B of A, Security Pacific to Form Banking Giant : Finance: Merger would create the second-largest bank in U.S. with $190 billion in assets. Move increases pressure on other banks to seek partners.

By MARTHA GROVES

Aug. 13, 1991 12 AM PT

TIMES STAFF WRITER

BankAmerica Corp. and Security Pacific Corp., in a surprise announcement that shook the financial community, said Monday that they would merge to form a Western U.S. banking behemoth with a global reach and $190 billion in assets.

The merger, the biggest in U.S. banking history, is valued at more than $4 billion and bolsters BankAmerica’s spot as the nation’s second-largest banking company. The new institution will carry the BankAmerica name and could challenge Citicorp as the nation’s leading bank.

The two banking companies’ “extraordinary strategic fit (would) create the preeminent banking institution in the United States,” Richard M. Rosenberg, BankAmerica’s chairman and chief executive, said at a news conference in Los Angeles.

The combination is the latest in a series of megamergers that are reshaping the face of financing. It increases pressures on other banks, including California’s Wells Fargo & Co. and First Interstate Corp., to seek partners--perhaps each other--to stay competitive.

Robert H. Smith, chairman and chief executive of Security Pacific, said the union would enable the banks to provide better customer service, reduce operating expenses and increase profitability and shareholder value.

The merger, which will take four to six months to complete, will have no immediate effect on consumers. Once the merger is completed, customers may see changes in the fees they pay, in the interest rates they earn on deposits, and in where and with whom they do their banking.

By emerging as the surviving institution, once troubled BankAmerica is demonstrating that it is now by far the stronger of the two banks. In recent years, Security Pacific has been hobbled by bad foreign, leveraged buyout and real estate loans.

The companies said the consolidation could result in significant cost savings. They said operational costs could be reduced by $1 billion annually in three years.

Bank officials declined to predict how many jobs would be lost and offices closed as the banks consolidate operations to save money. Industry observers speculated that perhaps as many as 20,000 of the banks’ more than 93,000-member work force will be laid off and that hundreds of their more than 2,300 branches will be closed.

For Los Angeles, the merger will mean the loss of the Security Pacific name and a prestigious bank headquarters that has been in the city for more than 100 years. Although the merged bank, which will retain the BankAmerica name, will keep an office in Los Angeles, the corporate staff will be housed in San Francisco.

Rosenberg will serve as chairman and chief executive officer of the merged company and Smith will be No. 2 as president and chief operating officer.

In trading Monday on the New York Stock Exchange, Security Pacific shares vaulted ahead by $9.125 to $32.125, with more than 10-million shares exchanging hands. BankAmerica shares rose $2.625 to $40. The two stocks were the most heavily traded on the Big Board.

Based on BankAmerica’s closing price, the deal is worth $35.20 a share, or $4.5 billion, to Security Pacific shareholders, who will receive a 0.88 share of BankAmerica for each Security Pacific share.

Security Pacific’s stock closed 9% below the anticipated deal value. Such a gap is not unusual in takeovers because of uncertainty about the length of time needed to close the transaction and uncertainty about how the buyer’s stock might fluctuate in the interim. The fact that Security’s stock remained well below the theoretical value indicates that traders do not expect to see a competing bid from another bank.

Subject to the approval of the Federal Reserve Board, the merger will continue the dramatic wave of consolidations sweeping the industry. Last month, proposed mergers were announced between Chemical Banking Corp. and Manufacturers Hanover Corp., with combined assets of $135 billion, and between NCNB Corp. and C&S; Covran Corp., with assets totaling $118 billion.

By joining forces, bankers are attempting to counter the widespread weakness resulting from souring business and real estate loans and to brace for the looming national banking reform that is expected to hasten the industry’s consolidation by favoring larger players.

The loan portfolio of Security Pacific is said to be in midst of scrutiny by federal examiners. “Security Pacific has been telling analysts that they’re expecting substantial write-offs,” said Michael Murphy, editor of Overpriced Stock Service, a Bay Area newsletter geared to short sellers.

