THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Sunday, April 9, 1995 TAG: 9504080231
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY TOM SHEAN, STAFF WRITER
LENGTH: Long : 169 lines
While many of the nation's savings and loan associations have rebounded from the bruising conditions of the late 1980s, Essex Bancorp Inc. is under mounting pressure from federal regulators to raise capital for its Essex Savings Bank subsidiary.
Virginia Beach-based Essex disclosed in March that its thrift failed to meet the capital standards imposed by regulators. And it acknowledged that it doesn't have much time to act.
``If Essex Savings Bank is unable to raise the additional capital by June 30, 1995, it may be subject to the appointment of a conservator or receiver, as well as other enforcement actions,'' Essex Bancorp said in a filing with the Securities and Exchange Commission.
After adding provisions for loan losses in late 1994, its thrift fell short of one capital requirement by $942,000 and was short on a second by $816,000, Essex said.
Capital is the cushion protecting a financial institution's deposits from any losses on sour loans or bad investments.
In the wake of hundreds of costly savings-and-loan failures in the 1980s, federal regulators have applied much tougher capital requirements to thrifts and have monitored their compliance more closely.
At a time when many thrifts that weathered the shakeout of the late 1980s and early 1990s are profitable and have strong capital, a few are still struggling to survive.
In March, the federal Office of Thrift Supervision reported that the number of problem S&Ls nationwide stood at 53, down from a peak of 450 in 1990. Meanwhile, the industry's core capital had climbed to 7.13 percent from 3.83 percent in 1989, the office reported.
As part of its turnaround effort, Essex Bancorp filed with the SEC last December to obtain additional capital through an offering of common stock and subscription rights to its existing shareholders.
But because of the pressure from regulators to raise the necessary capital by mid-1995, Essex said in March that it had scrapped those plans. Instead, it hoped to raise $15 million through a private placement of preferred stock and common-stock warrants.
Last week Essex Bancorp referred inquiries about these efforts to its chief executive officer, Gene D. Ross, who could not be reached for comment.
Partly because the nation's thrift industry is in better financial shape, the political pressure on federal regulators has moderated. ``I think regulators will give them more leeway'' if Essex fails to meet the June 30 deadline, said Vernon C. Plack, a banking analyst with the brokerage firm Scott & Stringfellow Inc.
Essex Savings Bank will require much more work to make itself appealing to an acquiring financial institution, but its management has made progress at stabilizing conditions, said Plack.
``Given everything they've gone through, I'm surprised the doors are still open,'' the analyst said.
Essex Bancorp wasn't always strapped for capital. In 1989 and 1990, the partnership that once owned Essex Bancorp raised $41.6 million from investors through a public offering of partnership units.
The partnership, Essex Financial Partners L.P., had a plan that anticipated the consolidation that eventually swept the industry: It would acquire S&Ls in the Southeast at low cost, upgrade their profitability and eventually sell them in a package to an expansion-minded bank.
Through Essex Bancorp, the partnership bought thrifts in North Carolina and Virginia, along with branches and deposits of a failed S&L in Florida.
But like many thrifts, Essex's North Carolina savings bank suffered heavy losses on real estate loans that went bad. When borrowers failed to make timely repayments on the loans, Essex had to set aside reserves for losses on the loans, which sapped its earnings. In addition, it had the cost of maintaining those properties taken back from borrowers through foreclosure.
After heavy losses in 1991 and the restrictions imposed by thrift regulators, Lawrence N. Smith, Essex Financial Partners' founder and chief executive of Essex Bancorp, was forced out in May 1992.
PaineWebber Inc., the brokerage and investment banking firm that underwrote the partnership's initial public offering, asserted control through its representatives on Essex Financial Partners' investment committee. In Smith's place, PaineWebber installed Ross, who had worked on turnarounds of troubled thrifts in Denver and Atlanta.
