For Tom Theurkauf it's deja vu all over again. A banking industry analyst at Keefe, Bruyette & Woods Inc. in New York, he follows commercial banks and thrifts in New England and California.

He sees a repeat in California of the New England disaster of 1989, especially among community banks. This year is likely to be remembered as a watershed for community banking in the state.

After a decade of start-ups and fast growth, small banks, especially in the southern part of the state, are reeling from the free fall in real estate values and the jump in unemployment. What began as anxiety about the future in 1991 has become a full-blown crisis for many community banks in California in 1993.

This year will probably see a record in community bank failures in California. But . . . a number of small banks are raising new capital and seeing a bottoming out of their loan problems, even if their stock prices don't necessarily reflect those factors.

Which is where Mr. Theurkauf comes in. Keefe has been either adviser or underwriter for a half dozen capital-raising efforts in California, ranging from the all-but-dead Pacific Bank in San Francisco to the $45 million recap of Union Federal Bank outside Los Angeles.

Mr. Theurkauf has had a hand in determining the value in all these institutions.

American Banker talked to Mr. Theurkauf recently about the shakeout in California and where the best bank investments are in this economically battered region.

Q.:What stocks do you like in California?

THEURKAUF: We've drifted to just a few names: Imperial Bancorp and Coast Federal Savings [both in Los Angeles]. They're not community banks, but they have key elements of what constitutes a good turnaround at this stage.

Imperial is is a midsize commercial bank, about $2.5 billion in assets. It has offices in all major markets in California. It's very much a business bank. The stock sells at a discount, right now at 80% of book value.

What we look for in any turnaround story is not only relation to book but underlying earnings power. We feel the potential is upward of $2 a share in earnings by 1995. It's trading at six times normalized earnings. Imperial's problem loans are relatively high, but they're coming down.

Coast Federal has $8 billion in assets. But it has elements of what we think will be key to any turnaround candidate in California. They have 88 branches across the state.

The stock is currently trading at 63% of book; it's a $13 stock. We have the concept of normalized earnings power, and we think Coast Savings is a $2.60-a-share earner in normal conditions.

With Coast, you can point to tangible evidence of improved asset quality. They've had 10 consecutive quarterly declines in nonperforming assets. Coast, with its 88 branches around the state, is rather dispersed, That's not a highlight, but there is an area of concentration in the Monterrey peninsula, which is a high-net-worth area and one of the best places to be in a recovery.

Q.: What are some other ways you determine turnaround trends?

THEURKAUF: We look at trends in the numbers, of course. But you have to interview management and the special-asset personnel. With Imperial, for instance, the tangible evidence of improvement is rather sketchy. But if you sit down and talk to the company you will be able to expect more dramatic improvement.

Q.: Why haven't more community banks sought bigger merger partners in California in the last year? It appears to be a buyer's market, but are there buyers?

THEURKAUF: You look at this parallel to New England. Economic stability helps everybody. It allows buying companies to understand better what they're buying.

In New England during the bad years, it was difficult for anybody to understand the loss content in a loan portfolio.

Now let's fast-forward to Christmas next year. Let's assume things have reached a floor in California, people are optimistic about 1995, and asset quality has improved for 95% of the banks. That will ease the logjam you might have today and free up the deal flow.

Q.: Then why aren't we seeing any takeover premiums in the community banks stocks?

THEURKAUF: I think that phase hasn't played out in California yet. I don't think the bank and thrift stocks have any acquisition premium at all. Now I'm not suggesting that this is going to play through as clearly or in lockstep with the situation in New England, but I do think it follows from from the New England example.

The market in California is simply too large for the national players to ignore, and within the next 12 to 18 months you could see a fairly vigorous consolidation phase in California. The investors who can identify well-managed banks and thrifts with great franchises are going to be the big winners.

Q.: What parallels can you draw from the current California banking market? Especially Southern California.

THEURKAUF: We do think that there are parallels. I follow New England commercial banks and worked for Shawmut National Corp. for eight years.

I saw firsthand the effects of a downturn in real estate markets, the downsizing in the defense industry, and lower employment levels.

But what I came away with was the belief that for every cloud there's a silver lining. The silver lining in New England was the reaction by the banks: They built their loan-loss reserves, tightened credit standards, and looked very tightly at expense levels.

In so doing they positioned themselves well for earnings momentum. Now New England is reaching stability. The large-bank stock performance in the last two years in New England is almost twice is good as that of other banks Keefe follows. In a stabilizing economy there can be values and good upside potential.

I'm not saying that you should blindly load up on California banks. Selectivity is definitely in order. The economy, there is still difficult. But the fact is that most of the banks we follow are showing improvement in asset quality.

Anecdotal evidence points to a firming in the realty market, not a turnaround. What we are looking at are situations where there are viable franchises in attractive markets in the long term. That, and institutions that are undervalued.

Q.: What will make the difference between failure and success for community banks trying to raise capital in California?

THEURKAUF: All investors are looking for are tangible signs. Once you have those signs to hang your hat on, your stock price will improve.

It's also a question of timing. Now that the economy is firm, it could be that the profits from turnarounds have already been made. We like to get our clients in early to these situations.

Q.: How do you see the market for California community banks and their stock performance five years from now?

THEURKAUF: I guess you would see fewer banks, but I don't really know. I think you will always have a number of small [under $1 billion in assets] banks and thrifts that will meet the needs of the community and offer higher level of service.

I don't think you're going to see a big shakeout in that size range. But at $1 billion and up you will see consolidation activity, and it will be very vigorous. So, you could have a smaller number of institutions of that size.

There's another element. Some of these community banks themselves will look to do mergers of equals. You could have large community and super community banks forming.

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