Smaller Lenders See More Deals Brewing

Though the deal for giant BankAmerica Corp. garnered all the headlines Monday, most future California bank mergers will involve much smaller institutions with far less recognizable names. Take Western Bancorp, for instance.

Built from the remnants of a troubled institution that had to recapitalize after loan problems a few years ago, Newport Beach-based Western (ticker symbol: WEBC) has exploded from $70 million in assets 18 months ago to $2.1 billion today. Western’s growth has come largely from buying other small California lenders. And the company’s appetite for growth isn’t letting up.

“We’re looking for acquisitions all the time,” said Arnold Hahm, Western’s chief financial officer.

Mergers and acquisitions have engulfed U.S. banks for several years, nowhere more so than in California. In recent years, First Interstate, H.F. Ahmanson and Great Western all have disappeared--or are soon about to.

But now that most large institutions have been gobbled up, the state’s heaviest M&A; activity will be focused on the smaller banks and thrifts that remain.

To be sure, small lenders already have been caught up in the whirl of mergers. Since January 1996 more than 80 California banks and thrifts have been purchased by other institutions, either California-based or out-of-state, according to SNL Securities in Charlottesville, Va.

The research firm currently counts about 70 major publicly traded banks and thrifts remaining in California. That total excludes scores of very small public banks and many more private banks.

With Bank of America off the table, investors’ attention turned Monday to Wells Fargo (WFC). Its stock jumped $18.81 to a record $370.94 on speculation it will be bought out, perhaps by U.S Bancorp (USB) of Minneapolis.

If Wells Fargo and its $97.5 billion in assets are acquired, the next largest financial institutions headquartered in the state would be Golden West (GDW), with almost $40 billion in assets, and then UnionBanCal (UNBC), with slightly more than $30 billion.

After that, the size of California-based banks and thrifts falls off precipitously: The fourth-largest institution on SNL’s list is Newport Beach-based Downey Financial (DSL), parent of Downey Savings, with $5.8 billion in assets at year’s end.

Many of the factors driving large-bank deals are spurring mergers of small institutions as well. Technology-driven innovation and the need to cut costs--not to mention the dazzling prices that sellers are fetching--are compelling small banks to link up.

To a lesser extent, the fact that a number of small banks have aging managements and shareholder bases is also prompting deals, experts say.

Some of the state’s smaller banks say that after years of going it alone, they prefer to stay independent. But that stance frequently changes when the right price comes along, said James Miller, head of small-bank corporate finance at Brookstreet Securities Inc.

“In the real world, they’re not the prettiest girls in the dance hall, so if something reasonable comes along they’ll look at it,” he said. “I’d say everyone’s in play. Everyone has a price.”

For investors interested in buying small California bank and thrift stocks as takeover candidates, however, the picture is mixed.

Though deals will keep coming, many stocks already reflect M&A; expectations. That means they often don’t jump much when deals are announced. That was shown Monday when shares of BankAmerica and NationsBank each rose barely 5%.

“There are many banks in California that have already made huge moves,” said Douglas Hughes, editor of the Small Bank newsletter in Hunter, N.Y.

On the other hand, California banks have an edge over others in terms of earnings power, said Tom Finucane, co-manager of the John Hancock Financial Industries stock mutual fund in Boston. The state’s booming economy means they can boost earnings an average of 14% to 15% this year versus the national average of 10% to 11%.

“People will pay a premium for the better growth,” he said. “But at some point you’ve got to say, ‘Hey, it’s a bank, not a software company.’ These are cyclical, somewhat slower-growing companies.”

So investors have to pick carefully and should make decisions based on a company’s business prospects rather than the chance of a buyout, Wall Streeters agree.

A key figure for investors is return on average assets, or ROA. This measures how effectively a bank manages its assets. For many years, an ROA above 1% was considered impressive. But in a good economy, many investors demand a figure topping that mark.

For investors who want to play the takeover game, some of the more commonly mentioned candidates include Beverly Hills-based City National (CYN), Inglewood-based Imperial Bancorp, (IMP) and UnionBanCal of San Francisco.

City National is a well-run bank that has made a strong recovery from its lending problems in the early 1990s, Finucane said. But with $5.2 billion in assets, it’s too small to compete against today’s monoliths, he said.

“In the long-term I think they’re [a buyout],” Finucane said. “They’re not small enough to blend in [to local communities] but not large enough to take on BofA and Merrill Lynch and Travelers and other gigantic companies that are getting bigger.”

