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First Choice Bancorp bulks up in SoCal with acquisition in Los Angeles

Cerritos, Calif.-based First Choice Bancorp's chief executive said the company will get a toehold in key areas of Los Angeles, including downtown, and will expand across San Diego County with its planned acquisition of Pacific Commerce Bancorp.

The all-stock $110.4 million deal, announced Feb. 26 and slated to close early in the third quarter, also would expand the buyer's foundation into a range of ethnic-focused customer bases, including the Chinese-American and Indian-American markets in Los Angeles that help make up the core of Pacific Commerce's commercial clientele.

The expansion comes at a time when Southern California's economy is healthy and strengthening, and when businesses are looking to take advantage of savings from recent federal tax cuts to invest in their own growth, First Choice President and CEO Robert Franko said in an interview. Banks tend to see greater loan demand when economies are expanding, as business clients often work with their lenders to finance investments.

"Southern California is doing very well," Franko said. "Right now, [economic strength in the region] seems to be everywhere. People are very optimistic about the future of their businesses."

Tax cuts passed late in 2017 have further bolstered business-owner outlooks for this year, he added. "Loan demand has definitely picked up" late in the first quarter, after commercial clients affirmed savings from the lower federal levies. "There is no question in my mind we are now seeing that."

That makes the Pacific Commerce acquisition of particular appeal now, Franko said, because it gives the buyer branches in key commercial areas of Los Angeles and San Diego, and it provides First Choice a bounty of low-cost deposits to fund profitable future loan growth.

First Choice will get two locations in downtown Los Angeles, as well as one each in Pasadena and West Los Angeles — all vibrant areas that help the buyer build out its L.A. footprint and expand its commercial lending operations. First Choice, which already is in the northern end of the San Diego area, also will get locations in central and southern areas of Greater San Diego with the Pacific Commerce purchase.

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Los Angeles-based Pacific Commerce had $536.1 million in total assets, $425.1 million in gross loans and $464.4 million in total deposits at the close of 2017. Nearly 50% of its deposits were non-interest bearing demand accounts, and its total cost of deposits was just 26 basis points. The deal will help First Choice lower its cost of deposits from 75 basis points to 57 basis points after closing.

With the acquisition, First Choice's total assets will jump from about $900 million at the end of 2017 to nearly $1.5 billion. Franko noted that, at the $1 billion level, community banks face more regulatory scrutiny. By surging over that threshold, First Choice will create a larger asset base over which to spread out compliance costs, and it will have more revenue opportunities to offset new expenses.

"We wanted to cross the line in a really meaningful way," Franko said.

First Choice projected that the acquisition would prove 8.1% accretive to 2018 earnings per share and 14.8% accretive to 2019 EPS. It estimated cost savings of 35% of the target's non-interest expenses; the buyer expects to realize 50% of those savings this year and 100% in 2019.

First Choice estimated that it would earn back tangible book value dilution in 3.3 years.

As it eyes revenue growth, Franko said First Choice is on the lookout for threats to credit quality. But for now, he said, there are no big warning signs of trouble, and with the Southern California economy on solid footing, he expects the bank can grow loans without any excessive risk-taking.

"It's a very robust place to be right now," Franko said.

Pacific Commerce CEO Frank Mercardante echoed Franko's confidence in Southern California. He said that by merging, the two banks could capitalize on their combined resources to provide more services to more customers. "It's going to provide a lot more opportunity for growth," he said during a conference call to discuss the deal.

Franko also noted that, following the deal closing, First Choice could have the size and appeal needed for its shares to trade on a larger stock exchange, one that could afford more trading activity than it currently sees on the OTCQX and one that could boost investor interest.

"We think that's in our future," Franko said.