In this game, raising money is easy, regulation is hard.

THE one thing that would-be bankers usually don't have to worry about these days is money. Most of the new bank start-ups in the past year have been well-capitalized--so much so, in fact, that certain banks have been over-subscribed.

But starting a bank, even a small one, involves a lot more than assembling a few wealthy investors. Despite the growth of boutique banks in Los Angeles, there are pitfalls--beginning with a variety of regulatory hurdles that can take up to two years to resolve, and involve endless interviews with regulators.

Several banks that have applied for state licenses this year did not win approval from the California Department of Insurance, which regulates banks along with the Federal Deposit Insurance Corp.

Compounding the problems of being a startup are regulations that now require banks to hire full-time compliance officers within a year of opening.

In addition, all the top managers must have held the same job title at another bank as proof that they are capable of executing their business plan.

Richard Cupp, president and chief executive of 1st Century Bank, said the first few months of regulatory scrutiny and the added costs of Sarbanes-Oxley compliance are tough on new institutions. "It can be overwhelming from a cost standpoint," he said.

Regulatory hurdles are just for openers.

Once a bank opens its doors, it almost immediately begins losing money. Under the best circumstances, it can take anywhere from 18 months to two years to become profitable, despite having high asset growth.

So far this year, half of the 62 banks with assets under $100 million reported losses, according to investment banking firm Carpenter & Co. in Irvine. Those numbers could escalate in the next few years as massive demand for real estate and construction loans begins to slow and banks are forced to look to other areas to generate fee income.

Chained to desks

While many banks eventually get poached by large competitors, the number of banks nationwide is actually declining because of rapid consolidation.

Charles Kenny, chief executive of the Private Bank of California in Century City, said executives at new banks all complain about being chained to their desks, which creates problems if they are not drumming up business. "We have no public relations, no legal team, no data processing department," he said. "There's nobody else to do it but yourself."

New banks are dependent on building personal relationships with their customers. That means the need to spend hours out of their offices calling on potential clients--even if it involves the occasional jaunt to Palm Springs to play golf and seal a deal.

Perhaps the biggest pitfall for new banks involves sticking too closely to original business plans and not branching out into peripheral businesses.

Charles Wood, president and chief executive at California Business Bank, a recent startup, said he spent at least a year of planning before assembling a list of investors to raise seed money. Another year was spent holding meetings with the management team, nominating a board and filing the applications for regulatory approval.

"We had to determine what our bank role would be, how to raise capital and then convert it into a business model," he said. "It takes time."

Raffi Krikorian, chairman of California Business Bank, said new banks are very particular about defining their niche. "We're not looking for the average John Doe to open an account and we're not too gung-ho on branch banking either," he said. Based in downtown Los Angeles, California Business Bank is trying to straddle several niche markets by servicing immigrant businesses, as well as owner-managed companies with sales of $250,000 to $1 million.

New phenomenon

Harvey Ferguson, chief executive of First Choice Bank in Cerritos, which opened in August, said the biggest challenge involves sticking to a business model that encompasses a huge group of minority businesses. First Choice calls itself a "pan-ethnic bank," because it caters to a dozen different ethnic groups, including Chinese, Indian, Cambodian, Bangladeshi, Filipino, Hispanic and Korean customers.

"Obviously it's a huge challenge because we're trying to make inroads into these communities that have no one representing them or helping them," he said. "First-time immigrants can be intimidated going into a bank."

The desire to own a bank has become more widespread than ever. Carmakers, retailers, even health care providers are all rushing to open new banks, though their reasons and degrees of success vary widely. Some merely use a bank charter as they would use an Internet site--to retain customers and define their brand.

Nancy Sheppard, president of the industry trade group Western Independent Bankers, said new banks are coming up with niche markets that are no longer defined by geography, the way they once were.

"There are a lot of ethnic banks focused on immigrant communities locally," she said. "But they may also have branches in New York and Seattle, which is a new phenomenon."

New Los Angeles Banks

                                                              Total
                                                              Assets
                                                 Year          (in
Institution Name              City            Established   thousands)

California Business Bank      Los Angeles         2005            N/A
The Private Bank of           Los Angeles         2005            N/A
 California
First General Bank            Rowland             2005            N/A
                              Heights
First Choice Bank             Cerritos            2005         14,091
First Standard Bank           Los Angeles         2005         63,279
California United Bank        Encino              2005         75,722
Commonwealth Business Bank    Los Angeles         2005        122,709
Excel National Bank           Beverly Hills       2005         19,335
Bank of Santa Clarita         Santa Clarita       2004         54,703
Beach Business Bank           Manhattan           2004         62,734
                              Beach
1st Century Bank, Nat'l.      Los Angeles         2004        136,640
 Assoc.
American Continental Bank     City Of             2003         62,118
                              Industry
Pacific City Bank             Los Angeles         2003        210,253
American Premier Bank         Arcadia             2003         69,137
Pacific Commerce Bank, N.A.   Los Angeles         2002         59,651
Mirae Bank                    Los Angeles         2002        185,699
Professional Business Bank    Pasadena            2001        149,875
Mission Valley Bank           Sun Valley          2001        138,693
InterBusiness Bank, Nat'l.    Diamond Bar       Se2000        216,036
 Assoc.
Southland Business Bank       Irwindale           2000            N/A

Source: Federal Deposit Insurance Corp.