By: John Maxfield
When Blue Gate Bank opened its doors in Costa Mesa, California, on January 23, 2017, bankers across the country took note. It’s one of only five de novo bank applications to be approved by the Federal Deposit Insurance Corp. (FDIC) since 2009, and it’s the first new bank to open in California since the financial crisis.
Starting a new bank in the current environment is not an automatic path to riches, which is one reason why there have been so few of them in recent years. Interest rates remain oppressively low. Heightened oversight has ratcheted up compliance costs. And investors are wary of the amount of capital required to start a new bank nowadays, as well as the returns they expect to earn on that capital given the economic and regulatory landscapes.
Bankers and investors will therefore be watching Blue Gate closely to see whether it flourishes despite the many challenges it faces. The venture offers the tantalizing suggestion that the prospects for new banks may finally be improving, after eight years in which new bank formation had all but come to a halt. But Blue Gate’s ability to grow, appease regulators and navigate a course towards profitability will determine if other banks follow its lead.
The five de novo bank applications that the FDIC has approved since 2009 averages out to less than one a year and compares to an average of 154 annual approvals in the eight years leading up to the crisis. “When we went to the regulators in 2008, ‘09, ‘10, ‘11 and said we wanted to form a new bank, they encouraged us to instead buy an existing charter in order to take troubled banks off their hands,” says Jeffrey Gerrish, a longtime lawyer and consultant to community banks.
This is why the industry and investors have taken note of late of what seems to be an incipient uptick in new bank formations. “I won’t call it a wave of new entrants to the space, but I’m aware of at least four investor groups that are looking to stand up new banks,” says C.K. Lee, a managing director in Piper Jaffray & Co.’s financial institutions group. Edward Carpenter is seeing the same thing from his vantage point as chairman and chief executive officer of Carpenter & Co., a California-based firm that advises and invests in new banks. “There’s both an uptick in filings that have become public information as well as a strong uptick in interest from investors,” says Carpenter.
Eight banks applied for FDIC insurance in 2016, two of which were approved while six applications are still pending. That’s hardly worth noting when you consider that over 200 banks filed applications with the FDIC in a typical year before the crisis. Yet the eight applications submitted last year represent a fourfold increase over 2015 and an eightfold increase over 2014.
The regulators, and the FDIC in particular, are helping to fuel this interest. “We would love to see new bank formations and applications,” says a high-level FDIC official. “Applications for de novo banks enrich [the federal banking] system, and the OCC is encouraged to see applications from bankers who recognize the value of being part of the federal banking system and are committed to meeting the high standards required of national banks and federal savings associations,” concurs a spokesman for the Office of the Comptroller of the Currency.
Last April, the FDIC reduced the period of heightened regulatory scrutiny for de novo banks from seven years down to three years, where it had been prior to 2009. This is a huge development, says Chris Walsh, chief banking officer of Blue Gate Bank. During the de novo period, a bank has little room to deviate from its initial business plan and is subject to a 12-month regulatory inspection cycle as opposed to the usual 18-month cycle. “The change is a very proactive and positive thing for the industry,” says William Stone, CEO of Bedford, New Hampshire-based Primary Bank, which in July 2015 became the first de novo bank to open in the Granite State in over seven years and only the second new commercial bank in the country to set up shop since 2010.
The FDIC is also hosting conferences around the country to demystify the application process for de novo banks. It held events last year in New York City, San Francisco and Atlanta, and has three scheduled for this year in Dallas, Chicago and Kansas City. In December, moreover, the FDIC began soliciting feedback on a handbook developed to facilitate the process of establishing new banks. “This handbook is the latest in a series of steps we have taken to support the establishment of de novo institutions,” said FDIC Chairman Martin Gruenberg in prepared remarks at the time. “Our goal is to increase transparency about the application approval process and resources available to assist potential organizers.”
Bankers have found the FDIC true to its word, especially the staff in its regional offices. “I give the FDIC a lot of credit; I think they’ve done a very good job of reevaluating their position on de novos and having an open mind,” says Donald Musso, CEO of FinPro Inc., a New Jersey-based consulting firm that’s marshalled hundreds of de novo banks through the application process, including Primary Bank in New Hampshire. Walsh agrees, saying that “the west coast FDIC has been very supportive of us getting approved and open.” Stone echoed this sentiment, finding the FDIC to be “very cooperative and encouraging in the process.”
A not uncommon complaint, however, is that the FDIC’s central staff hasn’t been equally receptive. “They tend to be so concerned about making errors in judgment that if the filing doesn’t fit perfectly within a box, then nobody wants to go out on a limb,” says Gary Findley, a veteran California lawyer and consultant who’s helped more than 200 banks get started since 1967, including Blue Gate Bank.
On top of the regulatory outreach, a number of additional factors are coalescing to draw bankers and investors into the de novo space. Interest rates continue to pressure lending margins, but they’re inching up. The Federal Reserve increased short-term rates three times over the past year and a half by a total of 75 basis points, and long-term rates rose after the presidential election, the unexpected outcome of which also suggests that the regulatory burden on banks could soon abate. The rapid rise in bank stocks since the election is similarly tilting the math in favor of establishing a de novo bank over buying or injecting capital into an existing one.
But while Blue Gate Bank and other de novos may open the proverbial floodgates for applications, Findley doesn’t believe that much water has accumulated behind the dam. The dearth of interest traces first and foremost to the amount of capital it takes to start a bank nowadays. “The initial capital required to own a bank has gone up in every cycle since the 1970s,” says Carpenter. “And this time the capital requirements haven’t been raised on paper, but it is encouraged by regulators that there be enough capital to do all things, including increased compliance.”
