First Community Bank is a regional, San Diego bank with $3.2 billion in assets. The bank pays a 2% dividend and trades at 2.5 times book and 22 x earnings. 3 analysts follow the stock - not one has a sell recommendation.
Those are the preliminaries -- the steroid behind this stock is this: We believe FCBP will be acquired in F2006, or at the latest, in F2007.
Meet John Eggemeyer -- if his name doesn't ring a bell, his accomplishments should.
In the 80s, Eggemeyer ran the leveraged buyout desk at Drexel Burnham Lambert. At Drexel, Eggemeyer closed more than 45 massive buyout deals. After that, he ran Heine Securities with fellow banking stalwart Michael Price. In 1996, Eggemeyer and Price closed one of the biggest banking deals in all of history - Chemical Bank's takeover of Chase Manhattan.
It gets better.
In 1996, Eggemeyer decided he wanted to fly solo, so he opened his own boutique LBO shop, Castle Creek Capital. Castle Creek' s modus operandi is to invest in US banks that operate in regions characterized by favorable demographics and economic growth. After Eggemeyer finds an underbanked region he likes, he buys weak banks at low prices, juices them up with low cost core deposits, and then sells those banks for an obscene profit. In short, Eggemeyer gives those banks scale and market presence by way of aggressive roll-up acquisitions.
Eggemeyer's fold and absorb strategy seems to be paying off. In 1999, Eggemeyer sold Western Bancorp to US Bancorp (NYSE:USB) for $1B, at roughly 50x earnings and 450% of tangible book. At the time of the sale, Western had $2.5B in assets. We feel First Community could be the next Western Bancorp.
FCBP operates 13 branches through the San Diego area and close to 71 branches in the L.A area. San Diego's one of the fastest growing cities in the US, so it makes perfect sense for Eggemeyer to be there. Since John Eggemeyer took a seat on FCBP's Board, FCBP has acquired 13 smaller banks. In the last 4 years, Eggemeyer has increased the bank's assets threefold. Eggemeyer's own holdings in the company have ballooned, as well. Unless you actually think he's there for the free checking, Eggemeyer is on FCBP's Board of Directors for one reason: he's there to flip the bank to a hungry, expansion-driven-powerhouse.
If a big bank wants to penetrate the San Diego market, they're going to have to go through John Eggemeyer first. FCBP's stock performace is walloping the Nasdaq bank index, which is exactly why we think a takeout will come sooner rather than later -- no bank wants to buy another bank once the acquiree has stopped growing. Ideally, acquirers aim to to scoop up another bank while it's still in the middle of its torrid growth pace.
Big acquirers typically look for banks with $4 to $10B in assets. We believe that when FCBP -- with its expanding market and asset size -- hits $4B in assets, it will go. Eggemeyer's last bank went for 50x earnings -- if that same valuation was applied to FCBP, FCBP would go for $150 per share. Will FCBP fetch that high a premium? Probably not, but at least we know that Eggemeyer likes to play hardball.
Who'd buy First Community? US Bancorp has already dealt with Eggemeyer in the past, so that's one potential buyer; Banc of America (NYSE:BAC) could be another potential suitor. Washington Mutual (NYSE:WM) and Wells Fargo (NYSE:WFC) shouldn't be counted out, either. All of these banks have been involved in Southern California deals in the last decade.
There is no question in our mind that FCBP's future involves a premium sale to a larger institution -- the only question is when.
FCBP 1-yr Chart
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