Rosenberg said the new BankAmerica expects that combined reserves for loan losses of the two firms will rise by about $1 billion. BankAmerica anticipates a one-time $700-million charge to account for costs of the overhaul.

BankAmerica’s chief financial officer, Frank N. Newman, and Security Pacific National Bank’s chief executive, Jerry Grundhofer, told analysts that the reserves and onetime charge are key aspects of the merger. They said those steps will enable the two banks to start their future together as “a new, clean institution with all its assets at market (value), all its liabilities at market.”

They added that executives are considering spinning off troubled assets into an unconsolidated corporation.

Rosenberg said the added muscle of the new BankAmerica will help the merged company compete against such “non-bank” competitors as AT&T;, which last year began aggressively offering its Universal credit card, and mortgage lender General Motors Acceptance Corp., which are not subject to the same regulations as banks.

Despite Security Pacific’s denials, some investment bankers wondered whether the bank decided to proceed with a deal now because it feared being hurt later in the year by further loan losses. With the California economy still shaky, there are widespread worries about the bad-loan problems that Security, Wells Fargo and First Interstate may face this year.

BankAmerica, which was a much less aggressive lender in the late 1980s than the other three banks, has avoided many of the bad-loan traps in which the others find themselves.

“You have to wonder how deep the problems are at Security,” said one veteran Los Angeles investment banker. He said there remains a strong chance that BankAmerica could back away or renegotiate the deal if Security Pacific’s troubled loans mount significantly in coming months. “This deal’s got to have a high probability of coming unraveled,” he said.

He added that BankAmerica apparently chose to go for Security now rather than wait for a potentially lower price later in the year, if Security Pacific’s loan portfolio deteriorated further.

“I think B of A decided it was better to be ahead of the game than to be a vulture. If you’re a vulture, you don’t have the luxury of negotiating a one-on-one deal” because at that point other banks may join in the bidding or federal regulators could get involved in structuring the deal.

The changes in the two banks’ fortunes have been evident in their loan problems over the past year. BankAmerica’s problem loans slipped slightly in the year ended June 30. In contrast, Security Pacific’s problem loans jumped to $2.64 billion from $1.87 billion a year earlier.

BankAmerica already owns the largest banks in California and Washington and also operates in Arizona, Idaho, Nevada, New Mexico, Oregon, Texas and Utah. Security Pacific, the nation’s fifth-largest bank holding concern, competes with BankAmerica in six states and also has operations in Alaska.

Both banks have “strong and similar operations” in Japan and elsewhere in the Pacific Rim, Smith said. Combined, the two will have operations in 36 countries in addition to the United States.

Michael Tennenbaum, chief of investment banking for Bear, Stearns & Co. in Los Angeles, said the merger, on top of BankAmerica’s planned acquisition of Valley Capital Corp. in Nevada, would create a powerhouse in the West, particularly in business lending.

“I now see B of A in the same role that Citibank has had in the East,” he said. “They’re going to be the pacesetter for big (loan) deals in the West.”

In Washington, Bush Administration officials indicated that they have no plans to oppose the deal. Treasury Department officials, who are seeking congressional approval of sweeping banking reform legislation, argued that the success of reform so far in Congress has accelerated the pace of merger activity in the banking industry.

However, congressional critics of reform argued that the wave of mergers is being sparked more by market forces.

That BankAmerica can consider such a transaction is a sign of how complete its recovery from the mid-1980s has been, when ill-advised loans to Third World countries and oil companies so weakened the bank that some industry observers speculated that it would have to merge with a stronger competitor to survive.

BankAmerica and Security Pacific have been on acquisition binges in the West in the last two years, with Security Pacific adding more than $5 billion in deposits and BankAmerica adding more than $12 billion. BankAmerica lost out recently to Fleet Norstar in a bid to take over troubled Bank of New England and expand its reach into the East.

Times staff writers Tom Petruno in Los Angeles and James Risen in Washington and researcher Melanie Pickett contributed to this story.

MERGER IMPACT: As many as 20,000 workers could be laid off and hundreds of branches closed. D1