First Interstate, Wells Fargo Face Pressure to Find Partners

The megamerger announced Monday left rivals Wells Fargo and First Interstate stunned - and under pressure to avoid being bridesmaids for long.

"It's a real surprise," Carl E. Reichardt, Wells' chief executive, acknowledged in a brief interview.

Though large combinations have long been predicted, most of the attention in California had focused on Wells and Security Pacific, which held merger talks last fall. Those discussions were sidetracked partly by fears Wells executives had about Security Pacific's loan portfolio.

Now that BankAmerica has stepped in and snapped up the Los Angeles-based company, the banking equation in the West has changed radically. Both Wells to grow to maintain their competitive position.

"Their options are relatively clear cut," said banking lawyer H. Rodgin Cohen. "They must merge with each other or another superregional."

The most pressure, clearly, is on First Interstate, which is based in Los Angeles and has $50.3 billion in assets. The company does not have many options and now appears to have lost the luxury of remaining independent.

First Interstate has seen its recovery grind to a halt amid loan problems, raising new questions about management's underwriting capabilities. What's more, its market position is the weakest of California's Big Four banks, with deposit share less than half of Security Pacific's.

"The BankAmerica-Security merger puts them on the brink - if not ever," said David L. Smith, a banking consultant based in Glendale, Calif. "I don't know how First Interstate will compete."

Strategy Shaken

Other suitors besides Wells Fargo may emerge for First Interstate. But the company's carefully designed strategy of completing the rebuilding process before entertaining any merger offers may have been blown out of the water by the actions of its rivals.

"I think First Interstate's strategy has got to be called into question at this point," said an investment banker in New York. "It is no mystery that everybody's talked to them. If Sec-Pac is willing to do this, why isn't First Interstate?"

Simon Barker-Benfield, a spokesman for First Interstate, said: "We have a comprehensive strategy in place. Our plan calls for us to reduce our nonperforming assets, which we have been steadily doing.

"With regard to competition, we would note that we already compete successfully with both banks in a number of markets."

Wells admits it is feeling the heat. The BankAmerica-Security linkup "puts pressure on everybody else to look at the cost effectiveness of in-market mergers," another senior executive said privately.

Wells Rates for Viability

To be sure, Wells has some time and a variety of options to consider. Despite a severe bout of loan problems, it remains one of banking's most effective institutions.

It has the market share to remain viable in much of California and sufficient capital to fund expansion. It could continue to grow through in-market acquisitions, like its purchase of Great American Bank's California branches.

In the long run though, the new BankAmerica could achieve economies of scale that would allow it to underprice Wells. If that were to happen, Wells could be forced to look at buying Western superregionals or a megamerger with First Interstate.

Wells broke off the talks with Security late last year, mainly because it appeared that the company was losing control of its loan portfolio, sources close to the company said.

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