It’s generally believed that $15 million is the minimum threshold to start a bank in the post-crisis world, though recent de novo banks have raised twice that amount. Blue Gate Bank raised $30 million, most of which came from the Gallaher family, which also has a major stake in First Community Bank in Santa Rosa, California. Primary Bank raised roughly the same amount from 421 community members in and around Bedford, New Hampshire. And while one of the earliest de novo banks to open since the crisis, Lakeside Bank in Lake Charles, Louisiana, initially raised only $12 million before its 2010 opening, it raised an additional $9.6 million two years later.
“The reason it takes more capital is because there were so many de novo banks chartered before the crisis that ended up failing,” says Tom Brown, founder and CEO of Second Curve Capital, a hedge fund that invests in banks. New banks failed at twice the rate of established banks, notes an FDIC official. The higher amount also enables a bank to grow to a size of relevance—$250 million or more in assets, say industry insiders—without having to raise capital again until after the 18 to 24 month start-up period during which most banks lose money. This size also enables the bank to have a higher legal lending limit that’s competitive with existing banks, which is what informed Blue Gate Bank’s $30 million target, says William Gallaher, chairman of the board of First Community Bank and the majority owner of Blue Gate Bank.
But it’s a de novo bank’s three-year business plan submitted to the FDIC as a part of its application for deposit insurance that ultimately dictates how much capital is needed. The FDIC requires new banks to have an 8 percent tier 1 capital ratio at the end of three years. This hasn’t changed from before the crisis, says an FDIC official, but the difference today is that compliance costs are higher coupled with the fact that it’s now more expensive to staff and equip a bank than it was a decade ago, all of which combine to eat up more capital than previously in the initial years of operation.
“This is a good change, by the way,” says Musso. “You should have to have enough capital to meet your business plan for the first three years. You do not want to have to go to the market to raise capital before then, because you’re probably not making any money and would have to issue stock at a discount to book value, diluting existing shareholders.”
Beyond the amount of capital it takes to open a bank, investors have also been deterred by a lower expected return on that capital. “If you have to put in $20 million to $25 million into a bank on day one in this low interest rate, highly regulated environment, I can’t pencil out the numbers that show a decent rate of return over a five-year period,” says Brown.
Interest rates are a culprit because of their impact on lending margins, but higher compliance costs are no less important. “We believe that the increased regulatory burden translates into a 30 to 40 basis point decrease in a typical community bank’s return on average assets as a result of additional report systems, controls, audits, all the stuff you have to have in place,” says Findley. A well-run community bank could earn 1.3 percent or more on its assets a decade ago, whereas the same bank today is lucky to earn 1 percent on its assets.
There are other concerns that weigh on the expected return from a de novo bank. Just like it costs more to operate a bank nowadays, some have found that it also costs more to go through the formation process. “The application was on steroids,” Findley told The Wall Street Journal last year. “Back 10 to 15 years ago, the application itself, and the whole business plan, was maybe 200 to 250 pages. Blue Gate Bank’s application was over 2,000 pages.” On top of this, Brown believes that the rapid proliferation of fintech companies lowers the “terminal value” of a de novo bank, which is the valuation multiple that a young bank can expect to attract from prospective acquirers five to 10 years into its lifecycle.
“Many investors are finding that the regulatory barriers are so high and so uncertain that it’s just not worth the time and expense of going through the process of filing a de novo application and building a bank from scratch,” says Lee. “They’ve found it easier to go and buy an existing charter or take their team and partner up with an existing institution.”
By and large, institutional investors with shorter investment horizons are staying on the sidelines. “A lot of banks were started before the financial crisis with the thought that they’d be run for five years or so and then sold, with investors making the majority of their money on the multiples inflation,” says Musso. “The de novos we’re seeing today are being started for a real business purpose or by a management team that wants to run the bank for the foreseeable future.” Findley agrees, adding that “if you’re looking for a short-term return on investment, you shouldn’t be in the de novo business.”
The de novo banks formed since the financial crisis confirm this. Lakeside Bank and Primary Bank are backed by community members who have vested and long-term interests in locally owned banks. “Our investors wanted to see a bank that was locally owned and locally operated that would keep money in the community,” says Lakeside Bank CEO Morgan “Mike” Harmison. The same reasoning was behind Bank of Bird-in-Hand, which opened in Pennsylvania’s Amish country in 2013. “There was, still is, a pent-up demand for a local bank,” the bank’s chief loan officer, William O’Brien, told The Wall Street Journal in 2015.
Blue Gate Bank, which is backed by a small group of experienced and well capitalized operators, cites an identical long-term, community-based rationale for its formation. “I’ve been in the banking business for 35 years and know a lot of small and mid-sized businesses in Orange County need community banks,” says Walsh. “The big banks hire recent graduates right out of school that are smart, but they don’t have business backgrounds. A lot of community banks, by contrast, have relationship managers and CEOs who are older, have ridden through economic turns with our clients, and understand the needs of small to mid-sized clients.”
Ultimately, a drop-off and then recovery in new bank formations is to be expected following a recession. “A period of consolidation is often followed by a period of new bank formation,” says Gerrish. “I think that’s what we’re beginning to see.” The current cycle has just taken longer to turn because of the depth of the financial crisis. “This is not typical of the cycles we’ve seen since we started doing this in 1974,” says Carpenter. “The recovery in new bank formations is taking about 18 months longer than the typical cycle.”
Higher rates will help this, as will a less onerous regulatory environment and further consolidation, all of which will make investors feel more confident about the prospects of starting a bank. But the initial catalyst has already occurred, says Carpenter: “When bank stocks from big on down are doing well, that’s the trickle effect that creates interest across the board.”
Blue Gate Bank opened in January 2017 as the first de novo bank in California’s Orange County since the great recession. Based in Costa Mesa, it is one of just a few banks in the nation to receive FDIC approval for a new charter since 2009.
