One Bank's Secret Sauce for High-Yield Assets: Restaurant-Franchise Loans

Pacific Premier Bancorp (PPBI) in Irvine, Calif., is turning to fast food to fatten up its margin.

The $1.6 billion-asset company is set to acquire Infinity Franchise Holdings, a specialty finance company that lends to franchise owners of restaurants like Dunkin' Donuts, Burger King and Taco Bell. While a fast-food focus might clash with a healthy California lifestyle, the goal for Pacific Premier is clear: strengthen its net interest margin by adding higher-yielding loans.

"This allows us to deploy some of the excess liquidity we have into loans with yields in the mid-to-high 5s [percent] to low 6s," says Steven Gardner, the chief executive of Pacific Premier. "That beats the high 3s to low 4s you can get on commercial real estate in Southern California right now."

The deal for Montvale, N.J.-based Infinity fits squarely into the trend of banks trying to gain a competitive edge in the current interest rate environment. They have already wrung out excess funding costs and expenses. To build earnings in the future, they will need to generate additional revenue.

"They've driven costs out and deposits are as low as they are ever going to be," says Terry Keating, a managing partner at Amherst Partners. "The No. 1 challenge is finding assets — and finding ones that have a good yield. They are scrambling to find a niche... and it is a sellers' market for specialty finance companies because they are performing very well and it's well known that the banks want assets."

There have been plenty of examples this year, including the largest deal of the year: PacWest Bancorp's (PACW) $2.4 billion agreement to buy specialty lender CapitalSource (CSE). Umpqua Holdings' (UMPQ) $158 million deal to acquire Financial Pacific Holding, a commercial leasing firm, is another.

Gardner is well aware of the competition. He says he has been on the hunt for a specialty lender, but was outbid.

"We've looked at a few different types of opportunities," Gardner says. "We've been involved, but haven't been the winning acquirer."

The $16 million cash and stock deal is part of what has been a seesaw acquisition strategy for Pacific Premier.

The company acquired two highly liquid banks (First Associations Bank in Dallas and San Diego Trust Bank) in the last year to bring down its loan-to-deposit ratio, which was approaching 110% because of success in organic loan growth. At the end of the third quarter, its ratio was 88.9%. The deal for Infinity, which would add $75 million in loans and $79 million in commitments, soaks up some of the company's excess liquidity.

"This is a good acquisition given their liquidity," says Tim Coffey, an analyst at FIG Partners. "It is on the small side and might be a toe in the water for them, but it is a no-brainer."

Coffey upgraded his rating of the company to "outperform" and his modeling expects the deal to add four to five cents to its earnings per share in 2014. He is expecting Pacific Premier to earn $1.17 per share in 2014.

For the Infinity team, the deal is a return to the banking industry. Led by John Rinaldi, the group was formerly with Irwin Financial in Columbus, Ind. Irwin's banks failed in 2009 because of problems related to residential real estate, and regulators sold the bank's operations to First Financial Bancorp (FFBC) in Cincinnati. In 2011 Rinaldi and his team formed Infinity with the backing of private-equity firm Perella Weinberg Partners.

A call to Rinaldi was not returned, but in a press release he said the acquisition should allow his team to gain market share among franchise lenders.

"After joining Pacific Premier, we will have the ability to expand our business development efforts... and also increase the depth of our banking relationships by leveraging Pacific Premier's superior SBA lending platform and suite of cash management products," Rinaldi said.

Two of Pacific Premier's recent deals, Infinity and First Associations, have been out of state. Gardner says that is not a rebuke of his home market, just an indication of his opportunistic approach to M&A.

"We are domiciled in Orange County and we love Southern California from a traditional core community bank standpoint, but we are relatively entrepreneurial when it comes to creating shareholder value," Gardner says.