Pacific Savings Hopes to Stabilize by Returning to Branch System

Pacific Savings Bank once boasted a network of 60 retail branches throughout Southern California, but its previous operators decided in the early 1980s to reshape the institution.

The Costa Mesa savings and loan began selling off branches at a rapid rate--48 in four years. Its strategy was to take advantage of new deregulation laws by investing directly in real estate projects instead of making traditional home loans through its branches.

It also began losing money--$172 million in nearly five years. By last September, the S&L;’s liabilities exceeded its assets by $119.4 million.

Now, Pacific Savings is starting to revive its once-thriving retail branch network and to enact a business plan that its managers hope will stabilize the S&L;’s financial condition until new capital can be raised or a sale arranged.

Pacific Savings has not been officially declared insolvent and seized by state and federal regulators. But the Federal Home Loan Bank Board hired Glendale Federal S&L; eight months ago to provide an executive to run Pacific Savings. The bank board also installed five new directors on the eight-member board.

The bank board and its deposit insurance arm, the Federal Savings and Loan Insurance Corp., are so strapped for funds that they cannot close and liquidate the estimated 10% of the nation’s S&Ls; that are considered insolvent.

Cost of Covering Losses

Federal regulators estimated in July that it would cost FSLIC $70.7 million to cover losses at Pacific Savings, according to a thrift industry publication, National Thrift News. And several industry consultants said the losses at Pacific Savings will only grow as regulators deal with bigger losers.

“It’s a matter of which fire you put out first,” said Salvatore Serrantino, a Santa Monica-based industry consultant.

With $1.5 billion in assets, Pacific Savings is too big to close, another consultant said. It falls in a midsize group of S&Ls; that find it tough to make money, he said.

But Harvey A. Lynch, a Glendale Federal executive vice president who was picked to run Pacific Savings, said he believes that the S&L; can be saved.

“There is value here,” Lynch said. “Liquidation is not an option. We are in a recovery mode. We are revitalizing our lending and revitalizing our branching operations.”

$165 Million Needed

Lynch has no illusions, though, that the S&L; can do the job on its own. Based on Sept. 30 financial results, Pacific Savings would need $165 million to bring it into compliance with regulatory requirements, he said. Year-end results are not available yet.

A year ago--HF Holdings in San Francisco, a group of investors led by former Treasury Secretary William E. Simon and former Federal Reserve Board Vice Chairman Preston Martin--was negotiating to buy Pacific Savings. But the talks have not been pursued, Martin said.

“We have done so much to change the thrust, the management, the product line and so forth that we should be able to present an attractive picture of ourselves sometime in the second half of 1988,” he said.

In its first major public move, Pacific Savings on Friday sold its 50% interest in a data-processing service that provides checking, savings and loan information on depositors for 116 S&Ls; and 16 related companies in California, Arizona and Nevada.

Lynch would not reveal the sale price but said it provided a “significant gain” on the S&L;’s investment. The buyer, Coast Savings in Los Angeles, also refused to disclose the price. Coast already owned the other half of the data-processing business.

First Public Step

The gain from the sale is not large enough, however, to have much of an impact on Pacific Savings’ negative net worth, Lynch said, but it represents the first public step toward ridding the institution of operations that no longer fit well with the S&L;’s core business.

With no fanfare, Pacific Savings previously sold a subsidiary that handled mortgaged-backed securities. It is also winding up its direct investment projects and has already refused to invest its funds directly in other real estate projects.

Pacific Savings got into financial trouble mainly through real estate loans and investments in Texas and Louisiana, areas where an oil industry recession has depressed the housing market. About $68.3 million of the S&L;’s $109.5-million loss for 1986 was attributed to loan and investment problems in those states.

“We believe we have our arms around the bank in terms of knowing its strengths and weaknesses,” Lynch said.

One of the strengths of the S&L;, which traces its history through several mergers back to 1890, has been its branch network, Lynch said. That network has been whittled down to 11 offices in Orange, Los Angeles, San Diego and San Bernardino counties.

Asset-Generating Operations

What’s worse, he said, is that when the S&L; began selling branches in 1981, it also started bringing into its headquarters the lending and other asset-generating operations that the remaining branches had been handling.

That left some offices accumulating only checking and savings accounts, with the main office trying to turn those deposits into such assets as mortgage loans or, increasingly, direct investments.

Now Pacific Savings is looking for branches it can buy from other institutions, though Lynch conceded that he will need regulatory approval for such purchases.

“We’re trying to establish a program where we can offer mortgages and retail real estate loans (second-trust-deed loans) through our branches,” Lynch said.

Pacific Savings hired a consumer loan director on Feb. 1 to expand its lending capabilities. Daniel Wilcox, who was a California Federal S&L; executive, will help design a new lending program for Pacific Savings, Lynch said.

At first, those new loans are being limited to loans secured by second trust deeds on real estate and to automobile financing, he said.

Plans to Offer Securities

In returning to its role as a full-service bank, Pacific Savings also plans to offer customers the securities that financial institutions are allowed to sell. Those are primarily deferred annuity plans and mutual funds.

Economic factors beyond the S&L;’s control could scuttle Lynch’s plans, but he said he is not worried.

“I’m somewhat disappointed in the market in general and real estate especially,” he said. “But the people who have to worry are the big players because they could only lose market share.

“While I may have to revise my expectations downward, I believe we can carve out our share of the retail loan market.”

PACIFIC SAVINGS BANK AT A GLANCE Pacific Savings Bank opened in December, 1890, in San Bernardino as Santa Fe Building & Loan. The name was changed in 1936 to Santa Fe Federal Savings & Loan and again in 1981, after a merger with two other savings institutions, to Pacific Federal S&L.; Also in 1981, the headquarters office was moved to Costa Mesa. In 1984, the institution converted to a state charter and changed its name to Pacific Savings Bank.

Year ends Dec. 31

9 mos. 1987 1986 1985 1984 1983 Assets (billions) $1.5 $2.0 $1.9 $1.8 $1.7 * Net worth (millions) $-$119.4 -$69.3 $40.2 $35.6 $45.5 Profit (millions) -$50.0 -$109.5 $4.6 -$9.9 -$7.2

* Assets minus liabilities

Number of employees 650

Chief executive Harvey A. Lynch