The Snowball Arrives In Washington -- Make Way For The Mega-Banks - - The '90S: An Era Of Sour Loans And Fewer, But Bigger Banks

WASHINGTON is about to witness one of the biggest marriages in the history of the state, a marriage that will affect how many homes are bought, how many businesses are started and how many acres of farms and timber are cultivated.

The marriage will join the region's two largest banks: Washington's Seafirst Corp., a Bank of America subsidiary, and Security Pacific Corp., formerly Rainer Bank, a Los Angeles-based bank. Although Seafirst is the bank that depositors in Washington use, the agreement is between BankAmerica Corp., strongest in northern California, and Security Pacific, strongest in southern California.

How the new, combined bank goes about its business will define the financial architecture of the state. No matter what happens after the marriage, the joining of the two banks will promote and curtail careers, will put people out of work and, eventually, may lead to a resurgence of small, community banks serving the state from Puget Sound to Pullman.

First, some things to remember about the proposed marriage:

-- It's not a merger. San Francisco-based BankAmerica Corp. is acquiring Security Pacific with most BankAmerica executives coming out on top. In Washington state, BofA's offices under the name Seafirst will remain largely where they are now. Security Pacific banks will disappear and so will many of its managers, tellers and loan officers. The joining of the two banks is done for efficiency. Higher efficiency in banking means fewer people on the payroll.

-- The snowball is rolling. What is happening in Washington state is part of a much larger trend that is rolling up banks across the country. Marriages between large regional banks have happened in the Southeast, the Midwest and now the pending consolidation of these two huge California banks. Americans have more banks than any other country but as the '80s blend into the '90s, fewer banks are surviving and those that do are bigger and less local.

-- The worry is not deposits, but loans. Seafirst bank executives believe the number of loans and other bank services in the state will not drop because of the disappearance of Security Pacific branches. But bank analysts are not so sure. Many close observers of banks think Washington state is on the verge of many more banks, each seeking a slice of the business. But no one can predict when that resurgence will happen. It could be in a couple of years, it could be in the next decade. In the meantime, there will be fewer places lending money in the state. It's the lag between the big bank branch closures and the expected smaller-bank revival that has Washington businesses worried.

In just the last six months, 185 banks across the country have closed. But in Washington state, the number of chartered banks increased by one. The state now has 99 banks, not counting branches, and together they deliver the full range of banking services. But they tend to cluster in the most populous areas. The fear of the result of consolidation is obvious. Lack of competition will either drive up bank fees or worse, close the surviving banks if times get tougher.

Bankers at Seafirst say that won't happen, in part because of the organization's long history in the state and because the efficiency of a single, mega-bank will offer higher levels of service to customers. Remember, the acquisition of Security Pacific by Bank of America is supposed to generate $1 billion in savings over three years through consolidation of departments. That's a theory disputed by some banking specialists.

Lawrence J. White, professor of economics at Sterns School of Business at New York University, believes banks that grow past a modest size of about $100 million in assets become so large that their sheer size offsets any efficiencies. Seafirst alone has assets of $12.3 billion.

"Bigger organizations face other problems caused by size," White said. "When two big banks merge there are the possible efficiencies of a single computer system, a single set of attorneys, a single personnel office and so on. But other inefficiencies set in - the organization tends to move slower, there are deeper layers of managers, the head office is remote from the field offices and the whole thing becomes unwieldy.

"Since these big bank mergers have just happened recently around the country, we don't know how large, regional banks are going to perform but it's fair to suggest two possibilities:

-- "The benign scenario says that nothing will happen. There will be no decrease in competition because smaller banks will thrive and the big bank will kind of sit there without much change.

-- "The worst case shows something different. A merger of big banks could have a stultifying effect on the market by decreasing competition. Once you allow the creation of larger banks and efficiencies don't materialize, what are you left with? Then we have the possibility of a floundering behemoth edging toward insolvency. And after that, a deposit insurance nightmare.

"That doesn't mean the merger couldn't work. It's certainly possible that any given merger can be pulled off. Maybe this one will be managed very well. But even if the big bank is more efficient and works better, that also means it may be less responsive to local needs."

