A reconstituted board of directors looks to have Pacific Mercantile Bancorp on track to regain its footing among Orange County’s top commercial lenders as it sharpens its focus in a bid to serve the most vibrant business sectors here.
It’s been roughly a year since the company and its Pacific Mercantile Bank subsidiary initiated turnaround efforts after a period of clearing out bad loans and raising its capital ratio under a regulatory order.
The bank wasn’t alone with its to-do list in the wake of the recession, which left many others nationwide facing similar challenges. It’s come through in fine fashion—nonperforming assets, which made up about 8% of its total loans in mid-2011, now account for less than 4%, while loans grew slightly to $729 million over the time span. The company returned to profitability in 2011 after a three-year streak of annual net losses. It pushed along with an $8.7 million profit last year.
More than $6 million in losses in the first two quarters of this year reflect a move to end its wholesale lending operations but haven’t rolled back gains for its shares. Pacific Mercantile stock has climbed more than 56%, to a market value of about $118 million, in the two years since it began a restructuring bid guided in large part by its board of directors.
OC-Oriented
The board, seven of whose 14 members joined just over the past year, is largely OC-oriented by design.
“We felt that if we strengthen the board in terms of OC individuals with deep business careers in OC, we would be taking the first step toward … [bringing] the re-emphasized business plan to lend to businesses in OC,” Chairman Edward Carpenter said.
Carpenter is the founder and chief executive of Irvine-based financial advisory firm Carpenter & Co. He also is a managing partner of the firm’s private equity arm, Carpenter Community Bancfund, which holds controlling stakes in Pacific Mercantile and four other banks in California, including Plaza Bank in Irvine.
Carpenter became chairman of Pacific Mercantile last year and more recently oversaw the board’s decision to tap Steven Buster as the company’s new chief executive. Buster took over from founder Raymond Dellerba, who remains a director.
Buster called the Pacific Mercantile board a “powerhouse,” with a lineup led by George Argyros, chairman and chief executive of Costa Mesa-based Arnel & Affiliates, a real estate developer that owns apartments, industrial buildings, offices and shopping centers. Argyros has also had success as a private equity investor (see related item, OC Insider, page 3) and served as the U.S. ambassador to Spain for three years in the early 2000s. He is a perennial member of the Business Journal’s OC 50 list of the most influential members of the local business community, as well as the OC’s Wealthiest list of the richest residents.
Other Directors
Other board directors include Howard Gould, who has spent decades as a banker, regulator and consultant and is currently vice chairman of Carpenter & Co.; Warren Finley, a longtime attorney in OC who’s been on the Pacific Mercantile board since its inception in 2000 and chairs its audit committee; and Gary Williams, owner of Laguna Niguel-based Garcher Enterprises Inc., an entity that owns Mail Boxes Etc. and the UPS Store franchise rights for OC, Los Angeles and San Diego counties. Williams joined the bank in 2007 and chairs its nominating committee.
Such names and the expertise the directors bring to the table are crucial for Pacific Mercantile, Buster said.
“Whether it be law, finance, high tech, entrepreneurial, investments, real estate—I can’t think of a topic we don’t have covered,” Buster said. “They are the formula for our bank. It starts at the top. They’re responsible for the strategic direction of what you’re going to do. And what you need are people who add value in all the different disciplines that a bank has to act in.”
Pacific Mercantile is Buster’s latest go at running a bank. It’s also an example of how he “failed” at retirement.
The OC native spent some 40 years in various roles at financial institutions in the U.S. and abroad, including Standard Chartered Bank and U.S. Trust Co.
His career also includes a two-year stint with then Los Angeles County District Attorney Gil Garcetti as the chief operating officer for the Bureau of Family Support Operations.
Buster became the chief executive at Richmond-based Mechanics Bank in 2004, making an entry into community banking.
“Frankly, I didn’t have a lot of interest in community banking at the time,” he said.
But he “decided to go ahead and interview for it” upon a good friend’s urging. “And I was just shocked to find out how much I liked it.”
He spent eight years there and retired.
“Two months into retirement, I got a call from a longtime acquaintance,” he said, referring to Carpenter. “He informed me about Pacific Mercantile and the fact that they wanted to rebuild [it] and that they had put new capital in. And it happened to be in my home of Orange County. So I put all that together, and … here I am.”
Pacific Mercantile had $952.1 million in assets as of June, down about 10% from a year earlier. That puts the bank at No. 4 among the largest banks based in OC by assets.
The bank, founded in late 1998, had long been the largest commercial bank headquartered in OC and also the only bank for some time with more than $1 billion in assets. Stricter regulations, tightening interest margins, and sour loans blended to put a damper on its trajectory in recent years.
The California Department of Financial Institutions in 2010 ordered the bank to “address the adverse consequences that the economic recession has had on the quality of our loan portfolio and our operating results and to increase our capital,” the bank said, specifically to boost shareholders’ equity to 9% of assets.
