Bad Loans, Fraud Brought On Fall of Unified

In 1983, a group of San Fernando Valley businessmen opened a tiny, one-office savings institution in Northridge called Unified Savings Bank. In just three years, Unified’s assets had ballooned more than tenfold to $105 million.

But the growth didn’t come without costs. During that same period, Unified went broke--a victim of fraud, bad loans and a willingness to pay dearly for deposits that left no room for profit, according to federal thrift regulators.

In October, 1986, the regulators declared Unified insolvent and chose their own managers to run the S&L; in hopes that it could work its way out of its problems. At the time, Unified’s liabilities exceeded its assets--or had a negative net worth--of $1 million.

But Unified’s condition only grew worse. As of Dec. 31, its negative net worth had swelled to $18.5 million, while its assets shrank to $37 million. So earlier this month, Unified was seized again, one of more than 200 S&Ls; nationwide to be taken over by the federal government since February as part of President Bush’s plan to alleviate the nation’s S&L; crisis.

Regulators won’t predict Unified’s future specifically but, for the most part, they are trying to prepare all the thrifts that have been seized for possible sale, liquidation or survival with the help of new investors.

As S&L; failures go, Unified is a mere footnote. Unified’s office on Tampa Avenue sits next to a Japanese restaurant in a small shopping center.

But the S&L; crisis has shown that size matters little in whether a thrift succeeds; huge S&Ls; in California, Texas and elsewhere also became insolvent. Two local S&Ls; that were seized are American Savings & Loan ($30 billion in assets), a unit of Irvine-based Financial Corp. of America, and Lincoln Savings & Loan ($5.4 billion in assets), also based in Irvine and part of American Continental Corp.

The explanations for the S&L; crisis are many: Savings institutions, given additional freedom to roam far from their traditional business of making home mortgage loans, in many cases got into businesses that they had little expertise in. And if enough of those investments go sour and the institution is taken over by the government, much of the bill for that failure ultimately is paid by the taxpayers.

Although there were many problems at Unified, almost everyone involved concedes that the S&L; was seriously damaged after only a year of operation, when the thrift was defrauded in 1984 by a man named Michael Louciano. Louciano, also known as Victor Bagha, was convicted of helping people get $1.5 million in loans from Unified--ostensibly so they could buy stretch limousines that Louciano’s company was supposed to make--but funneled the money to himself and did not repay the loans. Louciano, also convicted of defrauding other financial institutions, was sentenced to 18 years and is serving his time at a federal prison in Oakdale, La.

But there is a lot of finger-pointing about whether Unified’s management should have seen Louciano coming and whether Unified could have rebounded from that fiasco had it not continued making risky loans.

Thomas J. Evans III was Unified’s chief executive when the Louciano loans were made, and in March, 1985, Unified and its former directors sued Evans and other former officers in Los Angeles Superior Court, accusing them of negligence in approving the loans.

“A lot of bad loans were made that were just out of carelessness in the loan department,” Peter Wollons, a former Unified director, said in an interview last week. “You could say the directors are responsible, but the director’s job is not to go through every loan portfolio and go through every document.”

Countersued Unified

But Evans countersued Unified and the directors, denying any negligence and asserting that he merely followed lending policies set by the directors.

“I had done everything they had asked me to when I was running the organization,” Evans said in an interview last week. Unified was “very precise” in checking loan applications because “the management team was very sensitive to the small size of our capital base and the fact that we were a brand-new organization.”

Louciano’s scheme, he said, simply “blind-sided” Unified and was tricky enough to undermine Unified’s credit checks and other loan guidelines.

In his countersuit, Evans alleged that the board had sued him “both out of a desire to make him a scapegoat for their own acts and omissions with respect to the losses,” and “out of hatred and ill will toward Evans over business differences.”

