LOS ANGELES -- For years, Fist Interstate Bancorp was considered a goner.
Short on capital and long on bad loans, the Los Angeles-based company's takeover by a more powerful rival such as Wells Fargo & Co. or Norwest Corp. was taken for granted.
But talk about unlikely comebacks: long-scorned First Interstate and its low-key chief executive, Edward M. Carson, are gaining admirers. Analysts now figure the company controls its own destiny. And, surprise, it is First Interstate that is on the prowl for acquisitions.
"First Interstate is the rising star on the California banking scene," raves Campbell K. Chaney, an analyst with Sutro & Co., San Francisco. "The company has done a masterful job of turning itself around."
First Interstate's once-dismal reputation reflected its habit of hitting investors with credit shocks and nasty earnings surprises.
Now the $49.6 billion-asset company seems on track for sustained profits despite a vicious recession in its home state. In two years, its stock has almost doubled in price to more than $40 per share.
In an interview on the 72d floor of First Interstate's towering Los Angeles headquarters, Mr. Carson played down his transformation from goat to hero.
Quest for Credibility
"We're not trying to do anything except build our credibility," he said.
On the surface, Mr. Carson doesn't seem cut out to lead a major banking turnaround.
An Arizona native, he joined First Interstate's subsidiary in the Grand Canyon State right out of college in 1951. He became Arizona chief executive in 1977 and was drafted as No. 2 man at the parent company in 1985.
When Mr. Carson succeeded First Interstate's charismatic chief Joseph J. Pinola 2 1/2 years ago, he was widely dismissed as a caretaker. Early in his tenure, he was forced to declare at an investors conference: "I'd like to try to convince you that we're not a bunch of idiots."
Things have changed. Today Ed Carson is winning recognition as a sure-handed leader in his own right. "His real skill is getting groups of people to work together," says John d. Leonard, an analyst with Salomon Brothers.
Spreading the Word
As a manager, Mr. Carson is fond of aphorisms, some of which have been posted on employee bulletin boards. Among them: "We must lift state boundaries off our territorial map." and "Keep things as simple as possible."
In person, the 63-year-old Mr. Carson is soft-spoken and remarkably unassuming for the chief executive of the nation's 10th-largest banking company.
Lean and spare-looking, he greets visitors with warmth but just a hint of shyness. He responds to questions simply and directly, without bluster.
"Ed is not a flashy person," says First Interstate's 45-year-old president, William E. B. Siart, who is Mr. Carson's likely successor. "He's solid, thoughtful, and deliberate."
First Interstate's chief is eager to trumpet the company's recovery: "We've turned the corner. We're in a positive fit-to-win mode as opposed to a survival mode."
After losses in 1987, 1989, and 1991, earnings appear to be on a steady upward path, thanks to lower expenses and smaller provisions for loan losses.
Profits have risen for three consecutive quarters, with net income totaling $200.2 million so far this year. The company is on track to hit its full-year earnings target between $270 million and $280 million.
Although they are impressed by First Interstate's comeback, analysts are worried about revenue losses. Management's effort to shrink the organization and impose stricter credit standards have caused both loan and fee income to plunge. Total revenue fell a sharp 12% in the year ended Sept. 30.
"This company needs some revenue growth," warns PaineWebber analyst Lawrence Cohn.
Mr. Carson said rebuilding revenue has become a top priority. But the task is daunting. First Interstate alienated some business customers by failing to explain new credit policies adequately. In places such as Oregon, First Interstate lenders virtually disappeared from the market.
A Drive for Business
Now, the company is trying to pump up the sales force again. First Interstate is beating the bushes for new customers, especially retail and business clients unhappy with BankAmerica Corp.'s merger with Security Pacific Corp. Mr. Siart said First Interstate would also bolster revenue by raising fee income and originating more mortgages.
Nonetheless, short-term earnings gains will continue to flow from cost reduction and credit improvements. Consistently higher revenue won't come until the middle of 1994, Mr. Carson predicted.
When he stepped into First Interstate's top job, Mr. Carson inherited one of the nation's most coveted banking franchises. The company owned more than 1,000 branches throughout the West.
