Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, February 17, 1991 TAG: 9102150056
SECTION: BUSINESS PAGE: E-1 EDITION: METRO
SOURCE: MAG POFF BUSINESS WRITER
DATELINE: LENGTH: Long
"It's very clear to me the regulators have become a lot less willing to try to work with banks," said W. Ronald Dietz, of his vain struggle to save CorEast Savings.
Federal regulators "weren't prepared to work with us," Dietz said. In today's environment, "there's little tolerance in regulators for organizations below capital requirements."
His greatest regret, Dietz said, is that "we came so close" to avoiding the takeover that has swept much of the nation's savings and loan industry. The plan he was proposing would have met two of three government capital standards.
Dietz "really did turn it around," said Norman Fintel, a member of CorEast's board and former president of Roanoke College.
Fintel said the decision to take over the bank was political because "the regulators are running scared."
James M. Turner Jr., president of J.M. Turner & Co. in Salem and another CorEast board member, said Dietz and the board were "on our way to working it out, although our capital was not what it should have been."
He said regulators rejected a proposed plan for recovery, then put the thrift into receivership before the plan could be enhanced.
Paulette Odum, spokeswoman for the Office of Thrift Supervision in Atlanta, said nobody was available to respond to the statements of the CorEast officials.
Dietz was fired Feb. 1 by the Resolution Trust Corp. although its news release announcing the seizure said his management had "brought stability" to the thrift.
His dismissal, along with two of the thrift's Roanoke-based executives: Reginald K. Hutcherson, vice chairman of CorEast, and Anderson E. Shumate III, president of its western region, was automatic. It is standard procedure to clear away top management when the Resolution Trust Corp. assumes control of an insolvent thrift.
Both Hutcherson and Shumate declined to be interviewed about CorEast. The thrift's current employees have signed an agreement with the Resolution Trust Corp. that bars them from talking with the news media. Several cited that as a reason to decline interviews.
But Dietz said "CorEast had some troubles when I walked in the door" in June 1989 as president and board chairman.
He brought more than 20 years' experience in banking to CorEast. His predecessor, O.H. Harriss, came from a background in real estate development.
When he arrived, Dietz said, CorEast's home operations in Virginia were losing more than $8 million a year. Its New York investments, on the other hand, "threw off enough earnings to cover the losses in Virginia."
Yet it was relaying Virginia deposits to New York that ultimately led to the savings and loan's downfall.
The Virginia problems were unrelated to the current crunch in commercial real estate, Dietz said, but to difficulties of operating in "the new environment." The Virginia credit portfolio was "clean," he said.
Difficulties in Virginia stemmed largely from CorEast's creation in 1988. The institution was a merger of Roanoke's First Federal and Richmond's Colonial savings and loan associations.
His first task was "to move around rather smartly" in CorEast's original markets in Roanoke, Richmond and Lynchburg.
As he streamlined management and reduced expenses in Virginia, Dietz said, the institution steadied. Consumer deposits increased by $70 million to about $1 billion, he said, while home mortgages doubled.
But the summer of 1989 also hit hard at the company's cash machine in New York, where CorEast had opened a loan origination office. CorEast not only financed conversions of apartment buildings into cooperatives and condominiums, he said, but it also directly invested $23 million of its own funds in some of those projects.
"The New York market fell apart. Those loans began to have all sorts of problems," Dietz said.
"We spent the last 15 months doing a lot of triage on New York loans."
After foreclosing on a number of those properties, he said, CorEast last April was forced to transfer $40 million into reserves against likely losses on souring loans.
"That was the reason we had no capital. We had to recapitalize the bank," Dietz said.
The transfer also meant that CorEast no longer met any of the federal standards for capital ratios. Until that time, Dietz said, CorEast had exceeded all three.
"You can't take a $40 million reserve and not have a capital problem," he said.
He conceded that Virginia banks have been building reserves for commercial real estate losses without affecting capital strength. But Dietz said commercial banks "are much larger organizations and their problems are not as intense."
Dietz said CorEast came up with a plan to add $50 million in new capital through sale of its New York investments and other assets. The plan provided for an agreement with institutional investors for conversion of $27.5 million of bonds into preferred stock. It was seen as a chance to attract new capital investors.
Pumping in $50 million would have enabled CorEast to meet two of the three government standards to measure capital strength.
But regulators demanded that CorEast must come into compliance with all three, Dietz said. New York developer Arthur Cohen, who owned all of the bank's common stock since 1986, "felt he couldn't come up with the difference."
Dietz said more capital must come into the thrift industry, but the market environment "is discouraging to a lot of private investors."
One of those discouraging factors, he said, is seizure of thrifts like CorEast.
"We clearly had an improving situation," Dietz said of CorEast. Regulators were "comfortable" with management of the New York portfolio. Indeed, the thrift expected that profits produced on its operations in Virginia this year would exceed the New York losses.
But he said the Office of Thrift Supervision was unwilling to accept incremental additions to capital as CorEast recovered.
He said OTS officials in Atlanta "were supportive of what we were trying to do." But he added that in today's environment regulators have "no discretion to work with institutions like ourselves to be kept alive to work our way back into capital compliance."
The scenario throughout the United States, he said, makes clear that the government intends to resolve the thrift crisis by taking over non-complying institutions, Dietz said.
The merger of the Roanoke and Richmond thrifts and CorEast's entry into New York created a special situation.
But in many ways the history of the Roanoke thrift reflects the difficulties of the industry.
