Tustin Bank’s Growth Strategy Raises Concerns : Far Western’s Auto Loans and Its Control in Question

Far Western Bank, a tiny Tustin institution on the verge of collapse two years ago, has bolted past the rest of Orange County’s independent banks to become the biggest and one of the more profitable banks in the county.

But regulators are concerned about the 17-fold growth that boosted Far Western’s assets to $236.2 million by the end of 1987, and they question the bank’s strategy of putting nearly all of its assets in one basket--the purchase of auto loans made mostly by dealers.

State and federal regulators also are watching closely the moves of the investor group that pumped more than $5 million in new capital into Far Western in mid-1986 and changed the bank’s basic business course.

The primary subject of their concern is Richard L. Burns, who headed two San Diego companies that grew rapidly before sinking into red ink. Burns was forced out of the first firm, and the second wound up in U.S. Bankruptcy Court.

The bankrupt company, Nucorp Energy, was a fast-growing San Diego oil and gas operation that collapsed in 1982. In a subsequent trial involving securities law violations, a federal judge found that Burns had participated in a “fraud on investors, potential investors, creditors and anyone else who relied” on Nucorp’s financial statements.

Nucorp’s Large Default

Nucorp also had one of the biggest loans in default at Continental Illinois Bank & Trust, the still-troubled Chicago bank that federal regulators bailed out in 1984.

Burns and executives at Far Western refused to discuss their game plan for the bank, and state law exempts the bank from disclosing details about ownership interests and other significant changes in management, the board of directors and general operations.

The exemption applies to banks with fewer than 500 shareholders. Banks with more than 500 investors must file routine disclosure statements with the Securities and Exchange Commission.

“Our basic approach to life is no comment,” Far Western President Richard Trotter said in an interview last week. “We’re not trying to attract additional customers. The less the world knows about us, the better off we’ll be.”

Monday, Trotter said the directors had agreed at a board meeting Thursday to let Burns, Trotter and others respond only in writing to written questions, a proposal declined by The Times. He said the board rejected the possibility of a tape-recorded interview in lieu of written questions and responses.

Last week, however, Trotter discussed some details of Far Western’s operations and defended the course his bank has taken in pursuit of its rapid growth. As recently as the end of 1985, Far Western had assets of only $13.8 million.

“We have three branches that specialize in buying automobile paper, and their sole purpose is to make automobile loans,” he said, pointing out that the bank has avoided the pitfalls often associated with fast growth because what it does is “basically simple.”

“Independent banking has to find a niche and do well at it,” he said. “We found a niche, and we’re serving it.”

From an earnings standpoint, the bank’s performance appears to bear out Trotter’s assessment. Far Western’s net income has soared in the two years the Burns group has been in control. The bank had $1.4 million in combined losses for 1984 and 1985. It reported a $1.65 million net income for 1987.

Despite the profits, regulators are concerned about the bank’s heavy reliance on auto paper and the quality of those loans, because dealers who make the loans may be more interested in selling cars than making sure that customers can afford them.

Public information on Far Western, which had about 250 shareholders last year, is limited primarily to data contained in its application to start the bank eight years ago and the quarterly financial statements it submits to regulators. The bank is not required to issue a publicly released annual report, something the state Department of Savings and Loan requires of savings institutions.

According to regulators, the theory behind such secrecy is that certain information, especially if divulged at a time when a bank may be having financial problems, could cause a run on deposits, depleting a bank’s major source of funds and causing further damage.

Nevertheless, Trotter, other bankers, industry consultants and individual regulators who asked to remain anonymous characterized Far Western as a bank charting an unusual course for itself by buying up automobile paper.

But it was Burns’ involvement with the bank that sent up red flags at the State Banking Department, the bank’s primary regulator, and the Federal Deposit Insurance Corp., a secondary regulator.

Operates RLB Capital

Burns, a 49-year-old high school dropout who now operates RLB Capital in Del Mar, is well-known in the San Diego area. He has been described as the quintessential entrepreneur, involved in ventures ranging from real estate to equipment leasing.

He founded R.L. Burns Corp., an oil exploration and coal mining firm, in 1969. It enjoyed explosive growth, but suddenly foundered. As its losses mounted, Burns was ousted as chairman and forced to sell his 55% interest for $14.6 million, less than half its market value.

The company, now called Pyro Energy and located in Evansville, Ind., returned to profitability soon after Burns left.

After selling his interest, Burns set up a small oil exploration and supply firm, which was purchased in 1979 by Nucorp Energy in San Diego. Nucorp also was involved in gas and oil properties and the manufacture of oil field equipment.

Burns soon became chairman and chief executive officer, and the company’s growth took off. Revenues shot from $39.3 million in 1979 to $168.8 million in 1981. But nearly 17% of Nucorp’s 1981 revenues were later determined to have been generated by pre-billing--the practice of reporting as revenue sales orders that had been received but not yet shipped.

