Regulators Shut Down Sun Savings & Loan in S.D.
Sun Savings & Loan Assn., buffeted by two years of red ink, bitter board squabbles and a federal grand jury probe of former management, was shut down by federal regulators late Friday.
Sun’s five branches--four in San Diego and one in Mission Viejo--will reopen Monday as Flagship Federal Savings & Loan Assn. They will be operated by Great Western Savings of Beverly Hills under a management contract.
Hit hard by more than $17 million in loan losses in the last six quarters, the 6-year-old company, with $374 million in assets, had a $2.4-million negative net worth at the end of the first quarter ended March 31, meaning that its liabilities exceeded its assets.
Tenuous Position
As a result of its tenuous financial position, Sun has operated for four months under a federal consent agreement that severely limited management’s ability to increase assets or spend money.
About 60 representatives of the Federal Home Loan Bank Board entered Sun’s corporate headquarters unannounced in two waves Friday--half at 4:30 p.m. and the rest 15 minutes later.
Also stationed at Sun’s branches were about 90 other regulators, Great Western employees and officials of the Federal Asset Disposition Assn. The FADA will manage and market Sun’s non-performing assets, primarily bad loans, which are not being transferred to Flagship Federal. All performing assets are going to Flagship.
Sun’s branches were closed at 4:45 p.m., more than an hour earlier than usual. Federal Savings & Loan Insurance Corp. (FSLIC) representatives were stationed outside each branch--with small, printed Flagship Federal signs taped on windows behind them--to explain the federal takeover to customers.
One regulator at Sun’s main branch in University City told customers lined up outside that the “federal government created (Flagship) 45 minutes ago.”
Close Saturday
The branches, typically open half a day on Saturday, will be closed today, but an FSLIC representative will be on duty to field questions, officials said. Automated teller machines were also closed following the takeover, but were supposed to reopen at 9 p.m. Friday.
Depositors are insured up to $100,000. Customers with deposits in excess of $100,000 will share any proceeds of liquidated Sun assets on a pro-rated basis with the FSLIC, regulators said Friday.
On orders from the bank board, Sun’s stock did not open for trading Friday pending “an announcement.” The stock closed Thursday on the American Stock Exchange at $1.50 a share. At its peak, Sun traded at above $17 a share.
Sun management was kept unaware of the federal takeover until minutes before regulators moved in, although Sun executives suspected some type of action after they were told of the stock suspension order at 5:30 a.m.
“I’m very sorry to see this happen,” said Sun Chairman William McElroy, a founding director. “We had a good management team that was starting to get things straightened out.”
Status of Employees
Sun’s work force of more than 100 will be hired by Flagship Federal, according to regulators.
It remains uncertain, however, what will become of Sun President and Chief Executive John McEwan and Executive Vice President John Grosvenor, who assumed management of the company in early 1985 after the bitter ouster of Daniel W. Dierdorff as president and chief executive.
Flagship’s five-member board will be chaired by Los Angeles financial consultant Jay Janis, a former chairman of the Federal Home Loan Bank Board.
Other board members include Walter Allen Jr., a retired Bank of America vice president; Paul O’Brien, a retired chief realty officer for Security Pacific Bank; Alan Rothenberg, president of a San Francisco-based merchant banking firm, and Jack Steele, dean of the USC business school.
Sun customers generally reacted calmly to the takeover. But one depositor, perhaps unaware that her funds are insured by the government, complained that the savings and loan had “$13,000 of my money and it’s not mine anymore. That’s a hell of a situation to be in. I’m not going to sleep tonight.”
A more typical reaction was that of Dr. Barry Reder, a dentist, who said he wasn’t “upset about this--I get more upset if a filling falls out.”
Like other thrifts that opened in the early 1980s, Sun’s aim was to attract investors interested in a “community-based” financial institution. Sun’s board reflected that approach, boasting well-known directors such as McElroy, who is former UC San Diego chancellor, public relations expert Gail Stoorza Gill, developer Harry Summers, and philanthropist and arts patron Danah Fayman.
Rapid Growth
Sun grew rapidly, reporting assets of $18.1 million at the end of 1981 and reaching a peak of $471.2 million at the end of 1984.
