Behind the Scenes of a Bank Takeover by FDIC : Secrecy, Drama, Worry Mark One ‘Barbecue’

A tired Paolo Tolian had one last chore.

It was a Friday night, minutes before the bank’s six o’clock closing time. The frail utility man, a master of odd jobs at the bank through seven years and four bank presidents, walked his wobbly walk over to the door to seal it shut.

But the routine of the 64-year-old Italian immigrant was about to be interrupted.

A dark blue Oldsmobile eased into the bank parking lot. Out stepped Scott Jones, a handsome, broad-shouldered man you might expect to see hoisting a brew in a beer commercial.

Jones straightened his tie, buttoned his jacket and walked briskly into the bank, toting a thick briefcase. An associate jumped out of another car and joined him. Shortly after they marched in, followed moments later by two state banking officials, the door was locked behind them.

Jones, an official with the Federal Deposit Insurance Corp., strode quietly into the bank president’s office. In lowered voices, the men informed Terry Metrovich, president of San Diego’s California Heritage Bank, that the state banking commission had declared his $21-million institution insolvent.

Unnoticed by the employees, one state banking official stepped into the lobby and removed the bank’s charter from the wall. A rectangle of powder-blue paint saw light for the first time since California Heritage Bank opened in 1974.

In the words of one 21-year veteran FDIC official, who, fearing leaks, instructs his employees to avoid the term “takeover,” California Heritage Bank had just been “barbecued.”

This would hardly be the first financial institution to fall into the coals in 1985. California Heritage was one of 120 banks closed nationwide last year--one of eight in California. More banks were closed in 1985 than in any year since the Depression. The FDIC has said that more than 1,000 of the nation’s 14,500 commercial banks are in some form of financial trouble.

Industry officials say banks are failing at this alarming rate mostly because of poor real estate and farm loans, many of them made three and four years ago.

Some critics of the FDIC also say bank failures are on the rise because the agency is stiff-necked in its treatment of small community banks. The FDIC, these critics say, refuses in many cases to give small banks the leeway that it accords larger banks when their portfolios of bad loans begin stacking up.

Problems at long-troubled California Heritage appeared especially critical to FDIC examiners during a routine exam in late October when they discovered that the bank’s assets had dropped by almost one-half in a year’s time. Even more critical, operating losses and bad loans sent its net worth plummeting to zero from $1.8 million at year-end 1984.

Although the FDIC regulates about 8,500 banks, mostly small and medium-sized, that are covered by federal insurance but not part of the Federal Reserve System, it has no authority to shut down a bank. In the case of state-chartered institutions such as California Heritage, the state’s banking commissioner, after consulting with the FDIC, issues the closure order and then appoints the FDIC to act as receiver.

Most Visible Agency

That is why the agency is the most visible one during any bank closure. Part of its job in such situations is to quickly turn a closed bank into an open one by finding a buyer. If that is not possible, the agency uses its insurance fund to pay off insured depositors and proceeds to liquidate the bank’s assets.

As a result of the consultations between state and FDIC officials, 50 FDIC employees from across the nation were quietly summoned late last month to the Hyatt Islandia, a bay-view hotel in the swank Mission Bay section of San Diego. Only a handful of them knew which bank was about to go down. But they all knew why they were there.

For the next four days, they would review virtually every file, loan document and account in the bank. The laborious process would include everything from poring through reams of loan and lease documents--examining and, in many cases, revising the real estate appraisals used to justify loans--to the painstaking process of counting every penny in the bank’s safe and accounting for every penny on its books. The goal would be to determine the exact financial condition of the bank and, as much as possible, the causes of its problems.

So secret was the mission that hotel officials had no records of any FDIC workers under their roof. All of the agency’s business was conducted under the code name Mission Bay Ltd.

After all, if word leaked out that the FDIC had entered town en masse, anxious depositors might make runs on any number of banks.

