The Rise and Fall of a California Banking Powerhouse : Finance: For much of this century, Security Pacific Corp. was a cornerstone of the Establishment. Analysts blame its decline on questionable leadership and ill-timed expansion.

The past year will likely rank as the saddest and concluding chapter in the history of Security Pacific Corp., the once-noble banking house that has been an Establishment mainstay in Los Angeles throughout much of the 20th Century.

Though the stunning agreement last week to merge with BankAmerica Corp. was billed as a union of equals, the deal appeared more like a takeover or rescue operation because Security Pacific has been so weakened financially.

The Security Pacific name--so familiar on its branch offices across California--will vanish once the merger is completed by early next year. “You hate to see a name with that much history disappear,” said Jerry W. Johnston, a former Security Pacific executive.

The story of Security is that of a conservative financial institution that tried to shed its regional image and become a worldwide banking powerhouse. It was a move that ultimately foundered and has helped pave the way for its absorption by BofA.

Though no one has suggested that Security Pacific’s failure was imminent, the bank has clearly been in the grip of a severe decline as profits have plunged in the wake of mounting problems in the real estate market, corporate takeovers and overseas loans.

Banking analyst Donald Crowley of Keefe, Bruyette & Woods in San Francisco said Security Pacific’s management simply negotiated the best deal possible for shareholders considering the swelling problems.

The bank probably would have eventually recovered, Crowley said, but it would have taken “two or three tough years of digging out.” One consultant to Security Pacific, who asked not to be identified, said that the bank still has huge loan problems that have yet to be disclosed.

Security Pacific officials strongly deny that the merger amounts to a rescue operation by BankAmerica. “We did not have a gun at our head,” said Richard J. Flamson III, a Security Pacific director and retired chief executive. “We did not do this because we had to.”

According to Flamson, Security Pacific had been searching for a merger partner for several years and had held talks with financial institutions in Chicago, New York, Texas and California.

By some accounts, Security Pacific’s recent past has been a tale of questionable leadership, badly timed or ill-conceived business expansions and widespread internal chaos. Its problems surfaced at home and abroad--from Australia and Great Britain to California and Arizona.

In retrospect, its biggest mistake arguably was its decision to buy a commercial bank in Arizona in 1985, not long before that state’s economy took a nose dive from which it has yet to fully recover. The decision eventually cost the bank huge loan writeoffs in addition to the $480-million purchase price.

As the bad news rolled in, even some of the bank’s strongest supporters began to wonder aloud. To some, the bank’s traditionally strong leadership had eroded.

“The decisions were not as thoughtful,” said Johnston, now chief operating officer of Mitsui Manufacturing Bank in Los Angeles. “There was more shooting from the hip.”

Security Pacific’s disappeance from Southern California promises to leave a major void in the business community. It helped finance the residential development of greater Los Angeles--from Simi Valley down to Orange County and throughout the Inland Empire.

“They were the premier bank in the city,” said Jack Kyser, chief economist at the Economic Development Corp. of Los Angeles County, a private non-profit group. “They set the tone (in the banking community) and they were very involved in the community.”

When a group of wealthy investors led by Donald Bren wanted to buy the Irvine Co. in 1977 for $337 million, they turned to Security Pacific. When Bren later bought majority control of the Orange County real estate firm for about $1 billion, he again used Security Pacific.

Security Pacific’s direct roots go back to Feb. 11, 1889--the day co-founder Joseph Francis Sartori opened the Security Trust & Savings Bank at 148 S. Main Street. Satori went on to become one of Los Angeles’ leading bankers and was still Security’s chairman when he died in 1946 at age 87.

The current banking institution got its modern shape in 1968 through a merger of Security First National Bank in Los Angeles and Pacific National Bank in San Francisco. The bank holding company, Security Pacific Corp., was formed several years later.

Unlike many competitors, Security survived the Depression relatively unscathed, in part by asking its employees to take pay cuts of up to 15%. The Depression experience became part of the bank’s corporate culture and a symbol of its long-term stability.

Today, though, nearly all the bank’s employees are fearful that they will soon be out of work. “Nobody’s job is safe,” said one middle-level lending officer in Orange County. “Lots of people are wondering now how they are going to fit in.”

Security Pacific has changed markedly in recent years and was no longer the stable, steady financial institution that it once had been.

What had emerged since the mid-1980s was a tougher, harder-edged bank that some said was quick to get rid of long-time employees and shed its regional image in favor of one with international flavor.

Though applauded by many in the investment community, the moves alienated many of its own employees as well as officials within the community. The discontinuance of its monthly regional economic reports, a bank staple for years, symbolized the changing identity.

