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Buyer Defines Role for Borrego Springs Bank

The Washington state bank buying troubled Borrego Springs Bank says it plans to retain its offices and most of its staff as it expands lending of small business loans.

Last month, Sterling Financial Corp., holding company of Spokane, Wash. based Sterling Bank, said it agreed to purchase American Heritage Holdings, the holding company to Borrego Springs Bank, which is owned by the Viejas Band of Kumeyaay Indians, for $6.5 million.

“Our expectations are to keep all of Borrego’s operations intact,” said Pat Rusnak, chief financial officer for Sterling Financial. “It can be a good platform to grow our SBA lending.”

Before it agreed to be sold late last month, BSB, with three branches and seven loan production offices, was operating under a cease and desist order from its primary regulator, the U.S. Office of the Comptroller of the Currency, since June.

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Problem Credits

BSB had been negotiating with its regulators since last year because its loan portfolio was overflowing with problem credits. From 2008 to 2011, BSB reported its problem assets, including nonaccrual loans and foreclosed real estate, exploded from $4 million to $16.5 million, or 12.5 percent of its total assets.

As of Sept. 30, the bank’s problem assets rose to $18.1 million, or 12.7 percent of its total assets. Banks try to keep problem assets below 1 percent of assets.

Rusnak said the OCC’s issues with BSB had more to do with the bank’s heavy concentration in SBA loans. “That’s all they have,” he said of the bank’s $97 million portfolio.

Because of Sterling’s financial heft of about $9.6 billion in assets, it will be better able to deal with BSB’s problem assets, he said.

Rusnak said the OCC did push BSB to sell, and that the relatively cheap price (about half of AHH’s shareholders’ equity) was a function of the bank’s heavy concentration in SBA loans.

Sterling expects to retain most of BSB’s 80 employees including its chief financial officer and chief administrative officer. CEO Bill Ruhlman is slated to retire shortly and will stay on for a few months to help in the transition, Rusnak said.

Neither Ruhlman nor anyone from Viejas responded to interview requests.

Viejas began acquiring shares of BSB in 1996, and eventually became its majority owners in 2004 when it bought out the remaining 32 percent of the outstanding stock held by individual investors for nearly $7 million. That made the Viejas Band of Kumeyaay Indians the first California Indian tribe to own a commercial bank.

The tribe based in Alpine operates the bank along with other business ventures, including its casino and 37-acre outlet center, through Viejas Enterprises. A spokesman said the businesses have about 1,600 employees. The tribe keeps its financial results private.

Last week, Viejas held a topping out ceremony on its $36 million, 128-room hotel, which will open next year, next to the 2,000-slot casino.

While Indian tribes operate as sovereign nations and are under no obligation to divulge financial details, banks are among the most tightly regulated businesses in the nation, and must regularly disclose their financial results.

According to the OCC reports, the agency began looking at BSB in 2010, and became more worried following a more detailed exam in 2011. Regulators were concerned about the increased levels of BSB’s loans backed by commercial real estate, and its capital levels, or the reserves banks must maintain should loans go bad.

When confronted about a variety of the bank’s problems, BSB’s board of directors balked at signing the cease and desist order, which comes with more restrictions, greater scrutiny of operations, and a requirement to inject more money into the bank. To persuade the board to agree to the order, the OCC filed a more detailed account of the bank’s problems called a notice of charges.

Rating Disclosure

In that filing, the OCC disclosed more details about the bank’s problems and their genesis, as well as a key financial metric all banks receive but is never publicly disclosed called a CAMEL rating. The acronym stands for capital, assets, management, earnings and liquidity.

In the notice, the OCC said it downgraded BSB from a 2 to 3 CAMEL after a second visit to the bank in 2011 when it determined the bank’s overall condition had deteriorated.

Several local bankers said they had never heard of regulators revealing a CAMEL rating. Indeed, regulators insist that only a few top executives and board members be informed of the CAMEL rating, and are always told that it be kept secret, said former bank executive Frank Mercardante, now a bank consultant.

In June, the bank’s board of directors, including Viejas Chairman Anthony Pico and Ruhlman, signed the cease and desist order, and injected another $2 million into BSB, complying with the order’s higher mandated capital ratios.

Sterling is yet another Washington state based bank that has bagged a local community bank. It already owns Sonoma Bank in the Bay Area, and operates an apartment lending subsidiary with two offices in the Los Angeles area.

This year, AmericanWest Bank, also based in Spokane, completed the purchase of two local banks, Sunrise Bank and Security Business Bank of San Diego. AmericanWest now has seven offices in the county and about $220 million in assets.

BSB was an aggressive SBA lender and last year approved 343 federally guaranteed loans for a total dollar value of $84 million, according to SBA data. That ranked it as the 10th largest SBA lender in the nation by number of loans.

The OCC notice revealed that BSB’s loan officers received compensation based on the amount of loans they closed, and that the bank paid out more than $3.2 million in commissions in 2010, with business development officers receiving an average of $400,000.

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