$1.3-Billion Lost in 6 Months : American S&L; Varied Interest Rates to Stem Deposit Outflow

American Savings & Loan lost $1.3 billion in deposits in the first half of 1988, but outflows moderated after the ailing thrift instituted a controversial program to retain deposits by offering markedly higher interest rates at certain branch offices, company officials confirmed Friday.

Nervous depositors withdrew $295 million in June alone, which reduced the financial institution’s deposits to less than $15.4 billion, the company indicated. But $259 million of that total flowed out in the first half of the month, American Savings Chairman William J. Popejoy pointed out in a telephone interview.

Outflows moderated further in the first part of July, he said. “We don’t have a run or a situation that is out of control,” Popejoy stated, but he did confirm that money is still flowing out. He declined to be more specific.

American Savings has 185 retail branch offices in rural and urban areas throughout California. Headquartered in Stockton, the company is the operating subsidiary of Financial Corp. of America in Irvine.

Popejoy did not identify which branch offices have been offering the higher rates but said 10 are in the northern part of the state and 11 are in Southern California. The offices are in locations where banking competition for deposits is the keenest--mainly affluent areas and neighborhoods with large elderly populations.

“I would think that such a practice would leave the company wide open to criticism from loyal customers who are denied the higher yields just because of their street address,” said Robert K. Heady, publisher of Bank Rate Monitor, a newsletter published in North Palm Beach, Fla. “I wouldn’t want to be in American Savings’ shoes when the customers find out about this.”

However, the bi-level rate structure for new deposits will be discontinued early next week because it succeeded in moderating savings outflows, Popejoy said. The special rates were as much as nine-tenths of a percentage point higher than rates elsewhere in American’s branch system.

Letter Outlines Problems

The higher rates included 8% to 8.25% yields on 180-day certificates of deposit, or about one percentage point above the present Southern California average of major banks and thrifts.

The two-tier system, in effect since mid-June, illustrates a serious dilemma facing American Savings, which has been rendered insolvent by poor-quality loans. The financial institution needs the money from deposits to fund operations, but it does not want to offer uniformly higher rates on deposits. That would anger regulators and competitors, who say that abnormally high rates drive up costs for the entire industry.

The problem was outlined in a letter, dated July 1, that American Savings executive W. Brent Robinson sent to field-office managers. The letter was obtained by The Times.

“As you know,” Robinson wrote, “we have been experiencing a constant outflow of deposits for several months now. And, almost all branch offices have been affected. Senior management is keenly aware of the problem, and has been struggling to find a solution. Given our current situation, we have learned that a modest increase in rate does not result in a major increase in deposits.

“Rather, in order to bring in significant deposits, we must be well over the competition. The problem is that our only solution is totally unpalatable to the Federal Home Loan Bank Board (and to our competitors.) The net result was that we chose to compromise by offering the ‘premium’ rate to a small group of select branches in an effort to increase deposits slightly.”

American Savings has been bedeviled by periodic deposit outflows for four years, starting in summer 1984, when the true extent of its present financial problems began to surface. Later outflows occurred as depositors learned more about American’s worsening financial condition.

American’s latest deposit-gathering approach is not new. Savings and loans often offer higher rates at branch offices that are opening in new market areas. Individual managers also commonly pay higher-than-advertised rates to attract or keep large sums of money in their branches.

“It’s a very competitive situation,” noted Salvatore Serrantino, a savings and loan consultant for California Research Corp. in Santa Monica.

But American Savings’ latest move proved controversial within the company. Robinson’s letter was sparked because he received an anonymous complaint from an angry American Savings employee. That complaint, written on a company suggestion form, was also obtained by The Times.

‘Defensive Measure’

“Offering a lower rate and not disclosing information of a better rate available at another branch would break the trust between customers and employees which we worked so hard to establish during these difficult times,” the employee said. “Our customers will find out sooner or later.”

“Frankly,” Popejoy replied, “I don’t like it either, but we did this as a defensive measure.”

But Robinson, in his letter to sales supervisors, strongly endorsed the concept, saying:

“I am an advocate of regional pricing strategies. It does not make sense to me, for example, that we pay the same interest rate in Beverly Hills and Needles. Now I realize that arguments can be made that we should, but the economic laws of supply and demand would dictate otherwise. (I guarantee you’ll pay more for gas in Needles.)”