“It became a different Security Pacific than the one that I knew,” Kyser said. “To me it turned away from the community.”

Interviews with past and present Security Pacific employees, most of whom agreed to talk only if they were not identified by name, said management became increasingly ruthless, yet unfocused, as the 1980s wore on.

One former vice president in the communications department recalled that it was impossible to get any work done “because we were in a constant state of being reorganized. There was constant pressure to consolidate and reorganize and achieve corporate-wide goals.”

The bank reportedly fired its advertising firm and hired its own in-house advertising team, which was itself later disbanded after very little output, according to one former bank official.

Old-timers mourned the disappearance of the bank they once knew. They did not like the new breed of banker there, often outsiders recruited from Wall Street and from rivals such as Wells Fargo & Co.

The bank’s defenders, though, say Security Pacific was only trying to keep pace in a faster-moving financial environment that demanded far more of its employees than in the past. The dead wood and those unable to adjust to the faster pace had to be let go.

“It was a matter of the banking profession joining the rest of corporate America,” said Johnston.

Some say the bank changed dramatically about the time that Frederick G. (Fritz) Larkin Jr., its long-time chairman and chief executive, died unexpectedly in 1984 at age 70.

Though he had retired as chief executive in the late 1970s, Larkin remained on the board and reportedly tempered some of the impulses of his ambitious successor, Flamson. Employee firings became commonplace after Larkin’s death, according to Louis Laughlin, a former bank government relations official.

The modern Security Pacific was largely created by Flamson, who succeeded Larkin as chief executive in 1978. In ill health now, Flamson, 62, stepped down as CEO last year and was replaced by Robert H. Smith.

Once lauded for his brilliance and foresight, Flamson is now being roasted by some as the senior executive most responsible for the bank’s current financial woes.

“What destroyed that bank can be laid the doorstep of one guy,” said Laughlin, referring to Flamson.

In an interview, Flamson readily conceded that the bank made some ill-timed investments during his tenure, but maintained that his overall impact was positive. “We made a helluva lot of money for shareholders along the way,” he said.

Flamson landed at the bank quite by accident following the Korean War when he began working there temporarily repossessing cars. He was named chief executive 23 years later and often commuted to work by helicopter from his Newport Beach home.

In happier days, when Security Pacific’s stock price and profits were both rising, Flamson was usually pictured as a no-nonsense ex-Army officer who was an imaginative and decisive team player.

Principally because of Flamson, Security Pacific expanded aggressively overseas through its merchant banking division, headed by rising star David R. Lovejoy, as part of an industrywide move into the more lucrative areas of investment banking.

Adding to its core business of taking deposits and lending the money to real estate developers, Security Pacific turned to sophisticated, high-risk areas such as leveraged buyouts, securities and international lending.

Security Pacific invested heavily in brokerage firms in Great Britain and Canada, made extensive development loans in Australia and expanded its merger-advisory operations with high-paying investment bankers.

One key investment was its purchase of Hoare Govett, a London-based brokerage, in what was its first major foray into merchant banking overseas. It bought a 30% interest in Hoare Govett in 1982 and the remaining amount several years later.

The diversification appeared to be a success, giving the top brass cause to crow. “Record-setting profitability in 1989 again demonstrated the strength of our strategic directions,” the bank told shareholders in 1990. “These basic strategies are not complicated. They are simple, straight-forward and realistic.”

The balloon burst last December when Security Pacific announced that it would disband the merchant banking organization--resulting in thousands of lost jobs--while setting aside $850 million to cover expected losses.

The major share of the losses--about $650 million--resulted from loan problems, including those in Arizona and Australia. Another $200-million charge resulted from disbanding the merchant bank.

The Hoare Govett investment had turned sour after the 1987 stock market crash and eventually became, in the words of one Los Angeles money-manager, a “sinkhole.” Security sold most of its interest in the brokerage about a year ago.

Lovejoy, 42, whom many had expected would be chief executive one day, left the bank in April.

It was those developments in December that led Wells Fargo & Co. to cancel merger talks with Security Pacific that were close to completion. The merger was to be unveiled in January with Carl Reichart, Wells’ chief executive, as boss and Smith as No. 2.

The blues have continued into 1991, with the bank revealing last month that it has problems with its commercial real estate loans in California. Second-quarter profit fell 76% to $46.7 million.

Unless there is a hitch now and the merger with BankAmerica falls through, Smith will be Security Pacific’s final leader. After the merger, he is expected to be No. 2 at BankAmerica.

The BankAmerica name was selected for the merged bank “because it was better known than Security Pacific,” Flamson said. He added: “It doesn’t make me feel good at all to see the name go, but I understand the realities of it.”