California's 2d-Tier Banks Facing Slimmer Prospects

A cadre of second-tier banks in California has not escaped problems facing larger brethen on the West Coast, where the weather is fine but the economy is sluggish.

These smaller banks, which cultivate valuable links to local businesses, sit atop assets ranging as high as $5 billion. Though they have not rated a spotlight lately, they formerly enjoyed popularity when in-state consolidation was a sexier topic.

But those prospects are slimmer now. Potential acquirers "either have their own troubles to deal with or would be currently unwilling to pay the prices that seemed commonplace until early last year," said bank analyst Don Crowley of Keefe, Bruyette & Woods Inc.

Wells Fargo & Co. and Security Pacific Corp., for example, only have eyes for each other and the resulting cost cuts. Meanwhile, BankAmerica Corp. has plenty of branches in California already.

That leaves City National Corp., Imperial Bancorp, Pacific Western Bancorp. and a handful of other banks to fend for themselves until the state's economy improves.

"We generally are neutral or advise clients to avoid these stocks right now," said Campbell K. Chaney, the banking industry analyst at Sutro & Co., San Francisco.

On Tuesday, Imperial, based in Inglewood, was unchanged at $9 from Monday's trading, down 16.3% since June 30. San Jose-based Pacific Western, unchanged at $7, is down 17.6% over the same period.

Reversals in the Air

In May, Mr. Chaney advised selling the shares of the largest of the second-tier institutions, City National Corp. of Beverly Hills, saying it showed "all the signs of a banking company with emerging loan-quality reversals."

Unlike most of its peers, however, City National's stock has not slipped, which is probably due to it strong business reputation and nearly 25% inside ownership of the stock.

The shares on Tuesday were ahead 25 cents to $14.50, up a meager 1.75% since June 30.

Spiraling Nonperformers

Nonperforming loans at City National have spiraled 300% over the past three quarters. During the second quarter they rose to $145.3 million, or about 5% of loans, including $65 million of real estate loans.

In his second-quarter report, City National chairman and chief executive officer Bram Goldsmith acknowledged the impact of a soft real estate market, but termed the loans "money good" since they are "based on total customer relationships and solid underwriting standards which include our own conservative appraisals."

Mr. Crowley has a somewhat more optimistic view of the banks. Using credit quality as a screen, he said standouts on a valuation basis include California State Bank, Covina; Commercebancorp, Newport Beach; GBC Bancorp, Los Angeles; and California Bancshares Inc., Pleasanton.

PHOTO : 2 Second-Tier Banks Lag Behind the Market Source: DB Technology Inc., SNL Securities, Reuters

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