First Regional Bank of Century City, Calif., has grown fast in the past two years - more than tripling its assets, adding two branches to its previous six, and increasing its staff by more than 60%.
But the $1.1 billion-asset bank, which focuses on commercial and multifamily real estate, neglected its Community Reinvestment Act obligations. It received a rare "needs improvement" on its most recent CRA exam, mostly because it was "substantially noncompliant" on the investment portion.
The Federal Deposit Insurance Corp. made the evaluation based on the September exam made public Thursday.
Out of roughly 2,000 banks and thrifts examined last year, only 15 received a "needs improvement," according to the Federal Financial Institutions Examination Council. First Regional was the largest bank in three years to do so.
Its general counsel, Steven Sweeney, said that since its exam First Regional has made substantial strides to improve its CRA effort, including hiring a full-time CRA officer. It is also looking at more opportunities to make loans and investments in low-income areas and to offer services that would benefit them, he said.
Regulators have set no general target for the investment part of the test, but Kenneth Thomas, the author of "The CRA Handbook" and a lecturer at the University of Pennsylvania's Wharton School, said the rule of thumb is 0.6% to 1% of assets.
First Regional fell way short. From November 2001 to last September its qualified CRA investments totaled just $1,250 - in donations to nonprofits providing housing and other services to low-income people.
The FDIC said that was "very poor" in view of the bank's size and financial capability and "the availability of community development investments in the bank's assessment areas."
Mr. Thomas said that aside from donating to nonprofits, banks can meet CRA investment obligations by buying securities backed by mortgages for homes in low-income areas, investing in funds that support community development companies, and in other ways.
"To fail this part of CRA with all the opportunities out there now - it's like you really have to try," he said.
Mr. Sweeney said First Regional did little to increase its community reinvestment because it did not realize that it had grown big enough to be subject to large-bank CRA criteria. "Unfortunately, we did not keep up with the fact we moved into the large-bank standards, and so we simply didn't do much," he said.
Small banks - those with less than $250 million of assets for the two years before their CRA examination - are subject only to a lending test. Large banks also undergo investment and service tests.
First Regional's previous exam was in April 2002. It had $331 million of assets then but was examined as a small bank because it had had less than $250 million at the beginning of 2000.
In September's exam it got a "needs improvement" for service, because it has no branches in low-income parts of its market and access to all but one of the eight branches is limited (they are not at street level). Its lending score was "low satisfactory."
Mr. Sweeney said that First Regional will probably continue to expand, and that he does not expect the low rating to harm its finances and operations.
But Mr. Thomas said that regulators typically disapprove the merger and new-branch plans of banks with subpar CRA ratings, and that he expects First Regional to get that treatment.
"There is no doubt that their plans to expand via branches or mergers will be on hold for at least this year," he said.
