Federal regulators are stepping up their campaign against California bankers who loaded up on real estate development loans that subsequently went bad, triggering a wave of bank failures.
In what could portend a series of legal actions to recover the costs of those failures, the Federal Deposit Insurance Corp. has sued 12 former officers and directors of 1st Centennial Bank in Redlands, which collapsed in 2009. The suit accuses the defendants of gross negligence in approving loans to Inland Empire developers and home builders.
The case is a template for what's in store for former overseers of certain other failed banks in California, said Anaheim-based banking consultant Gary Findley.
1st Centennial was one of many community banks that helped finance last decade's home construction boom and were sucked under when the sector crashed.
In the Inland Empire alone, where both the boom and bust were extreme, "I'll be flabbergasted if a half-dozen of these [suits] don't come down the pike," Findley said.
Through an attorney, the 1st Centennial bankers denied the suit's allegations, which include contentions that the defendants disregarded regulators' warnings about too much construction lending and approved substandard loans to financially weak borrowers.
The borrowers included friends and repeat customers whose relationships with 1st Centennial were fraught with conflicts of interest, according to the complaint filed last month in federal court in Los Angeles.
"Defendants recklessly implemented an unsustainable business model pursuing rapid asset growth concentrated in high-risk loans in commercial real estate without having adequate … policies to manage the risk," the suit says.
Findley called the FDIC's complaint "mandatory reading" for bank directors.
One of 34 California banks that regulators have shut down in the last 2 1/2 years, 1st Centennial cost the FDIC-managed deposit insurance fund $163 million when it collapsed. The agency's suit seeks at least $26.8 million in damages plus litigation costs.
In a statement, Dan Marmalesky, a lawyer for the defendants, called the suit "unfounded, unfair and based solely on hindsight" and said he would move to have it dismissed.
When the loans in question were being made, bank examiners were giving 1st Centennial "their highest grades for asset quality and management practices," Marmalesky said.
"Just as the FDIC and numerous sophisticated market participants failed accurately to forecast the extent of the housing crash," he said, "so too were the directors and officers of 1st Centennial unable to predict the unprecedented plunge in housing prices in the Inland Empire that led to the bank's failure."
First California Bank of Westlake Village took over the bulk of 1st Centennial's remains in a deal with the FDIC. But First California declined to acquire the Redlands lender's construction and development loans, despite the agency's offer to shoulder most of the losses on the loans.
The FDIC has filed four lawsuits nationwide against former directors and officers of recently failed banks, naming 35 individuals as defendants, including the 12 associated with 1st Centennial.
One of the suits, filed last July, accuses four former executives of defunct Pasadena-based IndyMac Bank of negligence in granting construction and development loans that the suit says were unlikely to be repaid. The defendants are contesting the suit, which seeks $300 million in damages.
The four suits appear to be just the start. The FDIC recently reported on its website that as of Jan. 18 it had authorized suits against 119 people it claims are liable for damages totaling more than $2.5 billion. The agency is expected to pursue settlements in those cases before heading to court.