It was being metaphorically clobbered over the head by an elderly shareholder's purse that crystallized the roller coaster Peninsula Bank President Larry Willette had been riding ever since last July, when Peninsula announced its intention to merge into Western Bancorp.     "She was sitting right there," says Willette, pointing to the chair alongside his office desk, slowly shaking his head at the memory. "She was furious with me, with the board of directors . . . with any of us who were trying to take her bank stock from her." Even after countless explanations that her stock, in which she had a post-dividend basis of under $1 which would net her $45 and change, she was undeterred. "I don’t care what the price is," she ostensibly said, wagging her finger at Willette. "Don't you dare sell my bank!"     This proposed merger wasn’t a case of a megabank foisting itself onto a poor little community institution, nor did it feature faceless corporate raiders intent on looting Peninsula's fat coffers. Instead it was a coolly rational, potential win-win for both buyers and sellers, with Peninsula Bank standing to reap an unheard-of 4.2 percent multiple for its stock and Western acquiring one of the state's most well-respected banks. The deal was officially called off on Oct. 30, 1998.

Peninsula Bank President Larry Willette (left) and Chairman John Rebelo carry on in the bank that did not merge.

    "We went into this merger because of price and we came out of it because of price," Chairman John Rebelo says simply. "The bank is not for sale, but that doesn’t mean it can’t be sold."

    It was late 1994 or early 1995 when John C. Eggemeyer III met Rebelo in the course of Eggemeyer's making his community bank rounds in Southern California. Among those Eggemeyer does investment work for is Peter Huizenga, a part-owner of the Miami Dolphins and less-flamboyant brother of Wayne Huizenga. Eggemeyer's Castle Creek Capital Corp., a successful group of funds that invested in financial institutions, had turned its sights from the Midwest and Northeast. "California was the last market in the country to recover (from the recession)," says Eggemeyer, speaking from his Rancho Santa Fe home. In the past, he'd purchased banks for his private investors and then flipped them after creating a valuable franchise. "I became fascinated with the explosive growth out here and the opportunity for finding high investment returns."
    Although the Peninsula deal fell through, Eggemeyer does not lack for San Diego banking ties. In February 1995 he was named chairman of Rancho Santa Fe National Bank where he was well known to the the bank's board. Eggemeyer's investment banking entity, Belle Plaines Partners, had worked with RSF when the bank upped its capital in the early 1990s.
    Jim Boyce, president of Rancho Santa Fe, says Eggemeyer was a popular choice for the chair's slot when Paul Stevens decided to give it up. There's no conflict as Eggemeyer provides no investment banking services to RSF. The bank's 1997 proxy statement (1998's is being written) lists Eggemeyer as owning about 200,000 shares personally and controlling another 107,000 that are held by Castle Creek.
    After their initial meeting, casual, friendly relations ensued for the next couple of years between Rebelo and Eggemeyer. Both men are intelligent, committed to their work, share a deep respect for the power of community banks and sometimes crossed paths at California Bankers' Association events. While Eggemeyer was busy setting up his Southern California franchise through Western Bancorp (formerly Monarch Bank) in Los Angeles, Rebelo found himself on the receiving end of a flurry of inquiries about his bank's interest in merger or acquisition. It wasn’t only Eggemeyer's group that coveted the value of Peninsula's loyal community ties and solid balance sheet as a strong foothold into San Diego County.
    Early in 1997, Peninsula's board agreed to hire Montgomery Securities to help it weed through all of this outside interest. Eggemeyer says he had continued his "low-key dialogue" with Peninsula, for he was very impressed with the bank and its management. "Large banks are in business to sell products, community banks sell service," he says. "No one in San Diego epitomizes that more than Peninsula Bank." When he heard via the grapevine about the contract with Montgomery, he upped his suit and made an oral offer to Rebelo.
    "As soon as he made that offer, I took it to my board," says Rebelo. "It was so attractive that we knew we had a responsibility to take it to the shareholders as well." But before announcing the offer, Montgomery Securities advised the bank to enter serious negotiations with another ardent suitor as well, to better gauge Western's offer.
    On July 24, 1998, a joint announcement was made: In a tax-free pooling of interest transaction, Peninsula shareholders would receive a (post-dividend) stock price of $45.75 per share in Western Bancorp stock, for a total value in excess of $114 million. Western's stock is listed on the NASDAQ exchange and far more liquid than Peninsula's, not a minor consideration for older shareholders. Peninsula would retain its name and management in this merger, "so it would be transparent to the customer," says Willette. Rebelo would have joined Western's board, representing the San Diego subsidiary in the three-county stable of banks. And of keen interest to Peninsula, which had grown to 10 branches countywide the slow and steady way — through internal earnings — was the promise of additional capital for expansion. With growth came not only dominance in the marketplace, but also the ability to offer more career advancement to loyal employees.
    In tandem with Western's Santa Monica Bank, which was assimilating the newly acquired Bank of Los Angeles, and its Southern California Bank, Peninsula was crowned the third pillar in Western's structure; adding $438 million in assets which would boost Western Bancorp to the $2.7 billion asset mark, ranking it among the state's largest 12 banks.