Founded in 1917 as Roanoke Mutual Building & Loan Association, the institution in 1935 was renamed First Federal Savings & Loan. It grew into one of the area's most important financial institutions.
A decade ago, the University of Virginia's Tayloe Murphy Institute, now the Center for Public Service, ranked First Federal as second in the valley (behind Dominion Bank) in terms of consumer deposits. It held 12.6 percent of that market compared to 32.4 percent for Dominion and 11.5 percent for the former Colonial American National Bank, now part of Crestar Bank.
In 1979, First Federal made a move that gave it the capital strength to survive the credit crunch of the early 1980s while carrying the seed of its ultimate destruction as an independent local association.
That move converted First Federal from a mutual association, owned by its depositors, to a stock company, owned by investors. At that time, officials said the switch boosted capital reserves from $16 million to $26 million.
That capital protected First Federal in the early 1980s when, like virtually all other thrifts, it lost money.
But limited by federal caps on interest payments, banks and thrifts watched helplessly as deposits flowed into new investment vehicles, such as high-paying money market mutual funds at brokerage houses.
When they were finally liberated from those limits, thrifts and banks began to compete for savers' dollars. But unlike banks, which specialize in commercial and consumer short-term loans, the thrifts were invested in low-paying residential mortgages at fixed rates extending over 25 or 30 years.
Meanwhile, a group of large investors in New York, New Jersey and California had started to speculate in First Federal stock. Their investment was variously estimated in the mid-1980s at 12 to 22 percent of the outstanding shares.
Turner, who was a member of the old First Federal board, said nobody was sure why the out-of-state investors put their money into a Roanoke thrift.
He said First Federal was one of the first thrifts to offer public stock and he believes an investment adviser in New York recommended the new shares to some clients.
The group held enough of the stock, Turner said, so that they controlled the future of the Roanoke institution.
They surfaced publicly in January 1984 when a New Jersey lawyer, Alan Stark, appeared at an annual stockholders meeting and unsuccessfully sought a seat on the board. He said the investors he represented felt First Federal needed a push to expand.
Later that year, the same investors narrowly defeated a proposed merger with First Federal of Danville because they didn't like its anti-takeover provisions. They also believed that merger would reduce the Roanoke thrift's strong net worth position.
In November 1984, one of the New York investors placed an advertisement in The Wall Street Journal for a buyer for their stock, which was then trading at $14 a share.
The ad aroused the interest of Arthur Cohen, a wealthy New York real estate developer who already owned Colonial Savings & Loan Association in Richmond. Cohen publicly offered to buy stock in August 1985 for $21 a share, later boosting his bid to $25 a share. He soon owned more than a quarter of First Federal's stock.
Cohen acquired virtually all of the stock in April 1986 and owned First Federal outright.
Fintel, who had held stock in the old First Federal and served on its board, said he was "deeply regretful" about the buyout because it meant a loss of local control. But he said "there's very little one can do about it in this market."
When the thrift was First Federal, Fintel said, it dealt exclusively with home mortgages in the Roanoke and New River valleys.
He described Cohen as "a decent man" who ran the thrift to the best of his ability.
Turner called Cohen a man of high integrity and, in his career, both extremely bright and innovative. Nobody foresaw that the market in New York would deteriorate so quickly, he said.
Turner said he wasn't happy about the buyout as a local resident. But he said the board had to look at the dollar value of the offer. "It was a good economic deal for the shareholders," Turner said, and the out-of-state investors supported the buyout.
Cohen opened a New York loan office where he began to finance conversion of apartment buildings into cooperatives and condominiums. First Federal also bought a share in some of the projects. Much of that business was financed by issuing junk bonds through a First Federal subsidiary, First Equity.
He merged the Richmond and Roanoke thrifts, with federal approval, in May 1988. That merger yielded CorEast. The legal headquarters were kept in Roanoke, but the executive offices and operations center were consolidated in Richmond.
For president, Cohen chose Harriss the real estate developer from Colonial instead of Hutcherson the banker from First Federal.
Consolidating the two thrifts proved difficult and expensive. Bank officials acknowledged that their incompatible computer systems scrambled records and alienated customers.
Harriss returned to real estate a year later when Dietz was hired in an attempt to restore stability.
Although the federal Office of Thrift Supervision credited Dietz with achieving that goal, the agency said the repairs came too late. Its news release said recovery was unlikely without federal assistance because of insufficient capital.
The OTS attributed CorEast's problems to "over-concentration" in apartment conversions in New York, which it termed a deteriorating market. The agency also said costly certificates of deposit placed by brokerage houses accounted for 30 percent of the institution's total deposits. While those certificates brought money into the savings bank, they commanded high interest rates.
The impacts mean CorEast lost $50 million for its last full fiscal year, ended March 31, 1990, and $9.3 million for the six months ended last Sept. 30.
OTS said CorEast had troubled assets of $197 million or 16.6 percent of its total assets.
Its ratio of capital to assets, the most usual measure of capital strength, was a negative 2.5 percent.
> In addition to clearing away the thrift's top managers, the takeover means Cohen no longer has any association or interest in the thrift he created and named for its expected importance as the Core of the financial market in the East.
Indeed, the future of the new CorEast Federal Savings Bank is still up in the air.
Bob Frazier, the assistant managing agent installed by the Resolution Trust Corp., said the federal government is still reviewing the status of the bank to determine the alternatives. No decision has been made about potential sale to another institution or other possibilities, he said.
"It's too premature to really speculate," Frazier said. Ronald Risner, managing agent, said the RTC "is working toward a successful resolution. It just takes time."
by CNB