Low Reserves Blamed in Failed Bid to Rescue Rancho Bernardo Thrift
Federal regulators said Monday that thrift consultant Jim Gough’s plan to recapitalize troubled Rancho Bernardo Savings Bank fell apart in recent weeks when bank examiners discovered that the institution lacked the capital to provide reserves for a problem-plagued real estate project in Escondido.
During the past two years, Rancho Bernardo Savings had reported more than $3 million in reserves and writedowns in connection with the troubled real estate project, a residential development known as Country Homes.
But regulators recently uncovered “additional things that caused Jim to acknowledge that he would be unable to raise enough capital to fill the hole,” said Greg Mitchell, manager of the Office of Thrift Supervision’s Capital Enhancement Group, which matches potential investors such as Gough with cash-hungry thrifts.
The OTS on Friday placed the troubled savings bank, with $119 million in assets, into receivership and turned over management of the institution to the federal Resolution Trust Corp. The thrift was open for business Monday morning, operating as Rancho Bernardo Federal Savings Bank. Gough said Monday that he has remained at the savings bank as a consultant.
Gough, who had hoped to complete a multimillion-dollar cash infusion and take control of the savings bank early in 1991, first became interested in Rancho Bernardo Savings early this year after being introduced to the institution by the OTS’ four-person Capital Enhancement Group.
The San Francisco-based-group has arranged 17 marriages between still-solvent S&Ls; and investors who have pumped more than $20 million into the relatively weak thrifts.
Just two months ago, Gough seemed certain that the cash infusion that Mitchell’s group was helping to arrange would take place. But Gough said Monday that he experienced “serious doubts about two weeks ago” when examiners reported that the real estate project in Escondido had created a potential “black hole.”
“It just didn’t make economic sense to take that kind of exposure,” Gough said. “And operationally, the company was not making any money.”
Gough abandoned the proposed cash infusion when regulators determined that the savings bank needed to set aside an additional $1.8 million in reserves. That requirement would have eliminated the savings bank’s positive net worth and “violated the requirements of my purchase agreement,” Gough said.
Mitchell said, “Jim knew going in that it was a thin deal as it related to the solvency of the institution . . . . It really is unfortunate because (Rancho Bernardo Savings) is now going to require taxpayer assistance.”
Unlike the RTC, which often uses loan guarantees and other incentives to sell failed thrifts and their assets, the Capital Enhancement Group deals only with “unassisted resolutions” of still-functioning thrifts, Mitchell said. The group maintains a list of investors who believe that there are still solid investment opportunities in an industry plagued by seemingly endless failures.
The group focuses on strengthening weak but still-solvent thrifts because “it is in the government’s best interest to (market) an institution before it fails rather than to let it struggle through deposit outflow and the loss of management talent,” Mitchell said.
Rancho Bernardo Savings was a “rare case” where the institution’s financial woes were deeper than the OTS originally had anticipated, Mitchell said. “Some institutions are not as sick as others, and it’s (usually) clearer to us and the investor that” a cash infusion can successfully be arranged.
The real depth of Rancho Bernardo Savings’ financial woes emerged only after OTS and Federal Deposit Insurance Corp. investigators completed an in-depth investigation that “uncovered some circumstances that one could not have anticipated,” Mitchell said.
“Our general rule is that we will not market an institution unless we believe that it can be sold on an unassisted basis,” Mitchell said. “We only market them when we believe there is true market value.”
The Rancho Bernardo Savings episode has not soured Gough’s investment group on the S&L; industry. “I intend to go forward with an S&L; acquisition,” Gough said.
S&L; industry analysts said the Capital Enhancement Group has merit because the value of a thrift’s assets usually plummets after being seized by regulators.
“The estimate is that, if an institution goes to the (Resolution Trust Corp.), the deterioration in its value is at least 20%,” said Allan Bortel, an S&L; industry analyst with San Francisco-based Sutro & Co.
Bortel manages a team at Sutro that is seeking investors who see hidden value in an industry where stock prices have tumbled far below book value.
Bortel is now seeking capital for American Liberty, a once-troubled, Los Angeles-based thrift that formerly was known as Century City Savings. Earlier, The OTS group arranged for a $2-million investment in the still-solvent institution by a San Francisco businessman. After making the investment, the businessman renamed the S&L; and moved its headquarters to Oakland.
“If Greg can act with a thrift, then the taxpayer is better off,” Bortel said. “But it’s very hard . . . . Greg has done a great job in terms of selling the assets of these institutions . . . . Some of them are very tattered and torn.”
The OTS on occasion becomes involved with institutions that are not, by definition, troubled thrifts. That was the case late last year when the Capital Enhancement Group helped to find capital for U.S. Community Savings, a 5-year-old S&L; based in Encinitas.
U.S. Community had maintained an 8% tangible capital ratio for several years so it was not classified as a troubled thrift when the Capital Enhancement Group sought permission to introduce the thrift to potential investors, said U.S. Community Chairman Mike Casinelli.
U.S. Community reported a $406 net loss for the quarter ended June 30, contrasted with $23,297 in net income for the like quarter a year earlier. It reported net income of $337,201 for the nine-month period ended June 30, up from a $343,549 net loss during the like quarter a year ago.
Despite its relatively strong financial condition, U.S. Community Savings, which ended last year with $50 million in assets, was unable to find new capital it needed in order to grow. “With all the bad news the industry has been receiving, it was difficult to go out and do any kind of community offering,” Casinelli said.
The institution initiated “discussions with a lot of people,” Casinelli said. “But . . . we had a lot of vultures flying around up there . . . . we wanted to find someone who was going to be fair and realistic.”
Last December, Circle K Corp. founder Fred Hervey, who learned of the thrift through the Capital Enhancement Group, acquired 52% of U.S. Community Savings’ shares for $4 million. Hervey is a majority owner of Sun World Savings Assn. of El Paso, Tex., Sun World Federal Savings Bank of Alamogordo, N.M., and the Bank of Scottsdale, a profitable bank in Arizona.
Mitchell believes that as many as 50 other institutions in California, Arizona and Nevada could benefit from marriages arranged by the Capital Enhancement Group.
The OTS recently expanded the capital program beyond San Francisco, and Capital Enhancement Groups are now being added in the OTS’ 10 other districts. Those will deal with an estimated 300 still-solvent thrifts that, with additional capital and sound business plans, will be more likely to survive in the turbulent S&L; industry.
