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First Business Bank Swallows 1st Pacific in Whale of a Catch

In a surprise announcement, the minnow is eating the whale.

First Business Bank has agreed to purchase 1st Pacific Bank of California, a lender four times its size, in a deal first revealed to the employees of both institutions on July 16.

The transaction, which the Business Journal reported in May was in the works, involves First Business, with $100 million in assets, paying $1.40 per share for 1st Pacific, with more than $400 million in assets.

The agreement also calls for First Business to pay 1st Pacific shareholders a percentage of the recoveries on a number of charged-off loans, estimated at $7 million in value. The deal needs approval from both banks’ shareholders and regulators, and is expected to close in the fourth quarter.

The newly merged bank, which would retain the 1st Pacific Bank of California name, would boast about $500 million in assets with 11 offices, making it the eighth largest local lender in the county.

Nathan Rogge, chief executive at First Business Bank, said his bank had been talking with 1st Pacific about a merger for eight months.

The banks were brought together by a common fact: 1st Pacific was losing money and needed more capital, while First Business had capital in spades, especially after raising $18 million at the end of 2006 from its primary owner, the Auerbach Family Trust, controlled by local developer Ernest Auerbach.


Capital Base

That capital base, more than double what’s needed to be classified as a well-capitalized bank, enabled the smaller lender to convince regulators to sign off on the deal.

“Realistically, (the capital) is one of the reasons why a small fish can swallow the big fish. We have the equity to fix this,” he said.

First Business also has a track record of fixing itself, having emerged in 2007 from a consent order from the Office of the Comptroller of the Currency it received when it was called Ramona National Bank. Following the order, the bank replaced its top management, raised more capital, moved to Carmel Valley, and changed its name.

Following the merger, the combined board will have eight members, including outgoing chief executive of 1st Pacific, Ron Carlson.

In addition to CEO Rogge, the other main executives are Bill Roche, chief financial officer, and Paula Berggren, chief credit officer.

Rogge said personnel decisions haven’t been completed, but in case of duplications, the likely survivor will be First Business employees.

First Business has but 28 employees, while 1st Pacific has more than 100.

Several other banks showed interest in buying 1st Pacific, sources said, including Security Business Bank of San Diego and California Community Bank.

What appears to be a great deal for First Business may not be so sweet if 1st Pacific’s loan portfolio continues to deteriorate, said one local banker.

“The $64,000 question is what kind of exposure they are taking on because 1st Pacific had a pretty good concentration of land and development loans,” said Mike Perry, chief executive at San Diego Trust Bank. “They are gaining size and locations but the determining factor will be how the loan portfolio performs over the next three years.”

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