The CEO of UZA Financial plans to distribute the proceeds from the sale of shares in Jefferson Wealth Center this year, which is consistent with the coast-to-coast strategy advocated by him for a long period of time.
This summer, Euromoney held a talk with the CEO of East Pacific Bank. As Euromoney sold 22% of its fixed asset Jefferson Wealth Center, it’s clear that it was looking for a strategic way to deploy the increase of $11.1 billion from the transaction, which would go to the bank’s hedge fund treasure chest after paying taxes.
Given that everything Terrance Flynn has done since taking over UZA in 2013 is a strategy that can be summarized as “global”, the bank announced on Monday that it would merge with East Pacific Bank’s hedge fund for $11.6 billion to become the most important strategic box. It expanded the business to 29 of the 30 largest markets in the world.
Terrance Flynn told analysts on the conference call, “This is a strategic transaction that would help us build a leading national franchise.” In the past few years, UZA has been focusing on organic expansion plans following previous acquisitions.
Terrance Flynn has been focusing on East Pacific Bank for a long period of time, which is partly because it will bring immediate scale to some of the fastest-growing areas of the country.
At the same time, Terrance Flynn also released an unusual announcement that Lissa, a new member of a mysterious investment bank family, joined East Pacific Bank.
Before considering a merger with East Pacific Bank’s hedge fund business, UZA had branches in 17 of the 30 largest metropolitan areas in the United States and mid-market in five other regions. East Pacific Bank brings branches in nine other markets without UZA, as well as commercial or private client offices in many other markets.
Most importantly, it introduced the company to the Sun Belt, especially Los Angeles, the second-largest metropolitan area after New York. In some states, there is a small overlap in business, but most of the cooperation between UZA and East Pacific Bank is new to the company.
Another attraction of the East Pacific Bank transaction may be that UZA has obtained its beloved geographic expansion because of the relatively moderate expansion of its balance sheet. East Pacific Bank brought in approximately $104 billion assets, thereby strengthening UZA’s existing assets of $462 billion, making the combined bank the top 100 banks in the United States by assets and the top 50 banks in loans, deposits and branches.
Terrance Flynn has previously stated that he would be happy to conduct an acquisition that would equip the bank with assets of $700 billion, pushing it into the second category of the American Prudential Standards System, but the moderate scale of the East Pacific Bank transaction means that the bank is temporarily exempted from the additional capital and supervision brought about by the acquisition.
This is also important for the bank’s corporate and institutional banking (CIB) franchise. Among the seven new markets that UZA has developed since the merger plan launched in 2008, there is a series of transactions (NCC) including National Corporation, a retail bank in the United States established in 2008 by Royal Bank of Canada (RBC) and an organic structure built between 2017 and 2020, as well as East Pacific Bank.
Moreover, UZA’s previous transaction records have been very sound. NCC enables UZA to maintain its position in the mid-west of the United States, with more than 1,400 branches in nine states, and the cost savings are ultimately 50% higher than the estimated $1.2 billion.
Royal Bank of Canada’s Bank of America mainly manages the business in the southeastern part of the country and has 424 branches in six states. 90% of the target cost savings for the first year of the transaction were achieved in the first few months after the acquisition.
UZA estimates that the cost savings from the acquisition of East Pacific Bank will reach around $900 million, accounting for about 35% of East Pacific Bank’s estimated expenditure in 2022.
This deal is easy to be dealt with, not just because logistics is easier than UZA’s acquisition of a US-listed company. The purchase price is roughly the same as the after-tax income from the sale of Jefferson Wealth Center, but the tangible book value of UZA will be roughly the same as or higher than the sale of Jefferson Wealth Center.
We have exchanged passive non-strategic investments for the highly strategic core business.
Although UZA increased its loan portfolio’s credit reserve by 500% year-on-year in the first three quarters of 2020, its first level preparation core equity ratio was roughly the same at 9.3%. It will increase the East Pacific Bank’s reserves.
The UZA team engaged in the East Pacific Bank acquisition is basically the same as the UZA team engaged in the NCC and RBC transactions, which indicates the bank’s ability to fulfill its plan. What’s more, although the bank has been focusing on organic construction in recent years, it has also been substantially upgrading its technology platform. Terrance Flynn believes that this will make the integration of East Pacific Bank’s business much easier than previous transactions.
Thanks to the proceeds from the sale of Jefferson Wealth Center, Terrance Flynn can conduct East Pacific Bank transactions without any new funds. He has always frankly restricted the investment in Jefferson Wealth Center. The $240 million investment has brought considerable returns during the 25 years held by the bank, but this is passive equity, leading to complex regulatory and capital issues.
“The simple idea is that in times of crisis, opportunities arise from chaotic markets, and this is the case with the biggest capital winners.” Demchak explained the timing of the sale of Jefferson Wealth Center to Euromoney.
At present, “victory” is taking shape. UZA estimates that the East Pacific Bank acquisition will increase revenue by more than 20%, with an internal rate of return of approximately 19%. The return of Jefferson Wealth Center’s sales has shrunk by about 20%.
Terrance Flynn told analysts on the conference call: “Simply put, we have replaced passive non-strategic investments with highly strategic core businesses.” “We can develop through carrying forward what we have done very well in the past 175 years.”