Banks that can't make more loans often buy ones that can. Pacific Premier Bancorp (PPBI) is not that kind of buyer.
When the $1.1 billion-asset company in Costa Mesa, Calif., agreed this week to acquire First Associations Bank in Dallas, it sought to cure a problem that most banks would envy — a need for more deposits as it tries to sustain strong loan growth.
"FAB provides us with a large amount of liquidity," Steven R. Gardner, the president and chief executive of Pacific Premier, said during a conference call Tuesday. "We intended to redeploy [First Associations' deposits] into higher performing loans."
Pacific Premier last week announced it grew loans 8% in the third quarter, largely through its warehouse lending division, and that the growth had pushed its loan-to-deposit ratio to 96.5%. The average loan-to-deposit ratio for all banks at the end of the second quarter was 71.07%, according to data from the Federal Deposit Insurance Corp.
First Associations — which has only $19 million of loans but $306 million of deposits from homeowners associations across the country — was the right match for Pacific Premier.
The deal would lower Pacific Premier's loan-to-deposit ratio to 73.5% on a pro forma basis, bringing it in line with its peers and giving it room to make additional loans.
"Loans won't necessarily continue to grow at 32% annualized clip," Gardner said, "but we think there is plenty of opportunity to grow the loan book."
Pacific Premier has agreed to pay $53.7 million for First Associations. That price includes $3.5 million in cash for option and warrant holders, and $50.2 million for shareholders split between $37.6 million in cash and 1.3 million in shares. The deal, priced at 117% of First Associations' tangible book value, is expected to close later this quarter or in early 2013.
Pacific Premier has acquired two failed banks in recent years, but First Associations would be its first open-bank deal since the downturn.
The catalyst of the deal announced Monday again is something wannabe buyers would covet — the increasing strength of Pacific Premier's stock.
Pacific Premier has long been viewed as a potential acquirer, but analysts say it was likely waiting for its stock valuation to improve. Until last month, the company had traded at a discount to its book value of $9.66 per share.
"Steve has been talking about doing acquisitions for some time, but the stock has been trading at a discount to tangible book value," said Andrew Liesch, an analyst with Sandler O'Neill. "It is certainly easier to do an acquisition when you are trading above it."
The boosted stock price — Pacific Premier's shares closed at $10.53 on Monday and were trading at $11.06 at midafternoon Tuesday — was driven by its solid performance, Liesch said.
Its loan growth has hurt margins. Pacific Premier's net interest margin dropped three basis points in the third quarter to 4.61%, as loan yields fell 43 basis points to 6.14%. The margin compression is expected to continue, Liesch said in a research note about the company's results last week.
The deal for First Associations largely would help limit that problem for now.
"No doubt, a primary motivation to complete this acquisition is the solid base of low-cost deposits FAB provides," Liesch said in a separate note about the deal.
First Associations' cost of deposits is 0.23%, compared with Pacific Premier's 0.64%. The deal would lower Pacific Premier's cost to 0.53% on a pro forma basis. Additionally, Pacific Premier has $113.5 million of certificates of deposit that pay an average rate of 1.05% and are maturing this quarter.
"It immediately improves our deposit mix," Gardner said in the call. "Our intent is to run off $80 million [of the maturing CDs] and replace them with the low-cost core transaction accounts that FAB has."
A call to First Associations was not returned, but Gardner said there is also room for additional growth in the homeowners-association market. With roughly 3,100 HOA clients in 17 states, First Associations has a 2% to 5% market share. The 2007 de novo has been limited in its ability to grow.
"FAB has enjoyed very good growth, but think about any bank that started in 2007 and all the traditional sorts of limitations placed on new banks," Gardner said. "Given our size, we think we can be very nimble and will be able to leverage and expand."