It boasted a heritage that traced back to the efforts of Bank of America's founder, A.P. Giannini, to set up a nationwide banking organization in the 1920s and 1930s.
But Mr. Pinola - one of banking's true visionaries - had spent more time putting together the First Interstate empire than managing it. The company was saddled with a costly decentralized structure and operating units that varied widely in quality.
Mr. Carson and Mr. Siart had to focus on fixing this vast and creaky network while shoring up the company's balance sheet. After a slow start, there have been dramatic turns for the better on several key fronts.
Take credit quality. Problems in Texas and Arizona drove bad loans and foreclosed property to $2.2 billion by June 1989.
Since then, nonperforming assets have been halved to $1.1 billion thanks largely to the company's Diversified Asset Group, which is gaining a reputation as one of banking's elite loan workout units.
At the same time, a rigorous program of testing and training has transformed First Interstate's credit culture. A company that had as many different credit polices as it did subsidiaries is now working with one set of conservative lending rules.
Such efforts have helped First Interstate fight off the Golden State's harsh economic downturn. The company was one of the first to recognize the severity of California's problems.
It diligently set aside reserves and sold off problem assets. As a result, its nonperforming assets in the state fell to $560 million by September 1992, a 16% drop in one year.
First Interstate has registered similar improvements in liquidity and capital. Tier 1 capital was a lowly 4.9% of assets when Mr. Carson took command. It has since jumped to a robust 8.6%, due in large part to the company's dividend reinvestment plan, recently suspended when capital goals were met.
Mr. Carson has taken some painful steps to rein in costs. He consolidated data operations and combined 15 separate banking units into four regional groups: California, the Northwest, the Southwest, and Texas. And he slashed full-time staff some 23% since the end of 1990 to a little over 27,000 employees.
Impact on Stock Price
At first, Mr. Carson's cleanup work required big additions to loan-loss reserves, taking huge chunks out of profits. Last year, First Interstate lost $288.1 million, mainly because of provisions to cover loan problems in California, Nevada, and Oregon.
Investors greeted the 1991 set-backs with contempt, pushing the stock price down more than 30% between May and December. The period "was very difficult for everybody," Mr. Siart recalls.
But Mr. Carson was convinced the 1991 buildup of reserves had finally put the company ahead of the curve on credit, and he expected earnings to pick up rapidly
So he made a bold move: He forecast earnings. Early in 1992, First Interstate announced it expected to net $220 million to $240 million for the full year, a projection since raised to between $270 million and $280 million.
For Mr. Carson, one of the most gratifying developments of the last year is First Interstate's vastly improved bargaining position on mergers.
When First Interstate was viewed as a target, Mr. Carson doggedly pursued an independent turnaround strategy. Other bankers complained about First Interstate's unwillingness to consider a merger. But, said Mr. Carson: "I never stonewalled anyone."
In recent months, Mr. Carson has begun advertising First Interstate's readiness to do acquisitions of its own, citing Washington State, East Texas, and Southern California as priorities for expansion.
He has stressed a preference for government-assisted deals that offer protection against credit problems. Mr. Siart describes First Interstate's approach to acquisitions as "careful and thoughtful."
"Of course, we're interested," Mr. Carson said of the banking units of First City Bancorporation of Texas, now in the hands of the federal government. And when the government puts up San Diego-based HomeFed Bank for sale, First Interstate will look at it, he noted.
Mr. Carson confirmed that the company bid for Pacific First Bank, the Seattle-based thrift recently bought by Washington Mutual Savings Bank.
Having failed to get Pacific First, the Evergreen State is "off the board" because no other major banks or thrifts are available, he said.
Policy on Mergers
As for he thorny question of whether First Interstate would take part in a megamerger with a bank of about equal size, Mr. Carson said he "will be very aggressive" if the deal "clearly will pencil out as a positive for our shareholders." But, he added, "If it's a merger for merger's sake, forget it."
Kohlberg Kravis Roberts & Co., the investment company that owns about 8.5% of First Interstate's stock, is not pressuring for a merger, Mr. Carson insisted. KKR has "never changed [its] original pitch that [it was] a long-term investor," he said.
First Interstate's chief said he expects to keep his job until his retirement date. Then, he added with an impish grin, "they'll kick me out at 65."