YOU ARE HERE: LAT HomeCollections


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.

For the Record
Los Angeles Times Wednesday April 15, 1998 Home Edition Business Part D Page 3 Financial Desk 1 inches; 17 words Type of Material: Correction
Cathay Bancorp--The stock ticker symbol for Cathay Bancorp was incorrect in a chart Tuesday. The correct symbol is CATY.
For the Record
Los Angeles Times Thursday April 16, 1998 Home Edition Business Part D Page 3 Financial Desk 2 inches; 44 words Type of Material: Correction
Golden State Bancorp--The parent of Glendale Federal should have been included in a list of publicly traded California-based banks and thrifts on Tuesday. Although Golden State has agreed to merge with Ronald Perelman's private CalFed, the merged company plans to trade publicly under the Golden State name.

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.

Los Angeles Times Articles