American Pacific Rebounding From Embezzling, Sour Loans

American Pacific State Bank has taken its lumps over the past few years. For starters, there was a stunning $2.5-million embezzlement by its No. 3 executive.

Then the North Hollywood-based bank absorbed a one-two punch: A raft of both its small-business and real-estate loans turned sour, producing $4.7 million in loan losses from 1983 to 1985.

“You’re always waiting for them to stub their toe on something,” said a senior executive with another San Fernando Valley bank.

To be sure, American Pacific has followed the pattern of many financial institutions that stumbled or collapsed after expanding rapidly and taking on more business than they could handle in the late 1970s and early 1980s.

Nevertheless, American Pacific executives and most competitors express confidence in the bank. Bankers say that American Pacific, one of the five or six biggest banks based in the Valley area, with $137.9 million in assets, recognized its problems early enough and maintained a strong enough base of customers to rise again.

Bank Is ‘Solid’

“The bank’s been around a long time and is solid,” said Daniel J. Geary Jr., president of Warner Center Bank in Woodland Hills. “It can sustain some problems, take care of them and come back.”

APSB Bancorp, a holding company whose only operating unit is American Pacific, said it rebounded from 1984’s loss of $995,000, its biggest ever, with an unaudited profit of about $330,000 for 1985 and it projects net income of $1.2 million for 1986. The apparent recovery is coming while the bank is tightening lending practices, controlling its growth and shaking off some high-risk and unprofitable business.

The burden of bringing American Pacific back falls on the shoulders of Frank J. Ures Jr., the president and chief executive. Raised in Buffalo, N.Y., and educated at the University of Florida, Ures drove to California 20 years ago to find his first banking job. As Ures, 44, tells it, he simply wanted to get rich, and he thought that being a loan officer would help him spot a business that could be his ticket to wealth.

‘Grossly Underbanked’

Ures never left banking, however. In 1971, after moving up the ranks to a vice president’s job at what now is First Interstate Bank, he left to help open American Pacific in a Sun Valley building that had housed a shoe store and a haberdashery.

He picked that area, Ures said, because it was “grossly under-banked,” making it relatively easy to get a bank charter. In 1978, Ures began the series of acquisitions that brought American Pacific additional full-service branches in North Hollywood, Sherman Oaks and Granada Hills.

Meanwhile, a Tokyo real estate developer named Masashi Yamada was building a stake in the bank. He started buying American Pacific stock in 1974 and has come to own more than half its shares.

Ures and Yamada, now considered to be a passive investor in American Pacific, both had big ideas. Yamada wanted to establish a big downtown bank with international lending capacity; Ures was intent on expanding quickly.

The Roof Caved In

For a while, at least, Ures’ dream was coming true. The bank’s assets grew by an annual average of 48% from 1978 to 1982, a year in which its holding company posted $663,175 in profits and reached $153.9 million in assets.

“We felt we could do nothing wrong,” Ures said.

Eventually, however, the roof caved in. The loan losses, stemming from slumping business conditions and the softening real estate market, contributed to the bank’s net losses in 1983 and 1984 and held down its profits last year.

The bank also had been staggered by the discovery in August, 1983 of the $2.5-million embezzlement by Fereidoon Mafi (Fred) Vassegh, its senior vice president. Vassegh, who pleaded guilty in November to three counts of bank fraud, could be sentenced to up to 15 years in prison and a $15,000 fine and could be ordered to make restitution.

Embezzled Funds

According to federal authorities, Vassegh embezzled most of the funds in three ways: by pocketing deposits of $10,000 or more from unsuspecting customers, by making unauthorized withdrawals from customers’ accounts and by taking loans that bank officials believed had gone to other people. Vassegh avoided detection for more than three years, federal authorities said, because of his unquestioned authority at the bank and his knowledge of how to cover the paper trail of his activities.

American Pacific’s insurance ultimately covered about 95% of the sum embezzled. More costly to the bank was the the six months spent by 20 employees tracing how the funds were diverted, to document the insurance claim.

Moreover, Ures said, staff morale was devastated by the fraud, and the effect lingered for a year.

Ures said the feeling of being betrayed by Vassegh “was the thing that really shocked us. We recovered nearly everything from our bonding company, but the staff felt tremendously hurt, because of the confidence and trust that was put in his hands.”

Rely on SBA Loans

To recover from misfortune, American Pacific is relying heavily on a kind of lending that has both hurt and profited the bank in the past: loans to small businesses through the U.S. Small Business Administration program. Last fall American Pacific won what is known as “preferred lender” status, which enables the bank to grant and liquidate loans without going to the SBA for approval.

Ures said that, as the only community bank in California with the SBA’s preferred lender status--financial giants Bank of America and Wells Fargo are the only others in the state with that designation--American has a leg up on competitors. It can make loan decisions more quickly by skirting the SBA’s loan review process, which normally takes two to four weeks.

Some bankers find SBA loans attractive because they offer high interest rates and are partly insured by the SBA, which reduces the risk and makes the loans easier to sell. Others look askance at the loans, citing the risk involved in lending to typical SBA borrowers, small businesses that can’t obtain enough credit through conventional means.

Concerns Brushed Aside

Ures, who projected that SBA loans will bring in about 35% American Pacific’s pretax profits in 1986, brushed aside concerns by citing several steps he has taken to keep a closer watch on lending.

The bank expanded its credit department to examine loan applications more thoroughly, he said. It also has cut down on its volume of loans for businesses and real estate projects outside of the Valley area.

Furthermore, Ures said, American Pacific has begun limiting the size of its loans to about 75% of the appraised value of the real estate or equipment backing a deal. The bank used to lend amounts equaling 85% to 100% of the collateral’s appraised value.

To set the stage for increased profits, American Pacific moved last year to remove lingering problems from its books largely by writing off millions in troubled loans. In 1985, the bank reduced the volume of delinquent loans on its balance sheet from more than $5 million, or about 5.8% of its entire loan portfolio, to about $900,000, or less than 1% of the portfolio.

Cost-Cutting Moves

American Pacific also has cut costs. It expects to save $500,000 annually from its elimination last year of 22 jobs, reducing its full-time staff to about 135.

The bank hopes to save more money as a result of plans this year not to renew $6 million in high-interest certificates of deposit coming due before June. Ures said that move probably will restrict American Pacific’s growth, but he’s happy to pay that price.

“Asset growth is what kills, destroys banks. We all thought you had to grow, you had to grow,” Ures said.

“We’re all a lot wiser from what we learned in the past.”