Blue Gate Bank, the first new bank in California since the financial crash a decade ago, celebrated its one-year anniversary in January.
What was the first year like?
“Challenging on a couple of fronts,” said J. Chris Walsh, director of banking and the Costa Mesa-based bank’s day-to-day boss.
“I personally underestimated recruiting people. People would like to come work for me, but they have families who are worried if we will make it. Some people didn’t come here because we were a startup.”
Walsh was also counting on some clients who’d been with him for as long as 20 years to shift their funds to his bank.
“When it came to putting money in the bank, they said, ‘Let’s wait a year.’ I underestimated that challenge,” he recalled during an interview at his office near the South Coast Plaza mall.
“People look at a startup with the broad brush of a restaurant,” Walsh said. “We’re one of the more secure and safe places.”
He has the banking pedigree, having been in the industry since 1980 and being the son of a now-retired Bank of America branch manager. Walsh’s most prominent role was as chief executive of Sunwest Bank, where he helped triple assets to $820 million over six years.
Despite the startup status, Blue Gate is off to a good start with $145 million in assets, up 56% from the $93 million it reported on June 30. It’s also above the estimated $110 million the founders projected it would have at this point.
Blue Gate now employs 24, double that of a year ago. It plans to bump that to more than 30 by year-end in areas such as relationship managers and loan department servicers.
The bank’s long-term goal is $1 billion in assets. Seven of the 19 banks based in Orange County have at least that amount.
Sunwest Days
Walsh grew up in south OC, attending Dana Point High School. In college, he switched from premed studies in sports medicine to business. During his junior year at the University of California-Santa Barbara, he interned at Pacific National Security Bank as a teller and has been banking ever since.
“My father told me if you want to get a wide breath of business experience, the best place is banking. It was great advice.
“The most exciting thing is to see a business grow from nothing to something. As a banker, you can help them get to the next goal.”
While Sunwest chief executive, he led five acquisitions as the bank expanded its presence into Arizona, Idaho, Utah and Washington state.
He invested in Blue Gate Bank in 2016 because it was an opportunity to join a startup bank. It was only the third new bank in the U.S. since the financial crash.
Why aren’t there more new banks? Walsh pointed to a perception that a bank won’t make as much money as other endeavors.
He begs to differ. “If you have $5 million to toss someplace, I’ll give you three places: real estate, the stock market or a bank, where you may hope to get some type of return in five to seven years,” he said. “Where are you going to put your money?”
Walsh answered that question with Blue Gate, thanks to a push from Molly Gallaher Flater, its chairwoman, who comes from a banking family in Santa Rosa in northern California, where a road inspired the new bank’s name. Her father, Bill Gallaher, an advisory board member, is a real estate developer and majority owner of Poppy Bank, previously known as First Community Bank, which had $1.5 billion in assets as of Sept. 30. Her uncle Patrick Gallaher, who’s also on the seven-member Blue Gate board, is a longtime banker in the Santa Rosa area.
Five of the seven board members have Santa Rosa connections, including Douglas H. Bosco, part owner of Sonoma Media Investments LLC, which owns newspapers such as the Santa Rosa Press Democrat. The two Orange County directors are Brent Koch, managing principal of Wealth Management Strategies, and Doris Farinacci, a partner at Newport Beach accounting firm LTSP Inc.
The family saw an opportunity with a major consolidation of community banks due to heavier regulation since the financial crisis, and OC as a place with strong demographics for small to midsize businesses, Walsh said.
“We are blessed to have a family that believes in community banking,” he said. “They know in five to seven years, it will be well worth it.”
No Box Checking
Walsh said community banks can be more flexible in lending than larger counterparts that follow a formula by “checking boxes.”
For example, if a company’s major customer, say, Costco Wholesale Corp., cancels an order, a big bank may have liquidity covenants that would cause it to terminate a small company’s credit lines, Walsh said.
“A community bank will say, ‘I get it, and ask, ‘What will you do to replace Costco? What is your business plan?’ The community bank will ride with you, trying to make it happen, go with you a bit longer, whereas a big bank doesn’t need those relationships.
“We’re a relationship-driven business. That’s what community banking is all about.”
He’s providing loans of $250,000 to $10 million to companies generating annual revenue from $2 million up to $75 million. The bank sees opportunities in manufacturing, medical offices and accounting firms.
“We have to be a jack of all trades,” Walsh said. “If anyone calls me, I’ll say, ‘Let’s talk, and let me see what I can do for you.’”
Blue Gate now has $74 million in loans. To attract deposits, it offered “a very aggressive market rate” of 1.5% annual percentage yield. It now has $120 million in deposits.
The net interest margin, a key indicator of a bank’s profitability, is currently in the low 3% range, and the goal is 4%. It anticipates profitability by the end of its second year, Walsh said.
2,000 Pages
Federal regulations are as bad as advertised. To get started, he said the bank had to submit 2,000 pages of policies. He has government regulators working in his office to approve every policy and loan.
While he said he’s thrilled by his bank and is at work every day at 6 a.m., he doesn’t see himself opening another bank.
“I’ll be 60 this year, and I still have a lot of energy. I would do it again if I was in my 40s, but not in my late 50s. It’s a grind to get everything done.”
