Wells Fargo Co., currently the third-largest bank in Los Angeles, says it plans to pursue a strategy of acquiring smaller community banks and other financial-service companies.

The ultimate goal is to gain additional market share by opening more branches in underserved areas, while at the same time retaining some of the customer loyalty typically associated with community banks.

It's a striking contrast to the recent pattern of big banks being bought by even bigger banks leading to massive layoffs and branch closures. The strategy was devised by top management of Norwest Corp., which acquired Wells Fargo last year and adopted its name.

"The new Wells Fargo has an appetite for acquiring branches in attractive areas of Southern California," said Paul Watson, the bank's vice chairman and the highest-ranking official now in Los Angeles. "And Norwest's formula of buying community banks has been proven to work very well at building market share."

In line with Norwest's pre-existing strategy of offering customers an extensive array of financial products, Wells Fargo's acquisitions will not be limited to banks.

"We will be looking at a broad spectrum of financial services in Southern California. Nothing is too small," said Lynn Pike, Wells Fargo's regional president for Los Angeles. "It will go beyond community banks and include mortgage, insurance and investment companies."

To that end, Wells recently set up a mergers-and-acquisition team headed by former Norwest M & A; experts.

The expansion strategy could be especially effective in Los Angeles because years of consolidation in the local financial community have left L.A. almost devoid of major bank headquarters. There are, however, many smaller community banks.

"There has been a fair amount of consolidation in that market," said Joe Morford, an analyst at Van Kasper & Co. in San Francisco. "So if Wells is looking to expand in Southern California, they will likely need to piece together a number of community bank franchises."

That could help Wells gain ground in L.A., where it is a distant third in terms of deposits and assets behind BankAmerica Corp. and Washington Mutual Inc.

And community banks come relatively cheap, according to analysts and banking executives.

In an era of low interest rates, most community banks are finding their profit margins squeezed. And while many customers profess to want the personalized service associated with smaller institutions, they also want the convenience, technology and broad array of services offered by large banks. Such services are typically too expensive for a community bank unless it has ties to a bigger partner.

"There are a limited number of exit strategies for community bank owners," said Ray Dumser, president of Glendale-based Verdugo Bank and chairman of the Los Angeles regional committee of the California Bankers Association. "While they want to say that they are in business to serve the community, at a certain level you have to make money. So if Wells Fargo laid out the red carpet and offered good multiples, I'm sure they would get a lot of offers (from community bankers interested in selling out)."

The strategy already has proved successful elsewhere.

In five years, Norwest built a $14 billion-in-assets bank network in Texas by acquiring smaller banks.

Unlike many of the larger bank mergers, in which multibillion-dollar deals are arranged in a matter of weeks, Norwest's community bank strategy emphasizes gradual integration. On average, the bank takes about three years from the time negotiations are initiated until the acquisition target is fully integrated. The idea is to retain key personnel and the local relationships they have developed.

Watson said the hope is to avoid the types of difficulties that Wells encountered after buying First Interstate Bancorp in 1996. That deal, which Wells officials and analysts agree was rushed, resulted in a greater-than-expected loss of senior staff and difficulties in integrating computer records.

"The trick is to keep people and relationships intact," Watson said.

At the heart of Wells' new strategy is its desire to sell a wider variety of financial products to customers. Following the merger with Norwest, Wells employees are being encouraged to sell an average of eight products to each customer such as insurance, mortgages and annuities. That's double the target set by the old Wells Fargo.

Branches are seen as one of the best forums for selling such products. "We do feel that brick and mortar offers a phenomenal opportunity to cross-sell products," Pike said.

But building branches from scratch is expensive, and buying redundant branches from other institutions would require Wells to hire new staff and attract new customers. Buying an existing bank brings with it both experienced staff and relationships with customers.

"Buying community banks is akin to buying branches. But when you are buying a whole company, you get some synergy," said Ronald Mandle, an analyst at Sanford C. Bernstein.

Of course, when a community bank gets bought by a giant like Wells Fargo, it is no longer a community bank. So no matter how hard Wells tries to keep existing customers, there are bound to be defections, industry observers said.

"There is an equation that their financial people use when they buy an institution, that assumes that there will be a certain amount of runoff in terms of deposits and loans," Dumser said. "They take that equation and plug it into the price they are willing to pay."

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