Umpqua's New Deal in California Makes Up for the One that Got Away

Ray Davis has proven there are plenty of fish in the bank M&A sea.

The California deal that Umpqua Holdings (UMPQ) announced Thursday is just as good as the one it lost three months ago, the chief executive of the Portland, Ore., company says.

Umpqua's $24.9 million agreement for the six-branch Circle Bank near San Francisco justifies walking away in May from the three-branch American Perspective Bank in central California, Davis says. PacWest Bancorp (PACW) broke up Umpqua's $45 million deal by offering to pay $58 million.

Getting into a bidding war in a buyer's market did not make sense, Davis says.

"We love that market. We still love that market," Davis says of San Luis Obispo, where American Perspective was located. "That deal went away. This one popped up. And this one is in the sweet spot of what we've been looking for."

So which deal is better?

"Interesting question," Davis says.

They are both relatively small, all-cash offers for private institutions that signal to Wall Street that Umpqua — having last bought a bank in 2007 — is a buy-side player, he says.

"We know how to do acquisitions," Davis says, noting that the bank has integrated 23 banks in 20 years. "We do have price discipline."

Umpqua prefers the demographics of the San Francisco area to San Luis Obispo further south, he says. It is bigger, and Umpqua already has branches there. Acquiring Circle, based in Novato, would double Umpqua's branch count to ten around San Francisco and Oakland. The $11.5 billion-asset Umpqua has 194 branches; none are in San Luis Obispo.

"We have said publicly, this is the market where we really aim to grow into," Davis says. "The San Francisco Bay market is a big market — it is massive."

Other deals are possible. Circle, with $322 million of assets, is "an important first step in our planned expansion in the region," Davis said in the press release announcing the deal.

Umpqua offered a price equal to tangible book for Circle, as it did for American Perspective. Each offer had a cost-savings estimate of more than 30%, and Umpqua forecast that each would be immediately accretive to profits and minimally dilutive to tangible book.

American Perspective had pristine credit quality while Circle's loan quality is very good.

Both banks had a similarly heavy concentration in commercial real estate. American Perspective had a lower cost of funds, but Circle has better yields on its earning assets and a higher net interest margin.

The Circle deal has a few more moving parts. Umpqua's offer includes $20.4 million for Circle's outstanding common shares and $3.5 million to redeem outstanding preferred shares.

Both situations show that good community banks with difficult growth prospects are becoming increasingly willing to sell, Davis says. Does he see any rivals entering the fray for Circle?

"You can never rule that out. But I'd be shocked if that happened here," Davis says. "But you never know."