First Private Bank & Trust President and CEO Charles Jackson has led the bank on a journey of reinvention ever since the collapse of the subprime mortgage market left the organization teetering with a heavy load of bad loans in 2008. The trajectory has led from serious financial trouble 2 1/2 years ago to finally reaching that tipping point of profitability this March. A completely new bank has emerged as the organization has moved away from purely commercial banking and become a private bank that offers wealth management, jumbo mortgages and commercial lending to successful clients – a unique combination that very few community banks provide. With a track record of either starting new operations or fixing ones that were in trouble over the last 20 years, Jackson is now keeping the bank on a growth plan that is expected to double the bank’s number of branches and significantly increase its assets by the year 2013. First Private Bank & Trust is wholly owned by Boston Private Financial Holding but operates as an independent bank with its own board of directors. Q: What was the state of the bank two years ago? A: Two years ago the bank was like many other banks in the region in some trouble. They had involved themselves fairly deeply in land and construction loans particularly in the Inland Empire. On the face of it, these were essentially community bank type of transactions because they were loans to local developers who were developing entry level homes for people who were buying their first home. The problem was that these homes were totally tied to the availability of subprime mortgages because a very large percentage of the individuals that were buying these homes couldn’t afford or wouldn’t qualify for a standard mortgage. When the subprime market collapsed, that entire group of developments, out particularly in the Inland Empire in the high and low deserts, basically collapsed, and many, many community banks were caught with large amounts of loans that in the end were totally tied to the subprime market. Q: So the bank got rid of its troubled loan portfolio? A: Fortunately we recognized that we had these loans in our portfolio and we decided to essentially bite the bullet and put these loans up for sale. Of course selling those loans was going to mean taking a fairly heavy discount, which is what we had to do. …Our holding company in Boston was able to raise a very large amount of capital in the marketplace, and because of that capital which we injected into the bank, we were able to take those charge- offs at the end of 2008. What it did is it cleaned out the bank’s portfolio and gave us the opportunity to now rebuild the bank into a pure private banking model, which is what we’ve done and have been fairly successful at it. Q: What restructuring has taken place? A: The bank two years ago was very much like the banks you see in Los Angeles, they’re very attune to their local marketplace but tend to be what I call one trick ponies. They tend to be commercial lenders only. We now have really built ourselves around three major products: jumbo mortgages, trust administration and wealth management and in the middle are commercial and private lending so that we can really wrap ourselves around a successful individual and their family or their business, providing them with all three major elements and still offering that very high level of customer service that community banks are known for. We are in a very enviable niche, we are kind of unique in the way that we can provide the services that only the big banks can provide, but we can overlay it with this very high-touch service element. There are not many banks that look like us. Q: Are all three of those areas being pursued equally or is there one that is stronger than the others? A: Strategically we want to pursue them equally because we really believe in a nice balanced diversity within the bank but the market tends to dictate what is doing best at any given time. Over the last year and a half jumbo mortgages have just been booming and that’s been our real growth. And we have grown fairly quickly on the jumbo mortgage market. Q: What do you attribute that to? A: Low interest rates number one. A lot of people are refinancing their existing mortgages. The other element is that home prices have come down so people are seeing deals that they don’t want to pass up. Our average mortgage is $2 million and we have mortgages that are much higher than that. Now as interest rates begin to go up that will probably slow down fairly rapidly and what we’re hoping is at that point the commercial industrial market begins to revive and we’re able to make up for any slowdown in our jumbo mortgages with our commercial and industrial business. Q: How much have jumbo mortgages grown in the past year? A: We started our jumbo mortgage business in the 4th quarter of 2008 from zero and we now have almost $160 million of jumbo mortgages in our portfolio. Like I said our average jumbo loan is $2 million and growing. It’s a great entry point for us. The entry point to wealth management, into commercial loans is great because these are all individuals that own their businesses or they’re professionals and it gives us the ability to come in and offer other products. Q: What is the state of the bank now and has the recovery process been what you expected? A: The recovery process has been exactly what we expected. It’s right on track. We are making a profit, which is very good, for the first time in two and a half years. This last quarter we made a slight profit, the first quarter we made a larger profit. For the six months we essentially break even. The third and fourth quarter are going to be very good for us, we expect to make a decent profit for the whole year. The key for us has been to re-build our loan portfolio and we’ve now reached that tipping point where we’re actually now making more in revenue than we are in expenses. Q: I know you’re changing your logo, what marketing plans are