A REVIEW OF THE NORTH SAN JOAQUIN VALLEY FINANCIAL SYSTEM. Final Draft_

Transcription

1 A REVIEW OF THE NORTH SAN JOAQUIN VALLEY FINANCIAL SYSTEM Final Draft_

2 A Review of the North San Joaquin Valley Financial System Prepared by: Thomas E. Pogue, Jeffrey A. Michael, and Gilbert Perez with the assistance of Jacob Baumbach, Jennifer Li, Alfonso Rodriguez, Andie Smith, and Sydney Stanfill. Business Forecasting Center Eberhardt School of Business University of the Pacific 3601 Pacific Avenue Stockton, CA This report has been prepared by the Business Forecasting Center in the Eberhardt School of Business at the University of the Pacific. The report forms part of the North San Joaquin Valley regional economic assessment. This project is supported through the Department of Commerce s Economic Development Administration (EDA) s Local Technical Assistance Project No The statements, findings, conclusions, recommendations, and other data in this report are solely those of the authors and do not necessarily reflect the views of the U.S. Economic Development Administration (EDA). University of the Pacific, Licensed under the Creative Commons Deed Attribution- 4.0

3 CONTENTS Introduction... 4 NSJV s Commercial Banking System... 5 Angel Networks and Venture Capital in the NSJV... 7 Government Financial Programs... 9 Conclusions Figures Figure 1 Number of banks and branches by type... 5 Tables Table 1 NSJV Commercial Banks... 6 Page 3 of 11

4 INTRODUCTION This working paper is an initial review of the financial system in the Northern San Joaquin Valley (NSJV). It is the only element in the review of financial capital assets in the NSJV economic assessment project. It aims to provide a basic understanding of existing financial and banking resources that serve both residence of the NSJV and those in the surrounding areas. This paper adds to a growing list of completed sections of the economic assessment project, which analyzes and reviews economic development dynamics across the region. The information contained in this review is intended to initiate a conversation among stakeholders concerned about economic development in the NSJV region. Guidance from those stakeholders will direct further revision and refinement of this working paper in order to identify and prioritize the most important issues. Page 4 of 11

5 NSJV S COMMERCIAL BANKING SYSTEM Commercial banking is the most common type, as well as the most widely (in terms of number of unique customers) used banking in the United States. This holds true for the NSJV area as well. It is the type of institution people think of when they think of banks. Commercial banks are where people can deposit into checking, savings and IRA accounts, get mortgages and auto loans, and even obtain business loans. The benefits of commercial banks are numerous. They allow customers a depository for their incomes; facilitate the use of digital currencies which decreases the need to carry large amounts of cash on hand, and for those institutions which are members of the Federal Deposit Insurance Corporation (FDIC), insurance against theft. The following is a summary of the commercial banking system in the NSJV. The NSJV is home to over 20 commercial banks, five of whom have headquarters in the NSJV. These NSJV based banks are: Bank of Agriculture & Commerce; Bank of Stockton; Farmers & Merchants Bank of Central California; Delta Bank, N.A. and the Oak Valley Community Bank. 1 The bank with the most branches in the NSJV also has the largest total assets held by its parent company: JP Morgan Chase. Other well-known banks such as Wells Fargo and Bank of America can be found in the NSJV as well as a range of smaller banks. We have identified four types of banks located in the NSJV based on a Dunn & Bradstreet classification: Commercial, National Commercial, National Trust, and State Commercial. Figure 1 below shows the number of banks and branches by type of bank in the NSJV. A full list of the banks located in the NSJV can be found in Table 1 below FIGURE 1 NUMBER OF BANKS AND BRANCHES BY TYPE Banks and Branches by Type Commercial National Commercial National Trust State Commercial Branches Banks 1 In addition to these the Bank of Stockton owns Modesto Commerce Bank and Turlock Commerce Bank. Page 5 of 11

