Making a Megabank : Despite Problems, B of A Appears to Have Succeeded

At its annual meeting today in Los Angeles, BankAmerica Corp. is likely to tell stockholders that in the 13 months since it absorbed Security Pacific Corp., it has met the daunting task of merging the two banks’ sprawling operations.

BankAmerica is almost finished with the mechanics of the blockbuster merger, which increased the bank’s already dominant role in the West and left it poised to eventually create a coast-to-coast branch network.

“I think they’ve done very well” in completing the merger so quickly, said John Leonard, a bank analyst with Salomon Bros.

Yet rarely does a giant merger produce such gains without generating problems, and this union was no exception.

Some of Security Pacific’s small-business clients say service eroded once they became BankAmerica customers. Individuals who had Security Pacific accounts complain of bank-statement errors, name misspellings on new checks and foul-ups at automated teller machines after they were switched to BankAmerica’s computer system.

According to First Interstate Bank of California spokesman Rich Wyler, disgruntled BankAmerica clients have transferred more than $650 million of deposits to First Interstate branches since the merger, which is “very close to our goal.” More than two-thirds of the deposits came from small businesses.

Inside BankAmerica, tensions mounted within the work force, particularly among the former Security Pacific employees while they adapted to BankAmerica’s methods and watched as thousands of their colleagues were laid off in the consolidation.

Some friction was probably inevitable. Former Security Pacific executives recall the entrepreneurial and decentralized structure of their bank, whereas BankAmerica has a decision-by-committee approach “that rewards not making mistakes over taking care of customers,” as one put it.

San Francisco-based BankAmerica, whose main unit is Bank of America, also inherited several problems from Security Pacific, including lawsuits, troubled divisions and a mountain of bad loans.

But while senior BankAmerica executives concede that there have been sporadic problems, they say the snags are modest relative to the company’s enormous size, which now covers $184 billion in assets.

And other clients report no hassles. “We’ve been treated fine,” said Scott Campbell, controller of Patagonia, a Ventura-based clothing company with BankAmerica checking accounts.

Lewis W. Coleman, a BankAmerica vice chairman and its chief financial officer, said the bank has retained more than 90% of Security Pacific’s business and individual customers--which is higher than the bank expected--and that, other than the recession, “there really was not a huge amount of significant surprises” as the merger progressed.

“The (Security Pacific) customer base turned out to be extraordinarily loyal for the amount of change we put them through,” Coleman said.

The problems have also not seriously dented BankAmerica’s prosperity.

Second in assets to Citicorp, BankAmerica led the industry in profit, stockholders’ equity and total market value last year. BankAmerica earned $1.5 billion in 1992 for a relatively strong 0.9% return on assets, despite the costs of digesting Security Pacific. (Most banks did well in 1992 thanks to falling interest rates and improving loan portfolios.)

BankAmerica’s stock, meanwhile, jumped 30% last year, finishing 1992 at $46.50 a share and climbed as high as $55.50 this spring before pulling back amid a recent general selloff in bank stocks. It closed Wednesday at $45.375 in NYSE composite trading.

To reap the efficiencies of the merged banks, BankAmerica has closed 511 branches in the western states since the merger was signed, leaving it with 1,957. It has only about a dozen left to close.

The bank also says it is on target to slash $1.2 billion in annual operating costs within three years after the merger.

By contrast, another huge bank merger that has taken shape over the last 18 months--between Chemical Bank and Manufacturers Hanover Corp., which created Chemical Banking Corp. in New York--has proceeded much more slowly. The Chemical name began appearing on former Manufacturers branches only two months ago.

Whether a merger is done quickly or not, the BankAmerica deal illustrates that while such deals can bring sizable benefits for the acquirer, they also leave casualties.

In this case, the wounded include not only the 5,700 Security Pacific workers who were laid off (BankAmerica now has 105,000 employees worldwide), but also the former Security Pacific officers who survived the merger but were later eased out of BankAmerica’s executive suite.

From a customer and public relations viewpoint, the BankAmerica case also underlines how combining two huge enterprises can be troublesome, even in a friendly deal such as the $4.2-billion Security Pacific purchase.

For instance, a former Security Pacific customer in Sierra Madre with a modest checking-account balance was shocked when her now-BankAmerica ATM spit out a receipt showing a balance of $93,700. (The bank had mistakenly merged her account with her father-in-law’s.)

Bugle Boy Industries, a Simi Valley-based apparel maker, recently hired the bank holding company CoreStates Financial Corp. for its financing needs after complaining of mistreatment by BankAmerica.

Bugle Boy had a $70-million credit line with Security Pacific, but last fall BankAmerica threatened “without notice” to cut it off unless Bugle Boy paid a sharply higher renewal fee, Bugle Boy Chairman William Mow said.

“Once B of A took over, it was like they didn’t know our business,” Mow said. “You were a customer of Security Pacific, therefore you were no good.”

Not so, countered Coleman. “We did not treat Security Pacific customers differently than Bank of America customers,” he said.

David A. Coulter, a BankAmerica vice chairman in charge of large corporate accounts, declined comment directly on Bugle Boy but said in some cases BankAmerica applied more stringent credit standards than Security Pacific--such as offering less cash for borrowing or demanding higher fees to maintain an existing credit line. But in other cases, BankAmerica offered old Security Pacific clients larger lines of credit, he said.

He also said BankAmerica has no regrets about merging Security Pacific’s business as quickly as possible, even though it also disrupted its customers and employees.

“People expect you to have problems” in a merger, said Coulter. “But they also expect you to fix them quickly.”