Ross predicted in a May 1992 newspaper interview that Essex Bancorp could surmount its heavy losses and its difficulties with thrift regulators. ``All of the problems that I see are manageable,'' he said at the time.
But real estate-related problems have continued to hamper Essex's earnings. In the recent announcement of its plans to raise capital, the company reported an operating loss of $2.2 million for the 1994 fourth quarter, which it blamed partly on a loss provision for a tract of foreclosed farmland.
Ross had to wrestle with more than troubled real estate loans and foreclosed property. By the time he arrived, Essex had assembled a portfolio of residential mortgages that it serviced for others.
The servicing operation, which involved collecting payments from borrowers and distributing the proceeds to mortgage investors, generated valuable fee income without tying up Essex's scarce capital.
But Essex's financial condition was complicated by the decline in long-term interest rates in the early 1990s and the deluge of mortgage refinancing that quickly followed.
The rapid prepayment of home loans reduced the value of Essex's mortgage-servicing rights, and accounting rules required the company to mark down the value of those servicing rights the company had purchased. That, in turn, added to Essex's losses.
By late 1993, the company also had to contend with a class-action lawsuit brought by disgruntled investors.
As part of a settlement reached last September, Essex issued a new class of stock to the plaintiffs and promised to redeem those shares if it was able to raise a sufficient amount of new capital. The settlement also required PaineWebber to extinguish $20.5 million of Essex Bancorp debt, something that provided Essex Savings Bank with breathing room.
Some pieces of Ross' turnaround effort have fallen into place. Essex improved its efficiency in 1993 by consolidating its three S&Ls in North Carolina, Virginia and Florida into a single institution.
And after selling its Florida operations in June 1994, the company was able to focus more attention on its Essex Savings branches in North Carolina and Virginia.
Earlier this year, Essex streamlined an awkward ownership structure by folding Essex Financial Partners into Essex Bancorp and converting the partnership units into common shares.
Other parts of the turnaround strategy are still in the works, including efforts to market the company's mortgage-servicing capacity and the expansion of consumer banking services at its Essex Savings branches. In the past, the thrift's branches concentrated on large certificates of deposit to bring in funds.
Essex Savings' eight branches - in locations ranging from Elizabeth City and Greensboro to Richmond - are spread over too wide an area to make the network appealing to an acquiring bank, said Scott & Stringfellow's Plack, who predicted that Essex would shed some of its branches.
Even with the additional capital that Essex Bancorp hopes to raise, ``they aren't out of the woods,'' he said. MEMO: DEVELOPMENTS AT ESSEX BANCORP INC.
November 1989: Essex Financial Partners L.P. acquires Essex Bancorp
Inc., owner of a North Carolina savings and loan association.
September 1989 to July 1990: Essex Financial Partners raises $41.6
million from an initial public offering of partnership units.
April 1992: The partnership reports a $7.4 million loss for 1991 and
delays payment of dividends to its partners.
May 1992: Management of Essex Financial Partners and Essex Bancorp is
forced out. A new chief executive officer, who worked on turnarounds of
thrifts in Denver and Atlanta, is installed.
May 1993: Essex Bancorp's thrifts in North Carolina, Virginia and
Florida are consolidated in an effort to cut costs and boost
efficiency.
June 1994: Essex Bancorp sells its Florida branches and their
deposits to another thrift.
September 1994: The company settles a class-action suit in Texas
brought by disgruntled investors. The settlement calls for issuing a
new class of stock to plaintiffs but wipes out $20.5 million of Essex
Bancorp debt to PaineWebber Inc.
December 1994: Essex Bancorp files with the Securities and Exchange
Commission to raise additional capital through an offering of rights to
shareholders.
January 1995: Essex Financial Partners is folded into Essex Bancorp
in an attempt to simplify the ownership structure.
March 1995: Essex Bancorp cancels plans for a rights offering and
begins an effort to raise $15 million of capital from investors through
a private placement of preferred stock and warrants.
ILLUSTRATION: Chart
Essex Bancorp Inc.
by CNB