Mechanics Bank will nearly triple its size with a transformative acquisition, and the bank plans to use the size to ramp up loans, particularly in indirect auto.

On March 15, Mechanics Bank announced an agreement to buy Rabobank NA for $2.1 billion, projecting the deal would grow the bank from $6 billion in assets to $17 billion. Mechanics could use the deal to get even larger, but Chairman Carl Webb said the bank will downsize slightly to reduce debt.

The banks agreed to exclude $4.8 billion of agriculture loans. These will be transferred to RABO AgriFinance Inc., which will send back $4.8 billion in cash for the loans. Mechanics will use some of the cash to pay off all wholesale borrowings and certain other debt, Webb said.

Webb also serves as co-managing partner for Ford Financial Fund, a private equity firm with a fund that owns 79% of Mechanics Bank. He said the Rabobank acquisition was a long time coming and that a deal was close two years ago but fell apart. Negotiations on this latest transaction began in late summer 2018 as part of a competitive bidding process. He said the deal will be accretive for Mechanics Bank on day one but that he was most focused on the deposit premium.

"That was what was so compelling to us to pay this price and to make this large, transformative acquisition: the low-cost deposit franchise that they have," Webb said in an interview. "We always look at the deposit side first and what is the value of that franchise as determined by deposit cost. Because at the end of the day, that's where the value in a bank is."

While there will be cost savings due to back-office consolidation, there will be a very small number of branch closings, he said. Most of Rabobank's branches are in California's central valley and central coast, markets where Mechanics Bank did not have a presence. With the new markets and greater size, Webb expects Mechanics Bank to offer more loans, particularly from its indirect auto loan subsidiary CRB Auto Inc. In recent years, Webb said Mechanics Bank has been constrained by internal risk concentration limits, forcing the sale of auto loans in the secondary market.

"If we can bring those loans on balance sheet — which we couldn't as a $6 billion bank and we can as a $17 billion bank — and still stay below risk concentration limits, then we get the benefit of that margin expansion," Webb said.

Some of Mechanics Bank's new markets are heavily reliant on the agricultural industry. That could complicate the bank's plan to retain deposits while nixing agricultural lending. Webb said Mechanics Bank will continue to offer cash management and other core banking services to commercial clients.

"To the degree that Rabobank's ag customers are now bifurcated with their loans staying at Rabobank and deposits at Mechanics, it probably opens up opportunity for banks in the central valley that have banked ag business for a long time to try and penetrate that customer base," said Gary Tenner, a banking analyst with D.A. Davidson.

Mechanics Bank President and CEO John DeCero said he was not concerned about deposit attrition. Ag lending does not make up a large portion of the bank's deposit base, and client retention will be a priority for management, he said.

"We do value deposits significantly, and that's the reason we merged with Rabobank. Those customers become ultra-important to us," DeCero said in an interview. "There may be some attrition that occurs, but we don't see that in discussions with the Rabobank branches and the commercial groups. They have pretty tight relationships."

On the asset side of the balance sheet, the bank will look to compete with regional and large banks for credits with small and medium-sized businesses, DeCero said.

With the added scale from the deal, Webb said there are no plans to hunt for additional transactions. As for his private equity firm, he said there are no plans for an exit.

"We have no timeline. What we're trying to do is just to build a great bank," Webb said. "If you can just acquire these quality franchises, consolidate them, optimize them and just run them, it's a great investment."

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