The bank got a break when the Carpenter fund and New York-based Clinton Group purchased 112,000 shares of its preferred stock in 2011, putting in $11.2 million and helping pull up the equity ratio from about 6.5% to more than the required level. The Clinton Group got a seat on the board through Daniel Strauss, senior strategist in its private and public equity investment team.
The Carpenter fund upped its stake in Pacific Mercantile last year when it purchased an additional $26.3 million worth of common stock.
Orange County, meanwhile, saw rapid growth in its banking sector, an industry eager to serve concentrations of customers and draw from a healthy pool of financial industry professionals.
Opus Bank, for instance, shifted its official headquarters from Redondo Beach to Irvine in late 2011 and since then has grown assets to more than $3 billion, in large part by acquisitions. The former First PacTrust Bancorp Inc., now known as Banc of California Inc., moved from Chula Vista to Irvine in 2012. It has more than doubled its assets in the past year to about $3 billion, also with acquisitions.
Gaining size isn’t the main objective for Pacific Mercantile, which aims “to have the first truly locally focused bank of some size in OC,” Carpenter said. “We have a very strong OC orientation in the board and a very strong OC orientation in management. If you look at the board today, only two people … live outside of OC.”
Flemming
John Flemming, president and chief operating officer of Carpenter & Co., joined Pacific Mercantile’s board at the same time as Carpenter. Flemming has spent 23 years at the advisory and oversees a wide range of the firm’s activities, including investment banking, private equity and government asset management. He’s also a managing partner of the Carpenter fund.
Flemming pointed to Pacific Mercantile’s recent efforts to boost its services to what it considers technology-based sectors, such as healthcare and manufacturing. The bank, for instance, has brought on new talent, mostly industry veterans with experience in technology ventures.
“OC’s economy has turned from real estate to high tech, and the bank is making the shift with the economy,” Flemming said. “We are fortunate that we have some folks that, with an entrepreneurial bent, want to be a part of building that kind of institution and leading that kind of a shift. It’s not that we would be picking tech winners and losers, but it’s about … serving the industries that are growing, those that are the dominant wealth-building industries today.”
Targus
It helps that another board member, Michael Hoopis, is “pretty well wired” in the tech industry as chief executive of Targus Group International Inc., a global distributor of bags, cases and accessories for laptops and mobile devices.
Anaheim-based Targus has 45 offices worldwide and about 500 employees overall, about 200 of them in OC.
Its customers include computer manufacturers, including Lenovo and Hewlett Packard, and retail stores, such as Best Buy and Staples. It recently entered the cellphone and tablet markets, helped by its recent acquisition of phone-case maker Sena Cases in Irvine.
Hoopis joined Targus in 2006 after seven years as chief executive of Newport Beach-based Water Pik Technologies Inc. He oversaw Water Pik’s spinoff from Allegheny Teledyne Inc. in 1999 and remained in charged until the company was sold to Washington, D.C.-based private equity firm Carlyle Group for $380 million.
“I’ve been in the consumer-products industry my entire career,” Hoopis said. “I’m not a banker. It’s not all bankers on that [Pacific Mercantile] board. But I do believe I bring an interesting perspective because I’m not. The problems of businesses aren’t all that different from one to another. There are some exceptions always, and obviously in a bank, there are regulatory [concerns]. But developing a strategy, developing a growth engine, building a team, executing strategies—those things are all the same.”
Latest Additions
John Clark and Stephen Yost are among the latest additions to the bank’s board.
Clark, a certified public accountant by trade, runs Westar Capital LLC, a Costa Mesa-based private equity firm founded by fellow director Argyros and Chuck Martin, head of Newport Beach-based investor Mont Pelerin Capital LLC.
Clark started his career at PricewaterhouseCoopers and later established a practice with a partner. That firm was acquired by Ernst & Whinney, and Clark served as the managing partner of its OC office in Newport Beach.
Clark also spent seven years as chief executive of a manufacturing company that was acquired by a larger organization.
“And I decided to retire, I guess,” he said. “But after a few years of not working, I was offered the opportunity to join Westar Capital.”
Yost joined the board in March, bringing decades of credit administration experience. He served as chief credit officer of Imperial Bank and oversaw the credit side in the bank’s merger with Comerica Bank. He then served as the regional chief credit officer for the bank’s Southern California and Arizona markets and now heads consulting firm Kestrel Advisors in Arroyo Grande.
Multiyear Process
Carpenter & Co.’s Flemming said the board has just gotten started on a “multiyear process.”
“The first year has been about beginning to put in place tools, including the products that companies need today, and putting in place the leadership that knows how to train and market those products,” Flemming said. “The infrastructure piece of the puzzle is behind us. Now it’s about the marketplace traction and rolling it out and finding the demand. Hopefully, the [coming years] become a time of self-sustaining and further growth.”
