Ford Financial is back in California, and other banks in the region should take note.
The private-equity group, co-managed by Gerald J. Ford and Carl Webb, recently completed a tender offer to buy the majority of shares of the $3.4 billion-asset Mechanics Bank in Walnut Creek, Calif. The investment the first from the Dallas group's $755 million Ford Financial Fund II is intended to give the veteran team a beachhead to enter the West Coast's increasingly competitive bank M&A market.
It is also the group's third effort to roll up banks in California. While the group's last West Coast trip resulted in a quick sale to a foreign bank, Webb said in an interview last week that he expects to spend several years building a franchise now that it has the right bank in tow.
"The first bank is always the hardest," Webb said. "In consolidations and roll-ups, you need to find the right first bank so you can get the cost savings out of the next one you acquire, and this is going to be an excellent platform."
Ford Financial's move should get the attention of other active consolidators in the region. In the last five years, Umpqua Holdings, Banc of California, PacWest Bancorp and Opus Bank have been among the busiest West Coast buyers.
"There are only so many targets there," Rory McKinney, managing director of D.A. Davidson's financial institutions group and co-head of investment banking, said in an interview after the firm's conference in Denver earlier this month. "There's no secret Ford is going to do deals, and they have got a great platform."
Mechanics Bank, meanwhile, is regarded as an institution with a strong retail franchise and a very low cost of deposits at just 6 basis points, Webb said.
The bank's 55% loan-to-deposit ratio is low, relative to similar sized institutions, and Webb said that increasing that figure is among his team's top priorities. The group is looking for acquisition candidates that can generate more assets, though it is also seeking for ways to improve the ratio internally, given the uncertainty of M&A.
"You can't dictate when acquisitions are going to happen," Webb said. "We'll be very patient, disciplined and deliberate. This is a fine bank to run on its own until then. While we have several acquisitions that we're keenly interested in, the motivation has to be there on both sides."
Webb said it is tough to predict how large the bank will be in three or so years. The group, which grew Golden State Bancorp from $12 billion to $60 billion in assets from 1988 to 2002 when it was sold to Citigroup, isn't fretting about the managing itself around the $10 billion-asset threshold, where more regulation kicks in.
"Three years from now, if we are $7 billion to $10 billion, that would be just fine with me," Webb said. "Size is not something we shy away from, either."
For now, the group is keen on buying banks near the East Bay, or in contiguous markets elsewhere in northern California.
"Acquiring market share is more effective and efficient than what you can do organically," Webb said. "We're acquisitive by nature."
Ford Financial revisited California in 2010, infusing $500 million into Pacific Capital Bancorp as part of a plan to roll-up banks using the Santa Barbara company as the foundation. That changed when MUFG Union Bank, a unit of Mitsubishi UFJ Financial Group, made an unsolicited offer. MUFG Union paid $1.5 billion in 2012 to buy the company, with Ford Financial receiving $1.2 billion of the proceeds.
"The exit of the last one was an outlier," Webb said. "We thought we'd be in that investment five to 10 years. We were in it 27 months."
Ford Financial's team spent the next three years looking for the right target. Webb said they had serious discussion with about 10 companies. Some of those could still be potential acquisitions, but three of them have already been acquired.
While the hunt for the next platform was nationwide, Webb said it should not be surprising that the team is back in California.
"There have been 23 transactions valued at over $300 million in the last couple of years," Webb said. "Six of them have been in California. It is a consolidating bank state, and we'll look to play our role in that."