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First PacTrust Bancorp is back in the news today. Yesterday we reported that the parent company of Chula Vista’s Pacific Trust Bank had received $32 million from the Department of the Treasury’s Small Business Lending Fund.

Per the Treasury’s website, “The Small Business Lending Fund enables community banks across the nation to help small businesses put Americans back to work.”

Today, First PacTrust announced a merger agreement with Beach Business Bank, based in Manhattan Beach. The operation, when combined with the previously announced acquisition of Gateway Business Bank, will encompass 18 Southern California branches and 23 loan offices in California, Arizona, Oregon, and Washington.

“First PacTrust expects to maintain strong capital ratios after the acquisition, in part due to the successful completion of its $27 million public offering of common stock in June 2011, at $15.50 per share, net, and the recently announced $32 million investment in First PacTrust by the U.S. Department of Treasury's Small Business Lending Fund,” said a press release issued earlier Wednesday afternoon.

A bank’s capital ratio is a comparison of its assets against its risk. Certain ratios are required to be met by federal regulators in order to ensure the safety of customers’ deposits. One easy way to boost a bank’s capital ratio, and thus it’s standing in regulators’ eyes, is by stockpiling cash reserves. Conversely, making risky loans has a negative impact on capital ratios. And small business loans pose considerably higher risk than financing for other purposes.

While Treasury funds invested in larger banks have frequently been hoarded in order to improve capital ratios, the Small Business Lending Fund monies have a qualifier that reduces their borrowing cost from as much as 5% down to 1% if the bank receiving the funds increases its small business lending by 10% or more. If small business lending fails to improve, the bank receiving the funds could wind up paying a penalty rate as high as 9.5%.

Acquisition of a bank focused on business lending, then, could create the appearance on paper that small business lending had increased as a percentage of the bank’s overall volume. This could be true even if neither division of the combined bank was actually lending more to small businesses than it was individually prior to the merger. An employee at the Fund’s information line confirmed this, though he was quick to clarify that any existing loans on the books of an acquired operation could not be used to boost lending claims – only new loan fundings after the merger would be applied.

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