Fiscal Trouble : S & L Aimed at Latinos Is Revamped
Founded in San Fernando 15 years ago as the nation’s first Latino-run thrift, Camino Real Savings Bank was intended as a place for Latinos to save and borrow in their own community.
Latinos still bank there and the staff remains bilingual. But, after a brief and heady trip in the fast lane, Camino Real is a different institution now: It has a new owner, an Anglo real estate developer; its headquarters is being shifted from predominantly Latino San Fernando to Orange, and its past is under investigation by the FBI.
Camino appears to have survived its rocky journey, thanks to at least $15.5 million in cash and real estate pumped in by Mervyn A. Phelan, an Orange County-based developer who sees opportunity and tax advantages in its properties.
Phelan’s purchase of the S & L appears to have saved it from failure. Staggered by bad loans and foreclosed real estate, Camino nearly collapsed last year, its financial statements indicate. It also threatened to drag some other minority-oriented thrifts down with it through a network of lending agreements.
In late 1984, the S & L’s liabilities began exceeding its assets, giving it a negative net worth. As of March 31, when Camino’s assets stood at $159.2 million, its negative net worth--when measured by regulatory standards--had grown to $7.3 million, federal records show.
Sold Under Pressure
By that time it had already fallen under Federal Home Loan Bank Board (FHLBB) supervision. On July 1, pressured by regulators, Camino was sold, saving itself and its shareholders’ investments but ceasing to be run by Latinos.
All this happened partly because a little S & L with deep roots in its community decided to reach for the stars. Camino made disastrous construction loans, allegedly failed to monitor them properly, and was burdened with deposits for which it paid high interest rates.
Camino’s troubles also trace back to the deregulation by Congress of the savings and loan industry, allowing thrifts to take risks previously off limits to them and forcing them to pay higher interest rates to keep deposits.
But Phelan and others said Camino may have run aground for other reasons. They said a series of construction loans by the S & L were incredibly bad, including $16 million loaned to one developer. Not only did most all the loans go bad, they said, but often the money was not used for construction at all.
“We don’t know where the money went,” said Camino’s president and chief executive, Edward N. Jones, who was hired to clean up the mess while Camino’s former directors were under federal pressure to straighten things out. He was kept on by the new owner, whose purchase of the S & L he helped arrange.
FBI agent David Nesbitt, an accountant who works on bank fraud and embezzlement cases, confirmed that the agency is investigating the S & L, but declined to elaborate. An industry executive with close knowledge of Camino Real said the agency subpoenaed a stack of the institution’s documents and interviewed Jones.
The executive said the FHLBB also is conducting its own inquiry. A spokesman for the Federal Home Loan Bank of San Francisco, which has jurisdiction over member thrifts in California, declined comment.
Raoul Aragon, 67, and Edward Trujillo, 50, respectively Camino’s chairman and president until its sale, both deny any wrongdoing and said they have not been questioned by the FBI.
They blame forces beyond their control for the thrift’s near collapse. “In hindsight,” the soft-spoken Aragon said, “you have 20-20 vision.”
The idea behind Camino, which was known until six weeks ago as Camino Real Savings & Loan Assn., dates back to 1969, when a group of prominent Latinos from San Fernando decided to form a thrift institution to fill what they saw as a void in their community.
“It was a subtle thing,” Aragon recalled recently. “But the majority of savings and loans were redlining. Certain areas, they wouldn’t go in. We felt there was a very definite need for a Hispanic savings and loan.”
Established Latino Community
San Fernando has an old, established Latino community, and the seven original organizers included a few small business owners like Aragon, a veteran construction contractor who has lived in the city since 1930.
But Aragon said he could not persuade enough Latinos to participate--and to ante up the $3,500 or so that each organizer had to contribute toward getting the project off the ground--and so two non-Latinos were included: Wilfred Flanagan and Charles Chassey, both at the time small business owners in San Fernando.
Submitted in 1969, their application was rejected at first by the federal government. But after some intense lobbying, then-Vice President Spiro T. Agnew brought their charter with him on an election-season visit to Los Angeles. Aragon said that was on Sept. 15, 1970, the day before Mexican Independence Day.
The organizers did not know much about banking, so they sought a Latino chief executive who knew the business. They found Trujillo, who joined the institution in 1971 after serving as vice president of another savings and loan.
“Once we got chartered, we decided we wanted to be close to the barrio,” Aragon said of Camino’s headquarters on San Fernando Mission Boulevard. The local branches of the big, established banks were on Brand Boulevard.
Provided Jobs, Training
Aragon talks movingly of how Camino helped Latino working people buy homes and helped young Latinos climb the career ladder by giving them jobs and training.
