Investors' group builds franchise in bank buyouts. (Up Front).

A group of investors who assembled an Orange County-based collection of community banks and then and sold it three years ago is at it again. This time the group, led by investor John Eggemeyer III, is using a San Diego-area bank as its acquisition vehicle, recently extending its reach into Los Angeles.

Through a string of acquisitions, Rancho Santa Fe-based First Community Bancorp has put together a franchise with more than $2 billion in assets. Its management team, which has a record of buying, building and selling banks, said it has no current plans to look for a buyer. Still, investors and analysts believe the purchases are part of an overall strategy to build a mid-sized banking institution for eventual sale to a large out-of-state bank eager to expand in California.

"This is a collection of experienced banking executives that have built and sold banks in the past," said Steve Didion, president of Hoefer & Arnett, a San Francisco investment bank. "Their plan is to build a holding company that is valuable, but in the back of their heads there's always that idea that you can build something and sell it for a premium."

Eggemeyer, First Community's chairman and a 26 percent shareholder, controls the bank through Rancho Santa Fe-based Castle Creek Capital.

In May 1999, after a string of similarly sized acquisitions in Southern California, Eggemeyer sold Newport Beach-based Western Bancorp to Minneapolis-based U.S. Bancorp for $900 million in stock.

At the time of the deal, Western Bancorp had 29 branches and about $2.5 billion in assets, operating under the names Santa Monica Bank and Southern California Bank. Eggemeyer built Western Bancorp out of the ailing Monarch Bancorp, which in 1996 had only $60 million in assets.

Familiar team

With First Community, Eggemeyer brought back Western Bancorp's management team. President and Chief Executive Matthew Wagner, an L.A. resident, was also chief executive of Western Bancorp and has been friends with Eggemeyer for two decades.

Wagner said the bank has no plans to look for a buyer. "We're just going to run this thing and do the best we can for our shareholders," he said.

But analysts, rival banking executives and eager institutional shareholders believe Wagner and Eggemeyer are priming First Community for eventual sale.

"It's a viable strategy that has been proven," said D. Linn Wiley, chief executive of competitor CVB Financial Corp., the holding company behind Citizens Business Bank.

Others agree. "The strategy here is very similar to what this team did with Western Bancorp," said Jeff Diamond, senior vice president and portfolio manager of the Franklin Mutual Financial Services Fund, First Community's largest institutional shareholder with 7.7 percent of its stock. "We believe if an opportunity comes down the road, management will do the right thing (with a sale)."

Franklin also was a large shareholder of Western Bancorp. "Their strategy of acquiring under-managed banks, improving their operations and integrating them into a larger, more well-run entity is sound," Diamond said.

At present there are no hints of any suitor, but First Community, which operates under the names Rancho Santa Fe National Bank and Pacific Western National Bank, has wasted no time making deals.

On May 15, the bank announced it would buy Marathon Bancorp, a Los Angeles-based holding company with about $110 million in assets, for $20 million. The acquisition is one of three First Community has announced this year, and its second in Los Angeles. The first was Pacific Western National, which closed in January.

Since its formation in 1999, First Community has grown to an estimated $2.2 billion in assets from $325 million, mostly through the completion of at least eight acquisitions. Most of the purchases have been financed with cash and stock. The pace of acquisitions has quickened in the past six months, though, with an apparent focus on gaining a toehold in Los Angeles.

Since January, when the company raised $23 million through a rights offering, First Community has increased its asset base by roughly $1.1 billion, or $9 million a day. (In a rights offering, a company offers its existing shareholders the right to buy additional shares at a pre-determined future price, in exchange for a portion of the money up front.)

In addition to its pending acquisition of Marathon, First Community is slated to gobble up First National Bank of San Diego, a $714 million-asset bank with seven branches in San Diego County, as well as Upland Bank, a two-branch bank with $108 million in assets in San Bernardino County. First Community said it plans to merge both Marathon Bancorp and Upland Bank with Pacific Western National Bank, creating a Los Angeles banking arm with $1.1 billion in assets.

Investors have cheered the moves. First Community's stock closed at $24.35 a share on March 29, up 23 percent year to date. At its peak in early April, the stock closed at $28.96.

Community bank stocks have gained significant attention from Wall Street; Los Angeles-based banks such as Cathay Bancorp Inc. and Pacific Crest Capital Inc. have recently set 52-week highs. To continue expanding, First Community likely will have to pay a premium for future acquisitions.

"A lot of community banks are trading at values above what we would consider appropriate take-out values:' said Mark Agah, an equity analyst covering community banks for RBC Capital Markets. "They're not cheap; investors want to buy the group so they're trading at historically high values."

First Community reported net income of $2.2 million for the first quarter ended March 31, up from $1.6 million in the like year-earlier quarter. The per share decline was attributed to dilution caused by the bank's numerous stock-financed acquisitions, as well a drop in margins due to lower interest rates--a sign that the bank might be stretching to make its acquisitions.