There could be another buying binge in store this year for banks.
With a healthy stock market, big banks may just keep spending as they did in 2006, according to executives and banking watchers.
“The historical perspective is tied to what their stock is, because most of the deals are either 100% in stock, or 60% stock and 40% in cash,” said Raymond Dellerba, chief executive of Pacific Mercantile Bank in Costa Mesa. “If the big banks’ stock holds up, it’s very good currency for more acquisitions.”
Orange County and the rest of Southern California is an attractive market for banks looking to grow.
“California is such a large economy. People pay attention to that,” said Vernon Aguirre, California regional executive at Puerto Rico’s Banco Popular, which has its California headquarters in Anaheim. “Big banks are willing to pay some real premiums to get significant market share.”
Another reason banks could continue the buying spree: to “fill voids in the marketplace,” according to Dellerba.
Banks may want a new type of loan or service, or have an existing business they want to build up, he said. Or a bank just may be missing branches in certain areas, Dellerba said.
Those reasons played out in several deals in the past year:
n In March, Wachovia Corp. picked up Irvine-based bank holding company Westcorp Inc. and its auto finance unit WFS Financial Inc. for $4 billion.
Wachovia also bought Oakland’s Golden West Financial Corp. for $25 billion in October.
n Washington Mutual Inc. paid nearly $1 billion for Irvine-based Commercial Capital Bancorp in October.
n And last month, Wells Fargo & Co. said it plans to spend about $645 million in stock to buy Sacramento-based Placer Sierra Bancshares, which runs Anaheim-based Bank of Orange County. The buy is expected to close in the quarter.
Banks are in a tough market with shrinking margins and more competition for deposits.
The Federal Reserve now is in a holding pattern for interest rates after steadily raising them in the past few years. Its benchmark rate now is 5.25%.
The past three years have seen short-term interest rates rise, while long-term rates have been more steady,putting a squeeze on banks’ net interest margins. That narrows what a bank earns on loans and what it pays out in interest to attract deposits.
So banks are feeling the need to generate business.
Banks that want to boost other sources of income, such as insurance and money management services, could be looking to get a jump-start through acquisitions.
Merrill Lynch & Co., one of the biggest financial services firms, made such a move with its plan to buy San Francisco-based wealth manager First Republic Bank for $1.8 billion. First Republic has branches in Newport Beach and Corona del Mar.
Closer to home, Wells Fargo opened up a private banking office in Corona del Mar last year to offer wealth management services to big clients.
“We really have saturated the market with small businesses,” said Kim Young, Orange County region president at Wells Fargo. “Now we are expanding into customized solutions for wealth management.”
In May, City National Corp., the Los Angeles-based parent of City National Bank, bought investment firm Independence Investment LLC of Boston for an undisclosed amount.
Banks also are looking to stay competitive by opening more branches. Building up branches is a priority for some banks, even those that offer Internet-based services.
“(More than) 50% of customers still want a branch nearby,” Pacific Mercantile’s Dellerba said.
Acquiring a branch network gives banks immediate access to customers and their deposits.
“It just speeds up the process if you can come in and buy somebody and pick up a branch network,you already have a customer base to tap into,” said Scott Connella, market president of Union Bank of California’s Southern California division.
Snatching up branches also helps cushion a bank’s balance sheet.
“The business we run is an expensive one,” said Thomas Rogers, executive vice president and region manager at City National Bank in Irvine.
With acquisitions “we are striving to spread over a larger client base the costs we incur in doing business and hopefully improve profit margins,” Rogers said.
The big question: Who is left to buy?
Small, independent business banks are likely targets. But bigger ones still may see some play.
Local banking analysts long have speculated whether Union Bank of California, City National and Downey Financial Corp. could be bought.
“It’s true that we are one of the few banks that haven’t sold,” Union Bank’s Connella said.
Union Bank, part of Japan’s Mitsubishi UFJ Financial Group Inc., isn’t going anywhere, according to Connella.
“Consistency is important to clients,” he said. “There’s a lot of turnover in banking, and if you are a customer, that’s not necessarily good.”
As for Newport Beach-based thrift Downey Financial,long the rumor of being the next target for a buyout,there’s been a key obstacle: cofounder and Chairman Maurice L. McAlister.
McAlister controls 20% of the company and has shown no interest in selling.
The thrift is likely to face succession issues a few years down the road, analysts say.
For some banks, consolidation isn’t always bad.
“You will have some of these guys start to throw in the towel,” said Steve Gardner, chief executive of Pacific Premier Bank in Costa Mesa. “If you are just a newer bank and you are going to have to take on levels of risk that don’t make sense to shareholders in the long term, they can do better by combining their operations with bigger institutions.”
In other cases, community business banks are often started with the intention of being bought within a few years.
“That’s a pattern we have seen in the Inland Empire and in Orange County,” City National’s Rogers said.
