Sun S&L;’s President Still Facing Money Problems : After Stormy First Year at Helm, He Struggles With Ways to Increase Net Worth by Infusion of Capital

It’s been a stormy first year for Sun Savings & Loan Assn. President and Chief Executive John McEwan.

McEwan, whose hiring was announced one year ago today, has weathered the firing of Sun’s legal counsel by a vendetta-seeking and internally squabbling board of directors, continued losses and a shrinking net worth, scrutiny from dissident shareholders, a lawsuit against a former chairman who filed a countersuit, a federal grand jury probe of that former chairman, the resignation of four directors with ties to the former chairman and the firing of Sun’s outside auditors.

Through it all, McEwan’s task now is exactly the same as it was then--secure a much-needed capital infusion to bring Sun’s net worth above the regulatory minimum.

The difference a year makes, however, is that if McEwan fails in his search for equity funds, the specter of a takeover by regulators looms for the troubled S&L.;

Sun’s net worth--the excess of its assets over liabilities--was $5.9 million as of Sept. 30, or 1.34% of its $438.3 million in assets, well below the 3% regulatory minimum.

Since then, Sun’s assets and its net worth have plunged. Assets have dropped to slightly more than $400 million; how much net worth has dwindled remains unknown, pending completion of Sun’s year-end audit, due sometime next month.

Savings and loan industry sources, however, maintain that Sun’s net worth may be as low as $2 million or $3 million, primarily because of continued reserves for loan losses.

If true, then the $7 million capital infusion proposal by New York financier Van D. Greenfield would be dramatically altered.

Greenfield--whose staff analyzed Sun’s financial records from late November through mid-December--is reportedly prepared to up his investment to $10 million if that is what is needed to bring Sun’s net worth to the 3% minimum. In return, he may receive up to 70% of Sun’s outstanding stock, compared to up to 42% under the current proposal.

The equity interest will vary according to a complicated formula based on Sun’s book value at the time an agreement with Greenfield is signed.

Given the likelihood that Greenfield’s proposal will change, it now also seems likely that a concurrent $2.47 million infusion by developer Victor Fargo will not be completed.

As a result, Sun may not move into Fargo’s new office building at Fay Avenue and Silverado Street in La Jolla because the move was contingent upon Fargo’s capital injection.

The year-end audit will reveal losses that are probably more than Sun management anticipated, according to one Sun source.

A new set of auditors is likely to be very cautious, the source said. (The company fired Arthur Young & Co. in October at the insistence of regulators because of an apparent conflict of interest with ousted Sun Chairman Daniel W. Dierdorff.)

An auditor from the Federal Home Loan Bank Board recently completed an annual audit of Sun, having spent at least six months at the University City-based company. (The auditor is now reportedly auditing troubled Central Savings & Loan.)

The regulators’ audit was described as routine by Sun officials, but with Sun’s net worth sinking perilously close to the zero mark a federal takeover remains a possibility.

A federal takeover, in fact, has been discussed both among Sun board members and company executives, according to Sun sources.

Such a drastic move would trigger several options for Sun, according to financial institution sources.

Regulators could line up a large financial institution to absorb Sun’s losses and take over its five branches.

Or regulators could piece together an independent management group and subsidize Sun with “net worth certificates,” which would serve to boost the company’s capital on paper only; no cash would actually be infused. A similar action was taken against Central Savings last May.

The other alternative may be to bring in a single outside investor, such as Greenfield, who would be in a position to cut a fairly handsome deal, according to industry sources.

McEwan said he hasn’t discussed a takeover possibility with the regulators and maintained that Sun is in good shape in terms of liquidity and cash flow.

(Cash flow considerations are important to regulators; if an S&L;’s net worth is positive but it has no liquidity, then a takeover is likely.)

McEwan is perceived as tirelessly optimistic by his colleagues, and he steadfastedly refuses to discuss the downsides of any failed capital infusion plans.

“I wouldn’t conjecture that the capital deal (with Greenfield) cannot be consummated,” he said in an interview. “If the deal were to be called off, I’d go to another transaction.”

However, McEwan acknowledged that he does do contingency planning. “If Plan A doesn’t work, I have Plan B and usually Plan C. I prepare for all eventualities of any deal,” he said.

Of amazement to many industry observes is financier Greenfield’s continued interest in Sun. Despite several other failed attempts since the fall of 1984 to inject much-needed capital in Sun, Greenfield remains the sole White Knight still courting the troubled S&L.;

Greenfield has garnered a reputation as a cold, calculating money man who, despite his well-publicized intentions, has yet to infuse a dime into Sun, although he has spent at least $250,000 for various expenses and audits.

Still, Greenfield supporters and critics alike concede that history has proven Greenfield right regarding his financial dealings with Sun.

He withdrew his first $10 million infusion offer for Sun in November, 1984, after his financial analysis showed that Sun’s stock wasn’t worth the $11 a share he had originally proposed.

Indeed, Sun’s book value dropped to $4.90 a share as of Sept. 30.

Another Greenfield offer, combined with a capital infusion from Fargo, would have boosted Sun’s equity base by $7.2 million last fall. That plan failed in October, after Sun’s stock price plummeted to an all-time low of $3.125 a share.

The new deal is supposed to be partly tied to an infusion of cash by Fargo, and the regulators are analyzing the proposal as if the two investments are dependent on each other, according to Sun officials.

Greenfield seems determined to own a piece of a financial institution in Southern California, an area he reportedly views as ripe for his other arbitrage investment activities.

“He has a strong penchant for the Beverly Hills scene,” said one source who knows Greenfield.