For all the strides the local banking industry has made in recovering from the recent downturn, there is one area that still lags: formation of new banks.
It has been nearly four years since a bank was granted a charter in Los Angeles County, marking the longest such stretch without any newly formed local banks since the Great Depression, according to a Business Journal analysis.
“In the last several years, it’s been basically impossible to get a new charter,” said Wade Francis, president of Unicon Financial Services Inc., a bank consulting firm in Long Beach. “Starting a new bank is difficult even in good times and it would be extremely difficult to try to start a new bank in this environment.”
Banks today – particularly young ones – face a range of obstacles, including rising costs and cautious regulators. As a result, there have been no new charters granted in the United States this year and only a dozen in the previous two years, according to data from the Federal Deposit Insurance Corp. By comparison, there were more than 160 in 2007.
The lack of new institutions, coupled with bank mergers and failures, has led to a steady erosion in the number of locally based banks. At the end of the third quarter, there were just 70 banks chartered in the county, the lowest number in at least 20 years.
The last bank in the county to receive a charter to begin operating – the banking industry calls these brand-new banks “de novo” – was Pasadena’s California General Bank, which was founded in March 2009 but has since merged with another lender. Among local banks still operating, the last to receive a de novo charter was Royal Business Bank, a Chinese-American lender in downtown Los Angeles that opened four years ago this month.
Faced with the overwhelming difficulty of starting a bank from scratch, a number of investor groups have had to acquire existing distressed banks instead.
Many bankers say new regulatory provisions – including higher capital levels and additional staffing requirements – have increased the cost of doing business for community banks and raised the barrier to entry, making it difficult to start a new bank.
Meanwhile, regulators have been reluctant to approve new bank startups, experts said; instead, the government has encouraged investor groups to acquire operating banks – and the possible loan troubles that come with them.
“Rather than encouraging a new charter, the FDIC would prefer for someone who has strong capital and experience to invest in existing banks,” said Alan Thian, chief executive of Royal Business Bank.
One of the last
Thian didn’t know it then, but he submitted his application for a new bank just in time. A longtime banker in the local Chinese-American market, Thian set out to start his own institution, submitting a charter application in late 2007.
“The situation was not that bad yet,” he said. “If I started thinking about forming a bank a year later, I might have given it a second thought.”
With a healthy $71 million in startup capital, Royal Business Bank opened in November 2008, becoming one of the last new banks in the area.
The only other new charters came in March 2009, when California General Bank was founded and Pasadena’s OneWest Bank received a new charter after its acquisition of IndyMac Bank.
That marks the longest stretch without a new bank in the county since a nearly seven-year span between 1937 and 1944, according to FDIC data. The next longest stretch came during a two-and-a-half-year span between 1958 and 1960.
Edward Carpenter, founder and chairman of Irvine financial firm Carpenter & Co., pointed to several factors in the decline in new charters.
During an economic downturn, fewer people are going to be looking to start banks and there will be less investment capital available for those who do. Carpenter’s firm, which advises groups launching new banks, recommends investors raise at least $20 million in startup capital – and potentially much more. That number has been rising in recent years in part because of new requirements in the Dodd-Frank financial overhaul that have made it more expensive to operate a bank, he said.
“You really do need to have more capital at the time of startup,” Carpenter said.
It typically takes a few years for new banks to reach profitability, he noted, and regulators may not want a money-losing institution getting in the way of a possible recovery for the industry.
“That message will be rather effectively delivered by the regulators,” he said. “They’ll basically tell you it will be hard for you to get approved.”
Representatives for the California Department of Financial Institutions and the federal Office of the Comptroller of the Currency directed inquiries to the FDIC, which did not return calls requesting comment for this article.
Carpenter has assisted in the formation of about 70 percent of California banks since 1975, he said. While he still fields calls from investor groups looking for help starting a bank, the number has declined by half from prerecession levels to about 25 a year – and he turns most away. In fact, the firm has not assisted in a license filing since at least 2008.
“We have groups come in all the time and in the vast majority of cases, we advise them that it probably doesn’t make sense for them to start a bank at this time,” he said.
Change of plans
The challenges have driven a number of investor groups to change their plans.
After selling his El Segundo bank in 2007, Don Griffith raised $335 million to start a new institution. Griffith, who could not be reached for this article, previously told the Business Journal that he abandoned the de novo option in favor of buying an existing bank, which he said “would probably be quicker.”
He acquired Santa Ana Business Bank in June 2010 and used it as a platform to launch Grandpoint Bank in downtown Los Angeles. The holding company, Grandpoint Capital Inc., has acquired several additional banks, giving it pro forma assets of more than $2 billion.
It could still be several years before any new banks are formed.
Thian, of Royal Business Bank, said with interest rates so low, it can be tough for banks to be profitable – especially new ones. What’s more, he noted, rates are expected to remain low until at least 2015.
“I believe it still will be a couple of years away,” he said. “In this economic environment, it is so hard for a de novo bank to survive.”
