Bank fails and goes about its business
They arrived one day in November as Santa Ana winds pounded downtown Redlands. The dozen or so men and women walked into the red-brick headquarters of 1st Centennial Bank on State Street, then marched up the stairs to the executive offices.
Jeff Blake, a senior vice president of the bank, knew this couldn’t be good. The tellers downstairs might have thought the visitors were part of the parade of potential buyers who had been kicking the tires on the troubled bank for months now.
Blake knew better. They were bank examiners, showing up unannounced.
“You’re talking a lot of black suits,” he recalled. “They’re starting to line the coffin.”
Two months later, 1st Centennial was seized by regulators and turned over to new owners, costing the Federal Deposit Insurance Corp. $163 million. It was one of 140 banks that failed last year, sticking the FDIC with a record bill of $38.2 billion.
The mortgage meltdown of 2007-08 may be best remembered for the financial giants it brought down — Bear Stearns, Lehman Bros., Washington Mutual. But the carnage reached Main Street as well. Most of the banks that failed last year were community institutions, places where tellers greeted customers by name and bank executives served on charitable boards and sponsored Little League teams.
When times were good at 1st Centennial, locals shared in the bounty. The construction loan division ordered in catered lunches for its employees from Cuca’s Restaurant down the street. Roofers, electricians and drywall hangers became familiar faces as they stopped in to draw down loans.
Tellers would keep their windows open five minutes past closing time if a business needed to make a deposit to meet payroll.
Yet when it all came crashing down, the pain was muted, the repercussions muffled. Federal regulators moved in so swiftly and efficiently that hardly anyone noticed until it was over. The new owners cleaned out the management ranks, but tellers and new-account specialists — the public face of the institution — stayed on. There was no run on the bank. Only a handful of uninsured depositors lost money.
Ruined lives and public disgrace were staples of the classic 1930s narrative of a bank failure. In the new century, the shame and suffering have been obscured by bigger forces, subsumed in abstractions: the global credit squeeze, the liquidity crisis.
Tom Vessey, fired as chief executive five months before 1st Centennial failed, pointed out to those who asked that the bank’s board never accused him of any wrongdoing. He continued to allow his Italianate mansion to be used for fundraisers, showing off his garage filled with Route 66 memorabilia and awards won by his half-Arabian show horse, Ring O Fyre.
It was founded in 1990 as Redlands Centennial Bank, and its two-story brick headquarters, though hardly ostentatious, projected stability amid the storefronts on deeply shaded State Street.
Renamed 1st Centennial after expansion into other cities, the bank made real estate loans its specialty, and as home values soared, its fortunes rose. In 2007, near the peak of the housing boom, it reported a record profit of $9.3 million. By that time, its loan portfolio had swollen to $522 million, up from $191 million just four years earlier.
One of the bank’s biggest borrowers was E. Wayne Simmons, a Calimesa developer whose upscale housing projects included JP Ranch, at a former egg farm in the blustery San Gorgonio Pass, and Eagle Ridge, on a pine-covered slope facing Lake Arrowhead Country Club.
Simmons and other developers found 1st Centennial eager to finance Inland Empire housing projects — not surprising, since the bank had positioned itself as the local player in an industry dominated by giants such as Bank of America and Wells Fargo.
Owned by about 400 local shareholders,1st Centennial filled its board with local luminaries and sent staff members to teach personal finance to high school students.
The bank directors made community involvement a factor in their annual performance review of Vessey, who joined 1st Centennial in 2002 and was named chief executive in 2004. That was no problem for the CEO, who sat on the boards of the local YMCA, the Redlands Symphony Assn. and the Family Service Assn. of Redlands.
“1st Centennial provided us a lot of cash and was highly supportive,” said Deborah Crowley, treasurer of the board at Family Service, a group that helps struggling working families and that benefited from the bank’s charity.
This approach played well in Redlands, which prides itself on its history and distinctive character. Founded in 1881 in the foothills east of San Bernardino, the city boasts a 60-year-old symphony and elaborate late-Victorian mansions built by citrus ranchers and wintering Easterners. The local literary club is said to be the second-oldest in the country.
In its early years, 1st Centennial focused on making loans to established businesses. But as the housing bubble inflated, the bank risked more of its deposits on home construction in the Inland Empire. Such loans can be money-makers, but only if the tracts are completed and the homes sold at prices high enough to repay the debt.
The strategy also required a lot of capital, so 1st Centennial brought in other banks to help finance its larger projects. And it began offering exceptionally high interest rates on deposits to attract borrowers from across the country, many of whom relied on brokers to spot the best deals.
Regulators view a high level of brokered “hot money” as a red flag because these funds cost more and the depositors are more likely than local customers to pull their money out when a better deal comes along.
