FDIC tells Independence Bank to halt unsafe business practices.

FDIC tells Independence Bank to halt unsafe business practices

Federal regulators confirmed last week they have charged Independence Bank with unsafe and unsound business practices and ordered the largest bank in the San Fernando Valley to halt those activities.

The Federal Deposit Insurance Corp. ordered the $680 million (assets) Encino-based bank, which allegedly is improperly owned by seized Luxembourg-based banking conglomerate Bank of Credit & Commerce International, to cease and desist from a wide range of practices.

These include: "operating with inadequate management, operating with inadequate equity capital and reserves, operating with a large quantity of poor quality assets, following hazardous lending and lax collection processes, operating with inadequate routine and controls policy, operating with inadequate provisions for liquidity and fund management" and violating several provisions of state financial law.

The order was filed June 7 and became effective 10 days later.

"It's a formal enforcement action the FDIC enters into with an insured bank to keep that bank from behaving in a particular manner or conducting business in a particular fashion," said David Barr, an FDIC spokesman. "It outlines what the bank was doing wrong and what corrective actions it should take."

Among the corrective actions required are for the Encino-based bank to increase its primary capital -- a bank's cushion against demands by depositors and loan losses -- by $10 million within 60 days of the order's effective date, sell or otherwise reduce by year-end its assets marked substandard or classified as doubtful, refuse to lend to anyone with a loan charged off or negatively classified by the bank, and cease paying dividends, said Barr.

Fulvio Dobrich, chairman, president and chief executive at Independence, said the bank has already come into compliance with most of the requirements -- except for additional capital, a matter that Dobrich said is largely beyond management's control.

"We anticipate we will meet all targets except finding an investor to buy the bank or increase the capital of the bank," said Dobrich, who added that the bank is working with an investment bank to find a buyer. "You can't meet a (capital) target if it is defined for you by someone else and the market is not good for bank shares."

In May, the Federal Reserve ordered BCCI to sell its alleged controlling stake in Independence Bank. BCCI agreed to sell any stake it might have without admitting ownership of the bank.

According to sources quoted by the Los Angeles Times, the Federal Reserve may soon name a trustee to represent BCCI's stake and find a buyer for the institution.

FDIC's Barr said failure to comply with the cease and desist order could result in legal action against the bank and its officers. That could include hitting directors and officers with civil penalties of up to $1 million per day, removing the bank's management or eliminating its deposit insurance.

Nevertheless, one local banking expert remained sanguine about Independence's prospects.

"I don't believe the institution is in danger of closing," said Gary Findley, a banking attorney and analyst based in Brea. "What you've indicated are resolvable issues. With the BCCI issues that have come forward they are going through a tough time, but I still think they are a capable institution."

The FDIC order had nothing relating to the bank's disputed ownership, Barr said.

The Federal Reserve Board has accused BCCI of using a front man, Saudi Arabian investor Ghaith Pharaon, to conceal from Federal Reserve officials its purchase of the bank in 1985.

On July 12, the Fed began proceedings to bar four individuals from banking activities in the U.S. because of their alleged role in concealing BCCI's acquisition of Independence.

The individuals include Kemal Shoaib, a former officer of BCCI and the former chairman and chief executive of Independence Bank, and Pharaon, the disputed owner of the bank, as well as two top officials of BCCI.

Independence's operations have been harmed by publicity about the Fed action as well as the European seizure of BCCI on July 5 after accusations of widespread fraud at the $20 billion (assets) bank, Dobrich told the Business Journal last week.

"We've lost some of our traditional deposits, employees and prospective customers -- that's the essence of a bank," Dobrich, who has been chief executive of the institution since June 1989, said last week. "I can't tell you how serious it is until a few months have passed."

The bank, which mushroomed in size until Dobrich took over in 1989, has nose-dived in profitability over the past three years as management wrote off devalued, earlier real estate joint venture partnerships to develop land and buildings that have gone sour in the sluggish real estate market.

Last year, the bank earned $95,000, compared to $1 million in 1989 and $5.1 million in 1988.

The bank, formerly one of the stronger local community banks, has not been rated a premiere performer or "A" quality bank, marks of distinction awarded by Findley to superior banks, for three years.

"Their portfolio has softened some and their growth was not what it should have been," Findley said, noting management turnover also influenced his soured rating of the institution.

Dobrich admitted a key capital ratio fell below the required level in the first quarter. Risk-adjusted capital, which gauges capital according to the risk involved in the assets receivable being covered, fell to 6.4 percent in the first quarter from 8.5 percent at year-end 1990, putting it below the regulatory minimum of 7.2 percent, Dobrich said.

Leverage capital has also fallen, to 5.5 percent from 6.7 percent over the same period, compared to a minimum requirement which one analyst said would likely be 5 percent or higher.

Behind much of the company's difficulties is its rapid growth. The bank zoomed to $630 million in assets in 1989 from $220 million in 1985.

That growth was in line with with Pharaon's goals to grow the bank to $1.2 billion regional banking presence within four to five years after acquiring the bank, said Mort Michaels, bank president from October 1984 to the end of 1989 and now an independent banking consultant.

"As long as we operated with that (idea), we were told that Pharaon would provide the additional capital" needed to maintain capital ratios, Michaels said.

Pharaon did pump money into the bank several times -- $11 million in late 1987, $4 million in May 1988 and $10 million in June 1989. But the Fed says BCCI was in reality providing the funds and merely using Pharaon as a conduit.

The question that now emerges is whether Pharaon, BCCI or some other source will recapitalize the bank.

"We the board have requested Pharaon to put up additional capital in March," Dobrich said. "He has advised us he is not in a position to do so for reasons he has not explained to me."

Dobrich, a former Manufacturers Hanover senior vice president, said to his knowledge Pharaon still technically owns the bank.

"My opinion is based only on public information available to me, but I don't have evidence of anything that tends to indicate BCCI ownership," he said. "The share certificates of the bank we have are in (Pharaon's) name. It appears he pledged those shares to BCCI, but BCCI has not exercised its right to take possession of them."

Dobrich emphasized that Independence executives and employees have had no dealings with BCCI.

"We have had no contact with anyone from BCCI with the exception of two officers of BCCI when they had lent to the same customers we had," he said. "That goes for all my colleagues at the bank."