California bank stocks: The herd gets thinned again

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There’s no middle ground left in the field of California-based publicly traded banks.

With the takeover deal announced Monday for Union Bank parent UnionBanCal Corp., the list of publicly traded banks with headquarters in the Golden State begins with $609-billion-asset Wells Fargo & Co. -- and then drops all the way down to Beverly Hills-based City National Corp., with $16 billion in assets.

San Francisco-based UnionBanCal, with $60 billion in assets, has been the second-largest publicly traded bank headquartered in California. IndyMac Bank had been No. 3 -- until the government declared the Pasadena lender insolvent last month and seized it.

Of course, Union Bank isn’t going anywhere. And its shares already had been 65%-owned by Japan’s Mitsubishi UFJ Financial Group; the Japanese parent is just buying the remaining 35% now, for $3.5 billion.

As for IndyMac, the Federal Deposit Insurance Corp. is looking for a buyer.

Consolidation has been shrinking the number of U.S. banks for the last 30 years and it’s unlikely to stop soon. Many, maybe most, individuals and businesses probably don’t care where their bank is headquartered as long as it provides them with the services they want. Bank of America Corp. didn’t become less of a competitor in California when the headquarters moved to Charlotte, N.C., in 1998.

But for investors, small- and mid-size bank stocks have always provided a way to bet on the economies of specific geographic regions.

Managements of many smaller California banks naturally want to believe they’ll survive further consolidation. The bigger question at the moment is how many will survive losses on real estate loans -- particularly if troubles worsen in commercial properties.

The state’s real estate woes mean investors who would like to bargain-hunt for other potential takeover targets among remaining California banks face a minefield. Pick the wrong stock and you could lose it all, a la IndyMac.

Mitsubishi UFJ has made clear it wants to buy other U.S. banks. Brent Christ, who follows banks for research firm Fox-Pitt Kelton, tells my colleague E. Scott Reckard that if Mitsubishi were to shop for other California lenders it would probably seek out those that have weathered the credit storm better than others so far. But then, that would be a logical strategy for any potential buyer.

Christ mentioned two possible targets: San Rafael-based Westamerica Bancorp, which operates in Northern California and the Central Valley; and PacWest Bancorp, the parent of Pacific Western Bank, which has branches in Los Angeles, Orange, Riverside and San Bernardino counties as well as its home turf of San Diego.

As for the new No. 2 publicly traded California bank, City National, it would be a relatively small ticket for a deep-pocketed buyer: With the shares down 37% from their peak in mid-2007, City National’s stock market value now is $2.4 billion.

The bank has dodged troubles in the residential mortgage market, although it has been facing rising write-offs for loans to home builders.

In any case, as Christ points out, City National hasn’t shown any interest in giving up its independence.