1st Centennial violated another cardinal rule of banking: Don’t overindulge in any single type of lending.
Regulators first noted this risk at 1st Centennial in 2004, when the bank’s rapid expansion began, according to an audit by the FDIC inspector general’s office. But regulators concluded that 1st Centennial had sufficient capital and the management skill to handle the risk.
In fact, 1st Centennial got the equivalent of A’s and Bs on its 2004 FDIC report card, and similar grades the next year from state regulators. (The FDIC and the California Department of Financial Institutions took turns conducting the bank’s annual exams.) The top marks, including the highest possible grade for the bank’s management, continued in 2006 and 2007.
Then the housing market cratered. After more than doubling in four years, the median price of homes sold in Riverside and San Bernardino counties plunged 56% from late 2006 to early 2009.
Many residential projects financed by 1st Centennial became white elephants. The bank started pulling the plug on those projects and writing down the value of the loans. The record 2007 profit of $9.3 million turned into a $53-million loss in 2008.
“They had bet the farm on construction and development, and when Inland Empire real estate tanked, it took them down,” said Anaheim bank consultant Gary Findley.
The bank’s regulatory report card turned to the equivalent of nearly all Ds after its April 2008 inspection. Regulators told 1st Centennial directors to raise $30 million in new capital.
The board searched for deep-pocketed private investors, then shopped itself as a takeover target. It was a hard sell, said Blake, the senior vice president.
“Once they got a look at those construction loans,” he said, “they couldn’t foresee the kind of return they wanted on their investments.”
In August, 1st Centennial announced it was curtailing construction lending and seeking fresh capital.
That led some depositors to withdraw their money. The FDIC started daily monitoring of the bank’s cash levels on Aug. 8, 2008, and a week later the bank’s board fired Vessey and John Lang, the chief credit officer.
Vessey, Lang and other former 1st Centennial officers and directors declined to comment for this article or didn’t return phone calls. Simmons, the developer, declined to comment.
In November 2008, bank examiners from the state and the FDIC arrived in Redlands. They concluded that 1st Centennial’s loan portfolio was so troubled that it threatened the entire business. The regulators pressed the bank to reach a deal with a buyer.
First California Bank of Westlake Village, which had been interested earlier in the year, agreed to take a fresh look at 1st Centennial’s books.
“The loans looked even worse than they had in the summer,” said C.G. Kum, chief executive of First California.
As 2008 drew to a close, regulators shifted into take-down mode.
Seizing even a small bank requires scores of people. Martha Duncan of the FDIC’s Division of Resolutions in Dallas began assembling a team of specialists — loan liquidators, fraud investigators, wireless-network technicians — who would go to Redlands for the big day. They eventually numbered 106.
The agency invited 143 banks to consider taking over 1st Centennial after the seizure. Just two made bids — First California and San Diego’s Pacific Western Bank — and they wanted only its liquid assets, deposits and offices.
Neither would take on the troubled loans, even if the FDIC absorbed the bulk of losses. Those loans instead would go to the FDIC, which would seek buyers for them.
On Tuesday, Jan. 20, 2009, the FDIC deemed First California’s offer the best. It effectively paid $14 million for the bank’s insured deposits, more than twice what Pacific Western had offered.
Regulators decided that 1st Centennial’s last day would be Friday, Jan. 23 — standard FDIC practice, because a Friday failure allowed a full weekend for a smooth transition to new ownership.
Members of the takedown team descended on Redlands, using personal credit cards to check into hotels and referring to 1st Centennial by a code name — “Fox” — to avoid tipping off locals. Regulators knew that if word got out, it could trigger a stampede by panicky depositors.
On Friday at 5 p.m., Duncan and an official from the state Department of Financial Institutions walked into 1st Centennial to meet with Suzanne Dondanville, the bank’s interim CEO.
Just after 6 p.m., as armed guards watched over a conference room jammed with bank employees and regulators, Dondanville signed a line on the back of the bank’s charter, confirming the loss of its state license.
The employees looked shell-shocked, Blake recalled. Duncan thanked them, asked them to work overtime through the weekend and introduced their new boss, Kum.
Many employees worked until 11 that night alongside FDIC staffers, who used card tables and stacks of boxes as makeshift desks. On Saturday, First California managers offered jobs to all the tellers and new-accounts people who wanted them.
When the bank reopened Monday, customers were greeted by familiar faces.
Today, Inland Empire housing prices are stabilizing. But the big projects that 1st Centennial helped finance sit abandoned. At JP Ranch, rusting fences ring the property and most of the streets and building pads that were carved out of the hills lie empty.
At Eagle Ridge, the hillside stripped of its pines, a guard shack stands as a lonely sentry.
