BANKING/FINANCE

The previously unidentified firm that reached a tentative agreement to buy Western Empire Savings & Loan in Irvine is a 2-year-old New York merchant banking operation called Castle Harlan, according to executives at both the S & L and the firm.

Castle Harlan is negotiating with federal regulators in San Francisco to buy the S & L, which ran out of capital earlier this year. Western Empire now has liabilities that are about $1.3 million more than its $120 million in assets. Castle Harlan plans to invest about $5 million in new capital into the S & L.

The New York firm expects to receive assurances from regulators that, among other things, its stake would be protected in case any bad loans now on the books would cause further deterioration of the S & L, said Robert C. Wages, a project manager for Castle Harlan.

The S & L is losing about $200,000 a month and could use new capital, said Charles W. Terrill, the S & L’s chief operating officer. A few major commercial loans caused $4.3 million in losses in the last 18 months.

John Castle quit as chief executive of Donaldson, Lufkin & Jenrette, a Wall Street brokerage, in 1986 to help form Castle Harlan with Leonard Harland, who also operates a real estate company.

Wages said the firm is a traditional merchant banking operation that acquires stakes in companies it helps others buy. Castle Harlan owns a controlling interest in a money management firm in Philadelphia, but it has no other interests in financial institutions.

Existing shareholders of Western Empire would probably get nothing out of a sale, though they might join with Castle Harlan in recapitalizing the S & L, Wages said.

He said the firm expects to retain the S & L’s management, including Robert Margolis, who was brought in as president nearly three years ago to help the ailing institution.