Acquisitive PacWest Bancorp is shifting its sights to buying deposits instead of banks.

In early April, the Beverly Hills-based bank holding company purchased MUFG Union Bank’s homeowners banking services unit for $250 million in cash — a disruptive deal in a below-the-radar-business.

That transaction has catapulted PacWest into the top ranks of the HOA field, according to banking analysts and observers.

An HOA, or homeowner’s association, is an organization within a subdivision, planned community or condominium building that makes and enforces rules for the properties and its residents. Those who purchase property with an HOA jurisdiction automatically become members and are required to pay fees.

An HOA banking practice provides lockbox, electronic receivables processing and other financial services to HOA management companies.  

Industry analysts expect the HOA banking niche to see a runup in profits as interest rates move higher when the economy emerges from the recession caused by the coronavirus pandemic.
 
PacWest President and Chief Executive Matthew Wagner declined to discuss the acquisition when reached for comment.

The push by PacWest into the HOA market underscores the company’s recent strategy to diversify its lending portfolio and broaden its income streams. PacWest suffered a loss of $1.24 billion last year due to goodwill impairment charges and higher credit loss provisions as Covid-19 took a toll on the company’s loan portfolio. 
 
PacWest had a string of 29 acquisitions between 2000 and 2019. It scrapped an agreement to buy El Dorado Savings Bank in Northern California back in January 2019. It picked up where it left off in February with a deal to buy Civic Financial Services from Redondo Beach-based real estate company Wedgewood, a residential business purpose lender.
 
Some of PacWest’s strategic business push could become clearer when it releases its first quarter financial statement this week.
 
Nationally, the HOA business is difficult to track, with some analysts estimating the market encompasses tens of billions of dollars in deposits. No one is sure of the exact size, though analysts point to a few big players in the field.

PacWest bought its ticket into this elite club of HOA players with the acquisition of the Union Bank unit. Analysts see the field as ripe for consolidation — with PacWest showing an appetite to become a major player.
 
“It’s an area that banks are looking to get more involved with. It’s a nice, cheap source of deposits. This does put PacWest in a good position to go after this market,” said David Chiaverini, senior banking analyst with Wedbush Securities Inc., based downtown.

A major change

Wall Street sees the PacWest acquisition as catapulting $29 billion-in-asset Pacific Western Bank to a top competitive spot for HOA services — a major change considering the bank was virtually nowhere on the playing field only a few months ago.
 
Indeed, the MUFG unit adds about $4 billion in HOA deposits to the roughly $1 billion PacWest in HOA funds the company already had on hand. With more than $5 billion in HOA deposits, PacWest now ranks among the top banks in the sector, according to analysts.

PacWest is betting the payoff will come from rising interest rates, and several on Wall Street have already upped their estimates of the bank’s earnings outlook because of the deal.

“It doesn’t pay off in year one or two, but give them $4 billion in deposits over the next two three, five or 10 years,” said Andrew Terrell, a vice president and research analyst in charge of regional banks for Stephens Inc. in Little Rock, Ark.
 
“I did the math, and it’s a big accretion,” he said. “I think PacWest is either the biggest or very near to becoming the biggest HOA banking business.”
Others agree.

“This will benefit PacWest for years. This business is sticky. It’s hard to move customers,” said Chris Marinac, co-founder and director of research at Atlanta-based FIG Partners, an investment banking arm of Janney Montgomery Scott in Philadelphia. “This is a no-brainer.”

The business also provides another benefit, Marinac observed.
 
“There is a lending component to this,” he said of HOAs. “There’s normal maintenance and wear and tear, and renovation requires money. If there are enough deposits, you can use them to back credit. There isn’t much risk. The chances are very low that they’ll default on the property, and the land is worth a lot.”

Local rivals

The biggest rivals in the HOA market locally are Phoenix-based Western Alliance Bancorporation, a $35 billion-in-assets institution that does HOA services business in California under its Alliance Association Bank subsidiary, and Irvine-based Pacific Premier Bancorp Inc., parent of $20 billion-in-asset Pacific Premier Bank.
 
Pacific Premier became an even larger player last summer when it acquired Opus Bank.

In March, Pacific Premier disclosed in a securities regulatory filing that it had roughly $1.8 billion in HOA deposits.

Alliance Association President Stephen Curley said his banking unit had roughly $3.9 billion at the end of 2020. 
 
Another major player is Mutual of Omaha Bank, which runs its corporate offices out of Phoenix and manages the HOA business.

The company had about $4.5 billion in HOA deposits following CIT Group Inc.’s purchase of Mutual of Omaha for $1 billion in early 2020. The bank changed hands again in October when Raleigh, N.C.-based First Citizens BancShares Inc. agreed to merge with New York-based CIT Group in an all-stock deal valued at roughly $2.2 billion.

At the time of the sale, CIT Group Chief Financial Officer John Fawcett said the bank’s HOA deposits reached a record high of $5.5 billion, adding that the operation was on track to “double HOA deposits over the next five years.”

“I think we’re all about the same size,” Curley said. “I think why people think we’re larger is because we’ve grown organically 100%, and everybody else did it through acquisition.”

“PacWest wanted to be a player in this business and, you know, they decided it was easier to buy it than to build it,” Curley added.

Sunbelt business

The lion’s share of HOAs are located in western United States, and extend east through the Sunbelt states and the Southeast. The heaviest concentrations of HOAs are organized around the population and growth in these areas.
 
PacWest, Pacific Premier, Alliance Association and Mutual of Omaha are all headquartered in the Southwest.
 
California’s HOA market may be the biggest in the United States, making for a ripe deposit business.
 
In early March, there were 75,794 HOAs overseeing 1.8 million condos and townhomes, according to data provided by Chris Neri, assistant commissioner in charge of the subdivisions program with the California Department of Real Estate reported.

Oscar Wei, deputy chief economist with the California Association of Realtors, sees demand of condo and townhome sales growing 5%-6% annually, though interest rates could temper growth.

PacWest also is watching this trend.

In a regulatory filing made by PacWest this month, the bank said the addition of the HOA business represents “an offensive strategy as we head into a potentially inflationary environment.”