Merger Costs Rise for Security, BankAmerica

SAN FRANCISCO -- BankAmerica Corp. and Security Pacific Corp. will take merger charges hundreds of millions of dollars above their original $1.7 billion estimate, BankAmerica officials have privately told analysts.

The higher charges will stem from additional restructuring costs and writedowns associated with setting up a so-called bad bank to house bad loans, according to analysts who spoke with BankAmerica officials last week.

Eventual Cost Savings

Despite the increased charges, BankAmerica officials have repeatedly insisted the terms of the company's acquisition of Security Pacific will not be changed. Analysts said Friday that they expected the increased charges to eventually be offset by the cost savings associated with closing overlapping operations.

While higher charges will reduce the capital ratios of the combined bank, analysts said it is too early to say whether BankAmerica will have to raise additional equity.

At a news conference last week, BankAmerica chief financial officer Frank N. Newman noted that the merged bank's capital ratios will be well above regulatory minimums, even with extra charges.

"I can't guarantee what regulators will say, but there is no reason to believe they will require additional capital," Mr. Newman said.

When BankAmerica and Security Pacific announced they planned to merge two months ago, the companies said they expected to set aside $700 million to cover the expenses of combining facilities, systems, and work forces. Security Pacific also was expected to take $1 billion in extra loan-loss provisions to bring the company's loan-loss reserve ratios up to BankAmerica's levels, about 85% of problem assets.

In its earnings release last week, BankAmerica raised its estimate of the restructuring charge to $900 million. But in a meeting with analysts, BankAmerica chief financial officer Frank N. Newman said the $900 million figure applied only to Security Pacific installations and employees. Mr. Newman said BankAmerica will take its own charge to cover closing facilities and firing employees, according to analysts.

In the meeting with analysts, Mr. Newman would not estimate the size of the charge, expect that it will be under $900 million. Analysts estimated the BankAmerica charge will be in the $200 million range.

Right out of Earnings

The BankAmerica charge, however, will come directly out of earnings, probably in the first quarter after completion of the merger, analysts noted. By contrast, the Security Pacific charge will be treated as goodwill and amortized over 25 years under the purchase accounting formula used in the transaction.

BankAmerica says it anticipates higher overall restructuring costs because the two banks have found more opportunities than expected to close overlapping facilities. In its earnings release, BankAmerica raised its estimate of yearly merger-related cost savings to $1.2 billion from $1 billion.

Other unexpected charges will arise if BankAmerica spins off bad loans to a special collecting bank.

BankAmerica hopes to set up a collecting bank, if administrative and regulatory problems can be ironed out, Mr. Newman said at his news conference. But loans moved to the institution would have to be written down to their liquidation value.

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