But Russell Goldsmith, City National’s chief executive, says his bank can go it alone. Pointing to the five rivals his bank has bought in the last 2 1/2 years, he believes City National will continue to be an acquirer, not a target.

“Going forward, we’ll be very selective, but assertive” in doing deals, Goldsmith said.

Imperial, with $4.7 billion in assets, is spinning off a commercial and consumer finance operation and may attract interest after the deal is complete, Finucane said.

Hughes recommends UnionBanCal, the parent of Union Bank of California. He believes it can fetch $140 to $150 a share, a nice premium from the $108.50 it closed at on Monday.

UnionBanCal, majority-owned by Bank of Tokyo-Mitsubishi Ltd., is considered an attractive target because it has good earnings and a reasonable valuation compared to similarly sized rivals. With financial troubles plaguing many of the country’s banks, experts think the Japanese bank will sell the unit.

Hughes also likes North Valley Bancorp, which is based in Redding and is being helped by a solid Northern California economy.

Regardless of whether mergers take place, Finucane likes Western Bancorp, Santa Barbara Bancorp (SABB) and Silicon Valley Bancshares (SIVB). But he cautions that none of the stocks can be had cheaply.

Indeed, as with small- and mid-sized banks nationwide, many California institutions’ stock price-to-earnings ratios are in or near record high territory. While bank P/Es of 16 to 25 may not seem expensive relative to P/Es on blue-chip stocks, banks have historically sold for lower P/Es because their earnings tend to fluctuate with the ups and downs in the economy.

In the short-term, California’s economy will have a lot to say about where small-bank stock prices are headed. Banks likely can withstand a slight economic downturn, experts say.

But as history has demonstrated, a full-blown recession would most likely pound stock prices as banks’ loan losses inevitably mount.

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California Banks and Thrifts: Who’s Left

Here is a list of most of the major publicly traded banks and thrifts headquartered in California. The list excludes most institutions that have agreed to be taken over but whose stocks still trade. It also excludes many of the banks and thrifts whose stocks are very thinly traded, including most “pink sheet” issues. ROA is return on average assets, an important measure of bank profitability. P/E is the stock’s price-to-earnings ratio, based on the most recent 12 months’ earnings per share. The stock price is either Monday’s close or the most recent close and change.

