Netherton summed up the financial services reform act as a beating levied on the federal regulatory agencies by Washington for “not being on top of everything before it all happened.” Though she’s not sure if the regulatory agencies are the only ones to blame, she noted that prior to the legislation, “everything was going so smoothly” and regulators “just came in and did what I call a glance-over.” Today, regulators are taking a magnifying glass to files and banking operations like they never have before and, “They will never go back to thinking, ‘Oh, this bank is doing well, so we don’t have to spend time there,’” Netherton said.

David Choi, executive vice president and chief credit officer of Evergreen International Bank, said Wall Street reform will take time to implement, but Evergreen has no plans to hire on or expand to address the stronger regulatory burden. “For us, we did not expend any human resources because of that change in regulations, but we will be spending more time on each individual, to learn and participate in training and seminars,” Choi said. “It will be more time consuming than before, and the compliance department of our bank – of every single bank – will be more important. Bigger banks will hire people, but that is because they have to spend more time on compliance.”

Jim Gray, chairman of Manhattan Beach-based Beach Business Bank, agreed.

“From the operational side, the number one issue facing community banks, the mid-size banks and even larger banks, is the number of regulations coming out of the Dodd-Frank,” Gray said. “So far they have come up with 400 regulations. Not all apply to every bank, but it is a significant burden, particularly on smaller banks that don’t have five people in a department writing policies and responses to regulations, which are written as policies to meet those regulations. It’s a huge internal burden on banks. It takes a significant amount of time away from the running of the bank.”

On the business side, banks are still working on increasing lending. Banks had basically halted their lending activities from 2007 to 2010, and are now getting back to making loans in a stricter regulatory environment to quality borrowers.

“Cash flow has been deteriorating so much, and small businesses, once they have a sufficient cash flow from their businesses, are going to have a hard time getting a loan,” Choi said. “But banks are lending. It will take some time for small businesses to restore their cash flows. Consumer spending is still struggling. Residential properties are moving now, but not up to the level we expected.”

While the Federal Reserve Board Chairman Ben Bernanke has not indicated raising interest rates any time soon, when it does happen the cost of funds for banks to lend is going to be significantly higher on balance than it is today, according to Gray. “Think back to when savings and loans were a complete disaster because they had long-term loans on short-term deposits, and you can’t change the term of the loan,” he said. “The cost of the deposits you need to start a loan, with the margin for a normal business loans being between 5 and 6 percent, is now closer to 3 or 3.5 percent. . . . Putting longer-term loans on today’s interest rates is costly. The margins are small, so you don’t have a lot to play with. When the cost of funds goes from 1 percent to 3 percent, you’ve lost 2 percent, unless you have an adjustable loan.”

Challenges faced on the regulatory and legislative side, coupled with the level of economic uncertainty and cost of doing business from state to state, has caused a real problem in the industry, Gray said. “Maybe a year or two years down the road you will see some improvement, but banks are still struggling.”

Opus, First PacTrust Focus On Expansion, Recapitalizing Troubled Banks

On July 2, Beach Business Bank and Irvine-based First PacTrust Bancorp, Inc. announced the completion of their merger. The company will remain under the name Beach Business Bank, according to First PacTrust CEO Gregory Mitchell.

“Nothing has really changed, other than the fact that instead of a lot of people in California and across the country owning the shares, PacTrust now owns 100 percent of the stock of Beach Business Bank,” he told the Business Journal. “It’s still operating as an independent community bank servicing Long Beach, Costa Mesa and Manhattan Beach. It just has the benefit of a much stronger capital base and some resources of the holding company.” Previous holders of Beach Business Bank stock are now entitled to acquire a percentage of First PacTrust shares, for an exercise price per share.

In addition, First PacTrust has acquired Gateway Business Bank in Lakewood, which will be assimilating with the First PacTrust brand this quarter.

For First PacTrust, the number one issue is managing growth. “Most banks throughout California are shrinking, and they are facing pretty significant capital challenges. Because of their size, they are facing a number of regulatory challenges that are making it more difficult for them to remain viable,” Mitchell said. “Companies like PacTrust that have a reasonable amount of capital and access to the capital markets, are, in some circles, able to take advantage of the disintermediation in the market. But the challenge for us is selectively managing that growth so that we don’t harm ourselves from a regulatory perspective or, worse yet, harm a customer relationship in any way. We are the beneficiaries of some of the pain that a lot of these institutions are facing.”

Another Irvine-based institution focused on managing growth is Opus Bank, which was started in September 2010 by Stephen Gordon and several partners after they acquired Bay Cities National Bank of Torrance. Gordon, who serves as CEO, infused $460 million into the bank and has subsequently purchased other banks along the way. In June 2011, Opus purchased a bank based in Seattle, which had $1.5 billion in assets, and in October 2011, he and his partners infused another $100 million into the company to purchase Fullerton Community Bank.

During that time, Opus Bank continued to build out its divisions and bring on more bankers. Today, Gordon said Opus is the fastest growing bank in California and in the Western region, with $2.5 billion in assets, 47 locations and almost 500 bankers. The biggest challenges right now, Gordon said, are many. One is of culture – melding the three banks plus the core of Opus Bank, and creating one centralized philosophy.

“We just announced that we purchased 10 branches of Pac Western Bank, so we’ll have more branches in L.A. County, more branches in San Diego County and our first two branches in the Inland Empire,” Gordon said. “That creates lots of locations, lots of bankers, cultures that existed at these banks individually that are now melding into one. . . . Clients are expecting a lot from us.”

This is not Gordon’s first time growing a banking brand. He sold Commercial Capital Bank in 2006 after growing the brand from almost no assets to $6 billion. Gordon said he sold it for roughly $1 billion cash when he saw the economic “bubble” expanding and “thought the world was coming to an end.” Back in business with Opus, Gordon expressed his views on the impacts of the federal financial reform act.

“Now that America has unfortunately been transitioning into a socialistic nation, rather than a capitalistic nation, some of the public is under the belief . . . that when they borrow money they don’t actually have to give it back. That is problematic. We are training people the wrong way, and that’s happening at the highest levels of our nation. While we’re doing a lot of business – and we’re lending around $100 million a month right now – other banks are struggling.”

With buyers becoming more competitive, the economic environment is shifting again, Gordon said, setting up for another bubble.

“We’re not shying away. We’re going to continue buying banks. That’s not going to stop. But the whole system is getting stressed right now. I think most of the bank failures have occurred that are going to occur, but there are a lot of banks walking around that are stuck. They are not troubled enough to fail, but not healthy enough to be doing what we’re doing either. The challenges are widespread, and when people are sitting there saying that their biggest challenge is Dodd-Frank, I think that’s a joke. The pendulum on the regulatory side needed to swing to the other side, appropriately so. I think the banking industry needed a little bit of a slap in the face to get back to the old days of banking.”