BankAmerica's Big Bet on Failed Thrifts

SAN FRANCISCO -- BankAmerica Corp. says it is making good progress converting failed thrifts into full-service banks, but the costs in some cases have been higher than expected.

"It's still early, and we don't have all the evidence yet," Frank N. Newman, vice chairman and chief financial officer, said in an interview. "But we are confident" that the thrift-purchase strategy is proving successful.

A Series of Purchases

In the past 14 months, the company paid about $360 million to the Resolution Trust Corp. to buy nine failed thrifts with more than $13 billion in deposits. The deals allowed BankAmerica to enter Arizona, New Mexico, Idaho, and Utah and expand its operations in California, Washington, Oregon, and Nevada.

Analysts are divided over whether a bank can use thrift branches as foundations for commercial bank operations in new markets. A thrift typically has a narrower product mix than a full-service bank, and customers tend to be rate-sensitive savers rather than higher-margin checking depositors.

"I have questions about the efficacy of savings and loan transactions as stakeout deals, particularly with the prices BankAmerica paid," said R. Jay Tejera, an analyst with Dain Bosworth Inc., Seattle.

But others consider BankAmerica's thrift strategy an effective, low-cost expansion technique. "Overall, we are going to look back on it as one of the best decisions ever made in banking," said Thomas K. Brown, an analyst with Donaldson, Lufkin & Jenrette Securities Corp.

Learning by Doing

With no previous experience in thrift conversions, BankAmerica was originally groping in the dark, Mr. Newman acknowledged. But in the past year it has learned more about the process than any other banking company, he said.

"We've put a lot of effort into building a data base," Mr. Newman said. "We're a lot smarter now then with the first one or two purchases."

Conversions have gone well in Arizona and Oregon, the states where BankAmerica made its largest RTC purchases, Mr. Newman said. The company was able to hold on to more customers than it expected after lowering savings interest rates, he said; he declined to provide figures.

Unexpectedly High Costs

Front-end expenses, including branch remodeling and staff training costs, were higher than anticipated in some of the early deals, Mr. Newman noted.

BankAmerica officials have told Mr. Brown that high conversion costs and a shortage of loans in Oregon have stretched the break-even period in that state to more than two years, which is longer than expected. By contrast, the officials said, reaching the break-even point in Arizona will take only one year.

In states such as Nevada, where the company has only small operations, results have been poorer. "It's hard to make an adequate return with a bank that is low ranked in market share," Mr. Newman said.

BankAmerica's conversions proceed in three stages, Mr. Newman said. The first stage is stabilizing the operation. In Stage 2, BankAmerica introduces a broad range of checking and other deposit products for consumers and small businesses. Finally, it begins offering home equity, auto, and other consumer loans.

Moving into commercial lending is harder, Mr. Newman said, because of the need for expertise on local companies.

Most Loans Were Returned

BankAmerica refused to take most of the loans held by the thrifts it bought. And it exercised options to return more than $3 billion in other credits to the RTC. As a result, BankAmerica's Oregon and Arizona units have few loans on the books and have had to transfer funds to their sister bank in California, Mr. Newman said.

The company is continuing to bid aggressively for RTC thrifts in the West, both in new states and to fill in holes in markets where it already has a foothold, he said.

Texas, where BankAmerica recently bought a one-branch commercial bank as an entry vehicle, is a high priority. But fillins in places like Arizona are also likely, he said.

Mr. Newman played down BankAmerica's nationwide banking ambitions, expressed repeatedly during its unsuccessful pursuit of Bank of New England earlier this year.

Focusing on the West

"There is a distinction between having a vision and having a plan," he said. "By the end of the decade, we foresee banks that span the nation, and we think we will be one. But that doesn't mean we have a plan to get there in the next 12 to 18 months. We're still looking primarily in the West."

Outside the West, BankAmerica is interested mainly in places with large populations and liberal branch banking rules. The second requirement would become moot if Congress allows interstate branching.

Mr. Newman disagreed with critics who say that BankAmerica was arrogant and over-confident during the Bank of New England bidding. And he denied that BankAmerica lowered its prime lending rate in February to influence the bidding or raised the rate two days after the New England results were announced to show its unhappiness.

Asked his reaction to reports that the Federal Deposit Insurance Corp. aggressively discounted BankAmerica's New England bid until it fell below that of the winner, Fleet/Norstar Financial Group Inc., Mr. Newman said: "We just decided we don't want to make public comments second-guessing the regulatory agencies."

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