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Assets Ticker (millions) 1997 Monday Bank Headquarters symbol (12/97) ROA P/E Close Wells Fargo San Francisco WFC $97,456 1.2% 28 $370.94 Golden West Finl Oakland GDW 39,590 0.9% 16 96.00 UnionBanCal San Francisco UNBC 30,585 1.4% 15 108.50 Downey Financial Newport Beach DSL 5,835 0.8% 20 33.25 City National Beverly Hills CYN 5,252 1.7% 23 39.44 Imperial Bancorp Inglewood IMP 4,724 1.5% 28 30.00 Bank Plus Los Angeles BPLS 4,167 0.4% 24 15.69 FirstFed Finl Santa Monica FED 4,160 0.6% 19 42.38 Westamerica Bancorp Suisun City WABC 3,848 1.3% 31 34.63 Westcorp Irvine WES 3,728 1.0% 12 16.56 Bay View Capital San Mateo BVCC 3,246 0.5% 33 34.75 PFF Bancorp Pomona PFFB 2,765 0.1% 24 20.44 Silicon Valley Banc. Santa Clara SIVB 2,625 1.3% 22 63.88 First Republic Bank San Francisco FRC 2,423 0.8% 21 36.13 Cathay Bancorp Los Angeles BYFC 1,622 1.3% 16 36.25 Santa Barbara Bancorp Santa Barbara SABB 1,592 1.4% 21 54.63 GBC Bancorp Los Angeles GBCB 1,509 1.8% 17 65.38 Western Bancorp Newport Beach WEBC 1,383 0.2% 154 44.75 CVB Financial Ontario CVB 1,258 1.5% 22 24.69 Greater Bay Bancorp Palo Alto GBBK 1,092 1.1% 23 58.50 HF Bancorp Hemet HEMT 1,063 -0.3% NA 17.00 ITLA Capital La Jolla ITLA 1,016 1.4% 13 22.00 Hawthorne Financial El Segundo HTHR 928 1.1% 12 19.19 Quaker City Bancorp Whittier QCBC 852 0.4% 19 23.50 TriCo Bancshares Chico TCBK 826 0.8% 27 33.13 Pacific Capital Banc. Salinas PABN 765 1.5% 18 43.19 Provident Finl. Hold. Riverside PROV 724 0.3% 22 23.25 Pacific Bank San Francisco PBSF 603 1.4% 22 58.50 SierraWest Bancorp Truckee SWBS 589 1.5% 21 37.50 Bank of Commerce San Diego BCOM 557 1.5% 36 20.94 Highland Bancorp Burbank HBNK 549 1.2% 15 37.75 Pacific Crest Capital Agoura Hills PCCI 464 1.0% 16 19.63 VIB El Centro VIBC 446 1.0% 26 16.00 Foothill Indep. Banc. Glendora FOOT 436 1.1% 19 17.75 Monterey Bay Bancorp Watsonville MBBC 408 0.4% 41 22.75 SGV Bancorp West Covina SGVB 408 0.2% 32 18.13 FP Bancorp Escondido FPBN 353 1.3% 23 33.00 Capital Corp. of West Merced CCOW 343* 0.2% NA 14.75 Civic BanCorp Oakland CIVC 325 1.6% 19 19.00 Calif. Indep. Bancorp Yuba City CIBN 293 0.5% 26 25.00 North County Bancorp Escondido NCBH 281 1.3% 22 15.25 Bank of Los Angeles W. Hollywood BKLA 272 2.1% 16 16.00 Bank of Santa Clara Santa Clara BNSC 262 1.3% 19 26.75 Coast Bancorp Santa Cruz CTBP 262 2.1% 18 39.00 Orange National Banc. Orange OGNB 242 1.5% 18 28.00 Bank of Hemet Riverside BHEM 241 1.2% 13 40.00 Borel Bank & Trust San Mateo BLCA 234 1.5% 16 20.00 Professional Bancorp Santa Monica MDB 234* 0.4% 20 20.25 Desert Commun. Bank Victorville DCBK 209 1.1% 24 32.50 BYL Bancorp Yorba Linda BOYL 165 1.4% 17 21.00 First Regional Banc. Century City FRGB 162 0.8% 19 9.00 Business Bank of Cal. San Bernardino BBNK 152 0.6% 24 14.00 Broadway Financial Los Angeles BYFC 125* 0.3% 57 12.50 National Mercantile Los Angeles MBLA 119 0.1% 38 7.50 Community West Banc Goleta BCOM 95 2.0% 29 12.75

trading Bank Change Wells Fargo +$18.81 Golden West Finl -0.13 UnionBanCal +7.00 Downey Financial +0.19 City National +0.69 Imperial Bancorp -0.63 Bank Plus -0.19 FirstFed Finl +0.88 Westamerica Bancorp +0.69 Westcorp -0.31 Bay View Capital -0.25 PFF Bancorp +0.56 Silicon Valley Banc. +2.88 First Republic Bank +0.81 Cathay Bancorp -0.13 Santa Barbara Bancorp +0.28 GBC Bancorp +0.75 Western Bancorp +1.25 CVB Financial -0.19 Greater Bay Bancorp +0.50 HF Bancorp unch. ITLA Capital +0.88 Hawthorne Financial -0.06 Quaker City Bancorp -0.50 TriCo Bancshares +0.13 Pacific Capital Banc. +0.19 Provident Finl. Hold. -0.31 Pacific Bank +1.50 SierraWest Bancorp +0.13 Bank of Commerce +0.69 Highland Bancorp unch. Pacific Crest Capital +0.13 VIB -0.25 Foothill Indep. Banc. +0.75 Monterey Bay Bancorp +0.06 SGV Bancorp unch. FP Bancorp +0.13 Capital Corp. of West -0.50 Civic BanCorp +0.50 Calif. Indep. Bancorp -1.50 North County Bancorp -0.25 Bank of Los Angeles +0.25 Bank of Santa Clara -0.75 Coast Bancorp +0.50 Orange National Banc. unch. Bank of Hemet unch. Borel Bank & Trust +1.00 Professional Bancorp +0.50 Desert Commun. Bank unch. BYL Bancorp -0.25 First Regional Banc. +0.25 Business Bank of Cal. -0.13 Broadway Financial unch. National Mercantile unch. Community West Banc unch.

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*Assets and return of assets as of Sept. 30

NA: Not applicable (earnings were minuscule)

Source: SNL Securities