Small bank sees big opportunity for middle-market lending in San Diego

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First Choice Bancorp's venture into San Diego is a good example of a community bank trying hard to carve out a niche in a big market.

The $1.6 billion-asset company, based south of Los Angeles in Cerritos, Calif., bought the $536 million-asset Pacific Commerce Bancorp in San Diego a year ago, adding two branches to the one it already had in nearby Carlsbad. At first glance, metropolitan San Diego — where, as in Los Angeles, several U.S. megabanks are dominant players — would seem like another tough egg to crack.

But San Diego is different from many other large markets in that it is not a town with many big corporate headquarters, except for Qualcomm and Sempra Energy, and it tends to be middle-market-oriented, said Ken Siegman, who heads the West Coast financial services team for West Monroe Partners. The situation has given California Bank & Trust, Torrey Pines Bank and other business-focused banks in the $1billion to $5 billion asset range ample opportunity to connect with smaller companies seeking services beyond the offerings of Wells Fargo, Bank of America and JPMorgan Chase, Siegman said.

“The business market is heavily driven by technology, life science, service startups and middle-market players that are a solid play for local, relationship-based banks,” he said.


That is the kind of opportunity that drew First Choice CEO Robert Franko, who says its loans and deposits in San Diego are already growing at a good clip. The company is eyeing additional acquisitions that would add more commercial lenders, although it does not feel it necessarily needs more branches.

“If we found another bank that had branches [in San Diego] I’d be glad to take them,” he said. “But I’d be unlikely to think about doing a de novo branch.”

First Choice has been able to retain almost all of Pacific Commerce’s “meaningful” clients, making M&A less urgent, Franko said.

Investment bankers continue to present potential sellers to the bank, but few of them have been compelling possibilities, Franko said. “I’ve had guys whose banks are trading for one-times book say, ‘I’d be a seller at two-times book,’ ” he said. “I tell them, ‘If we’re ever a buyer at two-times book I’ll let you know.’ ”

He said M&A is an opportunistic business, and the bank is interested in growing organically until the right deal comes along.

Robert Bolton, president of Iron Bay Capital, said he continues to believe there will be M&A activity in Southern California because yield-curve concerns are creating more sellers and driving down deal prices. “While we acknowledge high-tax states in general are seeing some headwinds from an economic expansion perspective, we feel California remains attractive from an M&A standpoint,” he said.

Historically, the San Diego-based business banks have been attractive acquisition targets for middle-market players, Siegman said. But the market continues to support new charters, including Endeavor Bank, a San Diego de novo that in January 2018 received regulator approval to open.

One drawback of growth through M&A is that there is always an “us and them thing” in the immediate aftermath, but Franko said he worked to address that risk right away with the Pacific Commerce deal. He said part of that success was the bank’s willingness to make the needed personnel cuts by keeping the stronger employee regardless of which bank they had been with before the deal.

For example, the bank recognized that Pacific Commerce’s Small Business Administration lenders were in many cases stronger, so those employees were retained and given more responsibility.

Deposit gathering is difficult with megabanks dominating San Diego. So First Choice often requires large commercial borrowers to first have deposits with the bank. “If we don’t have half a million worth of deposits, it’s going to be a real challenge to get the loan committee to approve it,” he said.

And while it focuses on growth, First Choice is also diversifying its client base.

When the bank opened in 2005, its strategy was to serve the Asian-American community in Los Angeles, particularly first-generation immigrants, Franko said. But in 2013, the board decided to serve a more diverse client base. The Pacific Commerce deal will allow First Choice to capture a bigger share of the Hispanic market, especially Mexican-Americans, Franko said.

“Our client base has become more representative of Southern California as a whole,” he said.

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