underway? A: We have a very extensive marketing plan, we are hoping to begin with that plan in September. We’re planning to launch it and it’s going to be fairly broad, it’s going to involve television, radio and print. We’re going to have billboards, several cable stations… At the moment we’re doing our planning to figure out how best to finance it, how to roll it out. Q: What’s the objective? A: The objective really is name recognition. We are a small organization, we were known for being a different kind of bank – we were truly a commercial bank – we are now a private bank and we want people to know that. We want people to recognize what we’ve become and what we’re going to be in the future. And that’s going to be necessary because frankly most people don’t know who First Private Bank & Trust is and we want to concentrate on those areas where our client profile is best represented. Q: Was that decision to adopt the new business model deliberate? A: Oh yeah. It was a very deliberate strategy that was worked out, with the help of the holding company because the other banks within the holding company are structured exactly that way and the most successful one of all, the one in Boston, has been structured that way since 1973 and has been very successful. So we haven’t been geniuses coming up with the strategy, we are essentially good at copying the successes of our sister banks. And that’s essentially what we’re doing. Q: Has there been a migration to this model by other community banks? A: No. It’s not an easy thing to do. It’s fairly difficult for community banks to do that. Wealth management is almost an entirely different world and it’s difficult to start from scratch and most commercial bankers have a difficult time understanding it. The same with jumbo mortgages. Commercial banks have a difficult time feeling comfortable with jumbo mortgages. At the end of the day jumbo mortgages are one of the safest asset classes you can get into. If you look at the track history of jumbo mortgages they have a far better track history than commercial and industrial loans do. Q: So why are banks not comfortable with them? A: First of all there’s a lot of reporting you have to do. When you’re doing any kind of mortgage, whether its jumbo mortgages or conforming mortgages, there’s a tremendous amount of reporting and government regulation because of consumer protection, so you have to have the infrastructure to do that and a lot of commercial banks don’t want to touch that. They don’t want to get involved, I mean they’ve got enough regulatory problems as it is, they don’t want to have to get into one that truly touches consumers. So that’s one issue. Q: Are you looking to grow organically or through acquisitions? A: Our strategy really is a mix of both organic and acquisition strategy. We know that we need a larger footprint, we have five offices or branches right now, we know we probably need at least twice that. We’ve identified the areas we know we need to be in. It’s very clear where they are. It’s places like Century City or Beverly Hills, it’s Pasadena, it could be Downtown LA, the beach communities, Manhattan Beach, certainly Calabasas, Warner Center, possibly Santa Barbara, we know those areas have very big pockets of high net worth successful families and individuals and companies – privately owned companies. So that’s going to be important for us. Some of those branches we’re going to open as we say ‘De Novo’ but a number of them will be acquisitions. We also intend to make acquisitions in the wealth management area in order to build that up. Q: What’s the timeframe? A: The timeframe is really by 2013. We believe we need to be a certain size, which I won’t tell you right now for competitive reasons, but we know that we need to be substantially larger than we are now. But we want to be very careful about not getting too large and losing the service component of our strategy. At the end of the day service is everything. I don’t care how many products you provide to a client unless you can provide them with the kind of service that they need. Generally speaking once a bank moves beyond $2- $2.5 billion in size you begin having to worry about their service component. Some have been successful at doing it but I would say that in general history has shown that once you begin getting to that size particularly when you get to that $5 billion range service begins to suffer. Q: What opportunities do you see from the financial crisis? A: From an acquisition standpoint there are a number of smaller banks that are in trouble. We’re certainly looking to see which ones might fit our profile, our footprint profile. The problem for us is most of the banks are fairly traditional community banks so the cultural integration is always the most difficult to pull off. Financially everything is easy enough to analyze but bringing another organization in, or branches from another organization in, and integrating them into our very unique model is not easy. We have to be very careful in how we do that. But we think we’ll have opportunities over then next 18 months to make some very good acquisitions, either branches or smaller banks that will fit at least our footprint that we’re looking to develop. Also, competition in the community banking market, particularly in Southern California, has decreased because of the number of banks that have been closed and then absorbed by other banks. Q: How do you define the culture here? A: It’s different in that’s it’s a model that really has three different legs to it, so you really have to have a staff and a culture that is highly communicative, very team oriented and is incented financially and psychologically to try to bring the other product areas into their relationships and build their relationships that way. It’s very hard to do because people who have relationships with clients tend to be very careful, they don’t want somebody coming in and messing it up for them. So it’s a culture of trust it’s a culture