Irvine, Calif.-based First Foundation Inc. said it would pay more than $100 million to acquire a Los Angeles-area competitor that boasts both a low-cost deposit base and a solid business lending operation. The pair of strengths could bolster the buyer at a time when Southern California's economy is expanding and interest rates are rising.
First Foundation agreed to pay $106 million in stock to buy Los Angeles-based PBB Bancorp, the parent of Premier Business Bank. The target had nearly $587 million in assets and $478 million in loans at the close of the third quarter. It had $458 million in deposits, and its cost of deposits averaged 0.57%, according to a deal presentation.
The seller, which has sizable commercial real estate, one- to four-family and commercial-and-industrial loan books, among others, has six branches and a Small Business Administration loan center in Southern California.
"Premier Business Bank has built a reputation as a strong banking partner for business owners and real estate investors, which makes it a great fit," First Foundation Vice Chairman and CEO Scott Kavanaugh said in a release announcing the deal Dec. 19. "Our combined firm will be well-positioned for growth in Southern California."
Based on third-quarter data, the combination of PBB with First Foundation would have created a company with about $4.7 billion in total assets. The deal is slated to close in the second quarter of 2018.
The buyer projected savings of 40% of the seller's noninterest expense base. The savings would help drive earnings per share accretion of 10% next year, excluding merger costs, First Foundation said in the presentation.
The buyer estimated it would take 3.8 years to earn back 3.6% dilution to tangible book value per share.
The seller has steadily increased net income over the past three years, and it finished the third quarter of this year with a net interest margin that topped 4%. Its credit costs are low.
"They are making good money," First Foundation Inc. CFO John Michel said in an interview. "They are consistent and are in markets we are very comfortable with. And we think we can effectively leverage their core deposit base over time."
It would mark the third whole-bank deal for First Foundation since 2015.
Observers said the PBB deal also represents a wager on the vitality of the Southern California economy, including its largest market, Los Angeles.
"Southern California markets are very good," D.A. Davidson & Co. analyst Gary Tenner, who covers the buyer, said in an interview. "So it's certainly a good time to do [an acquisition] and grow the franchise there."
Sung Won Sohn, a former bank executive and an economist at California State University, Channel Islands, said the region's economic outlook is bright for early 2018, and banks that are situated well for both loan growth and rising interest rates should fare well. He said Greater Los Angeles and neighboring markets are consistently adding jobs on strength in real estate, technology and tourism.
"Things are really humming along here," Sohn said in an interview.
Sohn said most banks in the region have their balance sheets positioned to capitalize on rising interest rates. Federal Reserve policymakers boosted rates three times in 2017 and signaled they could follow a similar path in 2018. A banking company with low funding costs such as PBB should help First Foundation keep its deposit costs in check while it reprices upward its floating-rate commercial loans, benefiting the buyer's margin and profitability.
Sohn said his only significant concern about the Southern California economy is the potential negative impact of pending federal tax reform now working its way through Congress. While banks and other businesses would see a bottom-line boost from lower corporate tax rates, proposed caps on mortgage interest deductions – at $750,000 – and state income tax deductions could hurt some Californians, Sohn said.
A limit on mortgage deductions could cut into home sales, potentially crimping a real estate sector that is vital for Southern California, he said. And a cap on state income deductions could result in many Californians paying more in total taxes, a development that could hinder consumer spending.
"So things are really going well here right now," Sohn said. "The concern is that, a year from now, the bloom is off the rose."