RANCHO SANTA FE, Calif. - John M. Eggemeyer 3d, the chairman of First Community Bancorp here, is well known in banking circles for rolling up six southern California banks into Western Bancorp in the 1990s and then selling Western in 1999 for 4.4 times its book value.
A year later he created First Community through a merger of two small banks, and since then the question most industry watchers have been asking is not if First Community will sell itself, but when.
Last week the company announced the 15th, and largest, deal in its history, for the $888 million-asset Community Bancorp Inc. in Escondido. When the purchase closes, as it is expected to do this year, First Community would have $5.3 billion of assets and 72 branches stretching from San Diego to Riverside to Los Angeles.
"First Community is already an extremely attractive franchise, and this deal just makes it even more so," said Christopher Marinac, an analyst at FIG Partners LLC in Atlanta. It would be especially attractive to out-of-state banks looking to move into California, he said.
But it would not come cheap. Mr. Eggemeyer, 59, said last week that he expects it to fetch an even higher multiple than Western, which U.S. Bancorp bought for $958 million.
"I thought Western was an astounding company, but First Community is even better and should be a more valued company," he said. "But it becomes a question of the capacity of a potential buyer to pay that value."
Mr. Eggemeyer said that no suitors have come calling, and that at this point there is no urgency to sell. First Community's returns on assets are above industry averages, and its stock price has risen nearly fivefold since its first day of trading, six years ago.
Still, Mr. Eggemeyer said, "at some point in time you get big enough that you can't consistently produce returns in excess of average returns, and you need to think about selling. We haven't reached that point yet."
The former banker reinvented himself as a bank investor in the last decade. His private equity and merchant banking firm, Castle Creek Capital LLC, also of Rancho Santa Fe, is the largest shareholder in five banking companies, the smallest of which is the $20 million-asset Atlanta Bancorp. (First Community is the largest.)
Actually, Mr. Eggemeyer did not set out to be in banking at all. After playing center for Northwestern University in the 1960s, he pursued a career coaching college football. But in 1968 he was drafted into the Army Reserve, and when he got out of boot camp several months later, his dream coaching job at the University of Michigan under his mentor, Bo Schembechler, was taken.
So Mr. Eggemeyer took a job as an internal auditor - "a complete mismatch for me" - at First Chicago Corp. He soon went through a series of different jobs at five other banking companies. He had success as the president of the beleaguered First National Bank of Denver in the 1980s, turning it around and selling it to First Interstate of Los Angeles. But after that sale he was fired.
In fact, in more than a few of his jobs Mr. Eggemeyer either left voluntarily after a short time or got the boot. Either way, it really boiled down to his "impatience with the bureaucracy" of large banks, he said.
"It was so frustrating - I saw great opportunities for business to be more dynamic, but there was just too much inertia for my taste," he said.
After one more stint as a trust banker at First Bank System Inc. in Minneapolis, Mr. Eggemeyer tried his hand at investment banking in 1987 with Drexel Burnham Lambert in Chicago. That did not last long either; the firm soon collapsed under government scrutiny.
Times being what they were and banking jobs scarce, "I did what any other self-respecting person would do," he said - he opened his own advisory firm, Belle Plaine Partners Inc. in Chicago.
Mr. Eggemeyer's first experiment on his own was investing in and turning around the $1.3 billion-asset United Postal Bancorp and then selling it in 1993 to another St. Louis banking company, Mercantile Bancorp.
Belle Plaine moved to the San Diego suburbs and evolved into Castle Creek. In May 1999, after Western was sold, Castle Creek bought a large stake in State National Bancshares of Lubbock. (It is now based in Fort Worth.)
Later that year it also bought a stake in Rancho Santa Fe National Bank. It formed First Community Bancorp after Rancho Santa Fe bought First Community Bank of the Desert in Yucca Valley, Calif.
Using Western's management team, led by Matthew Wagner, First Community has not stopped buying banks since.
