Battling a sea change

Timing. It’s a critical component of high-performance engines, baseball and, as local entrepreneur Russ Garrow found out, start-up banks.

In January of 2007, Russ Garrow, head of Vancouver private equity firm Garrow Equity Group, headed up an effort to form a new state-chartered financial institution called Partners Bank.

“Once a bank reaches a certain size, it loses that individual service component of ‘from here, for here,’ ” Garrow said.

To fill this perceived gap, he proposed forming a bank that “put the client first, not necessarily the balance sheet first.”

But 14 months later, Garrow’s group of investors found itself in a regulatory cul de sac, a victim of market conditions, he said. And in April, Garrow made what he called a gut-wrenching decision to suspend the effort.

So, what went wrong?

Part of the answer, said Brad Williamson, director of Washington State’s Division of Banks Department of Financial Institutions – not speaking directly to the Partners Bank situation – first lies in the meager pool of experienced, competent bankers. It’s harder to get a management team that has all the necessary skills because there are not enough experienced bankers to go around, he said.

Second, Williamson said, the investment community has little or no appetite for new banks.

But Garrow said he had investors “coming out of the woodwork” to support the formation of Partners, and already had raised nearly half of the necessary $17 million in capital. Plus, he said he had formed a board of directors with financial savvy and economic and board experience.

Instead, Garrow –who previously was a human resources director at the Federal Reserve and has worked for several other banks, including Bank of Clark County and the Commerce Bank of Oregon – opined that a “regulatory sea change” was at the root of his difficulty in garnering a charter.

Changing tides

Jim Pishue, president and chief economic officer of the Washington Bankers Association, agreed.

“I do know the Federal Deposit Insurance Corp. has been very stringent in looking at business plans, management teams and the market,” he said. “They are certainly stricter than in the last few years – timing is everything.”

Getting FDIC approval is one of the first steps to forming a bank. Without it, it is nearly impossible to expect the state will grant a charter.

Only one new state charter has been granted so far this year, and another is in the capitalization stage – the last step before the final charter is granted, Williamson said.

By comparison, about eight new banks were chartered in 2007 – the most ever in one year. Historically, Williamson said, three or four charters are granted per year.

“The FDIC is more cautious about new banks, as are we,” he said. “We want to make sure everything is as positive as possible.”

Certainly, statistics such as those reported in the FDIC’s second-quarter 2008 letter to stakeholders, could lead to such caution. For example, FDIC-insured banks reported an 86.5 percent decline in net income in the second quarter of 2008 versus the same quarter in 2007.

And the Deposit Insurance Fund balance decreased by 14 percent during the second quarter of 2008.

The main sticking point in getting the FDIC to accept Partners’ charter application, Garrow said, was disagreement about who should be on the executive team.

Representatives for the FDIC were unable to be reached by the VBJ for this article.

“It was difficult to find execs who fit our client-first focus,” Garrow said. “Many execs just wanted to grow the bank to sell it or were overly concerned with their own egos.”

The FDIC turned down five or six executive candidates, Garrow said, because they hadn’t been CEOs before. Other banking experience didn’t seem to matter.

Garrow admits the bank possibly could have gotten the charter if he had been willing to hire the type of executive the FDIC wanted, but Garrow said wasn’t interested in what he called a “Pyrrhic victory.”

Although it wasn’t until this spring that he suspended formation efforts, Garrow said he could see “portents of doom” as early as mid-2007. For example, he said, 40 percent of banks formed in the last five years have not achieved systemic profitability.

The failure of these de novo banks to thrive was a warning sign that the FDIC might take a dim view of approving even more de novo banks. And he said local FDIC directors met last year with the national director to reexamine the charter approval process. Although Garrow didn’t know about the meeting until after it happened, he considered it another sign that the FDIC was adjusting its strategies – to the detriment of his formation efforts.

“The refusal to accept our application was based on the FDIC’s appraisal of market conditions, not on any lack of merit on the part of the proposed bank,” Garrow said.

He also expressed disappointment in how much say the Washington Division of Banks had in the approval process – which is to say, in his opinion – not much.

“The state should fight for local business, but that wasn’t the case,” said Garrow. Referring to the Washington state motto, he asked, “Are we really ‘open for business’?”

But Garrow hasn’t entirely given up on the idea of forming a new bank in Clark County. He sees the county continuing to grow, and as the deposit base in Clark County burgeons and there is merger-and-acquisition activity, there will be an opportunity for a new bank – but not until there’s another regulatory sea change.

“People ask me, ‘are you glad now you’re not in it?’ and I say ‘No – a bank with a clean balance sheet would run the table,” Garrow said. “But, there’s nothing in this world more common than unrealized potential.”


  1. Find a group of organizers and put together at-risk capital (at least $1 million to $2 million)
  2. Write a business plan, including the potential bank’s niche, board members, etc. It’s a six-page form, but can require hundreds of pages of supporting documentation
  3. Get the Federal Deposit Insurance Corp. to accept the application. If it gets accepted:
  4. A field examination of the business plan and executives and board members is conducted
  5. Conditional approval is granted or the application is denied
  6. Find investors to capitalize the bank
  7. The final charter is granted

Source: Russ Garrow



1 The number of banks chartered by the state so far this year

8 The number of new banks chartered in 2007 – the most ever in one year.

3–4 Historically the number of charters granted each year

The number of state-chartered banks in Washington has remained stable, despite new banks and merger and acquisition activity – oscillating between 96 and 99 since at least 2004. But 2008 branch charter activity has been busy in the first nine months of 2008:

44 Branch applications approved (Three in Clark County)

34 Branch certificates issued (Four in Clark County) 

25 Branch Openings (Four in Clark County) 

Source: Washington State Division of Banks