Blue Gate Bank Founding Chairwoman Molly Gallaher Flater’s vision to bring a client-centric community bank began in 2015 when she sought to address the lack of in-depth services from larger financial institutions. Soon after, she assembled a board of directors and executive team that successfully applied for and achieved FDIC approval in October 2016. As chairwoman, she leads an executive team that includes long-time banking veterans with many years of experience in the industry.
“We have a responsibility to make our communities stronger, and that begins with giving local companies the financial opportunities they need to be successful,” said Flater. “That’s what sets Blue Gate Bank apart from other community banks. We believe in a client-focused approach to service and are passionate about making great things happen.”
BankNews Editor-in-Chief Bill Poquette interviewed J. Chris Walsh, a 37-year veteran in the banking industry, who joined Blue Gate Bank as an organizer/founder in February 2016 and serves as director of banking month. Prior to joining Blue Gate Bank, Walsh served as CEO and president of Irvine, Calif.-based Sunwest Bank. During his leadership, the bank more than tripled in size to approximately $820 million in total assets, becoming one of the most profitable banks in Orange County. During his tenure, Walsh led five FDIC acquisitions and expanded the bank’s presence into Arizona, Idaho, Utah and Washington.
Q: What prompted the name “Blue Gate?”
A: We thought a lot about the name. There are a lot of banks incorporating words like “California,” “West Coast” or “Commercial” into their names, and we didn’t want a name that would pigeonhole us into one product or place. We wanted our name to reflect unlimited horizons. Blue Gate happens to be the street where the bank’s founders live, and it’s worked well for us as a name. The imagery it presents helps to distinguish us and set us apart.
Q: Why did the organizers opt for a de novo charter versus buying an existing bank, which arguably may have been less costly?
A: There were a couple of reasons for that. First, we wanted to start fresh with no loan or regulatory problems. Usually, when a bank is for sale, it’s not necessarily that something is wrong, but that its investors want out. “No baggage” comes to mind as a good term. The second reason was that our founders and investors have a lot of community banking experience in Northern California, and they saw an opportunity to bring that to Southern California. They have a passion for the industry and a proven philosophy for how to thrive in it.
Q: California lost 40 or so banks during the recession through failures and there has been ongoing consolidation before and since. Were these motivating factors in starting a new bank?
A: Yes, they were, especially in the Orange County, California, marketplace, which has experienced a lot of consolidation of community banks. We felt this was a great opportunity to start a community bank for small to mid-size businesses and high-net-worth clientele seeking the kind of personalized service they could no longer find. In addition, community banks offer more flexibility than the “credit scored” lending practices of big banks, which creates further opportunity for us.
Q: How did you convince investors to join the venture? Were most investors local?
A: Most investors are from Northern California, and the Gallaher family who founded the bank represents the majority of our investment, although we have nearly 20 investors to date. What made our situation unique was that our investors have not only decades of banking experience, but a passion for this type of work. They know what a community bank truly entails, and the positive impact it can have on its clientele and the community as a whole.
Q: How long did the organizing/application process take?
A: We submitted our applications to the FDIC and the California Department of Business Oversight in February 2015, and received approval from the state in July 2016 and the FDIC in October of that same year.
Q: Did the encouragement expressed by the FDIC for de novos in the past couple of years help?
A: Considering that we’re the first bank in California since 2009 to get approved and to open, I think that should answer the question. We’re the third in the state to get approval in that time. The FDIC on the West Coast and the California Department of Business Oversight have been wonderful to work with, despite the fact that the process required us to file thousands of pages of documentation. Officials on the West Coast were very supportive throughout the process.
Q: Why was Blue Gate’s charter approved and those of other de novos — two in Southern California — have languished with regulators?
A: Those other banks haven’t necessarily languished with regulators. Both were approved by the FDIC and DBO. They languished in raising the $30 million required in capital to become established. I believe there were 11 approved banks nationwide in the past several years, and only three opened. The tough part is getting the investors. You need an investment group that is passionate about opening a bank and dedicated to the cause, and we’re fortunate Blue Gate Bank had this.
Q: Does the Blue Gate Bank approval signal that other approvals might be forthcoming soon?
A: From my knowledge, there are two other banks in the approval process in Southern California right now. I don’t know if they’ll get approved, but again, the tougher part is getting the investors and the capital.
Q: How is Blue Gate differentiating itself from the competition?
A: Banking is a very commoditized industry. We all offer virtually the same products and strive to deliver phenomenal service. What makes Blue Gate unique is that our senior management and board are extremely committed to helping businesses succeed. We’re very passionate about what we do. We really want to be involved in helping our clients’ businesses be successful, and that’s why we are dedicated to offering the products and services they need to thrive. We try to partner with our clients, looking at their one-, two- and three-year plans and working with them to achieve their goals. If they are successful, then we are as well.
Additionally, when clients first meet with a Blue Gate Bank relationship manager, they also get a senior manager. This is so important because not only do clients get the person who will be the quarterback of their relationship, but they also get a senior manager who will be supportive of their business and their journey moving forward.
Q: How soon will Blue Gate Bank be profitable?
A: We are hoping to be profitable in our second year.
Q: What is your anticipated asset size in two, three, five years?
A: We expect to reach $300 million in two years; $450 million to $500 million in three; and in five years, that’s a tough question, but we are aiming for $750 million to $1 billion. It’s arguably a real aggressive projection, but that’s where we are aiming.
Q: Would you encourage or discourage potential organizers of other de novo banks?
A: I would encourage other de novo banks if their senior management and board have the same huge passion and vision for banking that ours does. If they don’t have a hunger for it, they’re not going to have the commitment needed to succeed. Everyone, from the board members who raise investment capital to the managers who provide that first-level of service to our clientele, needs to have that passion and courage to always strive to do their best. If they don’t have that hunger to commit to that level of dedication, I’d probably discourage them from starting.
