Blue Gate Bank: California’s first post-recession de novo

”That’s one neat thing about starting a brand-new bank: You get to hire these people and you get to tell them what your vision is from day one. It’s not like you’re trying to change the culture or recreate the culture; it is your culture.”
—Chris Walsh,
Blue Gate Bank

As a founding member of Blue Gate Bank, director of banking Chris Walsh shares how California’s first post-recession recession de novo became a reality.

By Andrea Lahouze

On Jan. 23, 2017, the doors of Blue Gate Bank in Costa Mesa, Calif., opened for business. Not only was the bank the first de novo in California to open since the Great Recession, it was also just the fifth post-recession de novo in the country to receive FDIC approval, a rate that averages out to less than one approval per year. (For comparison, there were an average of 154 new bank approvals per year in the eight years leading up to the financial crisis.)

For one of the founding members and director of banking Chris Walsh, the day was nearly one year in the making, having been spurred by a dearth of business-focused community banks in the region.

“Over the last two to three years, many community banks in the Orange County area have either merged together or been acquired by larger banks,” Walsh explains. “Orange County, for the most part, is a very vibrant, small- to mid-size business community, and business banking is what Blue Gate Bank is all about. We just thought it was a great opportunity in this marketplace at this time because of the consolidations of community banks and the economy.”

Hatching a plan
As the market began to recover, Walsh and 15 other industry-veteran cofounders set to work developing and writing a business plan and a marketing plan, defining policies and scouting for a location. Regulatory hurdles were high—“a difficult process,” Walsh laments. “I think we submitted 2,000 pages to the FDIC to be approved. Unheard of. The West Coast FDIC has been great. Back in the East in Washington, they haven’t been transparent.” The pages were sent for approval in February 2016; the bank received state approval that August and FDIC approval that September.

Approval, however, wouldn’t mean a thing unless they could raise the necessary funds. Another California de novo had received its FDIC approval before Blue Gate Bank, but due to a lack of required capital, it never opened. Walsh says Blue Gate Bank was extremely fortunate to have a family committed to community banking that were investors, including Bill Gallaher and his daughter, Molly Gallaher Flater, who provided the majority of the $30 million it raised to get off the ground. Investors who are committed to community banking are rare, he says, because returns take years.

$145 million

Blue Gate Bank’s asset size in December 2017, after one year of operation

$300 million

Blue Gate Bank’s predicted asset size by January 2019, after two years of operation

To illustrate just how rare, Walsh offers an example. “In today’s economy, say you are a wise investor, or you’re a very liquid, high-net-worth individual. You have $5 million to invest, and you have three places to go. Do you go to the stock market; do you go to real estate, either commercial real estate or single-family; or do you invest in a bank and hope in seven years you’ll get your money back with a good return? Where would you put your money? It’s not going to be in a bank,” he says.

Walking the talk—Blue Gate Bank director of banking Chris Walsh and relationship manager Brian Lange work together on a loan request.

“The important part in starting a bank is having an investor or a family that understands community banking,” he adds. “Molly and Bill truly understand community banking and really believe in community banking … so that made it easier for us to raise capital, because it came from one source.”

Though he has 37 years in the industry, including an eight-year tenure at the roughly $1 billion-asset Sunwest Bank in Irvine, Calif., Walsh says it was surprisingly difficult to grow Blue Gate Bank’s customer base and staff roster because it was a de novo.

“I really underestimated the tarnish or the blush that you have when you say you’re at a de novo bank from a client’s standpoint, and even trying to attract employees,” he says. “Even your best clients are going, ‘Really? Chris, I love you, but why don’t you call me back in a year after you’re doing well and you’re making money.’

“A lot of people look at a new bank like it’s a new business,” he adds, “and it’s totally a different thing. We raised $30 million in capital; businesses don’t raise $30 million in capital.”

Attracting a strong workforce was equally challenging, because potential employees held many of the same reservations as potential customers. To successfully build Blue Gate’s workforce, Walsh and other leaders decided to offer a robust package of benefits. The bank covers the majority of employees’ health insurance costs. It also offers competitive salaries, along with a 401(k) match. Walsh says that several people he’d previously worked with came along for the ride.

Marketing push
A sizeable investment in advertising and an aggressive interest rate for deposits have helped attract more customers to Blue Gate Bank. The bank board has also leveraged professional connections to get the word out about this new community bank to their CPAs, clients, attorneys and local residents. “Also, the relationship managers and the senior management here are getting out and speaking at different events, participating at different events,” Walsh adds. “The neat thing is how a lot of the people want to hear about a de novo bank and what it took to open. They want to hear the story.”

Regulatory processes will continue for Blue Gate Bank into early 2020, as startup banks must partner with the FDIC for the first three years and seek approval for any changes to the business plan. Walsh says it’s hard to be nimble. “For example, our business plan was written two and a half years ago,” he says. “A lot of stuff has changed in two years, so if you want to change and go a different direction or do a different thing, it’s very advantageous for your bank to do that. But you need to go to the FDIC for approval first, and it is not a quick process to receive approval for a change, so you might miss that opportunity for your bank to do well.”

Still, he is optimistic for what the bank’s second year holds. He believes its SBA team, which launched late last year, will be a bright spot. “SBA, I think, is critical to a community bank, period,” he says, noting that it creates a good amount of fee income if the bank sells the loans. “SBA is a critical piece to our growth, to our vision going forward.”

Culture from scratch
Walsh is also focused on building a stellar working culture.

“In most banks, they say that they deliver the best client service, except we really are people that have a client-centered focus,” he says. “From our tellers to our support people to our relationship managers to our admins, everybody really, really believes in the client-centric focus, and I think that’s one neat thing about starting a brand-new bank: You get to hire these people and you get to tell them what your vision is from day one. It’s not like you’re trying to change the culture or recreate the culture; it is your culture. We want to be very profitable, very efficient, very client-centric, and I think the neat thing about that is, with a new bank you get to start that culture from day one.”

So far, it’s working. Blue Gate Bank expected to have $117 million in assets at the end of its first year. Instead, it reached $145 million. Projections point toward $300 million by January 2019, the end of its second year. And though Walsh is quiet on specifics, he says a second branch is already in the works, slated for an early spring opening in the Los Angeles area.

Andrea Lahouze is deputy editor of Independent Banker.