Santa Barbara S&L; Says Worst Is Over : Battered Firm Counting on New Strategy and Management
On Dec. 12, David L. Tilton presided over his 20th annual shareholders meeting as chief executive of Financial Corp. of Santa Barbara, holding company for the venerable but ailing Santa Barbara Savings & Loan Assn.
Though the stockholders were unexpectedly docile considering the S&L;’s financial condition, Tilton recalls that the meeting was not exactly his finest hour. “We’ve been through some pretty low times recently,” he says.
That is something of an understatement, although events may not be as bleak as they appear.
Reports filed with the Securities and Exchange Commission indicate that Santa Barbara Savings, a pillar of the Establishment in Santa Barbara County for decades, hit yet another low at the end of September.
Its nine-month losses reached nearly $23 million, while assets exceeded liabilities by only $1.16 million--a woefully inadequate capital base for a financial institution with $3 billion in assets.
By most accounts, the S&L;’s corporate strategies have been either ill-conceived or ill-fated, while its management has suffered turmoil. As a result, Financial Corp of Santa Barbara has lost a total of $80.9 million during the past 15 quarters.
“They always seem to do everything they’re not supposed to do,” noted Gareth Plank, a research analyst for Shearson Lehman/American Express.
All these problems notwithstanding, a feeling that the worst is over has since settled over the 98-year-old financial institution, thanks in part to a key management move.
These days the company is pinning its hopes for recovery largely on the shoulders of a boyish-looking, 41-year-old Harvard Law School graduate named Philip R. Brinkerhoff, who two weeks ago replaced Tilton as chief executive of Financial Corp. of Santa Barbara.
Tilton, 58, remains chairman and a sizable (4.9%) shareholder. Berry Holmes, 54, who had been president and chief operating officer, resigned last summer.
Tilton’s departure as chief executive was a watershed in the business community of this elegant tourist town because it marked the first time since 1922 that a Tilton has not been in charge of Santa Barbara Savings. Tilton’s father ran the association for 43 years before his son succeeded him in 1965.
Meanwhile, the appointment of Brinkerhoff has impressed even the association’s harshest critics. “This is their real chance to turn things around,” said one former lending officer who was fired last year in a management shake-up.
Brinkerhoff has a resume that includes stints as president of American Savings & Loan Assn. under financier S. Mark Taper and director of mortgage securities at Financial Corp. of America under Charles W. Knapp, whose S&L; career ended abruptly last summer when federal regulators forced him to resign as FCA’s chairman.
He also spent five years as chief executive of the Federal National Mortgage Corp., the quasi-government agency known as Freddie Mac that provides a resale market for S&L-originated; mortgage loans.
One lure for Brinkerhoff is the promise of outsize wages, even though Santa Barbara Savings is a middle-size institution. (It’s the 16th-largest S&L; in California and the 42nd largest in the nation.)
Though his salary has not yet been disclosed, Brinkerhoff says he is making more than in his previous job as executive vice president and chief lending officer at Los Angeles-based Financial Corp. of America, the holding company of American Savings. His last known annual salary at FCA was $330,000, while Tilton at last report was making $184,020 a year.
Unprofitable Combination In one sense, Santa Barbara Savings has been a victim of the unprofitable combination of high interest rates and too many long-term, low-yield, fixed-rate loans in its mortgage portfolio. It’s a jeremiad that has been told by virtually every S&L; in the nation in recent years.
But Santa Barbara Savings had its own home-grown problems that have made it something of a textbook hard-luck story. Its recent history is strewn with business judgments that have come back to haunt it. For instance:
- The company took a devastating $4.5-million loss last year on five condominium investments in Dallas County, Tex., that it acquired in 1983 through another hapless association, San Marino Savings & Loan Assn. San Marino was declared insolvent by federal regulators about a year ago and was closed permanently several weeks ago.
- A plan to raise $35 million in capital by selling a majority interest in the S&L; to New York financier Ivan Boesky collapsed last June, in part because of regulatory delays in getting the deal approved. Without the capital, Tilton said, Santa Barbara Savings had to abandon a fast-growth strategy in which it was trying to outgrow its problems through acquiring loans from other associations. As a result, the S&L; fired its top loan officers and the heart of its lending support staff.
Financial Corp. of Santa Barbara Assets (In billions)
1979 $1.7 1980 $1.9 1981 $2.1 1982 $2.0 1983 $2.5 1984 $3.0*
* As of Sept. 30
A decade-long expansion program, which inflated the branch network to 100 offices statewide by the end of 1981, proved to be an albatross in the new era of banking deregulation and high interest rates. Buying branch offices from other S&Ls; proved to be an expensive way to bring in new deposits at market rates, and it added even more unprofitable fixed-rate mortgages to the portfolio.
‘Too Fast at the Wrong Time’ “We grew too fast at the wrong time,” Tilton admitted. “If I had it to do over again, I would have concentrated on a tighter area and slowed the growth pattern.”
Tilton, according to those who know him, is from the old school of banking--a low-key, gentlemanly executive who radiates conservatism and solidity but was unprepared to handle rapid change.
“The changes in the S&L; industry have been so rapid that it has been difficult for him to adapt,” said consultant Linda Tsao Yang, a former state savings and loan commissioner.
Yet, Tilton has prepared a foundation for recovery upon which Brinkerhoff plans to rely heavily.
With the help of an outside consulting firm and under prodding from banking regulators, Santa Barbara Savings prepared a survival strategy last year that called for selling off additional branch offices, staff reductions and a halt to troubled real estate development operations.
Cut Branch Network The linchpin of the plan called for the S&L; to pare its branch network from 74 offices statewide to 40 offices in the four counties of Santa Barbara, San Luis Obispo, Kern and Ventura. (In 1982, the S&L; disposed of 22 branch offices, which helped it hold its losses that year to $5.14 million.)
Brinkerhoff and Tilton hope the latest divestitures will help save more than $12 million a year in operating expenses, largely because the branch office reductions will help cut the payroll to 600 from 850 .
Thus far, 20 branches have been sold, six sales are pending, one office has been closed and seven others will be closed or sold. Proceeds from completed sales should bolster profits by $20 million in 1984, while sales of the others should add as much as $15 million in 1985.
With the survival plan in place, Brinkerhoff is now focusing on ways to make money on a continuing basis. (The association’s last profitable year was 1980, when it earned $347,000.)
First of all, he says, he plans to make extensive use of the resale, or secondary, mortgage market. That means that Santa Barbara Savings will now originate mortgages, collect the fee income and sell the loans to agencies like Freddie Mac--a practice Knapp often preached but used with only partial success at FCA, Brinkerhoff says.
Brinkerhoff also says he’ll use an internal sales force to raise deposits--a technique that was perfected by Knapp. Having salesmen use the phone is a much cheaper way to raise deposits than setting up branch offices.
“If rates stay where they are now or go lower,” Brinkerhoff says, “I would say it’s within the realm of possibility that we’ll make (an operating) profit in 1985.”
“Then,” he adds, “we can start looking at other business opportunities in 1986.”