By Jackie Stewart
There’s more to Southern California than warm weather and sunshine.
The area is also getting more looks from bank organizers than any other part of the country. Two of the five bank charters approved since 2011 have been planned for that region, with two more applications pending.
Though the numbers are relatively small, they are meaningful given the overall dearth of de novo activity since the financial crisis. And the concentration of applications in one region certainly merits closer inspection.
There are several reasons for the mini wave, industry experts said. Southern California rebounded strongly after the crisis, creating an interest in starting new banks. Organizers are also hoping to lure small-business customers away from the region’s established players while taking advantage of disruptions caused by consolidation.
“The entrepreneurial spirit of Southern California makes it an ideal spot for a community bank to open up,” said Chris Walsh, director of banking at Blue Gate Bank in Costa Mesa, Calif., which opened in January. “There are so many small and midsize business opportunities.”
A steady decline in the number banks based in California has provided an opening for new banks to pick up employees, investors and customers.
The number of institutions in the state has fallen by nearly 45% since late 2008, to 179 institutions on Dec. 31, based on data from the Federal Deposit Insurance Corp. Los Angeles had a 37% rate of decline from 2008 to 2016, with 76 banks still around. San Diego, which had 31 banks at the end of 2008, has only nine now.
The nationwide rate of decline was 29% over the same period.
“When you have consolidation … there’s often dislocation of customers,” said Gary Tenner, an analyst at D.A. Davidson. “That’s where the opportunity is. There are likely experienced bankers in the markets and these de novos think they can leverage that.”
Higher interest rates could also make it easier for a new bank to open, Tenner added.
Orange County, just south of Los Angeles, is a popular locale. Blue Gate is based in Costa Mesa, and the proposed SoCal Bank is planned to open in Santa Ana. Core Commercial Bank would have been located in Newport Beach, but it failed to raise the necessary capital after received regulatory approval, several sources said.
San Diego would also get a new bank if the proposed Endeavor Bank is approved.
Requests for comment from SoCal, Core Commercial and Endeavor were not returned.
Orange and San Diego counties have diversified economies that would help banks avoid concentration risk, said Rodney Brown, president and CEO of the California Bankers Association. Each market has a growing technology sector and a multitude of professional services such as accounting and law firms. Universities also provide a deep bench of talent for banks in hiring mode.
“The economy is very healthy,” Brown said. “We’ve enjoyed strong economic growth and there’s really meaningful job creation in higher-compensated professions. All of the right ingredients are there to serve consumers or businesses and grow a franchise over time.”
The new banks could thrive at attracting small-business clients, said Ruth Razook, CEO of RLR Management Consulting, which has worked with two of the California de novos. She noted that her firm moved its business to a smaller bank after a larger institution required it to hold significant deposits to avoid fees.
Many of the applications in California have emphasized a focus on small and midsize businesses. Doing so would make sense because it would help a fledgling bank bring in larger deposit accounts, which in turn could help fuel loan growth, Tenner said.
Blue Gate has zeroed in on several niches, working with homeowners associations, professional practices and escrow firms, which largely reflects the bankers it has been able to hire, Walsh said. He added that the Gallaher family, a predominant Blue Gate investor and a founder of First Community Bank in Santa Rosa, has helped the bank gain traction.
Renewed interest in de novo banking has been strictly investor driven, a spokesman for California’s Department of Business Oversight said. The state’s banking regulator has not been actively soliciting new banks.
An FDIC official, who asked not to be named, was unsure why California has drawn more interest than other states, though he said attractive growth markets could play a role. He noted that the FDIC, along with the Office of the Comptroller of the Currency and the Federal Reserve, had hosted events in different regions to discuss the de novo process, including a session in San Francisco last year.
The OCC is encouraged to see applications from bankers who recognize the value of being part of the federal banking system and are committed to meeting the high standards required of national banks and federal savings associations, an agency spokesman said.
The Fed did not provide any comment.
Bank organizers will face some challenges. California’s state regulator is taking deeper looks into business plans to make sure that any proposed bank would have a diversified loan portfolio, the agency’s spokesman said.
The FDIC official said the agency’s process isn’t necessarily more rigorous now, but organizers must be ready to address questions about areas, including cybersecurity and mobile banking, that didn’t get much attention a decade ago.
It could prove difficult finding qualified executives willing to go through the hassle of starting a new bank. Regulators want founders with management experience absent of blemishes tied to the financial crisis, industry expert said. Directors are also facing greater scrutiny, including reviews of their credit histories.
“In the past, if you threw together a management team and capital and kind of had a vanilla business plan, you would probably get approved,” said Tim Chrisman, founder of Chrisman & Co., an executive recruitment firm that worked with Blue Gate. “Now the bar is a lot higher for de novos in terms of talent.”
Another hurdle involves capital. Core Commercial, for instance, was unable to raise the nearly $28 million it needed to open. At one point, a single director was poised to own about a fifth of the proposed bank’s common stock.
De novos need investors who are prepared to remain shareholders for at least a decade. Not everyone has the stomach to wait around for a new bank to turn a consistent profit, industry experts said.
“I’m not optimistic we will have a significant number of new charters,” said Gary Findley, a lawyer who worked on Blue Gate’s application. “Part of it is the cost, the quality and qualifications you need for directors and officers. You need a well-thought-out business plan, and not a lot of management wants to go through that.”
