Popular's Regional Sales Fill Buyers' Needs

Popular's extraneous pieces are fitting well into the puzzles of three other banks.

The $36.7 billion-asset Popular (BPOP) said on Wednesday that it would sell its operations in California, Illinois and central Florida in an effort to streamline its bank.

"We've been talking about making adjustments for a while now," Carlos Vasquez, the San Juan, Puerto Rico, company's chief financial officer, said in an interview. "The adjustments make sense to simplify our operations, focus our efforts and manage our capital more efficiently."

The stars aligned for Popular to sell the operations. While the company has dealt with its own issues, including ongoing participation in the Troubled Asset Relief Program, consolidation activity has rebounded and prices have improved. The sales are expected to generate $25 million in proceeds and a $160 million goodwill writedown. Popular also plans to consolidate back-office operations in suburban Chicago and central Florida.

The buyers — Harbor Community Bank, First Midwest Bancorp (FMBI) and Banc of California (BANC) — also have reasons for snagging Popular's branches. Here is a look at how each buyer views their transactions.

Harbor Community

Harbor raised $330 million in 2010 to build a banking franchise with basically the same geographic reach that its executives had at Harbor Florida Bancshares, which was sold to National City in 2006 for 3.24 times its book value.

Adding $115 million in loans, $239 million in deposits and nine branches around Orlando will strengthen Harbor's footprint, says Michael Brown Sr., the Indiantown, Fla., bank's chief executive.

"This helps our geography broadly. If you think of our shape as triangular now, this adds the fourth side," Brown says. "We are a little farther north and a little farther south this time."

Harbor is open to more acquisitions in existing markets, Brown adds. The bank, which had deployed $85 million in capital before the Popular transaction, would like to bridge a gap between Vero Beach and St. Augustine on Florida's Atlantic coast.

Orlando will be bank's biggest market and Brown says he was only interested in entering the area with a sizeable transaction. "I wouldn't go into Orlando with one or two branches, but this gives us nine," he says.

The assets Harbor is gaining are a mix of commercial and consumer loans. Brown says that bringing residential lending to Orlando will be a priority for the bank's executives, who are veteran residential lenders.

First Midwest

The $8.3 billion-asset First Midwest Bancorp will buy $750 million in deposits, $525 million in loans and a dozen branches from Popular. It is the Itasca, Ill., company's biggest deal since the 2008 economic downturn, though First Midwest bought several failed banks and completed a smaller branch deal.

In that regard, it is an important transaction, says Chris McGratty, an analyst at Keefe, Bruyette & Woods. The timing was also helpful; First Midwest's earnings of 24 cents a share fell short of analysts' expectations by a penny.

"Investors are appreciating the use of capital with a low-risk deal," McGratty says. "They missed estimates, but people are talking more about the deal than the quarter."

Popular's Chicago franchise did a good job in the ultracompetitive commercial lending space, too, says Michael Scudder, First Midwest's chief executive.

"To us, this is more than just a branch acquisition," Scudder says. "It was an opportunity to acquire Popular's business operations here with a team of experienced commercial and middle market lenders."

The deal also gives First Midwest more of a retail presence within Chicago's city limits and its western suburbs.

Banc of California

The largest of the three transactions involves Popular's operations in Los Angeles and nearby Orange County. With the addition of $1.1 billion in loans, the deal fulfills Banc of California's goal of reaching $5 billion in assets.

"We hit an important milestone with the deal," Steven Sugarman, the Irvine, Calif., company's chief executive, said in an interview. "We feel the scale we get at $5 billion brings our cost structure and profitability in line."

The 20 branches are within broader markets that Banc of California already serves, but are in areas where its presence was thin. It also gives the company significant inroads into Latino communities. As it strives to be a major player in California, attracting Latinos is an important component. "It is hard to serve the market without having a deep capability that transcends into the Latino market," Sugarman says.

The transaction also speaks to a broader trend of buyers looking to shore up deposits. With a 20-basis-point cost of core deposits, Sugarman says Popular's deposits were the deal's main attraction.

"It is less for us about the origination capability, although that helps accelerate our financial performance by a year or two," he says. "Having robust, low cost access to deposits in Southern California was a major draw."