Bank of Coronado Gets Cease-and-Desist Order

Federal and state regulators have issued a cease-and-desist order against the Bank of Coronado and its holding company, Crown Bancorp, requiring the bank to maintain higher net worth levels, increase its reserve for possible loan losses and restrict the payment of dividends.

Dustin B. Rose, chairman of both the bank and Crown Bancorp, said Tuesday, however, that “corrective actions” already have been taken that address regulators’ concerns.

The cease-and-desist order was sparked by a regulatory audit of the bank last March. Authorities found that the bank’s net worth ratio--or its capital-to-assets ratio--was below the state regulatory minimum of 7.5% and that its reserve for possible loan losses was below the required 1% of total loans.

Since then, the bank has increased its capital-to-assets ratio, which now stands at nearly 7.8%, and, in the second quarter, boosted its loan-loss reserves by $300,000. Reserves as of June 30 totaled $575,000, while assets totaled $64.7 million and losses for the six months reached $30,000.

Because of the reserve increase, Rose acknowledged that he “anticipates . . . (continued) operating losses.”

In his first public criticism of ousted president James Klingensmith, Rose said that red ink will continue “until we can return our focus to the development of profitable new business as opposed to correcting the mistakes made by prior management.”

Klingensmith resigned abruptly in July following a board meeting at which only he and one other director voted in favor of selling Crown Bancorp’s Capital Bank of Carlsbad subsidiary to a group of unidentified New York buyers. (Capital, which is supposed to merge with Bank of Coronado early next year, was not affected by the cease-and-desist order.)

Klingensmith on Tuesday defended his management policies and blamed the board for the-cease and-desist action.

“Management acts at the direction of the board and, if mistakes were made, (directors) have to take the blame for that,” he said in an interview.

Rose said the bank and Crown will “not contest” the regulators’ order because they “only required steps (with) which the boards were already in agreement and . . . had already taken or commenced corrective action (on).”

The regulatory action caps a year of controversy at the bank. Last spring, the bank’s San Ysidro branch manager was indicted on charges of conspiring to defraud the bank for allegedly filing false cash transaction reports. The charges stemmed from a federal investigation into the laundering of proceeds from illegal drug sales.