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FDIC seeks damages from former officials at failed Redlands bank

February 2, 2011 | 10:47 am

Bank regulators have sued 12 former officers and directors at collapsed 1st Centennial Bank in Redlands, part of a broader campaign to recover losses stemming from more than 300 U.S. bank failures since 2007.

The Federal Deposit Insurance Corp. complaint accuses the bankers of gross negligence in approving 16 loans to Inland Empire developers and homebuilders that went upside down when the housing market collapsed.

The suit includes contentions that the former officers and directors disregarded regulators' warnings about too much construction lending and  approved substandard loans to financially weak borrowers.

L.A. attorney Dan Marmalefsky, who represents the bankers, said he would move to dismiss the suit, which he called "unfounded, unfair and based solely on hindsight." The bankers expect to be exonerated, he said.

The FDIC's deposit insurance fund lost $163 million when 1st Centennial failed in January 2009. The agency is seeking at least $26.8 million in damages plus litigation costs.

1st Centennial was one of numerous community banks that financed last decade's housing boom in the Inland Empire and were sucked under by the bust. It won't be the last to be sued, said Anaheim banking consultant Gary Findley.

"I'll be flabbergasted if a half dozen of these [suits] don't come down the pike," Findley said. "Because these failures were not just economic, but as a result of some shenanigans."

1st Centennial is one of 34 California banks that regulators have shut down in the last 2 1/2 years. In a story last May, the Los Angeles Times examined the bank's rapid growth beginning in 2004, its heavy construction lending in the once-booming Inland Empire, and the FDIC's unsuccessful attempts to find another bank to take on the soured loans when 1st Centennial went under.

First California Bank of Westlake Village wound up taking over 1st Centennial's liquid assets, deposits and offices. But it left the construction and development portfolio for the regulators to deal with -- despite the FDIC's offer to shoulder most of the losses on the loans.

The Times story also pointed out that state and federal regulators, while critical of 1st Centennial's heavy emphasis on construction loans, continued to give it top marks overall in its annual examinations, including the highest possible rating for its management, until after the housing market collapsed.  

The FDIC so far has filed four lawsuits against former directors and officers of recently failed banks, naming 35 individuals as defendants, including the 12 1st Centennial bankers. Another suit targets four former executives of Pasadena's defunct IndyMac Bank, who are contesting allegations they were negligent in granting construction and development loans that went into default.

The FDIC recently reported on its website that as of Jan. 18 it had authorized suits against 119 individuals it claims are liable for damages totaling more than $2.5 billion.

Consultant Findley said in a newsletter that the 1st Centennial suit is a "template" for more such actions. He posted the FDIC complaint on his website, characterizing it as "mandatory reading for directors of banks."

RELATED:

Anatomy of a bank failure: 1st Centennial goes under

FDIC prepares to crack down on officials of failed banks

--E. Scott Reckard

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