    When the merger news broke, opinions reverberated from every quarter. Competing bankers looked enviously at the record 4.2 book multiple that Peninsula was entertaining. "Peninsula was always considered a leader, a benchmark bank in the industry," says one local banker. "I always thought that if they were sold, it would be to one of the big, old-line banks, listed on the New York Stock Exchange."
    Over the years, the bank "had done a magnificent job of turning customers into shareholders," says Howard Levenson, whose Western Financial Corp. is the primary market maker for Peninsula's stock. "There were people who held that stock for more than 20 years . . . there was a waiting list for up to a year for people who wanted to buy it . . . there was a lot of disappointment among shareholders about the deal."
    The proposal spurred much journalistic speculation as well. Gary Findley, writer of Findley Reports banking newsletter, stated: "We are sad to see this transaction not because of the price, but solely because Peninsula has been the only banking institution in California that has been a Premier Performing Bank since the inception of this designation in 1976. ... While we wonder why, one thing we know is John Rebelo . . . is one quality banker and if he determined it was time then we will accept that for what it is."
    Employees had been kept in the loop all along, says Willette, so while the merger initially was a shock, they accepted the promise of a bigger and better Peninsula and helped management try to calm customer and shareholder fears. "They all got on the bandwagon . . . I just can’t say enough about this group of people," Willette says with emotion. "They're a terrific team."
    But as the summer drew to a close, and the nation's stock markets swooned, all financial institutions took a drubbing. Peninsula's stock, which had been listed at $47 pre-merger and leveled in the mid-$40s after the announcement, took a hit which brought it to the low $30s. Western Bancorp also dropped precipitously. "Two things happened simultaneously," explains Eggemeyer. "The market went through a very rough period, and while some returned, others stayed depressed. At the same time, the investment community sent a message to Western Bancorp, saying 'You paid way too much for Peninsula' . . . they were really quite critical about it. We’ve made so many acquisitions, and then do one that the market didn’t like . . . it really made them angry," the financier recounts almost wistfully.
    By late October, it was pretty evident that shareholders were not going to be called to vote on this merger. Two of the no-harm, no-foul triggers built into the merger contract had been tripped: Western's stock dipped below $36.66; and its drop pulled it out of kilter with an agreed-to bank stock index. On Oct. 30, the deal was cleanly terminated.

    Eggemeyer says Western Bancorp will listen to the marketplace and stay the course for the foreseeable future. Not only will that give the hardworking crew some breathing space, but also will let the financials finally fall into a more readable, apples-to-apples comparison. And as for Castle Creek Capital, the catalyst behind the banks, Eggemeyer says he is working on "a Western-style strategy in Texas and maybe the Bay Area," but will retain his residency in Ranch Santa Fe with his wife and young twin sons.
    "It is disappointing in some ways, not to be able to go any further with Western," says Rebelo. "They're still hitting their (financial performance) numbers and are a good, committed company. In some ways, there is relief, at least from the standpoint of how easily we could exit the contract, without lawsuits. I have told our board — and anyone else who asks — that our bank is not for sale, but that doesn’t mean it can’t be sold."
    "We learned an awful lot through this experience; it was a hard one," says Willette. "And while it’s not something I want to do again very soon, some very good things came out of it." At a recent board retreat, a rejuvenated Peninsula board was set to tackle the thorny questions of management succession, an aging roster of directors, competing in this technological era and stock liquidity. The latter is less of a problem these days, says Willette, since the merger excitement coincided with a family's 10,000-share block that was put on the market for estate reasons. He anticipates the stock will likely be listed on the Nasdaq stock exchange in the near future.
    To top it off, despite the $500,000 or so that this non-merger cost the bank, Peninsula for 1998 will once again report record earnings, this time of about $4.5 million, compared with $3.6 million a year earlier. That's the kind of news that keeps those little old shareholders delighted.

    While none reached the stratospheric levels of the national megabank, mergers/acquisitions involving San Diego financial institutions were more plentiful in 1998 than at any time after the early 1980s. In all, five betrothals made news, and, except for Peninsula Bank's suit by Western Bancorp, all made it to the altar by year’s end.
    First Pacific National Bank, or rather its Escondido-based parent, FP Bancorp, was acquired for about $110 million by Zions National Bancorp in May. Soon thereafter, Utah-based Zions merged First Pacific with Zions' San Diego flagship, Grossmont Bank, which has resulted in a $1 billion-plus institution with 24 offices in San Diego and Riverside counties.
    Downtown’s Bank of Commerce was successful early in the year by landing Rancho Vista National Bank for $35 million in stock. That North County institution brought assets of about $125 million to Bank of Commerce's nearly $600 million.
    Chula Vista's Pacific Commerce Bank brought three offices to the table for which Scripps Bank paid $25 million in stock late last year, resulting in an institution with assets in the $470 million range and an entree to the South Bay and Mexico for La Jolla-based Scripps.
    And finally, Escondido-based Palomar Savings and Loan Association was acquired by Community West Bancshares, the parent of Goleta National Bank for about $20 per share. The merged institutions will have about $220 million in assets, and Palomar will expand its focus from primarily real estate lending to other bankly pursuits.

— Denise Carabet