By Carrie Rossenfeld
COSTA MESA, CA— A lot of the challenges facing community business banks—or all banks, for that matter—hinge on the interests of their investors, who in large part establish the culture of a bank, Blue Gate Bank’s director of banking Chris Walsh tells GlobeSt.com. Blue Gate, a community bank with a leadership team of industry veterans who each bring 20-plus years of experience to the table, recently opened its doors here, marking it the first de novo bank to open locally since 2009. We spoke with Walsh, who offers nearly four decades of banking-industry expertise, about how the company is helping local businesses grow and sustain their organizations with products and services tailored to their needs, including real estate lending.
GlobeSt.com: Tell us the Blue Gate story.
Walsh: Blue Gate Bank was founded on the principles of helping small- to mid-sized businesses grow and achieve success, and that, in a large part, also helps the community. Our founders, Molly Gallaher Flater and Bill Gallaher, our board members and investors come from a strong banking background in Northern California. They know what the work of a community bank entails and are passionate about the positive impact Blue Gate can have on its clientele and the community as a whole. We are 100% committed to being a new kind of business bank that is bold, responsive, nimble and focused on the success of our clients.
GlobeSt.com: What makes Blue Gate different for the companies you serve?
Walsh: Blue Gate is a new kind of business bank. We’re unapologetically client focused. We work with a variety of clients, including real estate, property management, manufacturing, professional services, healthcare and service-oriented industries, as well as high-net-worth individuals. Each and every one of these clients has a need for a personalized approach to banking. What makes Blue Gate unique is that we’re very passionate about what we do. We partner with our clients, pairing them up with a relationship manager and senior manager to look at their business plan and work with them on out-of-the-box strategies to achieve their goals. We offer more flexibility than the “credit-scored” lending practices of big banks. Our philosophy is, if our clients are successful, so are we.
GlobeSt.com: What are the challenges community business banks face today, and how are you meeting them?
Walsh: A lot of the challenges facing community business banks, or all banks for that matter, hinge on the interests of their investors. It’s the investors who in large part establish the culture of a bank, and that works its way into all facets of the business—from senior management to the products they offer to their clients. Blue Gate is extremely fortunate to have investors with both decades of banking experience and a real passion for this type of work and the good it can do for a community. That gives us greater flexibility in the way we partner with our clients.
GlobeSt.com: What else should our readers know about your bank?
Walsh: Blue Gate Bank is one of just a few banks in the nation since 2009 to receive approval from the Federal Deposit Insurance Corp. for a new charter, and we’re the first in California to open. Getting a new charter is a much more rigorous course than it once was. Much of Blue Gate’s success was based on the solid backing we have from our investors and our comprehensive business plan, which has projections to be profitable in our second year.
Blue Gate Bank, an independent bank aimed at businesses and customers with high net worth, has opened at 611 Anton Blvd. in Costa Mesa.
It is the first new bank to open in Orange County since 2009, the company said, and only the eighth new bank to get regulators’ approval in the United States since 2008.
It offers checking, business and real estate loans and certificates of deposit.
Blue Gate has 12 employees in Orange County.
INVESTOR GROUPS ENCOURAGED BY PROSPECTS OF GROWTH AND GENTLER REGULATORY ENVIRONMENT
By Ben McLannahan
The “Trump Bump” has prompted investors to load up on shares in US banks. But it has also rekindled interest in another form of bank investment – building one from scratch.
Applications for new charters almost ground to a halt in the wake of the financial crisis, as low interest margins, sluggish regional economies and tighter regulation combined to discourage investors from taking the plunge.
Interest began to recover after the Federal Deposit Insurance Corporation eased its rules for new banks almost a year ago. Now, analysts say that more groups are moving forward with plans, galvanized by prospects of more vigorous growth, lower taxes and a gentler regulatory environment under President Donald Trump.
The FDIC is weighing six applications for bank charters from five investor groups, across California, Tennessee, Georgia, Florida and Texas. An official said that was a significant increase on the application rate of the past few years.
“Things are beginning to stir,” said Scott Martorana, executive managing director of FinPro Capital Advisors, a New Jersey based consultancy specializing in bank startups.
“We’ve had more conversations in the past six months to a year, than in the past few years before that.”
The financial crisis was particularly tough on small banks, many of which merged to cut costs, while hundreds more collapsed under the weight of bad loans. There were 8,534 banks reporting to the FDIC at the end of 2007; by the third quarter last year the total was 5,980.
Last April the FDIC tried to spur new bank formation by shortening the period in which new charters are subject to enhanced supervision and capital monitoring, from seven years to three. It also waived a requirement that banks of less than three years’ operating experience submit any significant change in business plans for the FDIC’s review.
Both measures were put in place in 2009, after officials noticed that charters less than three years old were failing at a rapid rate. Another FDIC official said that the recent rally in stock prices meant that many listed banks were no longer trading at bargain prices, and that it now made more sense for would-be bank backers to set up on their own.
The Dow Jones small banks index was trading at less than 1.3 times book value at the end of October; it is now at almost 1.7 times.
Molly Flater, chairman of Blue Gate Bank of Costa Mesa, California, which opened for business with $30m of capital at the end of January, said that the FDIC’s vetting process was “extensive”.
She noted that the regulator was particularly keen that prospective directors of Blue Gate, both executive and nonexecutive, had completely unblemished records.
But she said the outlook for banks of all sizes had improved following the election of Mr. Trump.
“It’s all good stuff for us,” she said. “Hopefully there’ll be less regulation, which is good for business, and interest rates going up is not bad for us either.”
BANKING & FINANCE: APPLICATIONS FOR NEW LENDERS SURGE AHEAD OF AN ANTICIPATED REGULATORY ROLLBACK
By Rachel Witkowski
WASHINGTON – Startup banks are close to coming off the endangered-species list.
Eight groups have filed applications in recent months with the Federal Deposit Insurance Corporation to open new banks, spurred by an improving economy and an expected deregulatory push by Republicans in Washington.
