California Banking Mergers on the Rise
Bankers, start your bidding: Sales of California banks are rising again after three years of decline.
Most sellers so far have been banks squeezed by rising technology costs, competition from credit unions and, until recently at least, falling interest rates. All are factors that can convince longtime shareholders it’s time to sell.
That’s good news to such aggressive acquirers as San Francisco’s Bank of the West, which last year bought United California Bank for $2.4 billion.
With financial backing from parent BNP Paribas, France’s largest bank, Bank of the West “continues to have a strong appetite for acquisitions,” said Vice Chairman Stephen Glenn, the bank’s senior officer in Los Angeles. Even after recent interest rate increases, it’s still relatively cheap to finance deals, he noted.
Though Bank of the West is focused on buying larger banks, most recent deals have been for community banks.
Just last week, California Independent Bancorp, owner of the nine-branch Feather River Bank north of Sacramento, agreed to be acquired by Humboldt Bancorp for $80 million in cash and stock. It was the 14th California bank deal announced this year, up from 12 for all of 2002, according to Irvine investment banker Edward Carpenter.
Over the objections of some shareholders, California Independent fended off a hostile $63-million takeover attempt last year, but this year’s sweeter offer was irresistible, Chief Executive John I. Jelavich said.
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Little-Bank Blues
Technology needed to comply with banking regulations costs about the same at California Independent, with $378 million in assets, as at a bank three times as large, Jelavich said. He also noted that lending profit has been down because of the sharp drop in interest rates in 2002 and the first half of 2003.
Besides community banks, regional institutions also are being courted aggressively by large players seeking to fill in missing markets or lines of business.
“We’re on seven or eight lists” at acquisition-minded banks, acknowledged D. Linn Wiley, chief executive of CVB Financial Corp., an Ontario banking company with $3.5 billion in assets.
CVB, whose chairman is 71-year-old Chino dairyman George A. Borba, owns 33-branch Citizens Business Bank, which has expanded from its Inland Empire base into Orange and Los Angeles counties and the Central Valley.
The bank has entertained suitors ranging from in-state rival UnionBanCal Corp. of San Francisco to Dutch agricultural lender Rabobank Group, which hopes to acquire a series of banks with farm-loan portfolios. Rabobank started the quest last year by purchasing El Centro’s VIB Corp., gaining 24 community bank branches from Calexico to Fresno.
So far, CVB stockholders including Borba -- his nearly 6 million shares are worth $120 million at Friday’s closing price of $20.10 -- have opted to keep growing the bank themselves. CVB’s latest acquisition, its 10th in 10 years, was announced in May: the $15.5-million purchase of Visalia-based Kaweah National Bank, which has four branches.
Other Southland banks in CVB’s size range, such as PFF Bancorp in Pomona, also crop up on lists of potential takeover targets. PFF executives couldn’t be reached for comment.
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Eyes on Zions
A larger topic of takeover speculation is San Diego-based California Bank & Trust, with 96 offices in 15 counties up and down California. Doyle Arnold, chief financial officer of Zions Bancorporation, the Utah-based owner of California Bank & Trust, declined to comment on the prospect that Zions might be acquired or that it might sell some of its operations.
Another active sector for mergers has been Asian American banks. These include institutions with $3 billion to $5 billion in assets, such as East West Bancorp Inc. in San Marino and San Francisco’s UCBH Holdings Inc. Experts believe such buyers as London’s HSBC Holdings, whose roots are in Hong Kong and Shanghai, or even San Francisco-based Wells Fargo & Co. eventually will buy one or more of these banks, which are currently very expensive.
Some potential buyers are newcomers pursuing narrow niches. One, wealth-management specialist Boston Private Financial Holdings Inc., is said to be on the prowl in California for institutions catering to the rich. What’s more, the deregulation of the financial services industry has put banks on the shopping list of some brokerage firms, insurers and even retailers.
Still, most potential buyers are mainstream players looking to expand existing California operations, including UnionBanCal and Beverly Hills-based City National Corp. Although some at times have been described as targets, they now are generally considered to be in a buying mode.
New York’s Citigroup Inc., which paid $5.4 billion last year for California Federal Bank parent Golden State Bancorp, remains interested in California acquisitions, executives said. But it’s more likely that Citigroup’s next big deal will be in another market, such as the Northeast or Florida, said Citi Chief Operating Officer Robert Willumstad.
Other large out-of-state banks with California holdings, including Minneapolis-based U.S. Bancorp and Detroit-based Comerica Inc., are considered potential buyers and sellers. If these so-called super-regional banks began merging, it could trigger another wave of consolidations similar to those in the 1990s that claimed most of California’s biggest banks and savings and loans.
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Shrinking Targets
This much seems certain: The number of takeover targets is shrinking. Today there are fewer than 300 California-based banks, down from more than 400 a decade ago, with most experts predicting a continued decline.
“There will be more mergers, particularly now that there is more confidence that the economy is going to be better,” predicted Wells Chairman Richard Kovacevich, who headed Minneapolis’ Norwest Corp. when it bought the old Wells Fargo in 1998. He has since made 66 acquisitions of financial companies across the West and Midwest, including 21 banks.
Kovacevich said he sees room for Wells to add 400 to 500 branches in California alone, but high prices made it tough during 2001 and 2002. “Now, prices are down,” he said. Three months ago, Wells agreed to buy Seattle-based Pacific Northwest Bancorp, with 58 offices and $3 billion in assets, for about $600 million in stock.
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Naysayer
One notable naysayer is consolidator John M. Eggemeyer III. He merged seven banks into Newport Beach-based Western Bancorp and sold it to U.S. Bancorp for $1 billion in 1999. He has since combined 11 banks into Rancho Santa Fe-based First Community Bancorp, which will have $2.3 billion in assets when his latest deal, for Glendale’s Verdugo Bank, is done.
Despite data showing that the average California bank sells for about 1.8 times its net worth -- down from 2.1 times net worth in 2001 -- Eggemeyer said he doesn’t see his targets cutting prices.
Meanwhile, bank watchers are looking for a resurgence of bigger deals that could kick the mergers into high gear. Potential seller Borba of CVB declined to be interviewed. But the bank’s CEO, Wiley, said the dairyman “still gets up every morning at 4:30 and heads for the corral.”
