PacWest Bancorp, the fast-growing Southern California regional lender, would reach $25 billion in assets with its fifth whole-bank acquisition since 2012, lifting it to a size nearly five-fold of where it stood just five years ago.
But analysts said the latest M&A play, announced April 6, provides more than heft for PacWest. Should its $705 million deal to buy Los Angeles-based CU Bancorp close in the fourth quarter as planned, Beverly Hills, Calif.-based PacWest would deepen its commercial lending presence in greater L.A. The city is the most heavily populated area in the West and one analysts say is ripe with growing small and mid-sized businesses that drive loan demand. CU has generated strong organic loan growth over the past several years.
"It's pretty clear this is a really high-quality commercial bank, and it is right in PacWest's backyard," FBR & Co. analyst Bob Ramsey, who covers the buyer, said in an interview.
CU, which has nearly $3 billion in assets, would provide PacWest with $2.1 billion in loans — the vast majority to businesses. The target's loan book consists of about 31% non-owner occupied commercial real estate, 25% commercial-and-industrial, and 22% owner-occupied CRE, according to a deal presentation.
PacWest said CU's loan book complements its own focus on business lending and that the seller's balance sheet also is similarly asset-sensitive, positioning the combined company to benefit from rising interest rates. Federal Reserve policymakers boosted their key benchmark rate twice in recent months and have signaled that more hikes are possible this year. Historically, lenders with asset sensitivity have benefited most from higher rates.
CU also boasts "pristine" credit quality, as Hovde Group analyst Brian Zabora noted in a report. The seller's nonperforming assets as a percentage of total assets was just 0.04% at the end of 2016, according to the presentation.
PacWest also stands to pick up an attractive deposit base of $2.6 billion. About 54% of CU's deposits are non-interest bearing and its overall cost of deposits was just 10 basis points at the close of 2016.
"They get a really good deposit franchise and without exposure to more credit risk," FIG Partners analyst Timothy Coffey, who covers CU, said in an interview. He added that PacWest, with more loan products, could put CU's deposit base to work more aggressively, benefiting the seller's customers and driving growth that should help shareholders of the combined company.
Coffey pointed out one wrinkle with CU — that it is operating under a regulatory consent order for Bank Secrecy Act/anti-money laundering issues. But, he said, PacWest "must have come to the conclusion that the order will be lifted this year."
PacWest President and CEO Matthew Wagner declined a request to discuss the deal, saying the bank does not do media interviews. In a press release announcing the transaction, he said PacWest has "long admired the Southern California franchise the CU Bancorp team has built over the years."
To be sure, Wagner and company had to pay up some to get the coveted CU operation. In its presentation, PacWest valued the acquisition at about 2.8x tangible book value. The industry average deal value last year was below 2x tangible book, according to S&P Global Market Intelligence data.
But analysts noted that a surge in bank stocks following the November presidential elections lifted the market values of both buyers and sellers in the banking sector, and that in turn has pushed up deal values in recent months.
The most recent deal of similar size in the West is Columbia Banking System Inc.'s planned acquisition of Pacific Continental Corp. in Oregon, and that transaction was valued at more than 3x tangible book when it was announced in January, Zabora noted. Because the pricing on PacWest's bid for CU is lower than what Columbia paid, investors could look past the cost, he said.
Shares of PacWest rose nearly 2% in morning trading April 6.
Zabora also said that, following several years of consolidation on the West Coast, CU carried "scarcity value" as one of a small number of large community banks headquartered in Southern California.
PacWest also noted that it expects the deal to prove 6% accretive to 2018 earnings per share, thanks in part to significant cost savings of about 50% of the target's expense base. Eight of CU's nine branches in Southern California are within 3.1 miles of an existing PacWest branch. Following a conversation with PacWest management, Ramsey said he thinks the buyer plans to get much of the costs savings by consolidating overlapping branches.
"You could say it is a full price," Ramsey said. "But I think this is truly a situation where you get what you pay for."
Jack Chen contributed to this report.