By Marlize van Romburgh Friday, October 25th, 2013

With its $56.4 million purchase of another Central Coast bank, Heritage Oaks Bancorp lays the foundation to build the region’s next big community banking franchise and emerges as the dominant player in the market.

Paso Robles-based Heritage Oaks said Oct. 21 that it is buying Mission Community Bank, based in San Luis Obispo, in a cash-and-stock deal expected to close in the first quarter of 2014. The combined bank would have $1.5 billion in assets, making it the largest bank based in the Tri-Counties.

“There’s kind of been a vacuum in the market for that dominant community bank and this, at $1.5 billion, will help to fill that void,” Mission Community CEO Tom Dobyns told the Business Times.

Under the terms of the deal, Mission Community shareholders will get $8 million in cash and about 7.5 million shares of Heritage Oaks stock. The deal, which is still subject to regulatory approval but has the consent of the largest shareholders at Mission Community, is valued based on Heritage Oaks’ closing share price of $6.42 on Oct. 18.

The combined bank will have about $1.3 billion in deposits and $1 billion in loans. Heritage Oaks said it expects the deal to be immediately accretive to earnings.

“The main advantage we will have is a larger legal lending limit, which will give us an opportunity to make larger loans to our customers,” said Heritage Oaks CEO and President Simone Lagomarsino. “There are also some economies of scale we can achieve with combining operations.”

Heritage Oaks is currently tied with Santa Barbara-based Montecito Bank & Trust as the largest lender based in the Tri-Counties with about $1.1 billion in total assets.
Bank executives could not say how many employees would be affected by the merger, but Heritage Oaks said it expects to achieve about $9 million in cost savings by closing overlapping branches.

It did not specify which branches would be shuttered, but all five of Mission’s branches — in San Luis Obispo, Atascadero, Paso Robles, Arroyo Grande and Santa Maria — are less than two miles from a Heritage branch.

Lagomarsino said the banks currently have 350 employees between them.

Ownership structure

After the deal closes, Heritage Oaks’ existing shareholders are expected to own about 77 percent of the combined bank, and Mission Community shareholders will own about 23 percent. The combined bank will have 13 directors on its board, including 11 from Heritage Oaks and two representatives selected by Mission Community.

San Luis Obispo attorney Michael J. Morris, currently chairman of Heritage Oaks, will be the chairman of the combined company and combined bank. Lagomarsino will be president and CEO.
Senior executives will predominately be from Heritage Oaks, while managers and associates will be from both banks, the firms said. The surviving company will remain headquartered in San Luis Obispo County.

Heritage Oaks recently purchased the former Union Bank building in downtown San Luis Obispo for an estimated $6.5 million, but Lagomarsino said that location would not be the new headquarters for the bank.

Heritage Oaks said several institutional shareholders have already voted in favor of the deal, including Mission Community investors Carpenter Community BancFunds and Palladium Equity Partners and Heritage investors Patriot Financial Partners and Castle Creek Capital Partners. All current directors and senior executive officers of both organizations have also signed agreements to vote in favor of the merger.

After the deal closes, the largest institutional shareholder will be Carpenter Community BancFunds, with 18.2 percent, followed by Patriot Financial Partners with 11.3 percent and Castle Creek Capital Partners with 7.6 percent.

More consolidation coming

The region’s banking market has seen massive consolidation since 2007, when Dutch banking giant Rabobank purchased Arroyo Grande-based regional powerhouse Mid-State Bank & Trust for $870 million.

The exit of Mid-State put Santa Barbara-based Pacific Capital Bancorp, the $8 billion parent of Santa Barbara Bank & Trust, in the spotlight as by far the largest community bank in the region. But on the brink of regulatory failure, the lender was recapitalized in 2010 in a $500 million deal that also transferred majority ownership to the Dallas-based Ford Financial Fund.

The Texas investors in turn sold the newly profitable franchise to San Francisco-based Union Bank for a historic $1.5 billion in late 2012, marking the exit of the 52-year-old Santa Barbara Bank & Trust name from the market.

With the onset of the recession, a number of community banks were scooped up by larger players, often in regulator-assisted deals. PacWest Bancorp, an aggressive acquirer out of Los Angeles, purchased Westlake Village-based First California Financial Group earlier this year for $243 million, after buying San Luis Obispo-based American Perspective Bank last year for $58 million.

Privately-owned Montecito Bank & Trust has been strengthening its executive team by acquiring talent from rivals but has remained cautious about acquisitions.

With a large investment from the Carpenter bank fund and former Mid-State Bank executive Jim Lokey on its board, Mission Community itself has been an acquirer of other institutions, buying troubled Santa Lucia Bancorp of San Luis Obispo in 2011 for a deal valued at about $3.7 million including repayment of $3 million in bailout funds. The Santa Lucia deal doubled Mission’s size to about $450 million in assets and made it one of the fastest growing banks in the region.

Dobyns said Mission has over the years been in talks with other banks about potential deals, but didn’t have any compelling offers on the table until now.  “Anytime you have a fiduciary responsibility to entertain an offer — whether you’re asking another bank to join you or whether you’re asked to join another bank — you have to take a look,” said Dobyns, who will leave the company after the deal closes. “The price [Heritage Oaks] offered was compelling.”

All in all, the region’s community banking lineup will have dwindled from 22 lenders in 2006 to 11 if the Heritage merger goes through.

Dobyns said the wave of mergers and acquisitions is likely to continue, although now banks are looking to combine in effort to be more competitive, rather than for survival.

“The banks that were going to fail have failed and those that have found a way to survive will survive,” he said. “Now they’re looking at the cost of doing business and compliance and it’s our thought that these days you have to be bigger to be competitive.”

Heritage was freed from a regulatory order last month after repaying its $25 million in TARP funds.

Lagomarsino said that with the Central Coast market locked down, the bank’s next move would be to look down the coast and target Santa Barbara and Ventura counties, where it already has a couple of branches and a new loan production office. “We will have a very good foothold in our existing market and Santa Barbara and Ventura County will be the next areas of expansion,” she said.