Small Banks Admonished to End 'Pity Party' Over Capital Struggles

Here is Greg Mitchell's first bit of advice for those who complain that Wall Street shows no love for hometown banks: "Sit down and shut up."

Investors are drawn to leaders with the "courage" and "testicular fortitude" to execute, not bankers having a "pity party" over their problems, according to Mitchell, the chief executive and president of First PacTrust Bancorp.

And for community banks that struggled to attract investors after the economy collapsed, capital is now finally available — provided they have at least $500 million in assets and a credible plan to boost profits.

The $142 million of debt and equity First PacTrust has raised in the last 18 months shows how other banks with around $1 billion in assets can raise money in a tough market, Mitchell said Tuesday at American Banker's M&A Symposium in New York. Still, bankers from small institutions need to be honest with themselves about the reality of their situation before they go to market, he said. Investors want to back diversified institutions with decent mass that can deliver at least a 15% internal rate of return over time, Mitchell said.

It is the job of bankers who want to raise capital to prove they can do that, he said. How? Be forthright about what is on your balance sheet and how much it is worth. Talk straight about how you intend to get rid of assets that lose money, and how you aim to find assets that make money.

First PacTrust's strategy on that front comes down to drawing new business clients and depositors to its 15 branches in the San Diego and Los Angeles areas, while finding good small banks willing to sell at reasonable prices.

The company's loans were up year-over-year last quarter and it opened a new branch in Los Angeles last year. It is also in the midst of closing two acquisitions: Gateway Business Bank in Manhattan Beach and Beach Business Bank in Los Angeles.

Mitchell said his bank is earning a reputation as a "consolidator of choice" in southern California. First PacTrust is receiving a "fair amount of reverse inquiry" from banks weighing sales, Mitchell said.

Investors will accept short-term losses as long as a bank shows progress in ways that will pay off down the line, he said.

First PacTrust lost money in the fourth quarter and eked out a small profit in the first quarter. But Mitchell said several stock analysts have continued to advise clients to buy its shares because its margin expanded and funding costs fell, even as it has set aside higher loss provisions against a big batch of loans it purchased last year.

He said that the capital markets are indeed out of reach for banks that are "too small to thrive."

Small banks that generated the vast majority of their profits from construction loans or commercial mortgages need to consider merging with similar-sized banks with compatible business lines or selling to larger institutions, he said.

These small, specialized outfits also need to come to grips with the truth they will never evolve into banks that do more than one type of thing well, and that they are unlikely to ever fetch a premium for their equity, he said.

Those aspirations are akin to "looking for Santa Claus," Mitchell said. Their best bet is to instead sell themselves in exchange for stock in a larger institution with better growth prospects, he said.

Mitchell took over First PacTrust in 2010 after new investors recapitalized the former mutual thrift.