U.S. Regulators Seize American Diversified S

American Diversified Savings Bank, a controversial industry maverick for several years, was seized and declared insolvent Friday evening by state and federal regulators.

It is the third California savings and loan and the sixth nationally to fail so far this year.

The Costa Mesa-based association, long a irritant to Federal Home Loan Bank Board Chairman Edwin Gray because of its wide-ranging investments in commercial real estate, apartments, hotels and alternative energy sources, had $977 million in assets but only a single savings office, located in Lodi.

The remainder of its operations, including several real estate subsidiaries, occupied three floors of a posh high-rise near the South Coast Plaza shopping center.

Pacific Savings Bank, also of Costa Mesa, has agreed to operate American Diversified under a management contract, said Donald L. Alexander, a spokesman for the bank board. Because American Diversified is not being liquidated, it will continue operating under the same name, and depositors will not be affected.

Few of American Diversified’s depositors, however, are retail customers. Only $22 million of the firm’s $893 million in deposits were placed by customers living near the Lodi savings office. The rest, the bank board spokesman said, were placed by professional money brokers on behalf of investment clients nationwide. The so-called brokered deposits are disliked by government regulators because banks and S&Ls; generally pay premium interest rates to attract the money, increasing their operating costs.

Alexander said Friday’s seizure was prompted by a just-completed bank board audit of American Diversified. Examiners found that many of the firm’s loans were based on “inadequate or inflated appraisals. Reappraisals (by FHLB-appointed appraisers) indicate there will be losses in excess of $23 million on these loans alone.”

Additionally, he said, American Diversified failed to file required reports with state and federal authorities “in a timely manner” and failed to establish the loan-loss reserves that had been required by regulators.

Losses and Layoffs

The bank board has not yet released American Diversified’s 1985 financial report, but the savings and loan confirmed two weeks ago that it had lost $2.2 million in its third quarter and had laid off 85 employees nationwide, about 6% of its total work force.

Alexander said total losses for 1985 and the first seven weeks of 1986 “will be substantial.”

Founded in 1980 as Tokay Savings & Loan Assn. in Lodi, the institution was purchased by Ranbir Sahni in mid-1983. Sahni, who owns 96% of the stock, and his president, Lester Day, who owns the remaining 4%, were the driving forces behind the institution’s dramatic growth in the last few years. Both men have been fired as officers of the company but remain as shareholders and directors, Alexander said.

Within 18 months of buying Tokay, which had $11 million in assets at the time, Sahni pushed the renamed American Diversified S&L;’s assets to $792 million, most of it fueled by investments in apartments and commercial real estate and the sale of real estate syndications.

Growth in ‘Jumbos’

American Diversified Savings Bank’s deposits also swelled in the first year Sahni ran it, mainly because he chased brokered accounts, Alexander said.

“On June 30, 1983, the association had no brokered accounts,” Alexander said. “Yet a year later, it had $369 million in jumbos (certificates of deposit of $100,000 or more), equal to 96% of total liabilities.”

In addition to jumbo deposits, the S&L;’s real estate investments also grew rapidly under Sahni and Day. From mid-1983 through 1984, Alexander said, they grew from “virtually” zero to $239.1 million. Last September, he said, regulators determined that 55% of the firm’s assets were invested in two subsidiaries that developed and syndicated commercial real estate.

American Diversified, with its investments in a wind farm in Northern California, an ethanol production facility in Kansas and a cellular telephone business in Orange County, has been raising eyebrows throughout the S&L; industry for several years. Bank Board Chairman Gray regularly cited the S&L;’s wind farm investment as an example of financial deregulation run amok. Just a few weeks ago, the company announced plans to build a $60-million manure-fueled electrical generating plant near dairy farms in Chino.

The S&L;’s real estate roots come from Sahni, a former pilot for the Indian Air Force and Trans World Airlines who founded a development company, American Diversified Corp., in 1971.

Move to Orange County

After Sahni acquired Tokay S&L;, he moved his corporate operations to Orange County from smaller offices on Wilshire Boulevard in Los Angeles.

“The whole program was go, go, go, and it was all predicated on hot money (brokered funds) and progressive lending (high-risk loans),” said Gerry Findley, a Brea financial institutions’ consultant.

He said he was not surprised by the closing because management was not doing enough “to reverse losses and the continued direction” of the savings institution.

A source who has been close to American Diversified’s executives and is knowledgeable about the S&L;’s operations, railed at the takeover, claiming the bank board and the management team from Pacific Savings Bank of Costa Mesa would lose $300 million to $400 million in the next six months as they try to figure out the complex nature of the operation, with its construction projects and multitude of limited partnerships.

“This is the most complex takeover the bank (FHLB) has ever undertaken, and it’s totally unnecessary,” said the source, who asked not to be identified because he regularly deals with the bank board.

Bringing in Experts

Alexander acknowledged that management teams usually lose money in the initial stages of a takeover. But he said the FHLB and Pacific Savings Bank are bringing in real estate experts to unravel an admittedly complex operation.

The new management team is headed by Kenneth Bovard, Pacific Savings senior vice president and general counsel, and Robert Botts, executive vice president. The bank board also named a three-member advisory board headed by Richard L. Christianson of Los Angeles. Christianson is the former chairman, president and chief executive of GlenFed Mortgage Co., a subsidiary of Glendale Federal Savings & Loan Assn.

The American Diversified source accused the federal agency of forcing the S&L;’s closure by demanding that real estate appraisals be written down to unrealistic levels and by stepping in Friday before Sahni could sell to potential buyers.

“There were people standing by to put in money,” the source said. “The bank board knew they were around and decided not to wait.”

He also said bank board examiners not only forced huge write-downs but refused to revise them when the assets were sold at a higher price.

Cites Board’s Refusals

“They took a San Francisco hotel, Inn at the Opera, and put an appraisal on it of $4.3 million (last fall),” he said. When American Diversified “sold the hotel to an independent third party the same month for $7 million,” the source said, bank board officials refused to increase the appraisal.

In another case, he said, regulators refused to revise their reduced value of $7.3 million on a structure that American Diversified had sold for $13 million.

But the source acknowledged that American Diversified had financed the loans for the purchases, something Alexander said was a questionable basis for establishing the real value of the real estate. Only if the borrower is able to pay off the mortgage can the loan amount be equated to value, he said.

“We have some expert examiners who really know these properties,” Alexander said.

Despite earlier losses in 1985, the S&L; source said, American Diversified earned about $20 million in December. The nature of real estate syndications is that they make their money in the last month, he said. Sahni and Day made the same claim in interviews last year and in 1984.

In December, the source said, American Diversified’s executives figured the savings and loan’s net worth was about $34 million, but FHLB write-downs left it with $8 million to $9 million, the source said. The institution needed a net worth of about $22 million to conform to FHLB standards, he said.

The bank board “did not like the nature of the operation,” the source said.

American Diversified, he said, “was fundamentally a real estate syndication operation, which this bank board thinks is inconsistent with (the traditional S&L; role of financing) home ownerships. But the bulk of real estate lending by American Diversified was in apartment buildings.”

Contributing to this article was Times staff writer Carla Lazzareschi.