But under an arrangement with the FDIC, a Times reporter was allowed to observe the agency’s actions from the time FDIC officials began gathering in San Diego on a Thursday evening until California Heritage reopened under new ownership on the following Monday.

Bids Were Invited

Two days before California Heritage was closed, seven area banks were invited to bid on the combined assets and liabilities of the soon-to-be-failed bank. Only one did.

The fate of California Heritage, and its workers, still hinged on that bid when Jones left the FDIC’s San Francisco office and arrived at the hotel that Thursday.

Although his title is closing manager, Jones says much more than that is involved: “When a bank goes down, and employees come to me in tears, I sometimes become more like their father.”

He also answers to the FDIC board and oversees dozens of FDIC workers, ranging from accountants to liquidators. He is the agency’s liaison with the outgoing--and sometimes incoming--bank executives and their attorneys. The media hound him for information about the takeover. And there are dozens of bank tellers, secretaries and managers who suddenly find themselves temporarily employed by the FDIC when their bank is closed.

Jones, who has been with the FDIC for 13 years, admits that he appears calmer than he feels on such occasions.

“Sure, I get butterflies,” he said in an interview the night before the California Heritage takeover. “When I get back to my room tonight, I’ll probably call my wife to calm me down.”

On Friday morning, others in the FDIC’s 50-member team began arriving at the hotel in small groups. Most were from regional offices in Costa Mesa and San Francisco. Virtually all of them were attired in casual clothing in order to be inconspicuous.

Given Short Notice

Few of them had been given even one day’s notice for the weekend’s work. One liquidator said he hadn’t even had a chance to call his wife and tell her where he was. Another said she was barely able to arrange baby-sitters for her two daughters.

Jones assembled the group in a locked conference room. “What we’re all here for today,” he told them, “is the potential--and I would stress potential--closing of California Heritage Bank.”

The workers were familiar with that scenario. One week earlier they had been summoned for a bank closing in the San Francisco Bay area. But an eleventh-hour infusion of capital had saved the bank.

“Once you get inside the bank, be sensitive to the employees. They pretty much don’t know where their next paycheck is coming from,” Jones said.

He proceeded to read off a long list of don’ts. Among them: Don’t spread rumors. “If someone does have a loose mouth, they will be terminated,” he said, then corrected himself: “Make that fired.”

Jones also cautioned his team: “Once we’re inside the bank, do not accept or borrow money from any bank employee.”

Even as Jones was speaking, Vince Courry, the FDIC’s regional head of security, was making arrangements with armed guards and a locksmith to meet at the bank at 6 p.m. The bank’s locks would be changed within minutes of the takeover.

Before leaving for the bank, a few FDIC workers reflected on their mission.

“I know how it feels to be on the other side,” said Myra Griffith, an FDIC liquidator. She was a former employee at Heritage Bank, an unrelated Orange County bank that was seized by regulators and liquidated last year.

Almost a Relief

“It was almost a relief when they finally closed us,” she recalled. “We could stop looking out the window every Friday to see if they were coming up the walk.”

At 5:25 p.m. this Friday, the workers reassembled in the hotel conference room. This time, all were attired in dark suits or dresses. Most appeared nervous as they scanned the preprinted job instructions handed to each of them.

“Be sensitive to the situation,” Jones reminded them. “We don’t want to go in there laughing.”

On the drive to the bank, Jones spoke little, gripping the steering wheel tightly. He parked at the very rear of the lot when he arrived, and took a deep breath before leaving the car.

From the outside of the bank, all appeared calm. Inside, a few employees were snacking on candy bars and soda pop as they went about their closing chores.

Jones, his associate and the two state banking officials walked inside the bank and entered President Metrovich’s office to deliver the formal closure notice.

Moments later, in a daze, the bank president staggered out of his office--almost as if someone had just clobbered him.

