When Steven Broidy became chairman of the startup Private Bank of California, he did what few executives outside the banking industry would ever consider: He sat down and talked strategy with his closest competitors.
Broidy met several times with Alan Rothenberg and Richard Cupp of 1st Century Bank, two prominent members of L.A.’s small-bank community. They took tours of each other’s offices in Century City and discussed the nuts and bolts of how to start up a new bank, even though they would be competing for many of the same clients.
“New bankers help each other with everything,” said Charles Kenny, chief executive of Private Bank, which opened just six weeks ago.
Such close ties with competitors would seem anathema in most other industries. But L,A.’s insular banking world is dominated by veterans who have been together for years and not necessarily in banking.
Kenny, a former banker at Manufacturers Bank, worked briefly with Rothenberg, a retired partner at Latham & Watkins LLP, at the World Soccer Federation. Rothenberg has known Broidy, a former vice chairman at City National Bank, for at least 30 years.
What they have in common are hefty Rolodexes, deep ties to the business community and the understanding that new banks, over time, far outperform the stock market. Better yet, new banks usually get sold to larger banks at lofty premiums or debut as successful IPOs, allowing their shareholders to cash out.
Moreover, running a bank or being just a shareholder offers plenty of cachet for successful local businesspeople many of them equipped with healthy egos. Add to that low interest rates and it’s no wonder that 15 banks have opened in Southern California in the past year, all backed by industry veterans and wealthy shareholders.
“The stock market hasn’t done so well and real estate is so priced out that you have a few guys who will sit down and write a check for $1 million each,” said Don Johnson, chief executive of American Business Bank.
Bankers also boast that they are able to poach business customers from large behemoths such as Bank of America and Washington Mutual, primarily by offering superior customer service (sometimes including such unlikely touches as courier delivery). Such poaching could include working together on deals.
“We have demands for loans from good customers, and if we can’t meet those demands we’d rather steer our customers to another independent bank than to a big bank,” said Rothenberg, who opened 1st Century in 2003.
Tapping shareholders
More than 30 years ago, Rothenberg was an organizing member of First Los Angeles Bank in Century City, which was co-founded by Charles Manatt of the law firm Manatt Phelps & Phillips LLC. (First Los Angeles Bank was sold to City National Bank in 1996.)
Now on his second bank start-up, Rothenberg’s 1st Century has become the role model for successful niche banks. He raised $26.4 million from 400 investors, a record at the time. (Since then, the record has been broken by California United Bank in Encino, which raised $35 million from 700 investors, and Private Bank, with $36.6 million drawn from 338 investors.)
“When we saw that Alan (Rothenberg) had started his bank, we thought they had a good business model,” said bankruptcy lawyer Richard Pachulski, one of the founders of Private Bank. “We’re frankly trying to improve on their model. If we do a good job, that will be an advantage that the next new bank has.”
One reason for the success of startup banks is that they have been able to tap their shareholder and director base, widening the circle of players in the industry.
These days, directors and investors are expected to generate deposits by becoming an ad hoc sales force (some executives go so far as calling them “ambassadors”) with requirements that they bring in new customers. There is often a quid pro quo attached to investing in a new bank: some boards turn down shareholders who do not have the connections to attract new customers.
New banks also have become pickier in their choice of directors, preferring to get a range of businesspeople including executives who can tap into ethnic Chinese and Korean-American markets to attract as diverse a slice of the business population as possible.
“Our board consists of members that represent many industries from all over Los Angeles,” said Raffi Krikorian, a real estate developer and chairman of California Business Bank, a startup in downtown Los Angeles.
Charles Wood, president and chief executive of California Business Bank, said his board fulfills dual roles: providing oversight and assisting in the bank’s growth.
“Everybody says, ‘Let’s start a bank’ because it sounds sexy,” he said. “But we had to find directors who we thought could help us out and assist us. A diversified board and shareholder base affords us a greater opportunity to grow.”
Krikorian spent two years trying to put together a bank in Glendale, but state regulators did not approve of his first choice of chief executive. After searching around, he eventually hooked up with Wood.
“People who I do business with, owners of apartment buildings and shopping centers, told me that they weren’t being serviced well by their banks,” he said. “These are companies that are not the corner bakery and they’re not multi-billion dollar conglomerates either.”
Early successes
Being recognized upon entering a bank either as a customer or shareholder helps explain the appeal of a boutique financial institution. “There are businesspeople who get good service when they go to restaurants or any other place in L.A., but they get no special treatment from their bank,” said Broidy.
Such a focus on service really goes back more than 50 years when Alfred Hart, a director of Columbia Pictures, opened City National and catered to businesspeople in L.A’s dominant industries real estate and entertainment.
For three decades, City National grew at a measured pace and now is L.A.’s largest independent bank. Along with that success has come plenty of copycats.
By 1981, four career bankers at Union Bank opened 1st Business Bank, which sought out owner-managed companies with revenues of between $3 million and $100 million. Such a focus has worked well in Los Angeles, which has become a capital for middle-market companies (loosely defined as having anywhere from $1 million to $500 million in revenue).
In 1989, financier John Anderson bought 1st Business Bank for $84 million, the highest price ever paid at the time for a community bank. Then, eight years later, Anderson sold it to Pittsburgh-based Mellon Financial Corp. for $287 million and suddenly bankers recognized that small banks with business niches could command astronomical buyout prices.
As regional banks were getting gobbled up in mega-mergers, a few bankers have jumped at the opportunity to branch out on their own.
One of the most successful emulators has been American Business Bank, which was founded in 1998 by five former bank executives who hailed from the former Security Pacific Bank, Union Bank and Mellon 1st Business Bank.
Ironically, two of Mellon’s former executives, John Black and Brian Horton, are in the process of forming their own bank, although they have not yet filed papers with the state Department of Financial Institutions or the Federal Deposit Insurance Corp., the two regulatory bodies that oversee state-chartered banks.
Johnson cautioned that many of the new banks might not stick to their business plans over the long haul. “You always hear about entrepreneurs who start a company out of their garage, but you can’t start a bank out of your garage. You have to have an office and computer systems with complicated financial software, so the cost structure is much higher,” he said.
More problematic: Many banks end up straying into other lines, such as Small Business Administration loans and real estate and construction loans to generate fee income. These are areas that take away from core loans to business customers.
New banks all want to cater to L.A.’s local companies, but not all of them have the right business plan to succeed.
David Rainer, chief executive of California United in Encino, said top management owns a big portion of the bank’s stock, meaning they are the same type of entrepreneur that they’re trying to attract as customers.
“We’re not here for a year and then we’re leaving,” said Rainer, the former president of U.S. Bank in California. “We’ve made a decision to build a bank together. The whole idea was that the bank was going to be owned by the business community, so we didn’t want to concentrate the stock in a few hands.”
