Mechanics Bank of Richmond (MCHB)

[Enterprising Investor]

Mechanics tunes up as growth vehicle (10/10/14)

A new majority owner will transform the bank into a platform for acquisition-driven growth, and the buyer’s M.O. suggests Mechanics will get a lot bigger, fast: ‘We’ve always been acquisitive. It’s served us well.’

Mechanics Bank’s planned sale of a controlling interest to Ford Financial Fund means its second century is likely to look a lot different than its first.

The 109-year-old bank will now be used as a platform for other bank acquisitions, likely starting in the Bay Area and possibly ending with a sale. It’s a strategy with which Ford Financial is very familiar, having profitably bought, built up through acquisition and sold banks around the country. That’s its road map for Mechanics as well.

“We’re not making any secrets about our ambitions,” said Carl Webb, a co-managing member of Ford Financial, who along with bank President and CEO Christa Steele sat down with the Business Times to discuss the future of the bank, based in Richmond but about to move its headquarters to Walnut Creek. Webb said his firm has already discussed with Mechanics Bank’s board possible acquisition candidates.

When news of Ford’s tender offer for 51 to 65 percent of the bank’s shares broke late last month, Webb said his phone started ringing. He declined to identify the parties on the other end of the line. Were callers simply offering congratulations, or offering to begin acquisition talks?

“It was both,” he said. “We had a few calls that said, ‘Just keep us in mind.’”

“We’ve got visions for what we think, hope, desire this company to look like in five or 10 years down the road,” Webb said, noting that Mechanics Bank will be bigger but he hesitates to say by how much. “There are opportunities, very close at hand, in concentric geographies. That’s where you will see us first.”

What’s surprising many in the financial community is the profile of his targets. Webb said he’ll be looking for community banks with $1 billion to $5 billion in assets, primarily in California. That’s relatively large prey for Mechanics, with assets of $3.3 billion. What’s more, while banking insiders expect the ranks of small banks to continue to thin, those above $1 billion are generally regarded as large enough to survive independently. Ford Financial, with its large checkbook, sees it differently.

“We’ve subscribed to this theory that there’s over-capacity in the banking system in this country,” Webb said. “What we’re typically able to do with a larger bank is to buy a competing bank, take out 45 percent of the costs and retain 97 percent of the deposits. That’s a hugely accretive business model and everyone’s employed it from Wells Fargo to us and everyone in between.

“As long as that dynamic is still there, bank acquisitions will continue,” Webb said, noting that community banks are facing serious headwinds with costly new regulations and low interest rates pressuring profits. “Size and scale have become more important. It’s become a size-and-scale game for a lot of reasons but especially due to regulatory pressures.”

A ‘tipping point’ for bank buyouts?

With Mechanics Bank out shopping for acquisitions, along with Bank of Marin and others, it could signal that Bay Area banking consolidation is taking on a new flavor. It’s not just ailing or tiny institutions that are looking to find a match.

“We may have reached a tipping point in which strong community banks decide to merge,” said Michael Natzic, a senior vice president at Crowell Weedon, which makes a market in shares of about 75 California community banks.

Mechanics Bank has long been seen as a conservatively managed bank with roots stretching back to 1905 when it began in Pinole cashing paychecks for railroad workers in Contra Costa County. The bank’s moniker comes from the name railroad workers sported at the time, which also is reflected in other San Francisco institutions such as the Mechanics Institute, with its private library and chess room.

Will Ford opt for a name change?

“No, no. This is such a unique bank, if not the most unique bank, that we’ve been associated with in our 35 years,” Webb said. “You have a 109-year-old bank that is well identified, enjoys a great reputation and good brand identity. The last thing you’d want to do is change the name.”

“And there are some horrible names in banking, by the way.”

“There’s always a place for a community bank, and that’s what Mechanics Bank has been and we expect it to be one for a long, long time,” he said. “We cut our teeth in this business on community banks. I grew up in a small West Texas town. The bank was the town, it was a reflection of the community.”

‘California has been very good to us’

Asked whether Ford Financial taking control of Mechanics Bank means it’s only a matter of time before the entire bank is sold, Webb said, “No, private equity is a term used broadly, and means many things. We don’t have any clock running or time horizon or date in the future that we have to hit. The best thing for this company — and in turn for Jerry (Co-Managing Member Gerald Ford) and myself as general partners and our limited partners — is to maximize the value of this company over a longer period of time by growing it organically and acquisitively.”

“We’ve always been acquisitive. It’s served us well. As long as you’re growing and creating exponential value, why stop?” Webb said.

It’s not often that people from Texas trumpet California’s business environment, but Webb said the private equity firm has long sought opportunities nationwide, with an emphasis on California.

“California has been very good to us,” Webb said. “We love California.”

Ford Financial acquired a series of banks that rolled up into Golden State Bancorp, parent of CalFed Bank, which was sold to Citigroup in 2002 after making six acquisitions over nine years, turning a $12 billion institution in 1994 into one with $55 billion by the time of the sale. More recently, the bank sold Santa Barbara Bank & Trust to Union Bank in 2012.

All the pieces are in place for Mechanics to go on a similar acquisitions tear, he said.

“Is this bank a platform for growth? We came away with that box absolutely checked,” Webb said. “By that I mean, can we go out and use this bank, which is a solid, well-performing bank, as a platform for other acquisitions in California? That’s our vision.

“The first acquisition is the most difficult and then it becomes successively easier in cost-savings and consolidation as you acquire competitors in the market,” Webb said. It also becomes easier for potential merger partners to see the vision being realized.

“There are a lot of banks out there that are tired. By that I mean you’ve got a tired management team, you’ve got a tired board of directors, or the board is tired of the management team not delivering the financial plans they put forward every year, or shareholders are tired,” Webb said.

“I’m excited to be back in the Bay Area,” Webb said, noting that his wife grew up in the region and he serves on the board of San Francisco real estate giant Prologis. “The Bay Area is a special place. For a kid who grew up in a hardscrabble West Texas town, it’s the last place I expected to be.”

http://www.bizjournals.com/sanfrancisco/print-edition/2014/10/10/mechanics-bank-ford-financial-fund-m-a-plans.html?page=all