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By BENJAMIN MARK COLE

Contributing Reporter

The Los Angeles metropolitan area is the second most populous in the nation, and the local economy is booming again, back to the familiar post-World War II pattern of growth.

The region has millions of well-paid workers, and the number of people in households with annual income of $25 million or more climbed 120 percent between 1994 and 1996.

With all that new money, one would think banking would be booming. Yet the number of banks and thrifts in Los Angeles County is shrinking in this era of plenty, and there is no major bank headquartered here.

Most of the big thrifts are gone too. How could this happen? How did Los Angeles, once contending to be the financial capital of the Pacific Rim, end up a virtual backwater?

The answer: sour loans, less-aggressive management and lots of luck bad luck.

Add to that the nationwide trend of bank and thrift consolidation, and you have the picture of Los Angeles: a sprawling economic empire, but one that lacks big banks or thrifts.

Certainly there is business here, and lots of it.

"You may have fewer headquarters, less chartered banks, but I don't think that means anybody has abandoned the market," said Doug Stewart, group executive vice president at downtown-based Sanwa Bank California, the largest remaining L.A.-based bank. "The core customers are still here, the region is vital."

Vital indeed. The amount of financial institution deposits in Los Angeles County totaled $152.5 billion as of June 30, 1997, the most recent figure available. That's more than any other U.S. county except New York, where $175.3 billion is on deposit. The only other county that even comes close to L.A. in terms of deposits is Cook County, where Chicago is located, which has $125.3 billion in deposits.

Despite L.A.'s massive deposit base, there has been a near meltdown in the number of banks and thrifts that have their chief executives here.

Some trace the decline to the advent of deregulation in the '80s. Back when interest rates on deposits were fixed by law, financial institutions increasingly were losing market share for the investor dollar. Depositors pulled their money out in order to get better returns in money-market funds, treasury bonds and other instruments.

After deregulation, what had been a sheltered industry, perhaps one even coddled by the federal government since the industry's near collapse in the 1930s, entered the brave new world of competition. With deregulated deposit interest rates came deregulated loans. And many banks and thrifts especially thrifts made loans that would eventually result in their demise.

"Just think of some of the names. Lincoln Savings. Columbia Savings. First Network Savings. Gibraltar. Mercury. Valley Federal. It's a virtual roll call (of defunct Los Angeles-area thrifts). There are many more no one remembers," said Campbell Chaney, veteran bank industry analyst with Walnut Creek-based Sandler O'Neill, a brokerage house.

At roughly the same time, such bank names as Crocker and Security Pacific were merged out of existence. "A lot of banks and thrifts back then failed in Los Angeles. And not just Los Angeles. In San Diego, all the big thrifts failed every single one," said Chaney. "The industry made poor loans."

Still, the wipeout didn't end with the fallout of the late '80s and the recession of the early '90s. Even as profitability returned, a firestorm of mergers swept the banking world. In Los Angeles, household names were extinguished seemingly overnight. Seattle-based thrift giant Washington Mutual Inc. bought Great Western Financial Corp. in 1997, while H.F. Ahmanson & Co. bought Coast Savings and Loan Association. Ahmanson's maneuvering counted for nil, as Washington Mutual bought it too, in 1998.

"Where you had four thrifts, you now have one, and that one isn't based in Los Angeles," said Chaney.

Then there were the banks: San Francisco-based BankAmerica Corp. bought Security Pacific, and then Wells Fargo & Co. bought First Interstate Bancorp.

Driving much of the merger wave is the incessant need to become more efficient. After decades of operating under the protective shield of the federal government, banks and thrifts had grown fat. Also, new technologies, particularly computers, allowed larger operations to become more efficient.

When operations were combined, the extra layers of executives and accounting systems could be jettisoned.

"Look at Washington Mutual. Instead of four executives, four boards, four computer systems, four marketing campaigns, you just have one," said Chaney.

Still, the question remains: Why did Charlotte, N.C., and to a lesser extent, San Francisco, end up as banking headquarters cities, and not Los Angeles?

Some attribute it to nothing more than historical happenstance. Others say it might be due to the fact that, just as merger mania swept the industry, banks in other regions of the United States, such as the Midwest and Southeast and Northern California, were enjoying better economic times than Southern California. The local economy rebounded, but too late.

"Other banks (outside Southern California) were posting better earnings. On the stock market, earnings are coin of the realm," said Chaney.

Armed with better earning records, and thus the backing of institutional shareholders, banks and thrifts in other regions knocked off California banks in the merger wars. But like all trends, the trend to hugeness may have run most of its course, said Scott Montgomery, chief executive at Century City-based Mercantile Bank, which has $130 million in assets, and thus is considered a "small bank."

Said Montgomery, "The big banks are going to compete nationally and internationally. That leaves middle-market companies feeling their service has been affected."

As the merged banks get too big to handle smaller businesses, such banks as Mercantile can move into the middle-market niche, said Montgomery.

"You had some recent local start-ups in banking, like Prime Bank and Encino State Bank," Montgomery said. "I think the overall number of banks may continue to decline, but you may see a number of small-business and community banks start up."

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