Both Aragon and Trujillo said Camino’s problems stemmed from deregulation. The process started in 1980, when Congress began dismantling federal interest-rate ceilings, and continued in 1982, when Congress broadened the range of businesses in which S & L’s could engage. For example, it allowed more commercial lending and direct investing in real estate.
“They threw us out into a competitive market,” Trujillo said.
Thrift institutions competed for deposits by offering higher and higher interest rates. At the end of 1983, Camino had $89.7 million in negotiated-rate certificates of deposit, most exceeding $100,000, an increase of $48 million over the year-end 1982 figure. Camino paid interest rates averaging 10.47% to get this money. Much of it was “hot” money--brokered deposits that seek out the highest interest rates without loyalty to a particular financial institution.
With deposits increasing from $53.9 million to $108.9 million during 1983 alone, Camino was growing fast. With those costly deposits, Camino made more loans.
“We tried to create a new portfolio with higher interest rates in order to create some profitability,” Trujillo said.
Camino found new borrowers through an Encino loan brokerage called Western Financial Diversified Ltd. According to Jones, Camino made $60 million to $70 million in real estate and construction loans to borrowers brought in by Western. Camino sold about half those loans to other institutions through participation agreements, he said.
Eye-Popping Deals
Western’s borrowers signed on for some eye-popping deals: interest rates as high as 18% or 19%, according to Jones, who said prime borrowers at the time were paying 14% elsewhere. The loans also had four to eight “points” or loan fees of 4% to 8% built in for Camino, he said.
Thanks partly to Western, Camino’s assets swelled during 1983 from $64 million to $121.2 million. Unfortunately, Jones said, Camino didn’t screen the Western loans properly, and 85% or 90% of them were never paid back. The collateral often proved inadequate, too.
In fact, some of the money loaned on these “construction” projects wasn’t used to build anything, so that Camino ended up foreclosing on land that didn’t contain the buildings the borrowed money was supposed to finance, Jones said.
Jones said the $16 million that went to a single developer--through five limited partnerships--amounted to 13% of Camino’s 1983 total assets. Each of those loans went bad, he said.
Western’s lawyer, Ben Edelman, said Western merely acted as a middleman on loans, and that it was the job of Western’s clients to make sure borrowers are credit worthy. He said Western’s fees average 1% of the loan amount.
Camino’s accountants ended up having to reduce the value of real estate on the S & L’s books by $20 million, but it still has about $85 million worth of property, most acquired by foreclosure and producing no earnings, Jones said. The S & L’s regulatory net worth slipped into the red in late 1984, and it finished the year $3.9 million in the hole.
The ramifications of Camino’s rapid growth don’t stop in San Fernando. Phelan said about $40 million of the $85 million in real estate on Camino’s books belongs to other financial institutions, most of them minority run, as the result of loan participations Camino sold them.
According to a lawsuit filed in Tulare County Superior Court by six of these thrifts, Equity Federal Savings Bank, a black-run institution in Denver, took $8.5 million worth of the loans. Golden Coin Savings & Loan, a Chinese-American institution in San Francisco, took $7.6 million. And Atlas Savings & Loan in San Francisco, the nation’s first thrift oriented to homosexuals, took $10.2 million.
“There were some really dumb things that occurred,” said Atlas’ president, James Bowersox, who took over after the deals with Camino.
The suit by the other thrifts is all but settled now, under a plan put forward by Phelan to pool about 22 properties acquired through bad debts. The pool would then try to make money on the properties by developing them with up to $10 million Camino has pledged to lend the group for the purpose. The goal is to cover the loan losses, put by the plaintiffs at $30 million.
For Phelan, a multimillionaire developer of residential and commercial properties, Camino offers the opportunity for a big return.
Phelan paid $2.5 million cash (another $1 million will be paid later, barring unanticipated losses), and also pumped in at least $13 million in real estate to bring the institution’s net worth up to nearly $16 million, according to Jones. Jones had brought the institution’s net worth up to around zero by selling some assets.
To Camino’s 149 shareholders, who paid $12 a share in 1979, when Camino went public, the deal meant the salvation of their investment: Phelan’s purchase yielded a profit of $13 per share, and a chance for another $10 per share later if he pays the final $1 million.
Phelan said part of Camino’s attraction is all its foreclosed real estate, on which he hopes to make money by using his expertise in the business. Accountants also note that most of the profits that savings and loans make on foreclosed real estate are tax-free, under a special provision in the law for thrifts. Such properties are attractive to entrepreneurs such as Phelan.
In addition, Camino has a $1.2-million tax loss on its books that it can use to offset future profits and avoid paying taxes on them.
Phelan has said that he plans to maintain the institution’s Latino emphasis. But he is moving its headquarters to Orange, where his operations are based. Jones said he plans to apply for permission to open a branch in that community, which would be the S & L’s sixth.
