The leaders of two local banks are aiming to shake up commercial lending in Southern California by combining into a sizable regional lender that promises to focus only on the needs of small and mid-size businesses.
The merger of 1st Enterprise Bank into California United Bank would create an institution with $2.2 billion in assets and $1.9 billion in deposits. Most of its loans would be for business operations or expansion, or mortgages on buildings occupied by the businesses.
The banks said the combined institution would be the 17th largest among Southern California's more than 100 commercial banks. It would have 11 branches in Los Angeles, Orange, Ventura and San Bernardino counties.
"This is a big deal," said Gary S. Findley, an Anaheim banking consultant. The merger of California United and 1st Enterprise will create "a top business bank."
Smaller local banks have been squeezed in recent years by hot competition, tightening regulations and low interest rates that have cut into lending profits — a combination of factors that is driving consolidation.
And those mergers and acquisitions create bigger institutions that put more pressure on larger, well-established regional banks, such as Community Bank in Pasadena with $3.4 billion in assets, Farmers & Merchants Bank in Long Beach with $5.4 billion in assets and Citizens Business Bank in Ontario with $6.9 billion in assets.
Competition from a well-managed $2-billion business bank would be "an earth-shattering event in Southern California banking," said David R. Misch, Community Bank's chief executive. "It really raises the bar."
California United, based in Encino, and 1st Enterprise, based in downtown Los Angeles, are almost identical in their business strategies, though California United is nearly twice as large after acquiring a Thousand Oaks bank and another in Anaheim.
Formed during last decade's boom years by veteran business bankers, the banks rode out the recession as many rivals failed, emerging unencumbered by bad loans and awash in deposits from commercial clients, held in no-interest accounts.
The idea to combine arose when California United's chief executive, David Rainer, and his counterpart at 1st Enterprise, John C. Black, struck up a conversation at a banking conference in January. It didn't take long to realize that both would benefit from branches spread across the region and their larger combined size, the bankers said.
"It's definitely a case in which one and one equals three," said Rainier, who will become chairman and chief executive of the combined bank. K. Brian Horton, president of 1st Enterprise, will stay on in that role at the merged institution.
"I was drawn by the ability to attract new customers — larger customers — than we have had in the past," said Black, who will remain as an advisor for a year. With only $750 million in assets, 1st Enterprise's current size, "there's only so much you can do."
Outsiders said the talk wasn't just rhetoric: Zachs analysts upgraded California United's parent company, CU Bancorp, recommending the stock as a "strong buy," and D.A. Davidson upped its rating of the stock to "buy," sending the bank's shares 4% higher since the deal was announced Tuesday.
The merger, expected to close late this year, calls for 1st Enterprise shareholders to receive CU Bancorp stock valued at $103.4 million as of Monday's closing price. Current California United shareholders would wind up owning 68% of the combined institution and 1st Enterprise shareholders 32%.
The merged bank will operate as California United but will be based in 1st Enterprise's 7th Street offices downtown. Its board will have eight representatives from California United and four from 1st Enterprise.
Customers at 1st Enterprise and California United are mainly manufacturing, distribution and service companies — enterprises central to the Southland economy and courted assiduously by banks throughout the region.
Unlike many of those banks, however, 1st Enterprise and California United have concentrated primarily on those businesses rather than building big sidelines in such areas as home lending, mortgages for apartment owners or mortgages for commercial landlords who don't run their business out of the properties.
Regulators are expected to approve the deal and to permit the merged bank to make larger loans because of its greater size.
California United hopes that authority for bigger loans and a stock that trades on Nasdaq will give it the heft to hire accomplished business bankers, luring them with the prospect of bigger deals and compensation that would include shares that can be easily sold.
"It's hard to make a buck these days. How do you get someone talented to go to work for a $200 million or $250 million [in assets] bank?" said Misch at Pasadena's Community Bank.
Jeff Rigsby, a San Juan Capistrano banking consultant, said the deal might make it more expensive for larger banks to take over smaller ones.