Most of the employees already were huddled in the bank’s tiny lobby when a blank-faced Metrovich joined them. The workers whispered in anxious tones. They were clearly confused by the late Friday afternoon commotion coming from the president’s office.

“There’ll be an announcement in a moment,” said Metrovich. He was unable to look directly at any member of his staff. There was utter silence in the 11-year-old San Diego bank that Metrovich had guided for less than six months.

All eyes turned to Jones, a stranger to the bank’s employees, as he stepped into the middle of the group.

“I’d like to welcome you aboard,” he said in a calm voice. “You are all now employees of the FDIC.”

Teller’s Jaw Dropped

As Jones continued to talk, one teller’s jaw dropped. Jones went on to explain that, sapped by years of bad loans and mounting debts, California Heritage had been declared insolvent by the state banking commission. The state had appointed the FDIC the bank’s receiver.

“We really need your help,” Jones continued, making certain to establish eye contact with each employee. He explained that before everyone went home, they would have to help the FDIC team pore through records to pinpoint the bank’s condition. Each worker would be paid time and a half, he said.

A small army of FDIC workers would shortly be entering the bank to examine its books, Jones said. He instructed the bank’s employees to answer the phone, “FDIC.” After all, he added, “California Heritage no longer exists.”

As Jones spoke, armed security guards hired by the FDIC were manning the doors and pacing outside in the bank’s parking lot. At the same time, FDIC board members in Washington were reviewing a bid by Grossmont Bank of nearby La Mesa to acquire California Heritage.

“Things will get hectic. But we’re begging each of you to work through the weekend” Jones said. “Are there any questions?”

There certainly were.

A worried Kay Guyett, the bank’s new accounts representative, pointed out that the bank’s rest rooms were located beyond the locked door. She would have to run the gantlet of reporters and photographers from three San Diego newspapers who were already peering in from the other side. Yet Jones had warned them not to speak with the media.

“If any of them touch me, can I pop ‘em one?” she asked.

Before Jones could answer, Metrovich stepped in front of him.

Couldn’t Prevent Collapse

“I’m real sorry,” he said, ducking his head. The recently hired president had been unable to turn the bank around in a short six months. “We tried to put enough money into the bank to prevent this from happening.”

He was interrupted by an anxious teller. “Do we collect unemployment if we’re not employed on Monday?” she asked.

“If that’s the case, I’ll be collecting it, too,” he replied, offering a small joke to break the tension.

A few minutes later, Metrovich sat in his office, discussing what had just happened. The closing was no surprise, he said. State banking officials had warned him earlier in the week that it was going to happen that day. But there really was no way to prepare for the emotional impact, he said.

Courry, the FDIC’s regional security chief, entered the office without knocking. He slapped inventory stickers on the furniture that now belonged to the agency.

“It only takes 10 minutes to make a bad loan, but years to collect it,” Metrovich said.

The security worker stepped over to a bureau behind the president’s desk. He taped the drawers shut so that nothing could be removed until inventory was taken.

Metrovich insisted that the intruder didn’t bother him. “He’s just doing his job.”

Other members of the FDIC team began doing their jobs, too. They had entered the bank about 20 minutes after Jones spoke to the employees. Most of them were greeted coldly by the bank employees, who soon lost their desks and chairs to the newcomers. Just as quickly, the bank’s employees found themselves helping the FDIC team to locate files, explaining their contents, answering phones and doing typing chores.

Counted Money in Vault

Three FDIC workers filed into the vault and immediately began counting money. Others reviewed the bank’s loans and lease commitments. Yet others rumbled through the bank’s legal documents.

When Metrovich left the bank that evening shortly before 9 p.m., Jones moved into the president’s office. It would be his command post for the rest of the night and most of the next three days.

Wayne Yost, owner of Action Locksmith Service in San Clemente, drove his pickup to the bank’s front door. “If you don’t mind the hours, it’s great work,” Yost said. He proceeded to change about 20 bank locks, beginning with the vault and working his way to the front entrance and a number of office doors.

