John M. Eggemeyer 3rd has refined the art of the bank deal, and his approach is anything but pushy.
During his initial meetings the chief executive of Castle Creek Capital LLC, a private equity firm in Rancho Santa Fe, Calif., looks only to make a connection with would-be sellers.
"The important thing is to be attuned to subtle signals about what is important to them," Mr. Eggemeyer said. "You have to be able to read nuance."
This low-key approach has worked very well. Castle Creek and its co-investors have bought stakes in 49 banks during the past 14 years - more than any other company with the exceptions of Regions Financial Corp. and Wells Fargo & Co.
The firm owns controlling stakes in five banking companies in California, Colorado, Illinois, Georgia, and Texas. The largest, the $5.5 billion-asset First Community Bancorp in Rancho Santa Fe, has had double-digit earnings growth every year since its inception six years ago. Its net interest margin is one of the industry's highest.
For his track record of building successful community banking companies, American Banker has named Mr. Eggemeyer one of its three Community Bankers of the Year for 2006.
Wall Street has rewarded his track record by putting a premium on his banks' stocks, which gives his company a strong currency to make more deals. (First Community's stock price has more than quintupled since it went public in 2000.)
But even when Mr. Eggemeyer's offer is not the highest, many sellers choose his bid, because they are eager to work with him - and they anticipate reaping a second return when he sells at a premium.
His long-term plan is to sell First Community and the other banking companies for hefty returns, much as he did with Western Bancorp in Los Angeles. In the 1990s, Mr. Eggemeyer rolled up six southern California banks into Western, which he sold in 1999 to U.S. Bancorp in Minneapolis for $958 million, or 4.4 times its book value.
The $1.6 billion-asset State National Bancshares Inc. in Fort Worth, one of the five companies Castle Creek and its co-investors control, announced in June that it was selling itself to Banco Bilbao Vizcaya Argentaria SA in Madrid for $480 million, or 2.14 times book value. That deal is expected to close in the first quarter.
In all, Castle Creek and its co-investors have sold six companies in which they had controlling stakes, for an average return of 48%.
But Castle Creek is doing more buying than selling, with six deals so far this year, including several in new markets.
In May, First Community announced its 15th and largest acquisition deal - for the $897 million-asset Community Bancorp in Escondido, Calif.
Two other companies in which Capital Creek holds a controlling stake - the $2.9 billon-asset Centennial Bank Holdings Inc. in Fort Collins, Colo., and the $559 million-asset LDF Inc. in Chicago - also have made deals this year. In June, Castle Creek struck its first deal in Florida, and soon it will be the majority shareholder in a $206 million-asset bank in Melbourne.
Mr. Eggemeyer, 60, said the key to most deals - besides offering an attractive price that enables the acquisition to be accretive to earnings in the following year - is to try to retain important officers of the seller.
"There's a strong linkage between incumbent management and customers, and since we can pay a great deal of money to acquire a company, it's important to retain as many customers as we can," he said.
Even so, Mr. Eggemeyer said he always nails down the terms of the deal before discussing how the officers would fit into the equation. "We don't want their decision-making to be influenced by what benefits them versus what benefits the shareholders."
Michael J. Perdue, a California banker, said Mr. Eggemeyer has been trying "to buy or hire him" for more than a decade.
He finally succeeded when First Community acquired Community Bancorp, where Mr. Perdue was the president. The transaction closed in October, after which Mr. Perdue became the president of First Community and its Pacific Western Bank. (First Community merged its second bank subsidiary, First National Bank, into Pacific Western. Matthew P. Wagner remained First Community's chief executive officer, and Mr. Perdue succeeded him as its president.)
Mr. Perdue said he was always willing to make a deal with Mr. Eggemeyer when the time was right, because he thinks Mr. Eggemeyer understands the value of a seller's staff.
"Other dealmakers look for just a certain part of your balance sheet - your deposits or asset generation - and they really don't care about your people as much," Mr. Perdue said.
William Farr, who was running Centennial Bank in 2004 when it was looking for a buyer, said Mr. Eggemeyer's style contrasted with that of the nine other bidders. Mr. Eggemeyer "kept his cards close to his vest," never letting Centennial's board know what he thought about the company - good or bad.
"I suppose if he had been too positive, we'd have been suspicious," Mr. Farr said. "Some of the other bidders were more positive, but their ultimate bids didn't reflect that. In the end, John showed us by action - by giving us one of the top bids."
Mr. Eggemeyer said a lot of things can kill deals, such as sellers' unrealistic price expectations and miffed executives who are not promised a top position at the buyer. And he concedes that he works to keep his ego in check. "Arrogance can cause you to be blind to a lot of things."
That means refraining from boasting about how he and his team could improve a would-be seller's bank. "You do nothing to advance your cause by telling them what's wrong or emphasizing what you're going to do to change the business," he said.
Mr. Eggemeyer acknowledges missteps.
Without naming names, he said, "I wish I could have redone the due diligence on a particular company, or that I had had a better understanding of the economy in which the bank operated.
"In those instances, you just have to weather the storm," he said.
Centennial's rapid-fire acquisitions have caused some growing pains. Its return on assets (0.81% on Sept. 30) and its return on equity (3.9%) were well below industry averages. Its profitability has been hampered by the drastic change of its loan and deposit mix after the three acquisitions; now more than 32% of its portfolio is in construction loans in a slowing market, the company said in its annual report. It also has incurred expenses to become public.
However, James Abbott, an analyst at Friedman, Billings, Ramsey & Co. Inc. in Arlington, Va., said he expects improvement within six months at Centennial under Daniel M. Quinn, who became its CEO in May. Mr. Quinn, who was previously vice chairman of commercial banking at U.S. Bancorp, and his team should be able to increase profitability by focusing more on business loans and commercial real estate loans, Mr. Abbott said.
John G. Eck, who was hired last year to turn around Labe Bank in Chicago, said he urged his board to sell a controlling stake in the bank's parent, LDF, to Mr. Eggemeyer.
"He wants to work with me to build a very meaningful organization in Chicago over the next 10 years," said Mr. Eck, LDF's chief executive. "We'll get a much better price this way than if we just dress it up for a sale."
Mr. Eggemeyer once aspired to be a football coach. But after graduating from Northwestern University, where he played center, he was drafted into the Army Reserve in 1968. When he completed boot camp a few months later, the job he wanted at the University of Michigan was taken. He became an internal auditor at First Chicago Corp. and went on to a series of jobs at regional banks. By the mid-1980s he was the president of First National Bank in Denver.
After First National was sold, Mr. Eggemeyer did a brief stint as an investment banker before starting his own firm in Chicago that eventually moved to the San Diego suburbs and became Castle Creek.
The key to success, he said, is strong management.
"You can have a wonderful market, a great strategy, and even good timing at getting into things, but if you don't have the right management, it doesn't work," Mr. Eggemeyer said. "Good execution beats great strategy all the time."
