First PacTrust Bancorp is betting the ranch on houses. It wasn't the original plan.
When First PacTrust raised $60 million late last year for acquisitions, commercial loans were looking a lot more promising than mortgages. But with many competitors eschewing the interest rate-sensitive housing market, First PacTrust took the opposite tack Monday, agreeing to buy Gateway Bancorp for $17 million with the goal of diversifying and improving fee income using the target's 22 loan production offices.
"If interest rates go up, then maybe the business isn't as attractive as it appears right now," said Andrew Liesch, an analyst at Sandler O'Neill & Partners LP. Still, he said, there should be a window of opportunity, given low interest rates. The deal works, he said, "in that they were looking for ways to increase fee income."
First PacTrust expects the acquisition to add more than $3 million a year in earnings, mostly through added revenue from loan production offices at Gateway's Mission Hills Mortgage Bankers. The division generated a respectable $6.5 million in gains on loan sales in the first quarter, though that was down from previous quarters.
Analysts said it is rare to see so many loan production offices change hands, particularly just a few years removed from the near-implosion of the mortgage industry in states such as California and Arizona.
"What First PacTrust got with Gateway is a professional mortgage bank, where they generate a lot of volume and turn around and sell it to the secondary market," said Tim Coffey, an analyst at FIG Partners LLC.
Gregory Mitchell, the president and chief executive at First PacTrust, in Chula Vista, Calif., said in an interview that loan production offices would typically struggle in the current economic and interest rate environment. But Mitchell said new mortgage regulations and extensive protections in the deal's terms altered his outlook.
"I was not terribly bullish on mortgage originations," Mitchell said. But "new mortgage licensing requirements [should] … keep the less-desired mortgage originators out."
The buyer is tackling the addition of the loan production offices unconventionally. Rather than convert the offices into full-service branches, Mitchell said the company will add some of its own mortgage products.
