Bank’s Closing Tied to Car Insurance Losses

The shutdown of Center National Bank in Woodland Hills was caused mainly by its losses in financing auto insurance premiums, a federal regulator said Saturday.

Laurence Schannault, a deputy regional director of the Federal Deposit Insurance Corp., said the size of the 4-year-old bank’s losses, however, remained unclear.

To determine the extent of the financial damage, and its origins, a team of about 50 FDIC officials combed through Center’s records Saturday for nearly 12 hours. They also worked on closing out Center’s books to clear the way for Encino-based Independence Bank to take over its operation Monday morning.

Declared Insolvent

The FDIC declared Center, located at De Soto Avenue and Ventura Boulevard, insolvent Friday and ordered it closed.

Independence will assume responsibility for all of Center’s $36.7 million in deposits, safeguarding the accounts of 2,500 customers. It also is assuming $19.7 million in Center assets. The FDIC took over another $18.7 million in assets that appear to be troubled, including $12 million in insurance premium financing.

The financing of auto insurance premiums, a relatively uncommon enterprise for a commercial bank, allows consumers to make monthly payments on their insurance bills rather than paying a larger sum at longer intervals. Center’s insurance premium financing, known as the Phoenix Program, worked through insurance companies rather than directly with consumers, Schannault said.

The two other San Fernando Valley-based banks that have failed in the last two years, West Coast Bank and West Valley Bank, also suffered losses from insurance premium financing. Unlike Center, however, they financed life insurance premiums, Schannault said.

He added that he knew of no link between Center and either West Valley or West Coast. A federal jury recently found West Coast guilty of fraud in some of its lending practices. As part of its normal procedure, Schannault said, the FDIC will investigate whether fraud or mismanagement contributed to Center’s downfall.

Commercial Business

Center appears to have suffered losses not only in its insurance premium financing but in such other lines of business as real estate and commercial lending, Schannault said. Center had little consumer business, which Schannault suggested was why few customers have called the bank or shown up to check on their accounts.

He called Center’s demise--the second bank shutdown by the FDIC in California this year--”a routine closing.”

Independence officials could not be reached for comment on their plans for Center, which is within a few blocks of an existing Independence branch on Ventura Boulevard.

Independence may have found a takeover of Center attractive, despite its problems.

After Saudi financier Ghaith Pharaon in October acquired Independence for $23 million, banking experts predicted that the bank would aim at fast growth, and acquiring Center would be in line with that.

In addition, the FDIC gave Independence nearly $17 million to assume responsibility for Center. Schannault explained that the payment was intended to offset the liabilities Independence was assuming.

By helping Independence take over responsibility for Center deposits, the payment saves the FDIC from having to pay insurance claims to depositors, which could have amounted to more.