Security Pacific Chairman Richard J. Flamson III was asked in a recent interview to describe his biggest mistake since assuming the bank holding company's top job nine years ago.
"Not buying First Interstate," he said.
Flamson quickly caught himself before revealing details of his tentative efforts in the late 1970s to buy Los Angeles' First Interstate Bancorp, which itself recently failed in a bold bid to buy the much larger BankAmerica, based in San Francisco.
But Flamson also disclosed that he had discussed a merger with San Francisco-based Wells Fargo at about the same time. The Security Pacific-Wells Fargo talks broke down because of doubts about legal and regulatory approvals. The discussions also foundered on the question of who would run the combined company--Flamson or then-Wells Fargo Chairman Richard P. Cooley, now head of Seafirst Bank in Seattle, Wash.
In his brief comments on possible California acquisitions, the 57-year-old Flamson revealed more than he intended about high-level intrigue in California banking and his own strategic vision of the future of the financial services business.
Although thwarted in his ambition to pull off a California mega-merger, Flamson last week reached agreement to buy Rainier Bancorporation, parent of Washington state's second-largest bank. The $1.1-billion all-stock deal will add $9.2 billion in assets to Security Pacific and solidify its position as a major West Coast retail bank.
The Rainier acquisition is the second-largest U.S. bank merger ever, based on dollar value. Security Pacific paid a rich price for Rainier, an institution generally regarded as Washington's best-run bank. But for its money Security Pacific gets a large deposit and customer base and a steady new source of income.
The merger, Flamson crowed last week, "produces the premier bank in the region, with major strengths throughout the Pacific Rim." Flamson asserted that the deal puts in place the last big piece of a geographical jigsaw puzzle that he has been working on for the past two years.
And, ironically, it means he will be competing once again with his old nemesis, Dick Cooley.
Flamson believes that in the increasingly competitive banking business, and especially with the onset of full interstate banking in the next few years, it is imperative to reach a critical mass of size and market share. Companies that fail to do so will be devoured.
The acquisition of First Interstate, if Flamson could have pulled it off, would have increased Security Pacific's California market share by 50% and given it a presence in 18 states stretching from Indiana to Alaska.
A Wells Fargo deal, had it happened, would have more than doubled Security Pacific's share of the Northern California banking market and brought tremendous cost savings from the elimination of overlapping operations within the state.
As it was, Flamson was forced to devise a different strategy. He set out briskly to acquire banks in neighboring states and to diversify into businesses only marginally connected to traditional deposits-and-loans banking. Today, Security Pacific earns two-thirds of its profits from such non-banking lines as insurance, discount brokerage, real estate and a variety of investment banking and capital markets activities to which it refers as its "merchant bank."
Fourth Leg of Stool
With the Rainier deal, Flamson has in place the fourth leg of the stool he's been hammering together in his 55-story Bunker Hill workshop. Within a couple of years, he expects each of the four businesses--Security Pacific's bank in California, the interstate bank network, the financial services supermarket and the merchant bank--to contribute a quarter of the parent company's profits.
The strategy's risks are substantial, ranging from dilution of management talent to simultaneous slumps in several geographical areas or lines of business.
In part because of those risks, and in part because the company has had difficulty communicating its vision to stock analysts and portfolio managers, investors have not rewarded the firm with a stock price that matches its performance.
The problem, company officials complain, is that nobody understands Security Pacific.
The Los Angeles bank holding company should not have to labor in anonymity. It is the nation's sixth-largest banking firm; it has a stellar record of profit growth and return to shareholders over the past dozen years; it is aggressively pursuing a variety of exotic global financial operations and is a fast-growing power in the country's richest banking region.
Still, a Security Pacific public relations executive recently lamented, stock analysts, investors and the media have no idea what the company is.
"They think we're a railroad," she complained.
Gets Little Attention