Edward Carpenter, an Irvine, Calif., investment banker, said Castle Creek has made close to half of the bank purchases in southern California in the last decade. It is the clear leader in banking M&A there, he said.
"They really set the tempo in the marketplace - for competitive pricing of deals and for strategic acquisitions that makes sense," Mr. Carpenter said. "They're also very flexible in their deal terms, because they listen to the needs of the seller." As a result, Mr. Eggemeyer and his team usually "emerge as the successful bidder."
Most of Mr. Eggemeyer's other banking companies are also buying or looking to buy, but none are growing as rapidly as First Community. In addition to owning a stake in State National, which now has $1.7 billion of assets, Castle Creek is the largest shareholder of the $2.9 billion-asset Centennial Bank Holdings Inc. in Fort Collins, Colo.; the $498 million-asset LDF Inc., which is the holding company for Labe Bank of Chicago; and the start-up Atlanta Bancorp.
Mr. Eggemeyer said Castle Creek is looking to buy banks in other high-growth markets, but he would not say where.
Though he may not have been keen on being a banker, he says he gets an immense kick out of wielding influence over them as the largest shareholder and in two cases the chairman of the board.
In his two decades as a banker he picked up some key pointers on strategy, and analysts say that is why his companies are performing so well.
First Community has had double-digit earnings and asset growth every year since its inception, and first-quarter returns on assets and equity of 1.91% and 12.2% were in line with other banking companies with $1 billion to $10 billion of assets.
Mr. Marinac said that management at all of Castle Creek's investments adhere to the gospel Mr. Eggemeyer now publicly preaches: Bring in low-cost demand deposits from business customers, avoid making transaction loans that do not come with deposit relationships, and run the back operations as efficiently as possible.
The companies are particularly good at bringing in core deposits, "and that has real value," Mr. Marinac said. For example, 84% of the deposits at First Community's largest subsidiary, the $3.3 billion-asset Pacific Western National Bank, draw no interest. Its cost of funds is 0.41%, versus an average of 2.10% for banks with $1 billion to $10 billion of assets, according to Federal Deposit Insurance Corp.
For now, Mr. Eggemeyer says, investors are pleased with the returns they are getting with his community banking companies, particularly First Community. It hit a high of $61.65 a share on Feb. 3, up from an adjusted close of $12.22 on June 23, 2000, its first day of trading. It was trading at $57.92 late Thursday.
"I don't have to prove myself anymore to investors and get an attractive return just by selling," Mr. Eggemeyer said. "We get high returns now."
Mr. Marinac said First Community has no reason to sell now, because it can still get compounded earnings growth in the low to mid-teens. "They could easily double or triple their assets without bumping into any of their bigger competitors, so there's a lot of value still to create."
When it does decide to sell itself, Mr. Marinac said, First Community could fetch $75 to $80 a share. Its book value is $30.40 a share, but its tangible book value is much lower, because it has so much goodwill left on the books from all of its acquisitions - so the ratio of price to tangible book value would be high.
From his bird's eye view as a successful investor and merchant banker, Mr. Eggemeyer sees some disturbing trends in the industry.
A surge in raising and spending capital has caused competition "to be as intense as I've ever seen it, and that's not a good thing," he said. At many banks, pricing has become more irrational and underwriting standards more slack, he said.
Competition has also increased because of the number of start-ups today, and a flood of capital has spawned a generation of them financed like none were before, Mr. Eggemeyer said. "But there's just not enough opportunities for them all to be successful," and he expects most to sell.
Mr. Eggemeyer also expressed concern about an "overly aggressive" crackdown on banks that own large concentrations of commercial real estate loans. "They may overshoot the mark and really slow down economic activity."
Todd Hagerman, an analyst at Swiss Reinsurance Co.'s Fox-Pitt, Kelton Inc., said Mr. Eggemeyer has proved himself worth listening to - and someone investors apparently do not mind sticking with for the long term.
"He's a pretty savvy bank investor with an enviable track record, and he's surrounded himself with capable executives who have built very high-quality companies," Mr. Hagerman said.
