In July, California retail bank PacWest Bancorp announced that in a deal valued at about $2.3 billion it would be buying local commercial bank CapitalSource to create the eighth-largest commercial bank based in California. Matt Wagner, chief executive of PacWest, said at the announcement of the deal that buying a community bank would not have made sense. Most of the community banks you are looking at today youve got anywhere from a 40% to 70% loan-to-deposit ratio. Youve got a big-buying portfolio that I dont need. I am going to end up with a bunch of excess deposits. In some ways it is a perfect tie-up, says McGratty. Specialty finance companies do not have stable funding and typically rely on wholesale markets, so need access to deposits, while the bank is looking for the earnings boost that comes through increased lending. But for the largest top-10 financial institutions, analysts say that the regulators are unlikely to support a large acquisition of a loans originator and that small deals would not be of interest to the mega-cap banks. Gokhale says that present valuations are also going to lead to acquisitions. Valuations are now at levels where buyers are willing to use their shares as currency and potential sellers are more willing to sell, given higher takeover premiums. In the PacWest-CapitalSource deal, the target was bought at 1.5 times book value and 1.7 times tangible book value. Gokhale says: PacWests shares were trading at close to two times book value, so it could use its stock as a strong currency to pursue the acquisition. The takeover price for CapitalSource was also significantly above where CapitalSource shares were trading before the deal was announced. We are likely to see similar deals in which sellers fund acquisitions with a combination of cash and stock.
Bank investors, however, remain cautious, looking for deals where transaction risk is low and cost-saving opportunities are substantial. They dont want a bank in the Midwest buying a bank in Florida, for example. That didnt work so well in the last cycle, says McGratty.