LOS ANGELES - Looking out a window from his office on the 72nd floor, Bill Siart finds reasons for pessimism in the surrounding Southern California landscape.
After pointing out landmarks from the Hollywood Hills to Dodgers Stadium, the CEO of First Interstate Bancorp spots a vacant patch of land on the edge of downtown.
"That was set aside for redevelopment," he says matter-of-factly. "Of course, since the slowdown, the redevelopment has been put on the back burner."
Slowdown may be too kind a word for what's happened to the economy in California, where employment growth is expected to barely pass 1% this year.
Indeed, the recessionary plunge of the once-Golden State has left banks that have large presences in the market, like First Interstate, with the prospect of stagnant loan demand and uncertain credit quality.
Other bankers may despair, but not Bill Siart.
The reason is simple: Even though his company has about half its $54.2 billion of assets in California, its franchise in 12 other western states continue to churn out returns on assets in the 2% range.
Indeed, the operations, most of which date back to the 1930s, supply a disproportionate 70% of the company's profits.
"The best banks are outside California," said Jay Tejera, a Seattle- based banking analyst with Dain Bosworth Inc. "I would say it is the best franchise in the West outside California."
Indeed, the company has grown profitable by pursuing a niche strategy that stresses consumer and small business banking. Avoiding the ego-driven urge to be big in all parts of all states, First Interstate focuses on expanding in key cities while leveraging fixed costs.
"They tend to perform at different times and at different levels in the markets they are in," said Carol Berger, banking analyst with Salomon Brothers Inc. "But improvements in Califorina could provide the greatest earnings growth for them."
With near term prospects for California sluggish at best, the out-of- state franchise is likely to remain the star each quarter. Already, the company's network of banks stretching from Alaska to the Gulf of Mexico have a history of financial results that double those of the holding company.
For the period ended Sept. 30, for instance, the Texas bank racked up a 1.95% return on average assets and a 25% return on equity, while the holding company earned 97 basis points on assets and a 14.9% ROE.
Texas provides a good case study for how First Interstate operates. Its 110-branch, $5.7 billion-asset franchise is the fifth-largest commerical bank statewide.
While banking giants including NationsBank, Banc One Corp., California- based rival BankAmerica Corp., and Chemical Banking Corp.'s Texas Commerce Bank have mass in multiple markets, First Interstate has critical share in only one of the five major cities of the state.
"They're a Houston bank, not a Texas bank," said Art Soter, banking analyst at Morgan Stanley & Co. "They are an important player there, but they are not a big competitor anywhere else in Texas."
Even then, the company is No. 4 in share in the heavily fragmented Houston market. Mr. Soter believes that has its advantages, adding: "They're able to participate in other people's (loan) business because they're not threatening anybody."
Linnet Dielly, CEO of First Interstate Bank of Texas, agrees. "I think people see us as less of a threat than the megabanks are," she said.
A further microcosm of the company is its tiny operations in thriving Austin. First Interstate has three branches there and such a small deposit base that probably few residents could identify the bank by name. But the operation returns 20% on equity.
"You can make pretty good money when you are small," Mr. Siart says.
But First Interstate is not always small in its markets. The company has strong positions in Arizona, Oregon, and Nevada - where it earned a 2.07% ROA in the first nine months of 1994.
Similar returns come out of Oregon,where First Interstate is a strong No. 2 to Portland-based U.S. Bancorp. In neighboring Washington State, the company has churned out similar margins, though one analyst believes the Pacific Northwest franchise was neglected as the holding company dealt with problems in California.
"First Interstate milked the extremely profitable franchise in Washington, Oregon, and Idaho in the late 1980s, when they were dealing with problems elsewhere," said Mr. Tejera. "In Washington, in particular, that has made them a niche player. They weren't investing in the franchise, and it caused their market share to erode."
Responds Mr. Siart: "That may have been accurate 2#1/2 years ago in Washington State, but it's not true today."
Still, Dain Bosworth's Mr. Tejera worries that First Interstate may again use the powerful earnings stream from its out-of-state franchise while it focuses on California - this time for acquisitions.
Mr. Tejera, a critic of the premiums the company sometimes pays for its targets, says profits from other regions will normalize growth of earnings per share while allowing First Interstate to pay up for new customers.
"They are sporting such strength elsewhere in the company, they can afford some of that dilution now," he said.
First Interstate executives, some analysts, and at least one institutional investor insist the company is not building California at the expense of other parts of the franchise.
"I see them looking for fill-in deals, and they are focused on value for the shareholder in making those decisions," said Sandra J. Flannigan, banking analyst at Merrill Lynch & Co.
Mr. Siart agrees. "We are trying to buy when we can buy at the right price and get a 20% ROE," he said.
Indeed, while many of the company's headline-making deals have been in California, First Interstate has repeatedly said it is focused on building Top 3-style market share in 50 counties across its western territory.
Specifically, Mr. Siart is looking for opportunities in Texas, Washington State, and California.
He also rebuts critics who insist that the company is overpaying in its deals. "I don't think we've overpaid for anything, and we are proving that we know how to take costs out that end up exceeding our own estimates," he said.
In Arizona, for instance, the company purchased 11 branches from Chase Manhattan Corp. and estimated it would cut 70% of costs. After closing all but one of the branches, Mr. Siart says, savings are up to 82% so far.
Still, one institutional investor with a small stake in First Interstate says the move to spend heavily in California now makes sense.
"There is a limited window of opportunity - maybe as little as one year - before outside players seriously look at moving into California," said the investor, who asked not to be identified.
"Right now, everyone is afraid (to enter the market) because of the economic uncertainty. Wells Fargo is too cheap, and BankAmerica is already big enough in most markets. That means that First Interstate is the biggest would-be buyer in the market."
California acquisitions may also be the best opportunity for First Interstate to match the double-digit loan growth it gets in other regions.
The bank estimates that core loan growth was only 8.5% in California, or 50% less than in its other three regions, during the first nine months of 1994.
However, when acquisitions were factored in, the California bank registered 18% loan growth during the same period, making it comparable to other subsidiaries.
Even so, others insist that potential acquisitions won't be overlooked if they are outside of California. Indeed, the Texas subsidiary is shopping for banks in the $100 million to $500 million-asset range as part of an effort to grow 5% to 10% a year in size.
Ms. Dielley said First Interstate can grow incrementally. "We can add mass without affecting the cost structure here," she said. "On that basis, we still have $2 billion to $4 billion in assets that we can acquire."
Salomon's Ms. Berger agrees. "Most of their markets are as big as you want to be. The net new investment wouldn't buy you very much anyway," she said. "Texas is the exception to that."