Surge of bank M&A in California leads to shortage of buyers

CVB Financial aims to expand into the Sacramento, Calif., area in a planned deal.
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Bank M&A in the Golden State is roaring back after a lull in activity over the past few years.

Ten California-based targets have sold this year, up from only three in 2020 and five in 2019. Much like many other financial institutions across the country, California banks are feeling the pressure for scale as margins continue to compress and organic growth remains challenged. But the string of deals is shrinking the already short list of buyers in the state and could lead to a slowdown in activity, deal advisers said.

"If a seller wants to really find a high-quality currency and wants to find a great institution with a strong culture and just a great earnings company..., you kind of got to make sure you get on that dance card sooner rather than later," Michael Cavallaro, founder and managing partner of MJC Partners, a Los Angeles-based boutique investment banking firm, said in an interview.

The percentage of California-based banks targeted in M&A deals declined from 2017 to 2020, but activity in the state has rapidly rebounded in the first seven months of 2021.

Most recently, CVB Financial Corp. and TriCo Bancshares both announced deals on July 27. Ontario, Calif.-based CVB Financial will expand into the Sacramento metro area with its bid for Suncrest Bank and Chico, Calif.-based TriCo will bolster its presence in Bakersfield with its announced acquisition of Valley Republic Bancorp.

But activity in the state could slow down in the near term as the limited number of buyers focus on their pending deals, Aaron Axton, a managing director with Keefe Bruyette & Woods, said in an interview.

"When you kind of think about the number of banks that have size, are high-quality, have a really, really good stock, pay a dividend and have plenty of excess capital, ... that list is not long," he said. "If I look down the list ... everybody's kind of taken a bite and did a deal."

Headwinds for deals

Scrutiny from regulators may hold back potential serial acquirers that would have bought three or four banks a year in the past, Axton said.

"Given the regulatory environment, people are much less likely to do more than a deal or two a year, even if it represents a fairly insignificant piece of the pro forma company," he said. "That's just a natural constraint on the volume of deals that can happen."

Some potential buyers, such as Sierra Bancorp, BayCom Corp. and RBB Bancorp, will have trouble making deals when their stock valuations lag those of larger regional competitors, Hovde analyst Brett Rabatin said in an interview. As of the close on Aug. 4, Sierra Bancorp traded at 1.13x tangible book value, BayCom traded at 0.93x and RBB Bancorp at 1.30x. CVB Financial, meanwhile, traded at 1.91x tangible book value.

"Competing with a CVBF for deals is impossible. If CVBF wants a transaction or wants a bank, a [Sierra Bancorp] is going to have a hard time being competitive on pricing just because of where their stock trades," Rabatin said. "They're kind of in no man's land, so to speak, of wanting to do deals, but not being able to compete as effectively with some of the bigger names that can offer higher pricing."

Some acquirers remain

While deal activity could slow as some buyers are on the sidelines, experts said there are still some prospective buyers that could pick off deals in the state.

Pacific Premier Bancorp Inc., the 11th-largest bank headquartered in California, is most likely to strike a deal in the state next, Axton said. The Irvine, Calif.-based bank is looking for large deals, including a merger of equals, Chairman and CEO Steven Gardner said on the company's second-quarter earnings conference call.

Heritage Commerce Corp last announced a deal in 2019, but could come back into the M&A playing field soon, Axton said.

Out-of-state players looking to move into California or those looking to bolster their current footprints in the state may continue to drive activity, Cavallaro said.

Clayton, Mo.-based Enterprise Financial Services Corp. expanded into the state with its acquisition of Seacoast Commerce Banc Holdings, announced in August 2020, and quickly followed up with its acquisition of First Choice Bancorp, announced in April. Most recently, in June, Tacoma, Wash.-based Columbia Banking System Inc. announced its acquisition of Bank of Commerce Holdings.

"Right now, if you are a buyer with a strong currency and in the right geographies in the broader western U.S., you have the advantage, you have the leverage," Cavallaro said.