- Key insight: CVB plans to sell Heritage’s $400 million portfolio of purchased mortgages after the deal’s closing date, projected for the second quarter of 2026.
- Forward look: The merged company expects to start with Common Equity Tier 1 capital of 14.6%.
- Expert quote: “We do see the potential benefits, both near- and long-term, of acquiring a like-minded business in a very strong economy and bringing the resources to compete,” Janney Montgomery Scott analyst Timothy Coffey wrote in a research note.
CVB Financial has agreed to pay $811 million in stock for Heritage Commerce Corp. in a deal that gives the Southern California-based buyer a major Bay Area foothold.
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The $5.6 billion-asset Heritage, which was founded in 1994 and is based in San Jose, holds deposits totaling $4.6 billion, virtually all of them in the Bay Area, according to the Federal Deposit Insurance Corp.
CVB, which is headquartered about 40 miles east of Los Angeles in Ontario, California, has more than $15 billion of assets.
CVB Chief Executive David Brager termed Bay Area expansion a “key strategic objective” in a press release Wednesday. “This will be the most strategic and the largest acquisition by assets in our history,” Brager said.
On a conference call with analysts, Brager said CVB had considered “several acquisition opportunities” in the last 18 months. The deal with Heritage was a negotiated transaction that solidified after what Brager described as a series of conversations he had with Heritage CEO Clay Jones.
“I think for us it was just the idea of, ‘Let’s create something bigger than either of us individually, let’s create an opportunity to be able to compete with the larger banks,'” Brager said.
Heritage was likely on Citizens’ short list of merger targets, “given how complementary it is from a customer, credit and geographic perspective,” Piper Sandler analyst Matthew Clark wrote Thursday in a research note.
Both institutions consider themselves business banks, and both have loan portfolios weighted heavily to commercial and industrial and commercial real estate lending. Indeed, C&I and CRE loans would comprise nearly 90% of the merged portfolio.
Both are also profitable, reporting returns on average assets above 1% in their third-quarter earnings reports.
For Heritage, the key driver for the deal was attaining the benefits from the pro forma company’s greater size and scale.
“There’s just a number of things that Citizens brings to the table to expand our product offerings,” Jones said on the conference call. “There are inherent synergies that we’ve been looking, in our long-term strategic plan, to build out here at Heritage. This just accelerates that strategic planning footprint and timeline.”
CVB is the holding company for Citizens Business Bank. Heritage’s bank subsidiary is Heritage Bank of Commerce.
The transaction’s $811 million consideration is “a good price for a sizable expansion of the franchise into one of the strongest economies in the country,” Janney Montgomery Scott analyst Timothy Coffey wrote in a research note.
“We do see the potential benefits, both near- and long-term, of acquiring a like-minded business in a very strong economy and bringing the resources to compete,” Coffey added.
The combined company will hold assets of $21.7 billion and deposits of $17.2 billion, and will have a physical presence in all of California’s biggest employment centers, according to Coffey.
The merged company will also have a 14.6% Common Equity Tier 1 Capital ratio, “which should enable us to provide meaningful capacity to continue returning capital to shareholders through both dividends and share buybacks,” CVB Chief Financial Officer Allen Nicholson said during the call with analysts.
Given the robust projected capital levels, neither Brager nor Jones ruled out additional merger-and-acquisition activity. But ensuring the seamless integration of Heritage will be the overriding priority, according to Brager.
“At the end of the day we’ll just have to evaluate the opportunities as they present themselves,” Brager said. “What we’re really focused on is just putting the two banks together. … We want to make sure the combination of Citizens and Heritage goes well first.”
CVB is projecting that the deal will close in the second-quarter of 2026. It expects earnings-per-share accretion of 13% in 2027, and says that tangible book value dilution of 7.7% should be earned back in about two-and-one-half years.
Jones has agreed to stay as president of the merged company. Brager will continue as CEO.
“I’m really excited Clay is joining the team,” Brager said. “We have a good personal relationship. We have a good business relationship. We’ve shared things over the years and talked things through. It’s just going to be great to be on the same team.”
CVB indicated that it plans to sell a $400 million portfolio of purchased mortgages that are on Heritage’s balance sheet, but otherwise signaled broad satisfaction with the composition and quality of Heritage’s assets.
CVB’s projected credit mark, representing its estimate of potential losses in the Heritage loan portfolio, is 1.08%, lower than those reported in many bank mergers.
“We’re going to meld that credit culture very well,” Brager said. “There wasn’t anything that we found [during due diligence] that really stood out to us as something they did that we wouldn’t do.”