Glen Fed-Cal merger puts pressure on Ahmanson.

The heat just got hotter for H.F. Ahmanson & Co.

Last week's announcement that Glendale Federal Bank will merge with California Federal Bank means Ahmanson's Home Savings of America will soon be the only remaining major thrift based in L.A.

More importantly, it will remove two prime acquisition candidates from Ahmanson's radar screen.

In today's banking environment, big is not only better, it's crucial for institutions hoping to survive, analysts said.

A growing number of large institutions both in California and elsewhere are looking to buy their way into the expanding Los Angeles economy. "What this merger means is that there are now fewer large savings and loans in the region, so each one becomes a more attractive target," said Thomas O'Donnell, an analyst at Smith Barney in New York.

National banks such as Bane One Corp. and NationsBanks have expressed an interest in expanding into Southern California. And analysts said there are so few commercial banks now headquartered in the region that a thrift would make a logical target.

Ahmanson, as expected, downplayed the significance of the Cat Fed-Glen Fed merger.

"Both institutions have been good competitors and I expect that together they will continue to be good competitors," said Ahmanson spokeswoman Mary Trigg. "We see it as a plus that we are the only large institution left in L.A. We see it as an opportunity to fill a niche that is community banking."

In an interview with the Business Journal last November. Ahmanson CEO Charles Rinehart was coy on the subject of further acquisitions after Ahmanson had purchased Coast Financial Inc. in October for nearly $1 billion.

"Our basic strategy does not require us to make another acquisition," he said. "We feel we can build internally. At the same time, if acquisition targets come along that make sense, sure we are going to look at them."

But with last week's Cal Fed-Glen Fed announcement, few local targets remain. As a result, if Ahmanson decides to grow through acquisition it would have to buy lots of little thrifts, or make a play for either Washington Mutual Inc. or the newly merged California Federal Bank.

Smaller banks that could be targeted by Ahmanson are Downey Savings, based in Newport Beach, and PFF Bank & Trust in Pomona.

Martin Freedman, an analyst at Freedman Billings Ramsey & Co., speculated that Ahmanson might at some point seek to merge with the new California Federal.

"If they did they would rival Wells Fargo in terms of asset size. It's a possibility in the future," he said.

Size is crucial for survival in today's banking environment for several reasons, analysts said.

With interest rates lingering at their lowest levels in years, the "spread" between the rate thrifts can charge on loans and the rate they pay on deposits has grown very thin.

With margins thinning, institutions must increase their business volume to maintain profit levels. The effect of thinning "spreads" on local thrifts was evident in early January when the share prices of both Ahmanson and Glendale Federal dropped sharply as investors became concerned about declining interest rates.

Another reason size is crucial is that it allows an institution to achieve cost efficiencies, and lower expenses can bolster the bottom line just as much as increased business volumes. Bigger thrifts also typically pay less to borrow money because they usually get higher ratings from the major credit-rating agencies, like Moody's and Standard & Poors.

The new California Federal Bank will be roughly the same size as Ahmanson, with Ahmanson having assets of around $47 billion and deposits of $33 billion and post-merger California Federal having assets of $51 billion and deposits of $28 billion.

RELATED ARTICLE: P.R. Problem for Glendale Federal

Remember that Glendale Federal Bank advertising campaign slamming Wells Fargo & Co.?

There were the billboards showing a stagecoach (Wells Fargo's symbol) inside a red circle with a slash through it - encouraging Wells Fargo customers to "Buck Them."

Then there were the radio spots that featured disgruntled citizens who were "Fed Up" with big banks and their shoddy service.

It was all part of an award-winning "guerrilla" ad campaign targeting former customers of First Interstate Bank after it was bought by Wells Fargo.

But now that Glendale Federal's parent plans to merge with California Federal Bank, the thrift that made a name for itself by blasting the "big guys" is soon to be one itself - which does create something of an embarrassing public relations problem.

Is there anything GlenFed can do to maintain its image as a high-minded renegade?

"The only thing they can say is, 'Yes, we are big, but our frame of mind has not changed,'" said Mike Sitrick, president of public relations firm Sitrick & Co.

That might not be enough. Sanwa Bank of California is already hinting that it may wage a campaign of its own. "We're building a tactical plan right now," said Gene Galloway, Sanwa's vice president for retail and community banking.

- Jason Booth