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Acquisitive Pacific Premier inks biggest bank deal to date

Pacific Premier Bancorp Inc., an acquisitive commercial bank in California, struck its fifth open-bank deal in as many years in an all-stock move that would provide it entrance to the Golden State's Central Coast and boost its asset size by roughly 50%.

The $405.6 million planned acquisition of Paso Robles, Calif.-based Heritage Oaks Bancorp, slated to close in the second quarter of 2017, would push Irvine, Calif.-based Pacific Premier to about $6 billion in assets. The early-2016 buyout of Security California Bancorp for nearly $120 million previously marked the largest acquisition for Pacific Premier.

Pacific Premier Chairman, President and CEO Steven Gardner, speaking with analysts about the deal Dec. 13, said the Heritage Oaks acquisition not only would add heft that many community banks are hunting for to gain efficiencies and offset high regulatory costs, but would also give the buyer a prominent new business line and more low-cost deposits that it can use to fund profitable lending, as well as access to a "very attractive" region that boasts a strong economy and relatively high household incomes.

He noted that the acquisition is expected to prove immediately accretive to tangible book value per share and 5.2% accretive to 2018 earnings, thanks in part to savings of about 26.5% of Heritage Oaks' noninterest expense. The savings are expected to be 60% phased-in during 2017 and fully phased-in the following year.

But Pacific Premier did pay up to cinch the deal, a fact that gave investors pause, Hovde Group bank stock trader Matthew Shields said in an interview. Shares of Pacific Premier dipped in morning trading Dec. 13 after the acquisition was announced.

S&P Global Market Intelligence's SNL Financial pegged the deal value at 214.1% of tangible book value on a per-share basis. SNL valuations for bank and thrift targets in the West region between Dec. 13, 2015, and the same date this year averaged 147.69% of tangible book.

"You would have to say it is a good price for" Heritage Oaks, Shields said. Shares of the target rose more than 4% in morning trading.

Shields, however, said larger deals tend to attract higher prices. He also noted that bank stocks have surged since the November presidential election, with both Pacific Premier and Heritage Oaks on board for the ride. The target's stock has climbed more than 30% in that time, so it should not surprise that it attracted a strong price relative to the average of the past 12 months.

FIG Partners analyst Timothy Coffey added that, in addition to the pricing, some investors were also likely concerned that the sheer size of the deal could present some integration challenges.

Those concerns noted, both Shields and Coffey said the acquisition of Heritage Oaks looks strategically appealing. It pushes the buyer into the Central Coast, an area ripe with small and mid-sized businesses that are actively borrowing to invest in growth amid a strong regional economy. It is also an area of California that boasts a prominent agriculture sector, and Heritage Oaks will give Pacific Premier a new and proven line of business in agriculture lending, helping it to diversify both geographically and operationally.

"I think it makes a lot of sense" for Pacific Premier, Coffey said.

Gardner said he is "very confident" that Pacific Premier has the resources in place to handle the integration of Heritage Oaks. He said the buyer already has a team working on the integration and that he foresees no problems with winning regulatory approval and in bringing together the two banks' staffs and systems.

"There's nothing here that gives me pause," Gardner said. "All of the pieces are already lined up."

The executive said the transaction, which will create a bank that stretches from the central part of California all the way to San Diego in the southern reaches of the state, will give Pacific Premier an infusion of low-cost deposits in a coveted market. More than a third of Heritage Oaks' deposits are non-interest bearing, he said, and its overall cost of deposits was just 0.22% at the close of the third quarter.

The target, which is the largest bank based in the Central Coast region, also will give Pacific Premier robust market share in a vibrant area of California, Gardner said. Pacific Premier holds the No. 2 spot in deposit market share in San Luis Obispo County and the No. 7. ranking in Santa Barbara County.

Average household income in Heritage Oaks' footprint is more than 20% greater than the national average, Pacific Premier said in its deal presentation, and the jobless rates in San Luis Obispo County are 4.1% and 4.6%, respectively. Both rates are below the California average.

"The economics of this transaction are compelling," Gardner said. He added that, following the closing of this deal, Pacific Premier will continue to look for acquisition opportunities, both large and small.