That is the most in a year since regulators clamped down on bank startups following the financial crisis, though it pales in comparison to the hundreds of applications that regulators routinely received annually in the precrisis period.
President Donald Trump last week signed executive actions aimed at unwinding parts of the 2010 Dodd-Frank Act. Some in the financial industry hope reduced regulation will spur broader interest in starting community banks and, over time, more lending that will bolster economic growth.
“We believe that hopefully the new administration will bring some relief to the regulations that have come down the last eight to nine years,” said David Dotherow, the founder and chief executive for the proposed Winter Park National Bank in Central Florida.
Mr. Dotherow has helped open several community banks, the most recent being New Traditions National Bank, which he opened in 2008 and sold in 2015 to a nearby competitor.
Mr. Dotherow applied to start another bank in December because the FDIC recently said startups could provide a three- year business plan in their application instead of the seven-year plan required after the crisis.
“It tells me they’re serious about groups starting a new bank,” Mr. Dotherow said of the business-plan change.
House lawmakers have criticized the head of the FDIC for the Dearth of new community banks since 2009, particularly as the number of banks has fallen nearly by half due to mergers and failures over the past two decades.
The FDIC has instead argued that the prolonged low-interest-rate environment has made it difficult for groups to start a bank and prove their viability.
There were roughly 5,100 commercial banks by the third quarter of last year, compared with more than 9,700 in early 1996, according to data from the Federal Reserve Bank of St. Louis.
Community bankers say the decline in the number of banks has led to fewer lending options for startups and small businesses without going online or to a megabank, holding back job growth.
“New bank formation is critical for the economy,” said Cam Fine, president and chief executive of the Independent Community Bankers of America.
The industry has historically identified community banks as those with assets of $1 billion or less. Community banks held 43% of small loans to businesses nationwide, according to third-quarter figures from the FDIC, the latest available.
Community banks reported their small loans to businesses totaled $293.3 billion in the third quarter, up $1.6 billion, or 0.5%, from the second quarter, the FDIC said. Noncommunity banks reported a decline of $1.7 billion, or 0.4%.
The eight startup bank applicants in 2016 compare with a high of 299 applications in 2005, when the FDIC approved 237 new banks. An FDIC bank application is key because the agency approves the deposit insurance for startup banks.
The FDIC last year revisited some postcrisis restrictions for starting a bank, held meetings with potential bank executives and proposed a handbook in December to help groups apply for a new bank charter.
In the fourth quarter of last year, it approved two new banks: Blue Gate Bank in Costa Mesa, Calif., and International Bank of Commerce, which was connected to an existing brand acquisition in Oklahoma City.
Those two approvals were the most since 2008, according to data provided by the FDIC. Before 2016, the FDIC approved three applications in a seven-year span.
A spokeswoman said the FDIC plans to do outreach meetings in Dallas, Chicago and Kansas City this year. The comment period for its handbook on applying to start a bank ends on Feb. 20.
By Hannah Madans
There’s a new bank in town. Blue Gate Bank opened Monday in Costa Mesa. The independent “de novo” bank is aimed at business clientele and high-net-worth customers. It offers checking, business and real estate loans, and certificates of deposits.
The Costa Mesa branch marks the first for Blue Gate. It started with Molly Gallaher Flater, who joined forces with Chris Walsh (director of banking), Bill Gallaher (organizer and advisory board member), Donn Jakosky, (chief credit officer) and Gary Findley (Findley & Associates) to launch the bank.
The bank went through an extensive application process and is protected by the FDIC. Blue Gate is the first new bank for Orange County since 2009, according to the company. It is just the eighth new bank to get U.S. approval since 2008.
“We have a responsibility to make our communities stronger, and that begins with giving local companies the financial opportunities they need to be successful.” Flater said in a statement. “We believe in a client-focused approach to service and are passionate about making great things happen.”
Blue Gate Bank, with 12 Orange County employees, is on the ground floor of 611 Anton Blvd. near Mastro’s Steakhouse.
The Blue Gate Bank executive team: Chairwoman Molly Gallaher Flater, center, with, from left: Chris Walsh, Donn Jakosky, Chuck Fenton and Kaye Kim.
By Tanya Macheel
Wall Street women march on Washington: Women working on male-dominated Wall Street often feel that it is better to draw as little attention to their sex as possible, and public demonstrations of any kind are not the norm for them. Yet dozens of them made the trek to Washington to participate in the Women’s March this past Saturday. “I never have done anything like this in my life before, and I just feel like it’s a time when everybody has to stand up for what they believe in,” said Lebenthal & Company President and Chief Executive Alexandra Lebenthal, who identified herself as a Hillary Clinton supporter. As is to be expected, some Wall Street women said they avoided the march, fearing backlash from colleagues, superiors or clients who were either Trump supporters or critics of public activism (and of course, many financial companies’ share prices surged since the election, a potentially positive sign for compensation at those firms for women and men alike). “I have friends that voted for Trump,” Lebenthal said. “I have a major issue with that, but it’s their right. And I wouldn’t stop doing business with that person if they voted for Trump.” Likewise, she isn’t concerned about the possibility that clients could reconsider doing business with her over her involvement with the march. “If that happens, it happens,” she said.
The future (of UBS) is female: The wealth management arm of UBS is “retraining” its advisers to deliver a more female-friendly customer experience. Specifically, women will be “served with a different dialogue that places greater focus on their aspirations as opposed to pure investment outcomes,” the bank said this week. Women’s global wealth is expected to grow from $13 trillion to $18 trillion by 2021, according to UBS research. The bank also predicted the amount of private wealth controlled by women will grow 1.6% faster year-over-year than that controlled by men. The new training for advisers recognizes that women have “very distinct” needs, said Olga Miller, managing director at UBS Wealth Management. The bank also has committed to increasing the ratio of women in management roles from one quarter to one third.