The company also acquired more than 25 oil-related firms throughout the Western United States between 1980 and 1982. By the time the oil glut hit, Nucorp was awash in $615 million in debts and saddled with contracts requiring it to purchase about $175 million in oil field pipe supplies.

Third Largest Debt

Included in its debts were $173 million in loans from Continental Illinois. It was the third largest debt owed to the troubled Chicago banking concern.

Nucorp filed for protection from creditors in federal bankruptcy court in 1982.

The Securities and Exchange Commission subsequently sued Burns and his chief aide, David W. Watt, to prohibit them from further violating SEC regulations. The agency claimed that Nucorp’s pre-billing practices artificially inflated its revenue by $18.9 million for 1980 and the first six months of 1981. The SEC accused the firm of inflating its 1980 earnings by about $539,000.

Watt signed a consent order, but Burns decided to go to trial.

In December, 1985, U.S. District Judge J. Lawrence Irving in San Diego found that Burns had participated in a fraud. The judge said he also agreed with a witness who characterized the pre-billing activities as a “deliberate attempt to ‘cook the books.”’

Under a bankruptcy reorganization plan in December, 1985, Nucorp creditors were to receive only a tiny percentage of the money owed them, and company shareholders were to be left empty-handed. The company still is in reorganization proceedings.

In March, 1986, Burns and 13 other former Nucorp directors and officers--and their insurance companies--agreed to pay $41 million to settle scores of claims by about 4,000 former shareholders. Litigation involving other defendants is still pending.

Conversion of Shares

In the spring of 1986, Burns and his wife, Joyce, began investing in Far Western Bank by buying preferred shares. They eventually pumped more than $5 million into the bank’s capital base, and Joyce Burns began converting the preferred shares into common stock.

She currently owns slightly more than 50% of the bank’s common shares, giving her control of the bank, Trotter said.

Joyce Burns and Watt joined the board, although it is unclear if Watt bought any stock. Regulators, however, said they believe that the real power and influence in the bank’s direction is Richard Burns, even though he reportedly only owns preferred stock.

By mid-1986, Far Western was changing its business plan to concentrate on buying automobile paper--vehicle loans made mostly by dealers, according to regulators and consultants.

The bank acquired two finance companies--National City Finance in National City and Atlantic Finance in East Los Angeles--and folded their operations into a newly created auto paper division. It also opened an auto paper operation a floor below its Tustin headquarters.

Trotter said that while the auto paper division is devoted to buying automobile paper, the bank’s headquarters operates as a “true, normal bank” by providing small business loans, among other activities.

But the auto paper accounts for the bulk of its lending operations--96.4% of all loans, according to quarterly financial statistics that the bank provides regulators.

While assets have soared from the end of 1985, when the bank relied on commercial lending, net loan losses also have soared.

At the end of June, 1986, Far Western charged off $359,000 in bad loans, according to financial statements. But by the end of 1987, the bank had charged off $10.65 million. In addition, it had been forced to repossess automobiles valued at $3.5 million.

While the figures may appear alarming, regulators concede they find it tough to evaluate those numbers because there is no other operation quite like Far Western.

The closest example is Balboa National Bank, a San Diego institution that collapsed on Jan. 14 when regulators declared it insolvent, closed its operations and began liquidating its assets.

Balboa’s assets were concentrated in automobile loans made mostly to armed forces personnel who in many cases left the area before the loans were paid off. Their cars often were found--if they were found at all--gutted on roadsides throughout the nation, regulators said.

Far Western’s purchase of the two finance companies gave it expertise in automobile lending, but that much concentration in one field worries regulators.

Typically, California bankers and regulators like to spread loan portfolios equally among three areas--real estate, commercial-industrial-agricultural and consumer loans. High interest rates and a depressed real estate market in the early 1980s destroyed numerous California banks that had placed most of their assets into real estate loans.

“Finance companies also make riskier loans, and this bank is being run as a finance company,” one regulator said. “Maybe it’s OK as long as there are prudent underwriting and controls in place.”

But regulators recently completed a routine audit of Far Western. The results, given recently to bank executives, questioned the quality of the auto paper the bank was buying, according to the regulator, who declined to discuss the audit further.

Another reason Far Western’s business plan may be considered riskier than normal is because auto dealers, not the bank, may be doing credit checks. And auto dealers are more interested in sales than loan quality, said James Gray, an auto dealer who also is chairman of Harbor Bank in Long Beach.

“If a bank doesn’t do the credit checking, the risk factor goes up significantly,” said Gray, who spoke about general industry practices and not Far Western in particular.

Gray, a former president of the California Bankers Assn., said any bank with more than 80% of its loans in automobile paper “ought to re-look at what their charter is, because it should be a finance company.”

Trotter, however, complained that any time a bank grows fast or does something unorthodox, regulators, other bankers and the media find something to criticize. He said the expertise Far Western has developed has given it an edge that other banks simply do not have.

THE GROWTH OF FAR WESTERN BANK

Net income:

in thousands 1983: 57 1984: -783 1985: -655 1986: 80.6 1987: 1,650

Source: Findley Reports and California Department of State Banking.