Pricey San Francisco bank deal could motivate others to sell

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A recently announced bank merger in San Francisco could cause the area's remaining community banks to consider their futures.

Heritage Commerce in San Jose, Calif., agreed on Friday to buy Presidio Bank in San Francisco for $200 million in stock.

Heritage regarded the $906 million-asset Presidio an attractive, like-minded bank, Walter Kaczmarek, the $3.1 billion-asset company's president and CEO, said during a conference call to discuss the deal.

"When you look at the scarcity of community business banks here in the Bay Area, it makes this transaction even more compelling,” Kaczmarek said. “We were highly motivated when we heard there was an opportunity to do something."

The deal, which priced Presidio at 206% of its tangible book value, will likely trigger more deals as more banks look to buy smaller rivals in the area, said Timothy Coffey, an analyst at FIG Partners.

While it is unclear which banks will emerge as buyers or sellers, Coffey said he is watching banks like TriCo Bancshares in Chico, Calif., which bought FNB Bancorp in San Francisco in 2017, and the $2.5 billion-asset Bank of Marin Bancorp in Novato, Calif. Avidbank Holdings in San Jose, Calif., is another bank that Coffey listed.

California Bancorp, the parent of the $1 billion-asset California Bank of Commerce in Lafayette, Calif., is another bank to watch.

Rising prices for bank deals could spur more announcements, said Steven Shelton, California Bancorp's president and CEO, though he added that the banks must also have the right alignment to agree to a merger.

“Sometimes ... you get a price that works,” said Shelton, whose bank bought Pan Pacific Bank in 2015. “It’s not about getting the highest price, but about partnering with the right bank.”

Though some industry observers believe Bank of Marin would be a good fit for California Bancorp, Shelton said he is focused on building a pure business bank.

A Bank of Marin spokesperson declined to discuss the speculation.

Presidio's premium is encouraging to other potential sellers, said Robert Bolton, president of Iron Bay Capital. Lower-cost deposits will garner demand and will command a higher price, he said.

Heritage-Presidio “was a good all-around deal and appears to be well received,” Bolton said.

Bolton said there will be more deals across California with higher multiples occurring in the most vibrant markets.

San Francisco is a strong market due to low unemployment, significant job creation and rising investment in new businesses, Coffey said. At the same time, area banks typically are strong deposit franchises.

The area's 2% unemployment rate in April was better than California's 3.9% rate and the 3.3% national rate, according to the Labor Market Information Division of the California Employment Development Department.

“Valuations are high, but the economy you’re buying into, and the bank you’re buying, offer better overall quality than other markets,” Coffey said.

Kaczmarek said as much during his company's conference call.

Heritage and Presidio "are both lucky to be in a very vibrant community in San Francisco," Kaczmarek said. The market "is not only very vibrant today, but is forecast to have strong demographic growth, both with business and household formation, for many years.”

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