6 Agriculture is an important and fully integrated part of the economy of the NSJV. This can be seen in the banking culture as well. The Bank of Agriculture and Commerce; and the Farmers & Merchants Bank of Central California were both founded locally to meet the needs of the predominantly agricultural based populations. Additionally, Rabobank which is a large international institution that focuses on agrifinance operates in the area as well. 2 Founded to serve the rural agriculture needs of the Dutch, it brings that same commitment to agriculture to the NSJV. Wells Fargo also has a big agribusiness lending presence, so demonstrating with Rabobank and other that it is not just the local community banks which feature prominently in the agrifinance market. TABLE 1 NSJV COMMERCIAL BANKS Institution Name Type San Joaquin Branches Stanislaus Branches Merced Branches Total NSJV Branches Total HC Assets ($m) NSJV Headquarters JP Morgan Chase Bank 2 52% 33% 15% 27 2,138,306 Bank of America 2 52% 30% 18% 23 1,632,502 Wells Fargo Bank 2 48% 36% 16% 25 1,488,428 Citibank 1 25% 38% 38% 8 1,369,398 U.S. Bank 2 58% 42% 0% ,661 Union Bank 2 50% 50% 0% 4 108,501 Bank of The West 4 55% 45% 0% 20 86,654 BBVA Compass 2 56% 31% 13% 16 75,500 Commerce Bank 2 100% 0% 0% 1 22,884 Umpqua Bank 2 33% 67% 0% 3 22,059 Rabobank 2 36% 36% 28% 11 14,310 Westamerica Bank 4 0% 50% 50% 14 4,891 Tri Counties Bank 4 0% 75% 25% 4 2,723 Bank of Stockton (incl. Modesto Commerce Bank & 4 64% 36% 0% 11 2,283 Stockton Turlock Commerce Bank) Farmers & Merchants Bank of Central California 4 59% 29% 12% 17 2,154 Lodi Central Valley Community Bank 4 50% 33% 17% 6 1,160 Oak Valley Community Bank 4 42% 58% 0% Oakdale Bay Commercial Bank 1 100% 0% 0% Bank of Agriculture & Commerce 1 80% 20% 0% Stockton Community Business Bank 1 100% 0% 0% Delta Bank, N.A. 2 25% 75% 0% 4 97 Manteca Note: HC=Holding Company; Type 1 = Commercial; 2= National Commercial; 3 = National Trust; 4 = State Commercial Source: Business Forecasting Center and FDIC Bank Database as of 30 June Other foreign owned banks in the region include Bank of the West (BNP Paribas-France), BBVA Compass (Banco Bilbao Vizcaya Argentaria, S.A-Spain), and Union Bank (Mitsubishi Financial Group-Japan). Page 6 of 11

7 ANGEL NETWORKS AND VENTURE CAPITAL IN THE NSJV Angel Networks and Venture Capital firms both invest in startup companies which is a vital part of driving innovation, growing small businesses and expanding any local economy. The difference between Angel Networks and Venture Capital firms is small. Angel Networks are cooperatives of Angel Investors that agree to share research resources and information while Venture Capital firms are pooled investments of individuals that then are invested in startups. The NSJV is home to three Angel Networks: the San Joaquin Angels (SJA), the Central Valley Fund (CVF), and Stanislaus- Merced Angels (SMA). These networks are present in the NSJV with the intention for partnerships with investors and businesses, new and old. The SJA is located in San Joaquin County. Like other Angel Networks it provides attractive private company investment opportunities to its members, while enhancing economic prosperity through the financing and growth of local businesses across the NSJV. To enhance the impact and reach of its activities the SJA partners with education institutions in the community such as San Joaquin Delta College and the University of the Pacific to assist both entrepreneurs and investors. An entrepreneur seeking SJA funding for their businesses completes an online registration and summary of their business proposal as well as an executive summary of their business plan. A screening committee then reviews the submissions and informs applicants if they are selected a couple of weeks before a scheduled member investment meeting. If a company is selected they agree to coaching in preparation for their presentation at the SJA meeting. In addition, selected companies may be asked to assist with the preparation of a due diligence report that can help the SJA assess the investment potential of the company. According to the SJA website, 3 typical investments range between $50,000 and $500,000. If larger amounts are needed, multiple angel groups often co-invest. Generally, the minimum SJA invests in a company is $25,000 in order to avoid the difficulty of monitoring many smaller investments. While no up-front commitment of investment funds is required of SJA members, there is an expectation to invest a minimum of $25,000 into promising growth ventures over the course of several years. SJA members pay an annual membership fee in the range of $500-$1000 of organizational support. According to its website, 4 the CVF was established to provide private capital for small to mid-sized businesses across the western US, but especially those in the Central Valley. The CVF s capital is used to finance later stage growth and expansion, strategic acquisitions, ownership transitions, and recapitalizations. CVF provides mezzanine capital, which is subordinated debt or preferred equity. For companies with a track record of profitability that cannot obtain desired levels of bank financing, raising mezzanine capital is frequently a superior alternative to raising additional common equity. Mezzanine capital is attractive to business owners because it is typically less dilutive than common equity, frequently enabling existing owners to maintain significant ownership. CVF mezzanine investments are specifically structured to accommodate the specific needs of the business Page 7 of 11

8 Currently, the CVF has focused its investments on firms across the western U.S. with at least $1 million in cash flow. It targets investments between $2 million and $10 million. In addition, the CVF highlights its extensive experience in the Hispanic markets in both the United States and México. In this the CVF cites relationships with Nacional Financiera (México s economic development bank), ProMéxico (a part of México s Secretary of the Economy), Fondo de Fondos, and numerous Hispanic-managed business. The SMA is based in Stanislaus County. Founded in 2013, its It interested in start-up and early stage businesses in a wide range of industries. 5 It is interested in NSJV businesses and those in neighboring regions of the Central Valley to facilitate due diligence, mentoring and other roles. The SMA is committed to promoting economic development in Stanislaus and Merced counties. Therefore, it is focused on businesses located in, or willing to re-locate to those counties. The SMA looks for investments in the $50,000 to $500,000 range. However, the SMA do not have specific limits on the size of its investments and like the SJA expresses a willingness to co-invest if higher investments are required. 5 Page 8 of 11

