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BENJAMIN MARK COLE

Senior Reporter

With virtually every bank and thrift stock in California's improving economy considered in play, or at least playable, investors might want to seriously consider adding financial stocks to their portfolios, say experts.

"Back up the truck, and load it up to the top with California financials," said Charlotte Chamberlain, bank and thrift analyst with brokerage Jefferies & Co. in West Los Angeles. "The economy here is improving, and the consolidation wave that has already visited the rest of the country is coming here."

Nor should investors be daunted that they have missed the boat. Although values of local banks and thrifts have had an enormous run-up in values in the past two years even eclipsing a stupendous rise of the general stock market it is not too late to hop aboard, said some analysts.

"Well, of course, it would have been nice to buy some of these stocks two years ago, when they were trading at 30 percent of where they are now, but then hindsight is always 20/20," said Campbell Chaney, analyst with Sandler O'Neill in Walnut Creek. "But there is still going to be a lot of M & A; action."

Recent bank and thrift buyouts include Wells Fargo Bank's acquisition of First Interstate Bancorp, Bank of America's takeover of Security Pacific, Bancorp Hawaii's buyout of Encino-based CU Bancorp, and Tampa-based IMC Mortgage Co.'s buyout of Los Angeles-based CoreWest Banc, among many other transactions.

The whole environment for bank and thrift stocks has changed in the last 10 years, due to the ascendance of institutional shareholders.

Take the case of local thrifts H.F. Ahmanson & Co. and Great Western Financial Corp. As the two rivals circle each other in a takeover struggle, it is institutional shareholders that own more than 80 percent of each thrift. The same five large institutions are the largest shareholders in each company.

In such a scenario, shareholder loyalty is almost always to the most lucrative deal.

The days in which shareholders' meetings were dominated by longtime loyal shareholders, who seem to know management on a first-name basis, are essentially over.

The modern investor only cares about getting a return on his or her investment making banks and thrifts extremely vulnerable to buyout offers.

According to an analysis by Mergerstat, an arm of Century City-based specialty investment bank Houlihan Lokey Howard & Zukin, the typical "premium" over existing market price paid to acquire a bank is 33 percent.

That means if an investor owns ABC Bank Inc. at $10 a share, but the next day the company announces it has agreed to be bought by XYZ Bank Inc., then the typical buyout price will be $13.33 a share.

Last July, First Nationwide Holdings Inc. agreed to buy the Los Angeles-based thrift California Federal Bank, for a premium of 19.7 percent above pre-existing market price, according to Mergerstat.

Analysts Chamberlain and Chaney both said that the immediate premium in the Cal Fed case understates the case. Cal Fed's stock price had risen steadily for two years prior to the buyout, partly on the possibility of a takeover, and then rose in the months immediately prior to the buyout on more-definite speculation of a takeover.

Shareholders in Great Western were well-rewarded recently when the price of the thrift rose about 30 percent, following an announcement in February by H.F. Ahmanson that it would seek to take over its rival.

Both Chamberlain and Chaney said California bank and thrift stocks are a good buy, even if no takeover occurs.

The economic climate of low inflation and growth augurs well for financial institutions, they said. Demand for credit remains healthy in such an economy, and loan defaults are comparatively less common at least less common than during a recession. But lenders' cost of funds has remained relatively low.

Banks are enjoying the highest "real" interest rates rates adjusted for inflation and biggest spreads between borrowing and lending costs in the postwar era, said Michael Bazdarich, economist and president of MB Economics in La Crescenta.

Of course, nothing is risk-free in the world of investing, including California bank and thrift stocks. The financial sector, for example, would be the first to be hit by a rise in rates.

"Any increase in inflation or interest rates would dampen things considerably," said Chaney.

Looming on the horizon for bank and thrifts are possible rate hikes engineered by Federal Reserve Board Chairman Alan Greenspan, who has spoken several times of late about the lofty height of stock prices.

Some economists expect Greenspan to raise rates not so much in response to inflation, but to the mere possibility of inflation. "Inflation doesn't have to be there for Greenspan to perceive that inflation is a threat," said Chaney.

A slowing economy would decrease demand for credit, meaning a reduction in loan volume for banks and thrifts. It would also mean higher default rates and, at the same time, a rise in interest rates would increase lenders' cost of funds, said Chaney. "That's not a pretty picture."

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