Bank’s Loan Practices Curtailed : Regulation: U.S. officials issue order limiting Pacific Inland’s business activities and real estate lending.
Pacific Inland Bank, which advertises itself as one of Orange County’s best-performing and best-capitalized small-business banks, has been hit with a federal order limiting its business activities and requiring it to curtail its real estate lending activity dramatically.
Banking regulators have been cracking down on real estate lending for several years now, considering property--especially in California--to be a high-risk investment in a recessionary economy. There are no hard and fast rules for how much of their money banks should devote to other pursuits. But Pacific Inland’s use of more than half of its $82.5 million loan portfolio for real estate clearly strained regulators’ tolerance.
The bank and its holding company, Pacific Bancorp, are engaging in “unsafe or unsound practices and violations of law and regulation,” according to the 24-page order issued by the Federal Reserve Bank of San Francisco.
The document, dated April 8 and made public Wednesday, doesn’t specify the bank’s wrongdoings. Bank President Ronald Askew characterized most of the order as “boilerplate” that has no application.
The order does not criticize Pacific Inland for improper insider loan deals or for having an excessive volume of bad loans--two of the most common reasons banks are placed under federal control. Instead, the document criticizes the bank’s concentration in real estate lending and alludes to problems in the trust department and with loan documentation and employee benefit accounts.
Federal Reserve officials could not be reached for comment Wednesday.
Askew said the bank has two real estate loans with inadequately documented appraisals; was running a trust department division that got behind on its record keeping; and failed to document several employees’ participation in a pretax savings plan.
Beyond that, he said, the regulators’ concern centers on Pacific Inland’s $24 million in real estate construction loans, mainly to residential developers; and its $21 million in mortgage loans.
Together, the two real estate loan portfolios make up 54.5% of Pacific Inland’s total loan assets.
The bank holding company also owns a large mortgage banking company, Pacific Mortgage Co., that services $1.5 billion in loans and originates an average of $125 million in loans each month.
The federal order “relates to the fact that we had a federal examination and the examiners criticized us for the fact that a large percentage of our loan portfolio is tied to real estate,” Askew said. “For that reason, they have asked us to come up with a diversification plan and to revise our loan policies to reduce the level of real estate loans.”
The order goes beyond that, however, prohibiting the holding company from making many cash expenditures or from incurring any debt without the explicit permission of the Federal Reserve Bank.
Placentia banking consultant Gerry Findley said such controls are increasingly common as regulators clamp down on banks.
“They basically put them into micromanagement situations,” he said. “It’s kind of like putting a noose around their neck, and every time they try to move, it gets tighter.”
Askew said that Pacific Inland’s total capital remains well above the state and federal minimum requirements and that its loan-loss reserve is nearly 50% more than called for in the federal order.
“They have not taken issue with our management, our profits, our liquidity or our capital,” he said.
Findley, the consultant said, there might be one other reason for the federal scrutiny of Pacific Inland: The holding company’s former chairman and majority owner, Anaheim real estate investor Richard J. Meyer, is being prosecuted by the federal government in connection with the 1986 collapse of a Northern California savings and loan.
“The regulators aren’t particularly happy” with Meyer, Findley said, “so they already had suspicions” when they examined Pacific Inland.