On the sidelines: While some regional bank CEOs have said they are open to pursuing deals, others are focused on making the most of acquisitions they have already done. Take Beth Mooney, KeyCorp’s chairman and CEO. She said there are opportunities for her bank to capitalize on new business lines it entered through its purchase of First Niagara last year. For example, First Niagara’s $3 billion indirect auto portfolio can help Key deepen existing customer relationships and stimulate growth, she said.
What’s the five year plan?: Major U.K. banks may not get a female CEO for at least five years, according to Megan Butler, the Financial Conduct Authority’s head of supervision. She’s losing patience with the country’s white male bank culture. “It’s extremely rare that in my professional life I have a conversation with a head of desk at an investment bank or a global head of business that is anything other than a white male,” she said at the Women in Finance Summit in London. “I’ve increasingly come to find that a little bit difficult to take.” Butler began her career in finance in the 1980s, when she was usually the token woman. Today she supervises most major U.K. financial firms and it looks almost the same, she said. “For 20 years I was completely resistant to the idea of having targets on gender. I found it patronizing and insulting and I didn’t want there to be any taint on any achievement I ever had. But I look back and there hasn’t been significant change quickly enough.”
Dress codes for women only: The U.K. parliament published a report this week revealing that legislation meant to ban sexist dress codes in the workplace hasn’t been enforced and suggesting firms be fined for noncompliance with the law. The report, “High Heels and Workplace Dress Codes,” also found that workplace dress codes were more strictly enforced with women than with their male counterparts. In addition, women reported being asked to wear shorter skirts and unbutton blouses. Now the two parliamentary committees that jointly issued the report – the committees for Petitions and for Women and Equalities – are calling for a review of current equality legislation. Incidentally, this week’s report runs counter to previous reassurances from now U.K. Prime Minister Theresa May that the country’s existing equality laws are adequate. In 2011, when she was women’s minister, she dismissed concerns about traditional gender-based dress codes, saying they “encourage a sense of professionalism in the workplace.” (The report got underway after the infamous incident with Nicola Thorp. You may recall that the former temp receptionist at PwC was dismissed without pay after she arrived at work wearing flat shoes and refused to go out and buy a pair of two- to four-inch heels to wear instead.)
Blue Gate Bank in Costa Mesa, Calif., has opened, with Molly Gallaher Flater as its chairman. Flater, whose family is the principal shareholder group for First Community Bank in Santa Rosa, Calif., began taking steps to form Blue Gate in 2015, and the Federal Deposit Insurance Corp. approved the bank’s charter application in October. That’s no small feat – de novos have been a rarity since the financial crisis.
The online-only First Internet Bank has promoted Nicole Lorch to chief operating officer. Lorch, who has been with the bank since it opened in 1999, was most recently senior vice president of retail banking.
In case you missed it
Tilting point: The collateralized loan obligation funds operated by Lynn Tilton’s private equity firm, Patriarch Partners, are suing her for siphoning more than $1 billion in fees and assets from investors and the troubled companies she manages. She has denied the allegations against her and called the lawsuit “frivolous, baseless and vexatious.” According to the lawsuit, Tilton has been running a racket, not a turnaround empire. “The Patriarch Enterprise’s repeated, continuous, and flagrant violations of law constitute a pattern of racketeering activity,” it says. Tilton has been dealing with a lot of legal trouble lately, including fraud charges from the Securities and Exchange Commission and a lawsuit from the German bank Norddeutsche Landesbank.
Am I dateable?: It appears that women’s progress in the job market is at odds with their success in the marriage market. A new study shows single women have a tendency to downplay their success and their career goals – including salary expectations – around men, whether consciously or subconsciously. One theory is that this behavior is a response to the unconscious bias against women who come across as ambitious. Despite efforts to advance women’s equality, men are still rewarded for being assertive and successful — in their professional and personal lives – while women are not. Actions that may help women advance at work like speaking up in meetings or asking for a raise signal ambition or assertiveness, “and those things are penalized for women in the marriage market,” said Amanda Pallais, an economist at Harvard University and co-author of the study. In the study MBA students were asked to state their career goals. When women thought only the evaluator would view their statements, they set a higher bar for themselves. But when they believed their peers would also see, the salary requests were significantly smaller and the career goals were less ambitious for the unmarried women compared with the men and the married women.
A seat, and voice, at the table: Tomorrow, U.K. Prime Minister Theresa May meets with Donald Trump, becoming the first European leader to do so since he became president. Following the women’s marches in cities around the world last weekend, May promised to speak up whenever necessary about women’s issues, as she tries to secure the U.K.’s “special relationship” with the new U.S. administration. “When I sit down (with Trump) I think the biggest statement that will be made about the role of women is the fact that I will be there as a female prime minister,” she said. “Whenever there is something that I find unacceptable I won’t be afraid to say that to Donald Trump.”
Put this on today’s to-do list: Closing the gender pay gap is not a one-and-done type of project. Salesforce CEO Marc Benioff acknowledged in Davos that, although it was only 14 months ago that it managed to close its gender pay gap, it also just bought “a bunch of companies,” thereby inheriting their cultures and pay practices. Now, Salesforce is looking forward to making some more employee compensation tweaks. “Every CEO needs to look at if they’re paying men and woman the same,” he said. “That is something that every single CEO can do today.”
FINANCE: SET TO BECOME FIRST NEW BANK IN OC SINCE 2008
By Michael De Los Reyes
Blue Gate Bank will continue OC’s national leadership regarding new banks when it opens its doors in Costa Mesa this week.
Blue Gate is just the 11th new bank in the U.S. to receive government approval since 2007 – and the fourth based in OC.