The chart shows the value of the acquisition of Security Pacific to BankAmerica in Washington. The income from fees and loans on real estate, agriculture and commercial ventures is shown for each bank, plus the percentage of added business that will accrue to Seafirst. In loans secured by real estate, for example, the combined bank would increase its holdings by 70 percent over current Seafirst holdings.

The size of the new bank will dwarf its competitors in Washington. In billions of dollars, these are the assets of the state's largest banks:

-- Seafirst - $12.3

-- Security Pacific - $7.6

-- U.S. Bank - $5.4

-- Puget Sound Bank - $4.7

-- 1st Interstate - $3.6

Combining Seafirst with Security Pacific offers assets of nearly $20 billion. If about $1 billion in assets are sold to meet anti-trust requirements, a combined bank with assets of $19 billion dominates banking in the state.

How much of the Washington state market the new Seafirst will be allowed to keep is up to negotiations with the federal anti-trust department of the U.S. Justice Department. In order to meet expected anti-trust objections, BofA may sell off $1 billion in deposits each in Washington and Arizona.

Seafirst will have to sell off about 36 branches, early estimates suggest. As reported by Times business writer Michele Matassa Flores, about half the branches targeted for sale are in the populous Puget Sound metropolitan region. Some 2,000 banking jobs are at risk, although if the branches are sold to another bank many of those jobs would be transferred to the new bank corporation. Together, Seafirst and Security Pacific operate 375 branches in the state.

But only the real estate locations, the talents of the people in the branches and the money held by depositors will be for sale. Seafirst will keep the loans bank customers made with Security Pacific. New owners of branches sold off will have to develop their own loan portfolios. Although Security Pacific's visible presence in the state will vanish, its hold on loans in the region will remain and be added to Seafirst's assets.

With more than 12,000 banks spread across 50 states, the U.S. has a far higher percentage of banks per customer than any other country. Consolidation is absorbing some banks and bad debts made in the last decade are closing others. The trend is for larger banks to get bigger. Not only is BankAmerica engaged in its huge acquisition of Security Pacific, it also is growing in Nevada in a proposed merger with Valley Capital Corp. of Las Vegas, the parent company of Nevada's second-largest bank.

The U.S. by 2000 will have fewer banks, although bank analysts cannot agree which of the emerging multistate bank corporations will survive and which will be absorbed by even larger, mega-banks. Estimates of bank failures continue to range in the hundreds for the next few years, more if commercial real estate does not rebound soon.

The Federal Deposit Insurance Corp. estimates the cost of bank failures in the next two years at $44 billion. That's the amount of money needed for the FDIC to make good its promise to depositors to cover their money if their banks invest badly and go under. Smaller banks would seem more vulnerable to economic doldrums, but that's not always so. Economists writing for The Washington Post discovered that the country's sickest banks are 158 of the largest banks, each with assets of more than $1 billion.

If bank failures hit Washington state, the banks that fail will further decrease competition. That, combined with the effects of consolidation, could mean fewer loan dollars available for businesses, home buyers and farmers.

No one is able to see the long-term effects of the disappearance of Security Pacific from Washington state. If BofA is managed well, the effects may be hardly noticeable or beneficial. But if BankAmerica performs poorly in the next decade, instead of two large, robust, competing banks in Seafirst and Security Pacific, Washington will have one, big sick bank.

COMBINED BANK LOAN INCOME

INCOME SEC-PAC SEAFIRST COMBINED

Interest and fee income on loans: Loans secured by real estate $150,023,000 $211,674,000 +70.9% Loans to depository institutions 8,319,000 47,000 +17,700.0% Loans to finance agriculture 12,623,000 14,592,000 +86.5% Commercial and industrial 70,042,000 107,934,000 +64.9% Loans to individuals:

Credit cards 0 112,540,000 0.0%

Other 30,779,000 61,376,000 +50.1%

Numbers are as of June 30, 1991 Source: Bancpen bank-analysis reports

SOURCE: BANCPEN BANK-ANALYSIS REPORTS.