U.S. Regulators Seize California Heritage in Wake of State’s Audit

California Heritage Bank, its net worth wiped out and its asset base dwindling at an alarming rate, on Friday was seized by federal regulators after state banking officials had declared the bank insolvent.

A team of 50 federal and state regulators took control of the 11-year-old bank’s Hillcrest main office and its Clairemont Mesa branch shortly before 6 p.m. It was the third takeover of a local bank in the past 12 years.

The Federal Deposit Insurance Corp. (FDIC) was named receiver of the bank, and late Friday night said it had been unable to find a buyer for the bank. If no buyer is found this weekend, the liquidation process will begin next week.

The bank’s assets had dwindled to about $18 million from $30 million since Dec. 31, 1984, and its net worth of $1.8 million at year-end 1984 had been exhausted because of “significant loan and operating losses,” according to regulators.

Some Accounts Over Limits

California Heritage has 3,502 deposit accounts totaling $19 million. All deposits in the bank are fully insured by the FDIC up to $100,000, and those funds were described as “secure and available” Friday night by State Supt. of Banking Louis Carter.

More than 50 accounts exceeded the level protected by the FDIC by a total of $1.1 million, according to state banking officials.

Friday night, the bank’s phones were answered: “FDIC.”

State banking examiners have been analyzing the bank’s records for the past three weeks as part of a routine audit.

On Thursday, a handful of federal regulators checked into a fashionable area hotel to lay the groundwork for the takeover.

On Friday, more than 30 regulators arrived, mostly from regulatory offices in Costa Mesa and San Francisco, and, at about 5:45 p.m., Scott Jones, the official “closing manager” entered the bank. At 6 p.m. he declared that the state had revoked the bank’s charter and he took possession of its assets as well as its state banking charter.

Suspected a Takeover

In an interview in his office 15 minutes after regulators seized control of the bank, President Terry Metrovich said he had suspected a takeover earlier Friday and blamed the bank’s failure on “bad loans.”

“I inherited massive problems, but the depth of (them) was unknown to me when I came (here),” said Metrovich, who joined the bank in March. Previously he was founding president of Rancho Vista National Bank and executive vice president of Bank of Commerce.

Metrovich gave a brief speech to the bank’s 17 employees right after regulators took over, saying he would try to help them find new jobs.

Bids for possible buyers of California Heritage were distributed Wednesday, with a deadline for turning in bidder sheets of 6 p.m. Friday. Word of a possible takeover began to spread Friday afternoon, according to banking industry sources.

However, regulators insisted that “there was no warning beforehand; bank closings are strictly confidential,” said James Thompson, regional manager of operations for the Federal Deposit Insurance Corp.’s division of liquidation in San Francisco.

The banks that were invited to bid on the bank were asked to keep California Heritage’s name confidential, he added.

Cited for Practices

California Heritage has been operating under a cease-and-desist order from the Federal Deposit Insurance Corp. since April, 1983. The order cited the bank for its high volume of bad loans, poor lending and collection practices and extraordinarily high compensation and fees to directors and associates.

Additionally, regulators criticized the bank for making “preferential” loans to bank executives, directors and major shareholders in violation of federal regulations.

The bank’s net worth has been dwindling all year, falling to $782,000 on June 30 from $1.8 million at year-end 1984.

California Heritage had counted on a $1.7-million cash infusion by the Sorokin family of Canada--Milton Sorokin, who recently served as the bank’s chairman, and his sons, Brian and Sam. Last year, the Sorokins had proposed buying newly issued shares in Mesa Bancorp, the bank’s parent company.

That infusion never materialized.

Background of Sorokin

The elder Sorokin is a real estate investor and mortgage lender from Alberta, who was a winter visitor to San Diego for five years before moving here in mid-1984. He immediately set out to invest in the Southern California real estate market.

He could not be reached for comment Friday night.

Sorokin last year proposed to regulators that he would help turn around California Heritage in exchange for organizing a real estate subsidiary of the bank. Regulators didn’t consent to the proposal.

California Heritage was formed in July, 1974, but grew sluggishly until 1981, when its stock was bought by Mesa Bancorp, a 70-member holding company led by Edward A. Forde and Edward V. Casanova. Both held top corporate positions at San Marino Savings & Loan Assn. before it was seized by regulators in early 1984.

Mesa Bancorp, which was formed in 1981 specifically to acquire California Heritage, had planned to convert the bank into a savings and loan and later merge it into San Marino. That would have allowed California Heritage to take advantage of of new state laws allowing S&Ls; to participate in making commercial loans.

Controversy and Lawsuits

The conversion plan failed when state and federal regulators refused to accept it.

The bank has had its share of controversy and lawsuits.

A $4-million lawsuit was filed against the bank in March by a Chicago savings and loan alleging fraud, conspiracy and racketeering. The suit, filed by Norwood Federal Savings & Loan Assn., was never settled, which reportedly was one of the conditions of the Sorokin takeover of the bank.

Adding intrigue to the financial controversy is the apparent disappearance of former California Heritage President John Sherman, who reportedly was in ill health and hasn’t been seen since spring. Sources close to the bank said they believed he had gone to Florida.

As for Metrovich, he said that he “learned a lot from the experience” and foresees no problem landing an executive job with another bank. “There’s no real lack of jobs out there for someone with my background,” he said, confidently.

But to ease the stress, he said he planned to go scuba diving today.

Other San Diego Seizures

Two other San Diego banks have been taken over outright by regulators in the past 12 years. In April, 1982, state banking officials closed Pacific Coast Bank and turned it over to federal regulators after determining that the bank had a negative net worth and discovering fraud among bank officials. Pacific Coast, with about $10 million in assets when it was seized, was the only bank based in predominantly black and Latino Southeast San Diego.

Pacific Coast Bank Chairman Stephen Forde, who was sentenced to 15 years in federal prison after his conviction on 38 counts of improper bank practices, is the brother of Edward Forde, the former Mesa Bancorp executive. Stephen Forde is free on bail, pending an appeal of his conviction.

And in October, 1973, federal officials seized U.S. National Bank, the $1-billion-in-assets company that was the flagship of former financier C. Arnholt Smith’s once far-flung empire. At the time, it was the largest bank failure in U.S. history.