But problems surfaced in the spring of 1984. Summers resigned, ostensibly over disagreements with Dierdorff, who assumed the chairmanship.
Amid rising dissatisfaction with Dierdorff, several outside directors--most notably Gill, Fayman and real estate investor Alan Koljonen--managed to oust him in late August.
Dierdorff took the battle to court, winning a temporary restraining order that voided his firing.
But his tenure was short-lived. Faced with continued internal dissent, Dierdorff resigned in mid-October.
However, three months later, to avoid an expensive proxy fight from a dissident group that was allied with Dierdorff, Sun’s board reorganized. Gill, Fayman and two others resigned.
The new board included New York financier Van D. Greenfield, who made but later withdrew a proposal to pour $10 million of equity into the company.
Concurrent with the reorganization, the board hired McEwan, vice chairman of Central National Bank of Cleveland, as Sun’s president and chief executive.
McEwan received $462,228 in compensation in his first year--nearly two-thirds of it in one-time payments that included moving expenses. In exchange, McEwan inherited a board that seemed to bicker as much as it directed and a company that, over the next six quarters, wrote off $17 million in loan losses, or 5% of its total loan portfolio.
During McEwan’s first year at the helm, five directors resigned--for a variety of reasons ranging from a lack of liability insurance to the revelation that one director had been convicted of attempted grand theft in 1973.
Capital Sought
McEwan’s efforts to secure a much-needed infusion of capital were constant but unsuccessful. Each attempt seemed undermined by Sun’s mounting problem loans, with potential investors retreating after they audited Sun’s books.
In the end, Sun’s loans proved to be its downfall. Most were “high risk” real estate loans, regulators said Friday.
“And then they deteriorated even further when the real estate market softened. A lot of the loans are beyond our control,” a Sun official said Friday.
Sun is a minority participant in about 35% of its total loans; in most cases, Sun has less than a 7% interest in those loans. As a result, Sun officials had little say about what happened to those commitments. Many have been written off as losses.
And additional loan losses loomed. At the end of the first quarter, Sun reported $54.9 million in loans that were delinquent more than 90 days. That figure probably has increased since then, according to sources familiar with Sun.
Much of Sun’s growth was linked to brokered deposits, typically certificates of deposit that are subject to short-term changes in market rates. Although Sun had reduced its reliance on brokered deposits this year, regulators said Friday that about 50% of Sun’s deposits had been acquired through an in-house money desk, which is a relatively expensive way for thrifts to raise deposit funds.
In addition to the problem loans, Dierdorff’s past activities were increasingly criticized. A board-ordered investigation of Dierdorff’s tenure alleged several instances of wrongdoing.
According to a lawsuit that resulted from the investigation, the former chief executive received more than $209,000 in kickbacks and gifts from Sun customers who had borrowed money and from brokers who received loan fees that were paid by Sun and approved by Dierdorff.
The suit also said Dierdorff created a secret checking account under the fabricated name of Dan Danzer, which he used to deposit the supposed kickbacks, according to the investigation.
Dierdorff also allegedly charged personal expenses to Sun, according to the board-ordered probe.
The suit further accused Dierdorff of receiving free air travel to Las Vegas, an unsecured line of credit, and free room, food and entertainment at the Dunes Hotel there. The Dunes is owned by M&R; Investment Co., which later defaulted on a $1.6-million Sun loan. The Dunes’ controlling shareholder is Morris Shenker, who was counsel to former Teamsters Union President James Hoffa.
The $5-million lawsuit was filed by the San Diego law firm of Fredman, Silverberg & Lewis, on behalf of Sun against Dierdorff and several Sun customers who reportedly received loans from the company.
Dierdorff denied the allegations and subsequently filed a $30-million counter-suit against Sun, charging breach of contract and accusing Sun of discrediting him through “leaks” to the press and federal regulators.
A yearlong federal grand jury investigation into Dierdorff’s activities is continuing, according to law enforcement sources. Last month, two Sun customers were indicted on charges of making false statements on loan applications.
Times staff writer Greg Johnson contributed to this story.
