Outside Investors Agree to Pump Capital Into Two Problem Banks

In a pair of deals that could halve the list of problem banks in Orange County, outside investors have agreed to acquire control of the Bank of San Clemente and of New City Bank in Orange, pumping sufficient new capital into the banks to cure their immediate financial troubles.

Knowledgeable industry sources say that there are only about four so-called severely troubled banks in the county after an intensive culling period by state and federal regulators that has resulted in the forced closure of 10 local banks since 1982.

In the deals currently being processed by regulators, Woodland Hills developer Michael Goland has agreed to buy $1.5 million worth of new stock in the two-branch Bank of San Clemente while a Garden Grove minister, Young Ook Kim, has agreed to pump at least $3.5 million into the coffers of New City Bank.

In a change-of-control application filed with the Federal Reserve Bank of San Francisco, Kim, a naturalized U.S. citizen, has said he plans to finance his purchase of 3.5 million newly issued shares of New City Bancorp stock with part of a cash gift from family members in South Korea.

New City Bancorp is the holding company for the bank, which has lost $3.5 million since it was founded in 1983 and is operating under a regulatory order to boost its capital to at least 7% of assets. The bank’s losses are believed to have eaten away the entire opening capital of $2 million and would have left New City with a negative net worth had it not been for a $2.5-million investment by several directors last year.

The bank reported in a recent filing with the Securities and Exchange Commission that its capital-to-assets ratio on Jan. 27 was 2.7%. The bank had assets of $26.1 million on Dec. 31, according to reports filed with the state Department of Banking.

A spokesman for the Federal Reserve Bank said the conditions of the cash gift that Kim expects to use to finance his purchase are being studied carefully.

Federal and state rules restrict foreign ownership of banks and require that the identity of major owners be made public. In one recent case, the state banking department ruled that an investor who bought a bank with funds borrowed from others was not the sole owner and required the lenders to list themselves as major owners of the bank.

In addition to the $3.5 million that Kim’s stock purchase would add to the New City’s capital account, three current New City directors--who put $2.5 million into the bank in 1986--have agreed as a group to purchase up to $995,000 worth of new stock to further bolster the bank’s financial condition.

Goland, in his application for approval to purchase control of Bank of San Clemente, said he would use “cash on hand” to purchase 750,000 newly issued shares of San Clemente Bancorp stock at $2 per share. He also would assume the holding company’s capital debt, totaling about $860,000 when accrued interest is added to the $763,879 principal. The bank, founded in 1975, was profitable until 1983, when the area’s booming real estate market hit a slump, souring a large number of loans that were based on assumptions that real estate prices would continue soaring. As of Dec. 31, Bank of San Clemente reported assets of $42 million and a capital-to-asset ratio of 4.1%. The bank lost $1.2 million in 1985, but by slowing its hemorrhaging through internal cost controls and improved lending practices had reported a loss of only $302,000 in 1986.

Michael Dunahee, president of the bank, said that Goland’s $1.5-million stock purchase and his agreement to assume the parent holding company’s capital debt would bring the bank into compliance with the regulatory orders under which it has been operating.

Dunahee is a former Bank of A. Levy executive and banking consultant who was hired in October, 1985, to devise a cure for Bank of San Clemente’s loan problems and to find new investors. He said that Goland--a Woodland Hills resident--is a passive investor who intends to keep the current management and board of directors and does not plan to move the bank out of San Clemente.

In his application with the Federal Reserve Bank, Kim said he wants to pump $3.5 million into New City Bank because he sees it as an “excellent investment opportunity.” Kim also indicated that he wants to open a new branch geared to serve the county’s Korean community.