Ed Carpenter likes to call his banking company “a 1974 startup.”
When did he know Carpenter & Co. would make it?
“I still haven’t realized it,” he quipped during a 90-minute interview at his fifth-floor office near John Wayne Airport.
“When … there is a recession, the first things companies cut back on are advisory expenses.”
Everyone who knows Carpenter has no doubt he’s made it. He’s advised hundreds of bank startups, such as Irvine-based First Foundation Inc., and made handsome returns on bank investments. He’s also actively involved in opening banks in Orange, Los Angeles and San Diego counties. Carpenter is once again on the Business Journal’s annual list of the 50 most influential businesspeople in Orange County (see Special Report, page 5).
Nowadays, the 73 year old said he has no plans to retire and sees fintech startups shaking the banking world.
“Very large companies backed by venture capital funds all over the country are getting into financial technologies,” he said. “Many of those fintech companies would like to be a bank, either to give them nationwide lending capabilities or to access deposits or payment systems.
“We are working with a significant number of these companies to become banks.”
Surf City Boy
Carpenter was raised in Southern California, taking up surfing, cruising the Huntington Beach pier, and he still surfs. He received a bachelor’s degree in business administration from Loyola University-Los Angeles, where he’s a trustee today, and an MBA from California State University-Long Beach.
“When I left college, I said there were three kinds of companies I wouldn’t work for—insurance, utilities and banks. I thought they were old and stodgy, not entrepreneurial.”
Thus, he went to work for the old AT&T, which though a phone company, was a lot like a utility in those monopolistic days. After a recruiter convinced him about Security Pacific National Bank, then the nation’s seventh-biggest commercial bank, Carpenter began his career by specializing in strategic planning and branch expansion.
In a few years, he struck out on his own, setting up shop in his garage “with an old coffee table and a really old calculator and a slide rule.”
He started out by visiting small banks he’d previously advised on planning and financial statements.
He estimates he’s advised about 500 banks and 200 savings and loans on starting up, or more than five times as many banks as anyone else in the country. At one point between 1975 and 1992, he advised 55 of the 60 industrial banks that started in the U.S. during the period.
“We’ve pretty well established ourselves in a very small pond in the licensing and capitalization of startup banks,” he said.
Carpenter’s website features a “new bank program” to provide a framework for identifying market need, creating a strategic plan, building a team, drafting regulatory applications, and raising capital.
In fact, he said he sees great opportunities in OC, where he’s involved in opening two banks this year (see “OC Banks” story, this page).
Regulatory Know-How
As the owner of a service company, Carpenter sought a revenue stream to bridge recessions. During the early 1980s recession, he did “workouts” to help banks in trouble and thereby entered regulators’ radar. When the savings and loans crisis hit late in the decade, his firm became the country’s second-largest asset-liquidation contractor.
“Around 500 savings and loans failed in the country,” he said. “We disposed of billions of dollars of loans and assets. That bridged a gap for the company during the recession.”
His knowledge of regulations has led him to serve on numerous federal and state banking committees, including as chairman of the California Financial Task Force to Review and Revise Bank Regulation. His team at Carpenter & Co. includes Vice Chairman Howard Gould, who twice served as California’s chief banking regulator and now oversees the fund’s portfolio management. Many of his employees have been with the firm at least 25 years, including President John D. Flemming and Executive Vice President James B. Jones.
In 2007, the firm observed bank stocks trading at all-time highs and growing too quickly, which he believed could lead to problems and opportunities.
“We decided to raise some equity to rescue troubled banks,” Carpenter recalled. “We felt there would be enough of a market to make bank investments at reasonable prices. We didn’t know a full-blown recession was going to happen. We weren’t that good.”
His Carpenter Community BancFund raised $280 million with the idea of providing institutional investors a method to invest in community banks, whose market caps are typically too small for big investors. He also structured the fund as a bank holding company so it could actively manage banks and hold big positions, giving it a leg up on other private equity funds that were limited in bank ownership.
His strategy is to invest in banks known in their geographies, but that are “underachieving.” The fund invested $39 million in San Jose-based Bridge Bank by 2010; it exited the investment in 2015 with gross proceeds of $144 million. Carpenter’s sale of Bridge “was one of the best returns on an investment that bankers have ever seen,” according to Pacific Mercantile Bancorp Chief Executive Tom Vertin.
Carpenter invested $45 million in Pacific Mercantile Bank (Nasdaq: PMBC) and brought in Vertin, a veteran Silicon Valley banker. Carpenter’s fund owns 32% of the bank, and is currently worth an estimated $70 million.
Other successful investments include Heritage Oaks Bancorp and Plaza Bancorp, both of which were bought last year for premiums by Irvine-based Pacific Premier Bancorp.
The New, New Thing
Nowadays, investors are searching for ways to capitalize on cannabis and blockchain finance.
Carpenter is most focused on the fintech firms that may need banking licenses due to it being his area of expertise.
While Silicon Valley and New York are the best known in the fintech field, Carpenter said OC also has a shot, particularly in healthcare services because those companies are providing financial services, such as collecting premiums and deposits. He said he couldn’t discuss the companies he’s working with.
“The question is will the disruptors be fintech or the banks themselves? I think the banks will be the greatest disruptors because they have more capability to move forward. They have more access to capital.”
