Officers Recapitalize to Halt Takeover of New City Bank

Three directors of New City Bank, which gained attention with its untraditional practice of making loans for church construction, apparently have rescued their small community bank from a regulatory takeover with a plan to infuse $2.5 million in new capital.

A total of $3.7 million in losses from loans that were not related to church financing had wiped out the 3-year-old bank’s capital by late last month, but the three directors pumped $1 million into the bank and have committed themselves to adding an additional $1.5 million by Oct. 27, according to a prepared statement from the bank.

The new money will give the Orange-based bank $2.48 million in capital, which represents 7.7% of its assets. The amount is enough to put New City on solid ground and satisfy state and federal regulators of its stability.

$37.5 Million in Assets

The bank reported assets of $37.5 million on June 30 and posted a net loss of $213,000 for the first half of the year--the latest period for which figures are available.

None of the three directors--Duane D. Logsdon, Phyllis McKinney and Herbert B. Leo--could be reached to expand on the two-stage deal that is keeping the regulators at bay.

As part of the recapitalization plan, which has been approved by state and federal regulators, the three directors will purchase the $3.7 million worth of bad loans from the bank for $1.5 million.

The loans had been charged off by the bank or deemed uncollectible by regulators, who recently completed an examination of the bank’s books.

Leo, Logsdon and McKinney turned over $1 million for the bad loans on Sept. 25 and will pay the balance on Oct. 27. They will try to recoup the money by collecting as much of the outstanding debt as possible.

Also by Oct. 27, the three directors will buy or will find other investors to buy 1,383,000 shares of newly issued common stock of New City Bancorp, the holding company that owns all the shares of the bank, at 72 cents a share--adding an additional $1 million to the bank’s capital. If the three buy all of the stock, they will own about 75% of the company.

As part of the recapitalization plan, four directors have resigned from the boards of the bank and the holding company.

One was Wallace D. Linn, who was the founding president and chief executive of the bank and the holding company. Linn resigned the bank posts in August and the company posts late last month.

Peter J. Porter, who had been executive vice president of the bank, replaced Linn. Porter also did not return repeated telephone calls Friday.

Linn, a fundamentalist Christian, had carved out a small niche for the bank in making loans to church groups, a practice most banks shun. About 25% of the bank’s loan portfolio consists of loans made to churches, Linn said in an interview 16 months ago. He could not be reached for comment Friday.

Unlike other banks, he said in the interview, “we understand what makes a church tick.”

Other banks “don’t understand how a church works, and they don’t have any confidence in how a church operates” or in its members’ ability to repay a construction loan, he said then. “Look what it might do to their image, foreclosing on a church.”

While the church loans turned out to be stable, ordinary commercial loans gave the bank trouble. According to a lawsuit the bank filed last month, for instance, a Buena Park travel agency called Carefree David West defaulted on a $250,000 promissory note due Aug. 25 when it abruptly closed its doors.