million second-quarter loss because of nasty credit problems in Oregon an Nevada. The dividend was cut by 60%, and the company's stock plunged. Last week. First Interstate told investors that the restructuring may mean "material" charges to third-quarter earnings.

"They aren't executing very well," said John Neff, portfolio manager for Wellington Management's Windsor Fund, which owns about 4% of the company's stock.

Mr. Carson is the first to acknowledge the $50.3 billion-asset First Interstate has a lot of work left to do. "We are guilty of having not had tight enough [credit] controls," Mr. Carson said in an interview several weeks ago. "That is a legitimate indictment of our company."

A Test of Aptitude

He has set about fixing those credit controls and credit culture. All employees with lending responsibility were recently required to take a nearly daylong test on their credit skills. Employees who fail to meet the company's standards will be reassigned, he said.

The top executives are also getting closely involved in the credit review process, he said.

Another sign of Mr. Carson's get-tough attitude on credit quality was the dismissal of the top executives in the Nevada operation.

"I was terribly disappointed," he said. "Frankly, I'm not going to put up with it.

The company already has a prodigious supply of nonperforming assets to work down. But even with the problems in Nevada and Oregon, Mr. Carson thinks he can buck the trend of other California banks and continue to reduce nonperforming loans to $1 billion by year-end from the current $1.77 billion.

Reserves Are Built

He has set aside big reserves to keep up the campaign. The company's loan loss reserves totaled 115.% of nonperforming loans at the end of the second quarter, compared with 71% at Wells Fargo & Co., and 58% at Security Pacific.

Analysts are wary of the California portfolios of all the big California banks. Mr. Carson said any problems will be manageable unless California's economy takes a serious turn for the worse. "I'm not terribly bullish on an immediate turnaround in California, but it is not another Arizona of New England," he said.

The task of building capital and cutting expenses takes on new urgency with Bank of America's acquisition of Security Pacific. The behemoth's biggest advantages will be delivering services cheaply and efficiently and having access to inexpensive capital because of expected hefty profits.

Mr. Carson is roundly praised for substantially increasing First Interstate's once-anemic capital levels. The company's equity-to-assets ratio now stands at 4.67%, up from the 3.04% of year-end 1989. BankAmerica projects a 5.5% ratio after it completes its acquisition of Security Pacific.

But the cost-cutting seems to be moving more slowly. In the past 12 months. First Interstate's costs to revenues have actually edged ahead slightly, to 73%, as the company shrank, according to J. Richard Fredericks, a partner in Montgomery Securities, San Francisco. That compares with 56% for penny-pinching Wells Fargo.

Mr. Carson has every department forging a "utopian" plan to do their jobs better with fewer people. Early results are showing big cost savings, he said. Consolidating the company's 11 computer centers to four will cut data processing costs to $150 million next year from $240 million in 1987.

Part of the cost savings came from squeezing out duplication in his program of forging "a banking company, not a company of banks." But some of the far flung bank are not giving up the independence willingly. "It is like pushing on a string, the banks don't want it, said one former executive.

Unloading Assets

In fact, to focus on the most profitable businesses, Mr. Carson is unwinding many of predecessor Joseph J. Pinola's expansions. He is unloading $1.7 billion in assets by selling banks in Colorado, Oklahoma, and New Mexico.

They are in various stages of being sold and will produce gains of about $26 million.

Mr. Carson, son of a truck driver, has spent his entire banking career with First Interstate. He joined the company's Arizona bank in 1951 after graduating from Arizona State University. He worked a myriad of jobs at the Arizona institution, and was named chairman and chief executive in 1977. After producing stellar profits there, he was brought to the holding company as president in 1985 and elected chairman when Mr. Pinola retired 14 months ago.

Mr. Carson says his target is for First Interstate to produce a healthy 1% return on assets by the time he retires in three-and-a-half years. The company earned last year $468.7 million, or $7.30 a share, representing a 0.86% return on assets.

Buying a Bit of Time

And as the employee memo says, the merger may actually buy him just about that much time. "First Interstate is midway through its transformation to |one banking company' while BankAmerica and Security Pacific have not yet begun a similar integration of their separate operations that they expect will take about three years."

But Mr. Carson may not have that kind of time. First Interstate has some big, and so far patient, shareholders. But as they see shareholders of other banks getting a big return from the buyouts, they may get restive.

Lewis Sanders, president of Sanford Bernstein & Co., New York, which owns about 10% of First Interstate's stock says, "The optimal outcome for the major California banks is in combination."

PHOTO : First Interstate's Persistent Credit Problems...

PHOTO : Have Taken a Toll on Earnings

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