Shortly after 9 p.m., Jones called the employees together once more. One nervous teller crocheted a baby blanket as Jones spoke.

“No acceptable bidder has been found,” he told the group. “We’ll have to prepare for liquidation.”

A hush fell among the workers. They knew they faced unemployment. Few spoke as they left the bank shortly before midnight.

But early Saturday morning, the news suddenly took a turn for the better.

Once again, Jones gathered the employees in the bank’s lobby. Grossmont Bank had agreed to acquire California Heritage for $400,000, he told them. At the same time, the FDIC had agreed to pay Grossmont more than $5.8 million to assume some of the bank’s liabilities.

Jobs Still in Doubt

Most employees applauded the news. But they knew that they were still not guaranteed jobs until they were hired by Grossmont.

Metrovich, the former president, made a brief appearance at the bank Saturday afternoon. He cleaned off the top of his desk, then placed all his personal belongings in a small, cardboard box.

A security guard shuffled through the box and listed all the items. Among them: a hand-carved clock, a personalized coffee mug, and framed photos of his 15-year-old son and 18-year-old daughter.

“I already called their mother and told her to warn them that I’m not about to go out and hang myself,” Metrovich said.

Before he left, he handed the FDIC the keys to the Cadillac that the bank had supplied him.

Attention again focused on the front door just before 3 p.m., when the bank’s new owners arrived. Along with three associates, Donald K. Clague, president of Grossmont Bank, sat with Jones and discussed the takeover for nearly 90 minutes.

“Will we have to count all the money?” Clague asked Jones.

Jones told him he could, but explained that the FDIC had already performed that task.

“How should we prepare for Monday morning?” asked Joanne Galleher, Grossmont’s chief financial officer.

“You might serve some coffee and doughnuts to the customers,” suggested Charles A. Holm, an FDIC specialist-in-charge, who said such small favors help calm down customers. “And you might want to pass out carnations to the ladies.”

When the meeting disbanded, Clague met with the bank’s employees.

Workers Asked to Stay

“I know it’s been extremely frustrating, and that a number of you have been hurt very deeply, but I hope that each of you would like to fill out applications and stay on with us.”

Charles Walker, California Heritage’s operations chief, grabbed a stack of employment applications. “Get ‘em while they’re hot,” he said.

When the employees cleared out by 11 p.m. Saturday, not one worker left without a job application.

But when they returned on Sunday, a note of mystery entered the picture. An envelope stuffed with a white powdery substance was found near the window of a teller who had quit the week before.

Suspicious that the substance might be cocaine, Jones phoned the San Diego Police Department. Two patrolmen arrived within the hour. Closer inspection revealed the substance to be leftovers of some powdery, diet drink.

Monday morning, the rains came.

Some bank officials contended that that was why only two customers were waiting outside the bank’s doors when it opened at 9:30 sharp.

Employees, however, arrived at the bank around 8 a.m. They received last-minute instructions. “If someone says that they want to close a checking account,” Walker told a group of tellers, “tell them: ‘Gee, I thought maybe you’d want to open a savings account.’ ”

FDIC officials quietly handed tellers printed lists of 50 customers who were delinquent with large loan payments. These customers could not make unapproved withdrawals.

Grossmont executives began phoning larger depositors to assure them that their money was safe.

Bank Resumes Operations

To present an aura of calm, Jones chased FDIC workers out of the bank lobby and into the bank’s scattered offices. The bank doors were unlocked and the two rain-soaked customers waddled in. Both made deposits. Grossmont’s president stood smiling.

So did Jones.

A bank employee asked Jones about the San Diego Chargers’ latest defeat.

“That’s one thing about this business,” Jones wryly replied, “before you know it, you can miss an entire football season.”

Jones smacked his lips, then walked back into the president’s office and clicked his briefcase shut. The barbecue was over.