Before the recession, Pacific Trust Bank was content to sit on the sidelines as other Southern California community banks vied with national lenders for commercial real estate borrowers.
"Many of our competitors certainly were running with the big dogs the past few years," said Greg Mitchell, the incoming head of the thrift's parent company, First PacTrust Bancorp Inc. "We were slowly going along," mostly writing single-family mortgages in Pacific Trust's market in San Diego County (albeit jumbo-size ones on pricier homes).
Now the $903.7 million-asset Pacific Trust is radically shifting its strategy aimed at taking advantage of the current dislocation of the CRE market and shielding the thrift should interest rates rise from their current historic lows.
Last week First PacTrust announced it is raising $60 million in a private placement. The company, based in Chula Vista, plans to deploy some of the capital to make CRE and commercial and industrial loans and to buy loan portfolios, branches and whole banks (including failed ones with assistance from the Federal Deposit Insurance Corp.).
Pacific Trust joins a growing segment of community banks that are raising capital to take advantage of holes in the market rather than being required to do so to bolster weak capital ratios.
"Most community banks are all deleveraging for capital reasons," said Mitchell, currently a consultant to the company, who will become president or chief executive once the placement is completed, which is expected in the fourth quarter.
"They don't have anywhere to go and they are in a position to divest their best customers," he said.
Analysts agreed that the CRE lending market can be attractive to companies that haven't been burned there already.
"There's some opportunity in the marketplace for those banks that are not heavily concentrated in CRE," said Tim O'Brien, a research analyst at Sandler O'Neill & Partners LP.
Pacific Trust Bank had just 5.4% of its $733.9 million loan portfolio in commercial real estate and less than 1% in commercial and industrial loans at March 31, according to the FDIC.
With a healthy total risk-based capital ratio of 13.51% even before the capital-raising effort, First PacTrust will have plenty of spending money for a shopping spree, once it repays its $19.3 million in Troubled Asset Relief Program funds.
A factor in Pacific Trust's decision to focus more on CRE and C&I loans over jumbo residential lending is so the bank does not become locked into the interest rate of a longer-term loan.
The term of a commercial real estate loan tends to be shorter than on a residential loan — five years is standard compared with 30 years on a home mortgage — allowing the bank to adjust to current market rates more quickly.
Home mortgages also tend to attract interest-bearing deposits whereas commercial loans will generate more low-cost and non-rate-sensitive deposits.
Hans Ganz, the president and CEO of First PacTrust and its thrift, said in an interview that the bank is planning for the inevitable. There is "clear evidence" that interest rates will rise, he said.
Lenders like Pacific Trust also have a greater chance of seeing real estate gain equity by entering the commercial real estate lending market at a time of lower property values, high vacancies and rental rate pressures, O'Brien said.
As it becomes clearer which way credit losses are heading, banks should be able to raise capital for such endeavors.
"Most of the real estate losses built into the portfolio have been recognized so investors are more interested" in putting money into a bank, said Walter Moeling 4th, a partner at the law firm Bryan Cave in Atlanta.
The private placement route for capital raising has become more attractive for community banks, Moeling said, as it tends to be less expensive for the smaller banks.
"On a day-to-day basis, we're literally working on dozens of these," he said.
"For those banks that are going to survive, they are really at an advantage for private placement" deals.
In First PacTrust's case, the private placement avenue also was less dilutive to shareholders.
The price per share was offered at a 37.5% premium compared with the company's closing price the day before the announcement was made July 27.
Ganz, who will remain president and CEO of the thrift subsidiary after the capital raising is completed, said the company's ultimate goal is to restructure "the balance sheet and income statement to a more traditional" banking model.
Pacific Trust was founded as a credit union in 1941, eventually becoming a thrift and in 2002, it converted from a mutual to a stock charter as a wholly owned subsidiary of First PacTrust.
O'Brien said CRE lending had become a less attractive option as nonbank competitors like insurance companies and finance companies gained a toehold.
But if the thrift can generate a larger relationship from the CRE loan, it could then receive a reasonable risk-adjusted return.
"If we suddenly got scale and balance sheet capacity, then we can originate loans with strong yields," Mitchell said. "The tortoise will cross the line first and be intact."