of cross selling, it’s a culture of high team work that has to go on here. Q. What about finding the right people, is that a challenge? A: It’s very, very difficult to do because I explained to you the kind of culture that we have and there aren’t many banks that are built like us. So finding people that already are in that culture or can adapt to that culture quickly is a very difficult thing to do. That has been one of the biggest impediments we’ve had to our growth, is finding the right people, but we’re almost there. Q: What are your thoughts on the financial reform that’s being proposed? A: Elements of it make a lot of sense. I think there are other elements that are truly a populist reaction to what’s going on and will become a real burden because we already have regulations that meet many of these new legislative initiatives, it’s just that they were never enforced. The examiners that we have now, the FDIC and the DFI, already have many of these powers and now basically we’re building a second layer over and above that so the burden is going to be substantial, the cost is going to be greater and the time that we need to spend on that is going to be far greater. Q: What is the most challenging thing about running a bank today? A: I hate to say it but it’s the regulatory issues, the amount of regulations we already have and those that are coming down the pike such as the new Consumer Protection Agency that’s being put together, the amount of work that we have to do to meet all of the requirements is phenomenal. The amount of money we have to spend in terms of people, in terms of auditors, examinations, is really a burden on small banks and it’s not going to get any better. It’s going to get worse, and if you want to be in this business you better get used to it. I would say that I probably spend 35 percent of my time on purely regulatory issues. Q: What are your thoughts on the financial reform that’s being proposed? A: Elements of it make a lot of sense. I think there are other elements that are truly a populist reaction to what’s going on and will become a real burden because we already have regulations that meet many of these new legislative initiatives, it’s just that they were never enforced. The examiners that we have now, the FDIC and the DFI, already have many of these powers and now basically we’re building a second layer over and above that so the burden is going to be substantial, the cost is going to be greater and the time that we need to spend on that is going to be far greater. Q. On a positive note, what do you find gratifying? A: Well I think anybody who’s in banking and is surviving is probably very happy and very pleased with themselves, and anyone who is making a profit ought to be very proud of themselves in this marketplace. And there are a number of banks that are very successful and have done a very good job, have managed their risk very well, but everybody has been hurt, there’s no question about it… but all in all I would say that we’ve probably come through most of the really serious problems so anyone who’s survived through this should be very proud of themselves and should be very gratified in the way they’ve managed their organizations. Q: You’ve spent a long time in the banking world. How did you end up here? A: I’ve spent most of my career working at very large banks. The last large bank position I had is I used to run Mellon Bank’s businesses on the West Coast. Then I went to Community Bank in Pasadena and ran that bank for four years and then went into the private equity marketplace and became a partner in a private equity company for a few years, and then I landed here through friends of mine at the holding company. Q: What made you say ‘yes, I want the job’? A: My career has always been around either starting new operations or fixing ones that were in trouble and over the last 20 years I would say it skewed more to fixing things that were in trouble. I think what you have to watch out for is making sure you are very realistic before stepping into it. Before coming here and meeting with my friends at the holding company it was very clear that unless new capital was raised it would be futile to try to do anything. So had someone asked me to come into a situation like this, without the ability to raise additional capital, I would have said, ‘it’s futile, why bother at this point.’ But Boston Private recognized the problem early, raised the capital early. Literally if they hadn’t raised it at the time they did within a couple of months afterwards it probably would have been impossible because the markets froze, everything shut down. Q: How did the holding company raise – was it $173 million? – in such a short amount of time? A: It was about $175 million, yes. Well, we had one large private equity company put in $75 million, and we did a secondary offering of our stock for about $100 million and that was enough to inject a large portion of that into the bank and let us do the things we had to do. You just have to hand it to the management of the holding company in reacting very quickly and recognizing they had a problem. That’s one of the biggest problems that you’ll always find particularly in the banking arena and it’s the lack of recognition that you have a problem, the tendency to go into denial, and that happens a lot. You have to move very quickly in this business, there’s an old saying about losses, ‘your first dollar is your best dollar of loss’ in other words when you recognize a loss, take the loss quickly and move on, because letting it rot and mature makes it worse in our business in particular. Those that recognized it were able to raise capital and moved quickly are still alive like us. PROFILE V. Charles Jackson Title: President and CEO age: 65 Education: B.S. from Georgetown University and MBA from George Washington University Most Admired: John Anderson, TOPA Equities Career Turning Point: Joining Mellon Bank in 1989 Personal: Married, 2 children
Right on Track
