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FDIC orders changes at six California banks

The banks, including two in Los Angeles County, received 'cease and desist' orders in February that spell out what the banks must do, such as boost capital levels and rein in risky loans.

March 28, 2009|E. Scott Reckard

Revealing the recession's rising toll on financial firms, the Federal Deposit Insurance Corp. disclosed Friday that it had ordered six more California banks to clean up their acts in February after the agency examined their books and operations.

The banks -- two in Los Angeles County, two in Riverside County, and one each in Stockton and La Jolla -- received "cease and desist" orders that spell out publicly what the banks must do, such as boost capital levels, beef up management and rein in risky loans.

The number of such regulatory actions has been increasing rapidly.

The FDIC, a primary regulator of many state-chartered banks as well as the guardian of federally insured deposits, has announced 10 public enforcement actions against California banks and bankers in the first two months of this year, compared with 24 in all of 2008 and no more than seven in each of the preceding three years.

By the end of 2009, two-thirds of the state's banks will be operating under cease-and-desist orders or other regulatory actions, Anaheim-based banking consultant Gary S. Findley predicts.

"While it is not quite Sherman's march to the sea, the examination process for most has been disappointing, brutal, contentious and the basis of severe frustration among the bankers," Findley writes in a newsletter to be published next week.

Most banks targeted in such actions eventually tighten up operations and continue in business or merge with stronger institutions, but regulators are preparing for a major wave of failures.

The FDIC recently began working to hire as many as 600 employees to liquidate the assets of failed banks in the West from a new office in Irvine. FDIC chief Sheila Bair predicts that failures will cost the federal deposit insurance fund $65 billion over the next five years.

To keep the fund sound, the FDIC is raising premiums on the insured banks and thrifts that pay into the fund, which because of failures dropped from $34 billion on Sept. 30 to $18.8 billion on Dec. 31. The fund can borrow from the U.S. Treasury, so there is no chance it could run dry, FDIC officials have stressed.

In addition to public cease-and-desist orders, banks are subject to a variety of regulatory sanctions, including so-called memorandums of understanding, which are informal directives to correct problems. Regulators don't release those memos, but banks sometimes disclose them to shareholders.

In his upcoming newsletter to clients, consultant Findley describes sitting in on 11 final conferences between regulators completing examinations and bank officials. To drive home their points, he said, the regulators have been using such adjectives as "severe," "significant," "excessive," "out of control" and "rapid."

Not all the banks in the latest announcements were criticized for loan problems. The crackdown at Stockton's Bank of Agriculture & Commerce deals with a sideline business that helped a client route Social Security checks electronically to retailers and check-cashing businesses for people without bank accounts.

Regulators were requiring such detailed monitoring of the third parties involved that the bank is exiting the transfer business, Chief Executive Bill Trezza said. He described the incident as embarrassing, but said it was nothing like the problems plaguing much of the industry.

"There are more than 300 banks in California, and the reality is that more than a third of those are losing money," Trezza said.

Here are the other banks listed in the FDIC's log of February enforcement actions:

* Calabasas-based First Bank of Beverly Hills was ordered to raise capital after suffering heavy losses on real estate lending. The bank recently agreed to a takeover by a Chicago financial firm that pledged to provide new capital.

* Imperial Capital Bank of La Jolla, whose delinquent loans more than quadrupled in the last year, was ordered to raise capital and hire a chief executive "with proven ability in managing a bank of comparable size, and experience in upgrading a low-quality loan portfolio." The bank said in a recent news release that it had made "significant progress" toward strengthening itself.

* First Regional Bank of Los Angeles was ordered to raise capital and tighten lending standards after sustaining losses on commercial real estate mortgages and loans to builders. A bank official said First Regional had received $12 million in new capital from its parent company and was changing the composition of its loan portfolio to reduce risk.

* Desert Commercial Bank in Palm Desert was ordered to strengthen its management, raise capital, reduce its exposure to commercial real estate and overhaul its lending standards. Bank officials couldn't be reached for comment.

* Temecula Valley Bank was ordered to bring in managers capable of "upgrading a low-quality loan portfolio [and] improving earnings," raise capital and dispose of troubled assets. Frank Basirico, the bank's new chief executive, said in a news release this month that the bank had begun dealing with the FDIC's demands.

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scott.reckard@latimes.com

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