First National Bank, one of San Diego's largest troubled banks, inked a deal last week that will cure its capital crunch and extinguish a long-defaulted debt to Bank of America.

The deal was a coup for First National and its chief executive, Robert D. Richley. a former president of First City Bank-Houston. Several community banks in Southern California have tried and failed to raise capital this year.

The white knights bearing an infusion of capital are New York investors. Mr. Richley said working out the deal, and slashing expenses at the bank, has been been a complicated process.

"By the time we got our capital and I looked back on the last year, I was surprised by how negative people thought things were here," Mr. Richley said.

"But I guess when you do all the things we did to make this happen, it does look like a lot."

In the last 18 months, Mr. Richley has cut First National's asset size from $606 million to $178 million, laid off 300 employees, and grappled with $30 million in non-performing assets.

While doing all that, he set up a deal to raise $8 million in capital.

"The key to this effort was the realization that in a period like this, the asset quality problem isn't the only thing you have to address," Mr. Richley said.

"You have to attack your cost structure. Investors are interested in you only if you can prove to them you can normalize your expenses. This isn't the only bank whose cost structure went way out of whack in recent years."

In the first nine months of the year, Mr. Richley has cut $6 million from his operating expenses, jettisoning not only employees but layers of management and club memberships for executives.

But the final pain came for shareholders. As part of the recapitalization, First National Corp., First National's parent, retained only a 4% interest in the bank. And that 4% interest was security for a $7.8 million loan from Bank of America. New York investors Jeffrey Smith and John Adams, who led the group that invested the $8 million in the bank, will assume the B of A debt for the holding company's remaining 4% interest in the bank.

The result: First National Corp. will file for bankruptcy and end its relationship with the bank.

Its shareholders could still get a nominal distribution when the company is liquidated, but the company couldn't assure this.

Though Mr. Richley was hired as chief executive in May 1992, it was his second stint in the job. He was chief executive of the bank for two and a half years before taking a job as Robert Abboud's second-in-command at First City.

Good Timing

Mr. Richley, 49, was one of First City's management that led the revolt against Abboud in 1991. In so doing, though, he was passed over for the top job in favor of Texas banker Ivan Wilson.

The timing, however, was right. First National chairman Malin Burnham asked Mr. Richley to come back and turn his old charge around. Part of the recapitalization agreement calls for Mr. Richlcy to continue as chief executive.

Going forward, Mr. Richley said he wants to start growing the bank again and said the San Diego economy, which suffered greatly in Southern California's real estate debacle, is at or near bottom.

"I have a lot of confidence in this market over the next 10 to 15 years," he said. "We've put together a well-disciplined, local commercial bank that will be a part of what this city is going to become."

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