Failures, M&A lead to opportunity and competition among Calif. banks

The California banking landscape has been rocked by failures and consolidation, and banks left in the state are looking to capitalize on that disruption — if they can compete with the biggest banks getting larger.

Half of the top six banks by deposit market share in the Golden State at June 30, 2022, no longer exist after the failures of Silicon Valley Bank in March and First Republic Bank in May and U.S. Bancorp's acquisition of MUFG Union Bank NA in December 2022. That disruption has created opportunities for banks in the state to win talent and customers.

"Banks that are left in California that have strong balance sheets and progressive and thoughtful management teams will no doubt be able to take advantage of the dislocation," MJC Partners founder and managing partner Michael Cavallaro said.

At the same time, some of the most dominant banks in the state have gotten larger and expanded their market share through the recent turmoil, intensifying competition for community and regional banks in the state. That increased competition will likely lead to a wave of M&A in the future as those banks look to scale in order to compete.

"In the very immediate near term, I think that sort of the likely outcome is big banks do take some market share through this," Hovde analyst Brett Rabatin said in an interview.

Calif. banks making moves

Farmers & Merchants Bank of Long Beach is already taking advantage of recent consolidation in the state, namely the recently closed acquisition of MUFG Union Bank by U.S. Bancorp, CEO Daniel Walker said in an interview.

The company is getting more phone calls and deposit inflows related to that merger than to First Republic's failure as MUFG Union Bank customers transition to U.S. Bancorp customers, Walker said.

"This month, it will really be an upswing because this is the month where the Union Bank customers have to switch over to U.S. Bancorp," the CEO said.

Still, the recent failures have led to a lot of deposit movement as customers pulled their money from Silicon Valley Bank and First Republic Bank prior to their demise. Those deposits are still moving around even after the failed banks were acquired. On First Citizens BancShares Inc.'s first-quarter earnings call, the company said about $7 billion of Silicon Valley Bank's deposits left for other banks in the first business week after the deal closed on March 27.

Banc of California Inc. has benefited from the failures of Silicon Valley Bank and Signature Bank and the outflows from First Republic Bank, President and CEO Jared Wolff said on the company's first-quarter earnings call on April 20, prior to the failure of First Republic Bank.

"We're a little bit at ground zero for all the activity that's been disruptive in the market with a heavy presence of First Republic Bank," Wolff said. "We benefited from a lot of the outflow that came from the resolution of Silicon Valley and Signature, [but] we were careful."

More competition, more M&A

On the flip side, the recent disruption has intensified competition in the state as some of the largest players get larger.

JPMorgan Chase Bank NA, which ranked third in deposit market share in California at June 30, 2022, acquired First Republic Bank, which ranked fifth. In another failed bank deal, First Citizens, which ranked 12th in deposit market share in California, acquired all customer deposits and substantially all the liabilities of Silicon Valley Bank, which stood in fourth place.

Just a few months prior to the failures, U.S. Bancorp, which was just two spots above First Citizens at June 30, 2022, in 10th, scooped up MUFG Union Bank, which ranked sixth.

Those big banks getting bigger, and the expected increased cost of regulation following the failures, will lead to a wave of M&A in the Golden State once dealmaking headwinds subside.

"This environment is going to create a wave of consolidation because it's only going to create the need for scale at the community bank and regional bank level. If you're a $20 billion bank feeling like you're going to get squeezed ... you probably want to double in size to help ease the cost. If you're a community bank, less than $5 billion, then you kind of realized 'We're going to have to spend more on risk compliance, balance sheet, management, all of that,'" Rabatin said. "The end result of all of this turmoil is more scale, and that's a wave of M&A when the opportunity presents itself."

Similarly, MJC Partners' Cavallaro predicts a "significant level" of M&A as a slowing economy, margin pressures, the need to invest in technology, additional regulatory costs and the benefits of increased scale drive California banks to pair up.

Banc of California's CEO intends to capitalize on the coming wave of M&A in the state.

"There are a lot of smaller banks that might decide that they just can't get enough scale, and I think we're going to be a beneficiary of that both organically through our acquisition of talent and clients through this disruption in the market and potentially transactionally if the right opportunity presents itself," Wolff said.