Beverly Hills Business Bank tells feds to pay up so it can cut loose.

Right now a lot of bankers would be happy to trade places with Ed Sondker, President and Chief Executive of Mission Viejo's Beverly Hills Business Bank.

In January the Federal Deposit Insurance Corp. gave the bank $105 million, the latest in a series of principal and interest payments on a government note held by BHBB. The government also guarantees the bank against any losses on its $380 million real estate portfolio.

So while other bankers have seen their balances sheets weakened by a rising tide of non-performing loans, Sondker has been busy redirecting the savings and loan into a niche. Today BHBB provides business banking services to medium-sized companies, secure in the knowledge that the government guarantees almost 80 percent of the bank's asset base.

But Sondker isn't happy.

He believes the government's support -- a legacy of the 1985 failure of BHBB's predecessor, Beverly Hills Savings & Loan -- is holding the bank back. He wants the feds to repay the $600 million remaining on the note six years before it's due, agree to a transfer value for unsold real estate assets, and let BHBB return to the marketplace by the end of the year.

"Both sides are in a hurry to settle," he said. "In the long term, I suppose it would be good to sit on the note, but it's kind of opposite to a philosophy of free enterprise. It also means we have to deal with the government probably more than we'd like to."

Settlement of the FDIC guarantees this year would complete the phoenix-like change BHBB has undergone in the three and a half years since Michigan National Corp., an $11 billion (assets) bank based in suburban Detroit, purchased the failed S&L for $52 million.

The management is all new. Headquarters, which relocated from Beverly Hills to Laguna Hills in 1981, has been moved again to Mission Viejo, a more centralized location for its operations.

Although the institution left Beverly Hills long ago, two of its six branches still are there. The other four are in Century City, Laguna Hills, Corona del Mar and La Jolla.

The name has been changed once to reflect the new focus on business banking, and management plans to choose another name in the next few months to reflect BHBB's geographic concentration on Orange and San Diego counties. "Beverly Hills" will definitely be dropped, removing the most obvious remaining vestige of its controversial past. Then BHBB -- which is still an S&L, despite the word "bank" in its name -- will request a banking charter.

BHBB has shown a profit every year since 1989. Second-quarter earnings released last month were $1.4 million. That's down from $2.4 million in the first quarter, but the drop reflected a $1 million provision to guard against future defaults in a $200 million loan portfolio acquired in April.

It has been a long road back for the former Beverly Hills Savings & Loan, which crashed in 1985. The mistakes of chairman Robert Fitzpatrick and Paul Amir, who took over from Fitzpatrick after a proxy fight in 1983, read like a catalogue of errors for the entire savings and loan industry in the 1980s: bad real estate loans, investment in junk bonds, joint ventures where Beverly Hills contributed all the equity as well as debt, overly optimistic accounting procedures and, allegedly, sweetheart deals to favored joint venture partners.

Funded by high-interest-bearing deposits, a five-year dash for growth starting in 1980 saw assets rise from $400 million to $3 billion. But losses, mainly on real estate loans and joint ventures, had wiped out Beverly Hills' capital entirely by the time the feds moved in April 1985.

Today the ruins of the old S&L sit oddly with the small but growing portfolio of loans to medium-sized companies the BHBB has built up in less than two years. This portfolio, Sondker said, does not include a single delinquency or non-performing asset.

"We're not like a normal bank at the moment," he acknowledged. "We've got a good bank inside a bad bank."

While the "bad" portion of the bank is still by far the larger of the two, management has been working to develop the "good" side.

The focus on business banking, and the concentration on medium-sized companies, was decided by Sondker when he was recruited from La Jolla Banking & Trust Co. in November 1990 and given carte blanche by Michigan National to chart the bank's future.

"We determined that it made sense not to compete with California's banking mega-giants," he said. "With our capital structure and our parent company's structure, we determined that we should concentrate on loans to companies in the $5 million to $50 million sales range, the middle market."

BHBB's average loan is $2.5 million to $3 million, although the bank has the facility to lend from $500,000 to $15 million. At the end of the second quarter, it had $18 million in outstanding loans.

The bank has since added another specialty: mortgage warehouse lending. BHBB acts as a "warehouse" between residential mortgage companies and ultimate holders of mortgages like Fannie Mae and Freddie Mac, extending lines of credit to finance mortgages for which final investors have already been found. In April it moved to bolster this business with the $200 million acquisition of mortgage warehouse loans from First Collateral Services in Walnut Creek.

The First Collateral deal shows one reason why Sondker is eager to gain access to the nearly $1 billion tied up in the government note and covered real estate assets: expansion and acquisition.

The last three years have been spent repairing the balance sheet, reducing assets and increasing equity. Assisted by the government's payments on the FDIC note and its coverage of real estate losses and charge-offs, the bank's capital ratio now stands at 10.7 percent, compared to 5.75 percent at the end of 1989. This figure is more than double the industry average and places BHBB among the best-capitalized 5 percent of S&Ls. It suggests to Sondker and his team that BHBB is ready to grow.

Gardner is a staff reporter with the Orange County Business Journal