It’s been awhile in any case, though – Blue Gate will be the first bank to open locally since 2009. California Republic Bank, which recently merged with Mechanics Bank in Walnut Creek for $330 million, formally opened its doors in Newport Beach in 2008.
Blue Gate has $30 million in capital and plans to open its doors after contractors put finishing touches on its new office at the Pacific Arts Plaza.
Chris Walsh, who formerly served as chief executive officer at Sunwest Bank in Irvine, is Blue Gate’s director of banking.
Charles “Chuck” Fenton, a former chief executive officer of TomatoBank, will hold the chief executive’s title at Blue Gate. Walsh was originally identified as the CEO in the bank’s application filed with the Department of Business Oversight.
Fenton was slated to become chief executive of Core Commercial Bank, which would have been based in Newport Beach. Core Commercial’s organizers withdrew their application prior to the November 2016 deadline.
Fenton said he joined Blue Gate Bank because of his “Prior experience with de novo banks.”
Tomato Bank was based in the Los Angeles County city of Alhambra and primarily served Chinese-American communities when Fenton was there. The bank had $472 million in assets and got out from under the federal government’s “onerous” consent order to improve information security under Fenton. It eventually was sold to RBB Bancorp, the holding company for Royal Business Bank, in Los Angeles in February 2015 for about $15 per share.
“That was about one and half times book value,” Fenton said.
Book value equals a bank’s assets minus its liabilities and is the usual method used to evaluate the value of bank acquisitions. The typical bank deal nationwide was a multiple of 1.3 times book value in the last few years according to SNL Financial, a banking industry data provider.
Fenton moved to Orange County after selling TomatoBank. He said he still knows a few clients in L.A. County and aims to develop a client base there for Blue Gate, even as both he and Walsh focus primarily on OC.
Fenton, Walsh, and Blue Gate Chairperson Molly Gallaher Flater said they don’t plan to develop and flip the bank.
“This is a long-term play,” Walsh said. “We have no intention of growing Blue Gate for three of four years then selling it.”
They plan to work with burgeoning companies that usually don’t fit the requirements of larger banks when it comes to lending.
Managers at many of the larger banks ask applicants for years of financial data that most small businesses lack and places a credit score on them that lacks flexibility when evaluating credit worthiness, Walsh said.
Small business owners either can’t meet the requirements or receive limited banking options, Walsh said.
“But we can work with the business owner to cross-collateralize to obtain the needed financing,” said Flater, a main investor in the bank.
Blue Gate’s managers can also help clients that had a bad year, Fenton said.
“We’re more likely to develop a solution to help them recover,” he said.
“That’s advice people usually don’t get from a big bank,” Flater said.
The idea of Blue Gate stated to take shape when Flater met Walsh during a business event in Northern California in December 2015.
“It was a good match in terms of banking philosophy, work ethic and long-term plans,” she said.
Flater started her career in 2006 as a board member at First Community Bank in Santa Rosa and with her family-owned business, Oakmont Senior Living in Windsor.
She said she learned three facts as she searched for expansion opportunities in the state: California had a dwindling number of state chartered banks; OC had a strong, vibrant economy; and fewer community banks were serving local businesses.
The state has 137 state chartered banks, down about 14% since 2008, according to the state Department of Business Oversight. Illinois by comparison, has 320 banks, according to its Department of Financial and Professional Regulation.
“And Illinois has a smaller population that California,” Flater said.
About 12.8 million people live in Illinois, while 39.3 million live in California, according to the U.S. Census.
The decision to open a bank in OC was made easier when she talked with Walsh, a 32-year OC banking veteran.
They applied for state approval last February and received it in July.
Flater resigned from both First Community Bank in Santa Rosa and Oakmont Senior Living to found Blue Gate and helped raise the $30 million required to capitalize it; she and her father, William P. Gallaher, provided almost $24 million.
Blue Gate looks to be ahead of a couple other potential banks in the region.
Two more OC applications were filed late last year. SoCal Bank in Costa Mesa applied in July, and Endeavor Bank in San Diego County applied in August, and both are waiting for approval to organize.
Those banks plan to target small-to medium-sized businesses in Southern California, according to the Federal Deposit Insurance Corporation, but SoCal Bank also will focus on female-owned businesses.
California Republic Bank in Irvine was the last bank to open in OC. It received approval in 2007, grew to about $8 billion in assets and was sold to Mechanics Bank for $330 million in cash in October.
California Republic sold for about twice book value, but the first wave of investors saw about a 370% return on investment, said John DeCero – the former chairman of California Republic Bank – now chief executive officer of Mechanics Bank. Early investors helped capitalize the bank by purchasing shares at $10 in 2007.
About 1,500 new banks opened nationwide between 1995 and 2007. Those banks were also the most likely to close during the Great Recession because they engaged in risky credit policies to grow, according to the FDIC.
But the FDIC said it’s encouraging more banks to open with tighter credit policies and to support burgeoning businesses.
There are plenty of opportunities for all the banks to be successful, said Walsh and Fenton.
“About 80% of community banks’ clients come from big banks,” Walsh said. “They’re usually looking for a different financial solution that big banks can’t provide.”
Fenton: chief executive shifted over after Core Commercial pulled back
Walsh: Sunwest veteran on board as director of banking
Flater: gave up board seat at family-owned bank in Santa Rosa for chair of Blue Gate
By Paul Davis
Blue Gate Bank in Costa Mesa, Calif., has opened.
The institution joins a small but growing list of banks to receive charter approval since 2009.
Molly Gallaher Flater, the bank’s chairman, began plans to form Blue Gate in 2015. The Federal Deposit Insurance Corp. approved the bank’s charter application in October, requiring the founders to raise at least $30 million in capital.