LAGUNA BEACH — Amid an escalating back-room battle, federal banking regulators, declaring that tiny First American Capital Bank was insolvent, closed it Thursday.
The office of the U.S. comptroller of the currency took its action barely two weeks after the bank filed suit in federal court to try to prevent such a takeover. The court refused to act immediately, and the lawsuit is still pending.
The bank's chairman, Ernest George, charged Thursday that the action was based on a faulty report by the comptroller's office and vindictive actions that led to write-downs of $4 million in various assets. "We expected they would wait for the (March 15) court hearing," he said. "We never even got the results from their (recent) examination of the bank."
The comptroller's office sold the bank's $24 million in insured deposits to Orange National Bank, which will have the funds available for customers this morning at its Laguna Beach office a few blocks away. Orange National, which bought troubled Laguna Bank in August, paid a premium of $2.6 million for the deposits and about $6.5 million in assets.
About $2 million in 35 accounts exceeded federal insurance limits of $100,000 for each account holder and will not be refunded immediately, said Roberta Valdez, a liquidation officer for the Federal Deposit Insurance Corp., which was appointed receiver. "We may be able to gather further information from depositors and reduce that (uninsured) amount," Valdez said.
First American Capital is the second bank in California to be closed since strict banking laws took effect in December. Regulators closed Columbia National Bank in Santa Monica at the end of January.
Under federal law that took effect in mid-December, the comptroller's office can seize a bank and turn it over to the FDIC once the institution's capital--its final cushion against losses--falls below 2% of its assets. Such banks are in a category called "critically undercapitalized." Previously, regulators acted only after capital was wiped out.
The comptroller's office determined that First American Capital was critically undercapitalized during a recent federal audit of the institution, but regulators said Friday in a press release that unsafe and unsound practices also caused "insolvency (and) substantial dissipation of bank assets and earnings."
The bank had been operating under a formal agreement with the comptroller's office since 1987. The agency said in its release that directors and officers at first seemed to make progress in correcting weaknesses cited in the agreement but never fully complied with the terms.
"Bank management began to pursue high-risk growth strategies without properly evaluating the risks that could result from those activities," the agency stated. "Examiners noted losses from these activities at subsequent examinations of the bank. These losses caused the bank's condition to deteriorate and eventually depleted all of the bank's capital."
But George and the bank's president, Jess Barrera, rebutted the regulators' contentions. They asserted that heavy-handed federal agents, nearly unaccountable for their actions under broad authorization from Congress, arbitrarily devalued assets and refused to allow the bank to sell some of its holdings to bolster its capital.
Though small--it had $28 million in assets at the end of the year--First American Capital strode into court Feb. 19 to do battle with the comptroller's office by trying to get a temporary order stopping it from closing the bank.
U.S. District Judge Linda H. McLaughlin refused to issue an order immediately because the comptroller's office would not say that a takeover was imminent, George said. Instead, she set a hearing for March 15.
George, who has a 53% stake in First American Capital, asserted that regulators want to close down small banks because of a perception that the nation has too many banks. He also lost North American Thrift & Loan in Corona del Mar to federal regulators last year.
At First American Capital, he contended, the comptroller's office wrongly reduced the value of the bank's automobile loans and headquarters building and required a change in the way the bank accounted for future profits on certain home loans. The result reduced the bank's capital by $4 million, putting it under water.
Barrera said that once regulators devalued assets so that the bank's capital fell below the 2% level, they then were able to control nearly every decision the bank made, including its efforts to raise capital by selling some assets.
George and Barrera said the bank, for instance, had $700,000 in equity in its headquarters building, which three appraisers valued at between $4.3 million to $4.7 million. Without any proof of a lower value, the comptroller's office would not let the bank recognize its equity, which is the difference between the value and the loan amount.
The agency then refused to allow the bank to sell the building, which contained adjacent office space, to a buyer for $3.95 million in cash, Barrera said.
In court papers filed late Thursday, George said, the agency acknowledged that a decision it made on a loan portfolio was wrong. George maintains that the right decision would have allowed the bank to sell the loans at a healthy profit and regain $1 million it had been forced to sock away in reserve.
A spokesman at the comptroller's office refused to discuss any details about the bank's operation, and lawyers for the agency could not be reached.