58.9 F
Los Angeles
Sunday, May 28, 2023

New Interest

California Business Bank was founded near the height of the last boom, back when L.A. investors were creating a bank every six weeks or so.

Then came the recession. The bank didn’t fail, but it came awfully close. It had only about a million bucks left before San Diego investor Richard Tan bought the bank in July. He’s making the same bet the bank’s co-founders made eight years ago: that a new bank can find customers and grow as the economy takes off. With that wager, he’s the first new player to jump into L.A.’s banking scene in years.

“Southern California typically leads this country’s economic recovery,” Tan said. “To fully leverage off the recovery, businesses will once again rely heavily on banks.”

While California Business Bank isn’t new, it might as well be, with few customers, a single branch and just $46 million in assets, making it the second smallest local bank. Tan, who owns paper-packaging manufacturers and financial services companies in China and Hong Kong through a San Diego holding company, essentially plans to build a new bank on top of the nearly failed institution.

He pumped in $8 million of new capital, brought in a new board and this month hired a new chief executive, one with experience building banks from scratch.

Tan is the first to jump into the bank business here in nearly five years. With changing regulations and tepid economic growth, Los Angeles hasn’t seen a new bank since 2009. Nationwide, there were no new banks founded between December 2010 and November of last year. While several small local banks have been swallowed by larger institutions, no one has bought and rebuilt one as a standalone operation.

Those mergers, combined with bank failures during the recession, mean there are far fewer banks today than when California Business Bank opened in 2005. Then, it was one of 85 headquartered in Los Angeles County. Now, 66 remain. That smaller pool could be part of the attraction for Tan, said Wade Francis, president of Long Beach bank consultancy Unicon Financial Services Inc.

With all the bank consolidation over the past few years, he said, it’s no surprise to see an investor who thinks Los Angeles is ready for a new one.

“It’s all cyclical,” Francis said. “Banks are born out of economic expansion. If there’s an opportunity for a new bank, there will be someone who steps in.”

‘Financial tsunami’

California Business Bank opened in November 2005, co-founded by Encino real estate investor Raffi Krikorian and other local business owners. It was one of eight local banks launched that year, as investors believed economic growth would continue to support new institutions. Seven more banks opened in 2006.

For California Business Bank, the plan was to cater to small and midsize local business, especially those run by immigrant entrepreneurs. The bank was quickly profitable and by the middle of 2008 had grown its assets to more than $130 million.

“Then we got swept up by the economic and financial tsunami,” Krikorian told the Business Journal.

The bank lost millions as construction and real estate loans went bad. The bank’s stock, publicly traded on the over-the-counter markets, fell from more than $10 a share to little more than $1 by the beginning of 2010. The thinly traded shares last week sold for 30 cents.

Regulators ordered the bank to raise additional capital, and Krikorian and others obliged, pouring $5 million into the struggling institution in 2011. But loans continued to sour, eating up that money. In 2012, regulators ordered another capital raise of at least $8 million, but the original investors weren’t willing to get in any deeper.

Then last year, Tan approached the bank with an offer. He would invest the required $8 million and in exchange become the bank’s majority shareholder. The deal closed in July, with Krikorian and some other co-founders retaining diluted shares of the bank.

In an email exchange with the Business Journal, Tan said there were many other banks he could have acquired but that California Business Bank was a “‘diamond in the rough’ with excellent potential.”

Tan didn’t elaborate. In the bank’s brief history, it had one profitable year – 2007 – when it made $570,000. All told, it has lost $24 million since its founding.

Steve McCracken, one of the new directors, indicated it was a deal based on timing: Tan wanted to buy a bank somewhere in Southern California and California Business Bank was looking for a buyer.

“The opportunity that Richard Tan saw was an opportunity in banking,” said McCracken, a former executive with Callaway Golf Co. in Carlsbad. “This one was available and it was in the right market. The previous history of this bank is less relevant than where we’re going.”

Tan is betting a resurgent economy will spur businesses to expand and borrow money, driving growth for the bank.

“We see opportunity on a broad front, starting with the recovering economy providing more lending opportunities,” he said.

He also said California Business Bank will strike a balance, offering the personal service of a small bank with the technology and capabilities of a big one.

“Our model will blend the best aspects of community banking with advanced technology and multichannel delivery,” he said.

To build the tiny bank and boost its tech credentials, Tan this month hired Adriaan Van Zyl as chief executive. Van Zyl was previously chief operating officer at BofI Federal Bank, formerly Bank of Internet, a San Diego lender that has no physical branches.

For now, California Business Bank has just one branch, inside of its 10th-floor office at Flower and Sixth streets in downtown Los Angeles. Van Zyl expects the bank will eventually have more locations, but said his goal is to grow the bank without building a big branch network. Instead, he plans to attract customers by offering better online banking than other community banks.

“Customers nowadays, they don’t want to just deal with a person, they want technology as well,” he said.

Kosovo experience

A native of South Africa, Van Zyl has helped start banks before – one in the wartorn territory of former Yugoslavia. In 2001, he was one of a handful of bankers who created the American Bank of Kosovo for the U.S. Agency for International Development. The commercial lender, created to spur economic activity after the 1999 Kosovo war, was later sold to Raiffeisen Bank of Austria.

Stateside, Van Zyl built a small commercial lender, ADB Bank in Cedar City, Utah, that catered to medical and insurance businesses. (The bank, though profitable, closed voluntarily in 2010 to become a premium finance company – a firm that provides loans to cover the upfront cost of insurance policies.)

Van Zyl said he hopes to attract some of his old ADB customers, such as small medical offices and insurers.

“I certainly see business for a bank there,” he said. “I got to know insurance industry players in California when I was at ADB.”

But California Business Bank isn’t trying to re-create ADB’s business model. Director McCracken said he’s reaching out to insurance industry customers to start building up the bank’s business in the near term, but that he’s hoping for a broader customer base in the long term.

“Insurance is low-hanging fruit we can reach quickly,” he said. “We have plans to grow this bank substantially.”

Featured Articles

Related Articles