Bank stock lost more ground Thursday as investors continued to sell in advance of the Federal Reserve's policy meeting on interest rates next week.

Financial sector stocks are certain to bear the brunt of any rate hike at the Fed's session Tuesday and Wednesday, according to Ross Bruner, chief investment officer at Mabon Securities in New York.

"Any way you slice it, it's going to be bad for banks," he said.

Mr. Bruner said banks have been hit hard this week as investors "chased a rumor" that the Fed increase would be more than the one-quarter of a percentage point rise that Wall Street has been expecting.

"There is a lot of speculation" going on, he said. Moreover, bank stocks will probably remain volatile even if the Fed acts.

"I expect it to last through the summer," perhaps quieting down a bit when banks begin reporting second-quarter results in mid-July, he said.

Then the banks with solid results are likely to draw interest from investors, Mr. Bruner said, and those that falter may be especially punished.

The weakness in bank stocks Thursday was magnified by sparse trading in the sector, market watchers said.

"Banks and thrifts are trading down on very light volume," said Mark Fitzgibbon, managing director at Sandler O'Neill & Partners. "Some people have headed to the beach early this year."

Because there was lack of liquidity-not a lot of either buyers or sellers-the stocks endured big price moves whenever an order was placed, Mr. Fitzgibbon said.

For the day, the Standard & Poor's bank index lost 1.05%, the Dow Jones industrial average 1.24%. The Nasdaq bank index fell 2.02% and the S&P 500 index 1.30%.

In the merger and acquisition realm, analyst Thomas H. Hanley of Warburg Dillon Read said Unionbancal - which was off 2.61%, or 31.25 cents, to $35 a share - could fetch as much as $55 in a buyout.

As the third-largest commercial bank in California, Unionbancal could serve as an ideal entry vehicle for a larger bank trying to crack the California market, Mr. Hanley said.

In initiating coverage of the stock with a "buy" rating, Mr. Hanley also had good things to say about Unionbancal as a stand-alone company.

He expects continued improvement in overall fundamental financial performance, driven by solid growth in commercial loans and fee income, an increased focus on cost control, and strong asset quality.

Credit quality measures "paint a very solid asset quality picture," which has been driven by a conservative credit culture and strength of the geographic markets that Unionbancal operates in, Mr. Hanley said.

Meanwhile, First Commonwealth Financial of Indiana, Pa., bears close watching for initiatives it is undertaking on the fee income side, said Gerry Cronin, a banking analyst at McDonald Investments of Cleveland.

"We view 1999 as a critical transition year," as First Commonwealth moves to meld its trust, insurance, and banking products, Mr. Cronin said. Shares were up 0.27%, to $23.625.

The company's basic operation is solid, but does face some challenges, Mr. Cronin said.

Mr. Cronin said First Commonwealth's below-average profitability levels can be attributed to its earning asset and funding mix, and subsequently to a lower net income interest margin. Spread income accounts for roughly 85% of total revenues, he said, and a step-up in balance-sheet-related activity could help the bank.

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