One of the largest banks in Los Angeles has been quietly grappling with dangerously low capital levels since incurring substantial losses during the financial crisis.
After the souring of investments in mortgage giants Fannie Mae and Freddie Mac, California National Bank is among the worst- capitalized banks in California, according to Highline Financial, an Austin, Texas-based provider of banking data.
Moreover, FBOP Corp., an Oak Park, Ill., holding company that owns Cal National and seven other banks, has been unsuccessful in repeated attempts to raise capital.
Cal National is not expected to report much better results in its quarterly financials in the coming weeks, but Cal National's chief executive said he expects the bank to return to well-capitalized levels by the end of the second quarter.
Indeed, the uphill climb is steep after a recent financial decline that has surprised even seasoned banking experts. The bank took a roughly $500 million loss last year on securities held as available for sale, according to its fourth quarter regulatory filing.
"Wow," said bank consultant Bert Ely last week upon reviewing Cal National's most recent financial report. "I just am really amazed at the magnitude of the loss on available-for-sale securities. It's a mind-boggling number for that size balance sheet."
Cal National is the fourth largest locally based bank with $6.3 billion in assets. In the fourth quarter filing, it reported an annual loss of $281 million. The bank also upped its provision to cover future loan losses to $66 million, about five times higher than just six months prior.
In the process, Cal National's total risk-based capital ratio, which regulators use to determine whether a bank is appropriately reserved to cover future operations, dropped to 5.36 percent, among the lowest of any bank in California, according to Highline Financial.
Banks must maintain a capital ratio of at least 10 percent to be considered well capitalized. Falling below that figure can draw the attention of regulators, though Cal National is not operating under any regulatory enforcement action.
The bank maintains that its core earnings are solid and its problems largely stem from investments in the two government-sponsored mortgage companies. The bank also expects capital-raising efforts to pay off soon.
"By the quarter ending June 30, we will be back to well capitalized," said Gregory Mitchell, chief executive of Cal National.
Despite operating 68 branches and employing some 900 people across Southern California, the downtown L.A. bank has largely avoided public scrutiny as it has run into trouble.
It has a far lower profile than its bigger local rivals, including City National Bank and East West Bank, which are publicly traded. As a privately held institution, Cal National has no public shareholders and is not required to report earnings to the Securities and Exchange Commission. However, like all banks, it must submit call reports containing quarterly financial data to the Federal Deposit Insurance Corp.
The bank was cobbled together from several acquisitions made in the 1990s by FBOP, a bank holding company founded in 1981 by notoriously media-shy Chicago businessman Michael Kelly. Reached by telephone, Kelly declined comment for this article.
The holding company had owned just one small bank until 1990, at which point it began gobbling up institutions across the country. To date, it has completed more than 25 acquisitions.
In 1996, FBOP entered the local market by buying the lone branch of Torrance Bank. Two years later, the company bought Topa Savings Bank and Topa Thrift and Loan, giving birth to Cal National. The bank proceeded to expand in the following years through a combination of acquisitions and organic growth.
FBOP's buying spree continued right up until the financial crisis began settling in. The company announced plans in June to acquire troubled Rancho Cucamonga bank PFF Bank & Trust and combine its operations with Cal National.
FBOP proceeded with the attempted acquisition despite increasing turbulence in the industry, even getting shareholder approval in September. But then it quietly abandoned the effort in the following months. FBOP did not make a formal announcement about why it pulled out of the deal, said Joseph Gladue, an analyst at B. Riley & Co. who follows PFF.
"They weren't in great position to be getting approval to buy banks," Gladue said. "You have to get approval from regulators to make any acquisitions and they're not going to approve any acquisition that they think won't work out."
PFF ultimately was seized by regulators and its assets were subsequently acquired by U.S. Bancorp.
FBOP's and Cal National's real troubles began Sept. 7, when the federal government placed Fannie Mae and Freddie Mac which had suffered billions of dollars in losses due to record home loan defaults into a conservatorship. At the same time, the government took control of the institutions through newly issued senior preferred shares that drastically diluted existing common and preferred stocks, resulting in widespread shareholder losses.
FBOP and its banks took a pretax loss of more than $1 billion on its Fannie and Freddie preferred shares. About half of that loss was absorbed by Cal National.
"They really had heavy concentrations on that stock," said bank consultant Ely.
Cal National is not FBOP's only bank facing capital concerns. The company owns San Diego National Bank, which also ranks with Cal National among the worst-capitalized banks in the state. San Diego National, which has $3 billion in assets, has a capital ratio of 6.6 percent.
San Diego National Chief Executive Robert Horsman did not return calls requesting comment.
FBOP is attempting to raise capital on behalf of its banks, said Cal National Chief Executive Mitchell, who did not provide details other than to say the company is "pursuing a number of options."
Though Mitchell said he is confident that the effort will pan out, FBOP has struggled to raise capital for several months.
In Cal National's third quarter call report, the bank said FBOP had applied for the U.S. Treasury Dept.'s Troubled Asset Relief Program, which it anticipated at the time would repair Cal National's capital by the end of 2008.
"A portion of the funds received by FBOP will be used as a capital injection into California National Bank during the fourth quarter that will bring the bank's capital up to a level exceeding well-capitalized standards," the bank said in a management note.
But the bank did not receive the funds, and in the following quarterly report, management included a similar comment saying it expected to receive the TARP funds by the first quarter of 2009. FBOP has indicated in filings that it has applied for about $530 million, the maximum amount it is eligible for under federal guidelines.
While it awaits word on the bailout funds, the company is pursuing other sources of capital, which could mean private equity or hedge funds, which have been investing in banks. However, that could mean selling stakes in its banks at steep discounts. Finding investors willing to put up money for a bank with financial concerns has been a tough go for other institutions.
"The capital markets for community banks dried up last October," said Wade Francis, president of bank consulting firm Unicon Financial Services Inc. in Long Beach. "They're trying to raise capital, but it's not working for them."
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