Ed Carpenter has done it again.
The longtime banking investor, who’s among the Business Journal’s 50 most influential businesspeople in Orange County, last month sold his company’s stake in Costa Mesa-based Pacific Mercantile Bancorp (Nasdaq: PMBC) for $61.2 million, reaping returns on a stock that he started investing in when it was around $3 and that now hovers around $9.
“We are very pleased that the Carpenter Fund was able to provide the necessary capital to the company and assist with improvements in the company’s operating performance,” said Carpenter, who is also chairman of the bank’s board of directors.
Last year, he successfully sold stakes in Heritage Oaks Bancorp and Plaza Bancorp to Irvine-based Pacific Premier Bancorp (Nasdaq: PPBI). Financial terms of the deal haven’t been disclosed, but he likely at least doubled his investment.
It was the latest successful bank investment for Carpenter, 1974 founder of Irvine-based Carpenter & Co.
An even better outcome was Carpenter’s 2015 sale of shares in Bridge Capital Holdings, which was “one of the best returns on an investment that bankers have ever seen,” Pacific Mercantile Chief Executive Tom Vertin told the Business Journal this year.
Carpenter invested $39 million in San Jose-based Bridge by 2010; he exited the investment with gross proceeds of $144 million.
During his career, Carpenter has advised investors how to start about 500 banks and 200 savings and loans, or more than five times as many banks as anyone else in the country.
Banking Background
During the early 1980s recession, Carpenter conducted “workouts” to help banks in trouble, an activity that helped him become well-known to banking regulators. When the savings and loans crisis hit late in the decade, his firm became the country’s second-largest asset-liquidation contractor.
In 2007, the firm observed bank stocks trading at all-time highs and growing too quickly, which he believed could lead to problems and opportunities.
The Carpenter Community BancFund raised $280 million with the idea of providing institutional investors a method to invest in community banks, whose market caps are typically too small for big investors. He also structured the fund as a bank holding company so it could actively manage banks and hold big positions, giving it a leg up on other private equity funds that were limited in bank ownership.
A Floundering Bank
Pacific Mercantile, begun in 1999, floundered after the 2008 financial crisis. By 2012, it had two regulatory cease-and-desist orders involving its mortgage and commercial banking practices.
Beginning in late 2011, Carpenter began investing in Pacific Mercantile when the stock hovered around $3 per share, becoming its chairman and its largest shareholder in 2012.
Vertin, who was previously in the running to head Silicon Valley Bank, joined in 2012 as president of the commercial unit and became chief executive in 2016.
Vertin changed the bank’s focus from funding transactional real estate to operating companies, where he seeks the entire relationship of loans, deposits and treasury management.
Vertin’s secret sauce includes a program developed in-house called Horizon Analytics. He employed Silicon Valley programmers and bankers to design the program to provide detailed marketing information to small- to medium-size companies with annual sales of $10 million to $70 million. It uses a private company database and financial analysis techniques typically available only to large public companies.
Pacific Mercantile ranked as Orange County’s sixth-largest commercial banks last year, with some $1.2 billion in assets.
Forced Sale
Carpenter’s fund sold 7.42 million Pacific Mercantile shares at $8.25 each, reaping $61.2 million, according to a filing with the Securities and Exchange Commission.
A day before the sale, the stock closed at $10.20 on Sept. 13. The discount on the block trade is typical for thinly traded shares; Pacific Mercantile’s shares averaged 19,700 daily trades in the past three months.
Since the disclosure, the stock has fallen 13% to $8.95; it’s still higher than its 52-week low of $8.05 in February.
Carpenter said his fund had to sell its shares because it was “approaching the fund’s expiration date, thereby driving the necessity for the sale of our equity interest.” The fund has a 10-year expiration date.
Philadelphia’s Patriot
The lead buyer was a fund of Patriot Financial Partners LP, a Philadelphia-based private equity firm that invests in community banks, thrifts and financial services companies. James Deutsch, a partner of Patriot who has almost 40 years of banking experience, will join Pacific Mercantile’s boards of directors.
“The company is well positioned in the Southern California market to continue serving small- to medium-sized businesses and helping them succeed,” Deutsch said in a statement.
The firm, which owns about 16% equity interest in Pacific Mercantile, also holds a 5.7% stake in rival Banc of California Inc. (NYSE: BANC) of Santa Ana. Patriot Managing Partner W. Kirk Wycoff is on Banc of California’s board of directors.
Still Active
Carpenter will continue as a Pacific Mercantile board member. John Fleming, Carpenter & Co.’s chief operating officer, will retire from the board after the next election.
Nowadays, Carpenter said he’s advising new bank openings in Orange County that haven’t yet been publicly disclosed. He’s also advising “very large companies backed by venture capital funds” that are getting into the financial technology industry and would like to have the same capabilities as banks.
Keefe, Bruyette & Woods, a unit of Stifel Co., acted in a financial advisory role and assisted Carpenter with the sale of the common stock in this offering.