Fired in Dispute

In May, 1984, three months after Unified began making the Louciano loans, Unified’s board fired Evans in a dispute over whether Unified should be sold. Evans, who was a veteran of the S&L; industry and had held management posts with Great Western and other local thrifts before coming to work for Unified, said Unified’s board was thinking of selling the S&L; for a quick profit. But Evans said he preferred to keep Unified independent and fulfill his five-year business plan. In any case, Evans said that the loans had no bearing on his departure and that the fraud did not come to light until after he left.

Both suits were settled out of court two months ago. All of the parties involved declined to disclose the settlement’s terms.

Meanwhile, it is unclear whether Unified recovered from the Louciano mess or whether it compounded those problems by making more bad loans, thus ensuring its failure.

Wollons said, “Louciano was the major factor,” although “there were a lot of other things that popped up afterward.” He declined to elaborate.

Another former director, Rex Licklider, declined comment about Unified, and a third former director, Ronald Moormeister, did not return a telephone call requesting comment.

However, regulators gave a clear indication in 1986 that Unified’s problems did not end with Louciano. In seizing the thrift, the Federal Home Loan Bank Board--which regulates the nation’s S&Ls--said; the management that succeeded Evans immediately “began making high-risk, non-residential construction loans,” many of which went bad.

After regulators took over Unified in 1986, they chose William Verant as president. Verant also declined to discuss the case.

High Interest, Lower Profit

The FHLBB also confirmed that Unified lured a sizable portion of its deposits from money brokers, who were attracted because Unified paid exceptionally high interest on big deposits. But those high rates narrowed Unified’s profit margin.

The agency also criticized Unified’s “deficient underwriting, appraisal and internal control practices” that led the thrift to make unsound loans.

Evans said that after he left in 1984, Unified became less a “retail” thrift catering to nearby residents, and more a “wholesale” one that bought expensive deposits from brokers and made more loans in ventures outside the Valley, some of which went bad.

“They no longer had a direct touch with the local community, and I think that was probably the most significant factor that got them into trouble,” Evans said.

Condition Often Worsens

Why did Unified not improve under the supervision of Verant and the regulators? FHLBB spokeswoman Lorna Thompson said she could not comment about Unified specifically. But in many cases, she said, a seized S&L;’s condition worsens because regulators more accurately report the bad loans and losses on its books.

The bank board’s former program of seizing an S&L; and putting it under new management “has definitely slowed down the losses at those institutions; it’s just that things were so much worse than they thought when they went in,” she said.

Even if the FHLBB manages to find a buyer for tiny, troubled Unified, the original investors aren’t likely to get anything.

Evans has 3,500 shares, or 1%, of Unified’s stock, which he bought for $35,000 when the thrift opened. Now “it’s my understanding it’s of no value,” he said. And some of the other Unified directors and investors are known to have lost much more.

KEY DATES IN HISTORY OF UNIFIED SAVINGS March 1983: Unified Savings Bank opens in Northridge after being organized by a group that includes Thomas J. Evans III, who becomes Unified’s president.

February 1984: Unified begins making loans to several people, totaling $1.5 million, ostensibly so they can buy stretch limousines made by Michael Louciano.

May 1984: Unified’s directors fire Evans and later sue Louciano, also known as Victor Bagha, for allegedly defrauding Unified to get the loan proceeds. Federal authorities start investigating Louciano.

March 1985: Unified sues Evans and other former Unified officers, alleging they were negligent in approving the Louciano loans, which are now termed “uncollectable.” Evans and the other defendants deny the charges.

May 1985: Evans countersues Unified and its directors, alleging, among other things, that they tried to make him a “scapegoat” for Unified’s problems and that he followed lending policies approved by the directors.

June 1986: Louciano is convicted of bank fraud and conspiracy in federal court, and later sentenced to 18 years in prison.

October 1986: Unified is declared insolvent by the Federal Home Loan Bank Board, which hires new executives to manage the thrift.

February 1989: Unified and Evans settle their lawsuits out of court.

April 1989: Unified is seized anew by the Federal Deposit Insurance Corp. as part of President Bush’s plan to shore up the ailing thrift industry.