The obstacle to launching a new bank in San Diego surely isn’t a lack of chutzpah.
In fact, the Southern California region is leading the charge this year when it comes to asking regulators for the OK to establish financial institutions de novo — that’s “new” in bank speak (and in Latin).
Still, such moves remain relatively rare in a time when the banking industry has trended toward consolidation rather than expansion, with the number of state-chartered banks in California shrinking by 23 from 160 at the start of 2014 to 137 at the end of the third quarter this year.
“I think it’s a tough time to start a bank, quite frankly,” said Alan Lane, CEO of La Jolla-based Silvergate Bank, one of San Diego’s remaining local banks.
But a group of San Diegans that includes at least one person with de novo bank formation experience is looking to do just that.
Organizers of the proposed San Diego-based Endeavor Bank filed an application with the California Department of Business Oversight (DBO), which oversees state-licensed financial institutions, on Aug. 12. That application remains active, according to the DBO, which typically makes such decisions in about 90 days, depending on the quality of the application — though the department hasn’t had much experience with such applications in recent years.
Endeavor’s application is one of three filed this year in California. In July, Federal Deposit Insurance Corp. (FDIC) Chairman Martin Gruenberg said the agency had received a total of 10 applications for deposit insurance since the start of 2011. (California requires FDIC insurance for all state charters.)
De novo Drought
The last year in which a new bank was established in California was 2008, when San Diego’s Vibra Bank opened in Chula Vista. But in 2015, the institution merged with Pacific Commerce Bank, a larger bank based in Los Angeles, reducing the total number of banks headquartered in San Diego to single digits, less than one-third of the number active a decade prior.
“Back in the 1990s, when there were a lot of banks being formed … bank valuations were a lot higher and capital requirements weren’t quite as stringent,” Lane said. “It’s just a different time and it’s not as clear to me how you actually make a go of it.”
A group in Orange County found that out the hard way this year after they failed to come up with the $25 million in initial equity required by the government.
Core Commercial Bank got the go-ahead from federal and state regulators to organize in late 2015. But the group behind the organization withdrew the
application just shy of a year later, on Nov. 17, according to the DBO.
“It would be tough to raise the capital because potential investors are going to be asking … how do I make money?” Lane said. “How do they present to potential investors a reasonable return on their investment?” He said investors who want to back a bank would get better returns by putting their money into an existing bank that’s profitable.
FDIC Encouragement
While the FDIC, after all but shutting down approval of proposed new banks following the recession, this year signaled its interest in getting more applications into the pipeline, it’s a tough sell when banks’ margins are squeezed by the cost of increased compliance and years of historically low interest rates.
Endeavor Bank, however, sees a money-making opportunity. In its application, organizers argue that businesses in San Diego are being underserved and need more financial institutions to fulfill their banking needs.
“The number of businesses in the county is on the rise, while the number of locally based banks catering to those businesses continues to drop, creating an opportunity for the establishment of a local institution with the goal of serving the banking needs of the county’s small businesses,” it said.
The number of San Diego businesses grew 20 percent between 2004 and 2015, the application said, increasing from 85,800 to more than 103,000. At the same time, the number of banks has gone from more than 30 in 2004 to fewer than 10.
“In general, the growth in employment and number of businesses supports the argument for the need for a locally-based community bank,” the application said.
Types of businesses the bank would aim to serve, were it to get regulators’ OK and raise the required capital, include professional services and small manufacturing firms that work with the region’s tech, maritime, action sports, craft beer industries, as well as with nonprofit organizations and “other business niches where management has the ability to serve the business owns in an advisory relationship capacity.”
The bank has proposed capitalization of $25 million, the same amount that Core Commercial attempted to raise for a year before raising th e white flag. The company listed on Endeavor Bank’s application as its representative, Irvine firm Carpenter & Co., was also listed as shepherding Core Commercial through the process, according to filing with the DBO.
But while Core Commercial decided to withdraw its application, another Orange County group may soon be the first to open a new bank in California in eight years.
The Blue Gate Bank in Costa Mesa, which got regulatory approval in August, plans to open for business in January, according to Chris Walsh, director of banking for Blue Gate.
Endeavor Leadership
Regulators may find at least one aspect of the application appealing: the experience of one of its directors/organizers.
One of the eight organizers listed on the Endeavor filing is Christopher Woolley, a San Diegan who helped found Square 1 Bank in 2005. That bank, which was headquartered in North Carolina and focused on venture-backed technology and life science companies, went public in 2014. The following year, Square 1 was sold to Pacific Western Bank, a larger Los Angeles-based commercial bank.
At Square 1, Woolley, who declined to comment on his plans for Endeavor because the application remains in regulators’ hands, founded its life science practice — a similar role to the role he held at Imperial Bank, which later became part of Comerica Bank, where he was a founding senior vice president and managing director of the bank’s technology and life science division for Southern California and Arizona.
Woolley is the only director listed on the bank’s application with prior experience launching a bank. Other San Diegans whose names are on the filing include philanthropist Joyce Glazer, restauranteur Gina Champion-Cain, and Karl Strauss Brewing Co. co-founder Matt Rattner. Robert J. Lampert is listed as the proposed chief financial officer.
Survival Test
Richard Sanborn, CEO and president of Seacoast Commerce Bank, said the amount of money regulators require today of those who want to open a new bank is a daunting hurdle.
“Regulatory expectations that make it almost impossible to be successful early on coupled with the $20 million to $25 million needed to start a bank today makes return to shareholder nonexistent for many years,” he said.
That being said, Sanborn said he “absolutely believes” there is a need for more banks in San Diego and nationwide.
“Hopefully, the regulatory agencies will ease the requirements to allow for more capital to flow to banks and ultimately to consumers and small business owners,” he said. “It’s in all of our benefits to have a strong, vibrant banking industry in our area where there is access to capital for everybody. Where there are only a few players, capital is restricted.”
Sanborn said local consolidation in the banking industry is behind the interest in launching a new institution.
“There’s a growing desire and a growing need to have a new community bank in San Diego,” Sanborn said. “A group of local, connected community organizers with the resources to start the bank and the wherewithal to last through the pain period — that’s the first two or three years — is important, and I think this group has those qualities.”
