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 because of his “prior experience with de novo banks.”
TomatoBank 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.
Long-Term Play
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 or 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.
NorCal Connection
The idea of Blue Gate started 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 than 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.
OC Heat
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.”
