Zions-First Security Deal May Spur More California Dreamin'

Add the proposed new First Security Corp. to the list of banking companies that could provide an expansion-minded buyer with a firm foothold in California.

The pending merger between Zions Bancorp. and First Security Corp. was designed to keep the headquarters of both in Utah, where the two Salt Lake City banks dominate.

But it would also provide a back door into California, where the merged $40 billion-asset company would have $6 billion of deposits.

"Would a $40 billion bank with a strong market share at home and a toehold in California be attractive to another bank? You betcha," said R. Jay Tejera, a bank analyst at Ragen McKenzie in Seattle. "But that doesn't mean it's going to happen anytime soon."

Still, that won't stop bankers and merger advisers from dreaming about the possibilities. Many industry experts agree that any genuine nationwide commercial bank needs a presence in California, the largest U.S. state. The problem is how to get it.

"If you want to be a national player, you have to be in California," said Martin Friedman, a thrift analyst at Friedman Billings & Ramsey & Co. in Arlington, Va. To Mr. Friedman, the best way to enter California on a grand scale would be to buy a thrift.

That approach is unlikely to appeal to many commercial bankers who view thrifts as inadequate alternatives to full-service banks. But the options are slim.

California's commercial banking market continues to be dominated by two banks: San Francisco's Wells Fargo & Co. and Bank of America, now based in Charlotte, N.C. The third-largest is Japanese-owned Unionbancal of Los Angeles. The new First Security would rank fourth, reflecting Zions' $5 billion of deposits and First Security's $1 billion.

Despite this concentration, new banks are proliferating in the state, and if an outsider wants in, it can pursue thrifts with tens of billions of assets, banks with less than $500 million of assets, or a few banks with several billion of assets.

Large potential acquirers such as First Union Corp., Bank One Corp., and Mellon Bank Corp. have indicated that they want to create a presence in California, but many of the banks available are too small for them to consider acquiring, investment bankers said.

First Union, whose stock has been under severe pressure, and Bank One, which says it will concentrate its expansion through the Internet, still might be interested in entering the state if the price is right and the market share big enough, analysts say.

"They're are not going to look at a $55 million-asset bank," said James T. Hill, managing director of Sutro & Co., a boutique investment banking firm that specializes in bank M&A on the West Coast. For the industry giants, buying a bank that small is tantamount to buying a branch, he said.

In the meantime, consolidation is proceeding rapidly among California's smaller banks, a trend that could produce more appealing targets for out- of-state acquirers.

So far this year, there have been 14 merger announcements involving California banks and thrifts, according to SNL Securities. Since 1996 there have been 131 bank and thrift mergers worth $141 billion, according to statistics compiled by American Banker and Sheshunoff Information Services, a Thomson Financial company.

California banks or out-of-state banks that already have a presence there are most likely to take advantage of the consolidation within the state.

The $6.8 billion-asset City National Corp. of Beverly Hills plans to buy $414 million-asset American Pacific State Bank of Sherman Oaks for $89 million. Minneapolis-based U.S. Bancorp plans to acquire $2.5 billion-asset Western Bancorp of Newport Beach for $985 million.

And the new First Security can use its current base in California for more acquisitions. "California still offers banking franchises ripe for the plucking," said Joseph Morford, a bank analyst at First Security Van Kasper, the Utah banking company's securities subsidiary.

"Except for the Japanese institutions and some midsize thrifts, the community banks really represent the only acquisition opportunities left in the state," Mr. Morford said. "As this supply dwindles, we would not be surprised to see a bit of a frenzy break out in merger activity particularly with stock prices of acquirers rebounding and Y2K concerns fading."

The greatest merger activity is likely to take place among California's 50 banks with $100 million to $500 million of assets, said Mr. Morford. "But those banks with more than $500 million of assets are the ones most likely to go first," he said.

Two of California's biggest independents are City National and $3.8 billion-asset Westamerica Bancorp in San Rafael.

City National, often called the "bank to the stars" because of its large business with Hollywood, has become particularly attractive because of its plans to buy American Pacific.

City National and Westamerica are "high-quality, top-performing banks which represent great core holdings," Mr. Morford said. "As two of the largest franchises remaining in California, they offer critical mass and a strong deposit share in some of the best markets."

The next tier of banks that would be attractive to other banks includes $2.7 billion-asset Pacific Capital Bancorp of Santa Barbara, $1.9 billion- asset Greater Bay Bancorp, Palo Alto, and $1.2 billion-asset Mid-State Bancshares of Arroyo Grand, Mr. Morford said.

Another group of attractive banks are niche players. The $6 billion Imperial Bancorp, Inglewood, has built a strong business specializing in midsize businesses; $3 billion-asset First Republic Bank, San Francisco, excels in private banking, and $1.7 billion-asset GBC Bancorp, Los Angeles, focuses on California's large Asian-American community.

"Niche players, though, may have limited appeal as acquisition candidates and are more likely to require a unique set of buyers," Mr. Morford said.

Although some jewel banking franchises remain, the choices for many bankers still are few, said Sean J. Ryan, a bank analyst at Bear, Stearns & Co. "Banks could stitch together a number of community banks to gain access, but that is unwieldy," Mr. Ryan said. "The option of paying top dollar for a terrific statewide banking operation simply is not on the table."

Other experts maintain that banks looking to access California may have to put aside their aversion for thrifts and start buying them.

"If you want to be in California, you are going to have to look at thrifts," said Mr. Friedman of Friedman Billings.

The growing difference between the value of thrifts and banks could also spur a round of merger acquisition between the two, said Chad Yonker, a thrift analyst at Fox-Pitt, Kelton.

"A bank could offer a market premium for a thrift and at the same time make the deal accretive," Mr. Yonker said. "That kind of deal is a lay-up."

Candidates include the hulking Washington Mutual of Seattle, the country's largest thrift at $174.3 billion of assets, which had $63 billion in California deposits as of June 30, 1998, or family-owned Golden West Financial Corp. of Oakland, which has $36.7 billion of assets.

The front-runner of thrift takeover targets is Golden State Bancorp of San Francisco, several analysts said.

Gerald J. Ford, chief executive of Golden State, and billionaire financier Ronald Perelman, who has a 34% stake in Golden State, have track records of fixing up companies-particularly thrifts-and selling them at a premium. Mr. Ford and Mr. Perelman have indicated they would have no problem selling Golden State.

"They have said that they want to maximize value any way that they can," Mr. Friedman said. "These are financial people, they are not empire builders. They want to make money the best way they can and the best way is getting size then selling."

The bias against thrifts, however, remains formidable. John F. Grundhofer, chief executive officer of U.S. Bancorp has said that he wants to further expand his franchise in California, but not through thrifts.

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