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Tuesday, Sep 27, 2022

Regulators Urge Bank to Boost Its Operations


CEO: Greg Mitchell.

Revenue: $40.9 million in 2010; $46.7 million in 2009.

Net income: $1.86 million in 2010; net loss of $2 million in 2009.

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No. of local employees: 106.

Headquarters: Chula Vista.

Year founded: 1941.

Stock symbol and exchange: FPTB, Nasdaq.

Company description: Holding company for Pacific Trust Bank.

Among the risk factors First PacTrust Bancorp Inc. disclosed to potential investors in its November prospectus was the fact that its subsidiary, Pacific Trust Bank, was operating with a memorandum of understanding, a type of enforcement action, with its primary regulator.

The disclosure, made several weeks prior to when the company raised $60 million in new stock, wasn’t required of the bank, but was done as part of the company’s full disclosure process to investors, said Jim Sheehy, First PacTrust’s executive vice president, and secretary/treasurer.

The news wasn’t exactly fresh. Pacific Trust Bank and its main regulator, the U.S. Office of Thrift Supervision, entered into the agreement in August 2009. The MOU called for the bank, based in Chula Vista with about $860 million in assets, to take a number of corrective steps to its operations, including submitting a three-year business plan to the OTS; conducting an analysis of its nontraditional mortgages (it specialized in jumbo mortgages of more than $417,000); and not increasing the amount of brokered deposits without prior approval from the OTS.

“An MOU is the least onerous of any enforcement actions, and doesn’t have to be publicly disclosed by either the regulator or the bank and it wasn’t until we decided to do the stock placement,” Sheehy said.

The fact that First PacTrust was given the OK to conduct the stock offering and used some of that money to repay $19 million in federal bank bailout funding shows regulators were comfortable with Pacific Trust Bank’s actions.

Regulatory Actions Increasing

But bank regulators have been increasing the number of enforcement actions in recent years following a decimating recession that has wrecked havoc on the portfolios of many lenders.

According to a recent analysis by American Banker, the banking industry’s trade paper, total enforcement actions last year were 2,724, up 21 percent from the total issued in 2009. The number included both formal actions such as consent orders (also referred to as cease and desist orders) and informal actions, the most common being MOUs.

In San Diego, five lenders are currently operating under formal actions, mostly consent orders with two regulatory agencies, usually the Federal Deposit Insurance Corp. and the state’s Department of Financial Institutions.

Besides limiting the banks on certain activities and causing some negative impact on customer attraction and retention, getting an enforcement order from a regulator can be costly, said Larry Hartwig, president of Escondido-based California Community Bank.

“Your FDIC insurance rate pretty much doubles,” Hartwig said, referring to the rates all lenders pay for insured deposits the lenders accept.

In its annual 10-K report for 2009, First PacTrust reported spending $1.65 million for FDIC expenses, compared with $475,000 and $447,000 for the same insurance coverage in the prior two years. Banks pay a percentage of their deposits for the required FDIC insurance.

More Aggressive Enforcement

While informal MOUs aren’t as serious as formal enforcement actions, regulators have been more aggressive in the past few years in the wake of public criticism that they were partly responsible for the financial crisis and the subsequent recession. Critics, particularly in Congress, said if regulators had been more observant and watchful, the overall impact from poorly underwritten lending would have been less.

Dan Yates, president of Regents Bank in La Jolla, said regulators have become more aggressive in their use of enforcement actions in recent years.

“There’s no question that an increase in MOUs and enforcement actions as tools to affect changes in management is definitely on the rise,” Yates said.

Hartwig said state and federal regulators recently completed an examination of his bank, and there was a palpable change of attitude by examiners.

“A year ago, they seemed to almost be on a witch hunt, looking at things that they hadn’t looked at before … Where before (more than three years ago), you would tell them you were taking certain steps on things and they’d take your word for it. But about a year ago they’d tell us to prove it. They wanted to see evidence or letters.

“This time around, they seemed to be kinder and gentler to a degree … They seemed to be more reasonable.”


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