9 GOVERNMENT FINANCIAL PROGRAMS Government sponsored loan programs often exist to address a shortfall in the private markets willingness to lend to small businesses and meet those businesses borrowing needs. These programs can be found at all levels of government. The United States Small Business Administration offers subsidized loans to companies with less than a certain number of employees, most states have small business lending practices, and local governments often have loan programs as well. This is the case for all of the counties in the NSJV. The following is a summary of these programs. There are a number of financial assistance programs for businesses in the NSJV. Programs available to the entire country can be found through the Small Business Association (SBA). The NSJV belongs to the Small Business Association Region 9 with the regional office in Glendale CA, the local chapter office is located in Fresno. The SBA has certified partners that assist in providing services to business and there are four located in the NSJV: The Alliance SBDC Modesto, Modesto/Merced SCORE Merced, Success Capital Expansion & Development Corporation Modesto, and Northeastern California SBDC Stockton. The SBA provides three types of financial assistance to small businesses: 1. Guaranteed Loan Programs (Debt Financing) 2. Bonding Programs (Surety Bonds) 3. Venture Capital Program The Guaranteed Loan Program is the largest and traditional SBA financial assistance program. Rather than provide direct loans to small businesses, the SBA establishes the guidelines for loans given by partners (lenders, community development organizations, and microlending institutions). Because of this, a SBA loan is actually a commercial loan with SBA guidelines and security. SBA loans may not be given to small businesses if the borrower can achieve other means of financing. The SBA loan changes somewhat with government policy changes and the macroeconomic environment, thus borrowers need to be aware of current policies when seeking financial assistance. The Bonding Program is a three party agreement between a surety (one who is responsible for the debt or obligation of another person), a contractor, and a project owner. This agreement is called a Surety Bond Guarantee. The contractor must agree with the contract s terms and conditions and if the contractor unsuccessfully performs the contract, the surety undertakes the project. If the contractor does not fulfill the contract s terms and agreements, the SBA, who made an agreement with the surety, will take on a percentage of the loss. The SBA can guarantee a minimum bond of $5 million, but depending on the contract, the bond can go up to $10 million. The Venture Capital Program s Small Business Investment Company (SBIC) Program is a publicprivate investment partnership. Private investment firms provide financial assistance to small Page 9 of 11

10 businesses and the SBA provides low-cost, government-guaranteed debt. SBICs limit their investments to small businesses that are qualified through SBA regulations. In addition to each of the NSJV s principal cities there is a business assistance programs. In Stockton, which is located in San Joaquin County, there are programs to help a company be more eco-friendly, a revolving loan fund and industrial development bonds. Modesto in Stanislaus County, offers businesses a deferral program, education programs and an economic incentive program. Lastly, in the city of Merced in Merced County, offers their local businesses the opportunity for hiring credit, support for companies that have high impacting recycling, and net operation loss carryover in addition to a revolving loan fund. The stipulation for these programs, however, is that for each $10,000 or $20,000 loaned, at least one full time job must be created or saved. There is also a host of other government financial government programs for business in the NSJV. A selection of these include: 1) California Capital Financial Development Corporation. It is a regional direct lender for loans up to $50,000. State of California loan guarantees up to $2.5 million on loans up to $20 million. Further Information- 2) CalRecycle Direct lender of up to $2 million to recycling businesses or non-profits located in a Recycling Market Development Zone (RMDZ). San Joaquin County s RMDZ includes all of the unincorporated areas of the county and the incorporated cities of Stockton, Manteca, Lodi, Tracy, Lathrop, Ripon, and Escalon. The Stanislaus County RMDZ encompasses the cities of Ceres, Hughson, Modesto, Newman, Oakdale, Patterson, Riverbank, Turlock, and Waterford. In Merced the RMDZ includes the cities of Atwater, Dos Palos, Gustine, Livingston, Los Banos, Merced and all Merced County unincorporated areas. Further Information- 3) CDC Small Business Finance- The Community Advantage Program provides working capital loans up to $250,000 to eligible small businesses. Further Information- 4) RCAC Community Advantage Lender- RCAC provides a wide range of community development services for rural and Native American communities and community-based organizations in 13 western states and other Pacific Islands. RCAC offers the SBA Community Advantage loan in underserved markets up to $250,000. Further Information- 5) SAFE-BIDCO- Regional direct lender and loan guarantee provider to small businesses. Loan guarantees up to $750,000. Further Information- Page 10 of 11

11 6) Valley Economic Development Center, Inc.- Statewide direct lender and loan guarantee provider to small business for up to $5 million. Further Information- 7) Rural Development at the U.S. Department of Agriculture- Direct lender and loan guarantee provider to small business in rural areas. Loans up to $25 million. Further Information- CONCLUSIONS The NSJV area contains a range of commercial banks, angel investors, and a variety of publicly supported financial programs. It is important to recognize the geographic mobility of capital, while accessing the right network is key and often built along local networks of know-who financial flows are highly mobile within the United States. Therefore, this review of financial resources located within the NSJV area should be viewed as just an initial overview. Other needs not met by the regional system can sometimes be addressed by the much larger financial systems located in the Sacramento Area, the Bay Area and beyond. Page 11 of 11