A group of Kumeyaay Indians wants to use its gaming-business profits to buy a troubled San Diego-area bank, but California officials could deal them out.
The move by the Native American group to buy Borrego Springs Bank, besides creating the first Native American-owned bank in California, will mark one of the closest relationships between legalized gambling and banking on record, according to several California officials.
But California law enforcement officials claim that a large portion of the gaming conducted by the group - that of slot machines - is illegal. Still, tribal officials are confident that their plan to purchase the bank will go through, and see no legal reason why they should not be allowed to buy a state-chartered bank.
"We've already notified the state superintendent of banking that we have some serious concerns about them buying the bank," said Steve Telliano, press secretary to California Attorney General Dan Lungren. The attorney general is currently in litigation with the tribe until a court determines who can regulate its huge desert gaming operation and how.
"I don't know why our money would be treated any different from anybody else's," said John Winkelman, economic development adviser to the Native American group. "We're doing this entirely openly. It's not an issue as far as we're concerned."
At stake is the future of Borrego Springs Bank, a $30 million-asset bank outside San Diego that has been under California orders to raise its capital after losing much of it to ill-fated commercial real estate loan participations in the early 1990s.
The Kumeyaay group - known as the Viejas Band - consists of 280 Native Americans who are descendants of the people first met by Spanish missionaries in Southern California more than 300 years ago.
Last week, the Viejas Band agreed to inject $2.4 million into Borrego Springs Bank, which would give it 60% ownership. The Viejas Band would appoint six of Borrego Springs' 11 board members. Existing shareholders would control the remaining 40%.
This is the tribe's first venture outside gaming. Only a handful of banks in the United States are owned by Native American groups.
Under a federal exemption, Native American tribes do not fall under the Bank Holding Company Act, so they do not have to apply with the Federal Reserve for a change in control. The regulatory approval is the purview of California Bank Superintendent Conrad Hewitt and the Federal Deposit Insurance Corp.
Officials in Mr. Hewitt's office declined to comment, saying they had not yet received the change-in-ownership application.
Viejas Band officials say the investment is a key ingredient in the economic development of its reservation, located 60 miles away, and as a way to diversify the tribe's financial interests away from gaming. The bank plans to open a branch near, but not in, the reservation.
"Economic diversity and investing in community business partnerships are the financial policy and priority of the Viejas Tribal Council," said Anthony R. Pico, chairman of the Viejas Band. "We felt the bank offered us an opportunity to invest on a broad scale in what we consider one of the fastest-growing areas in Southern California, the desert and San Diego's East County."
Frank Riolo, chief executive of Borrego Springs, said the tribe plans to keep management in place and maintain its community orientation.
"It will be a little different from a traditional minority-owned bank," he said. "This will be a true community bank. That's what the Indians want."
There's little doubt that the Viejas Band would be a savior for Borrego Springs. Though stabilized after years of losses, the bank is under orders from Mr. Hewitt's office to raise its equity to a minimum of $2.7 million. Currently, it's $1.5 million, Mr. Riolo said.
The $2.4 million the Viejas Band is injecting comes from one of the most profitable casino operations in California, all of which are owned by and operated on federally protected Native American reservations. The Viejas Band employs 1,200 people and grosses more than $80 million a year, Mr. Winkelman said.
Much of the revenue, however, comes from slot machines, which are illegal even to own in California under state law. Attorney General Lungren has argued that this aspect of their gaming business is illegal. The Viejas Band has gotten a restraining order on the attorney general prohibiting enforcement of the law on the reservation.