Here’s Outlook for 5 Thrifts Kept Alive by the Regulators

In the last three years, more savings and loans have failed in Orange County than in any other county in California. Federal regulators have seized, sold or installed new managers at 11 Orange County thrifts. Six of the thrifts no longer exist, but the rest are still operating under management hired by regulators from healthy thrifts. Times staff writer James S. Granelli looks at the prospects for the remaining five S&Ls.;

Butterfield Sale of Thrift, Which Could Come Soon, Called Top Priority

It’s the seemingly endless bargaining with regulators, and the inability to move on personally and professionally that frustrates someone like Anne Bacon.

“It’s tiring,” says Bacon, president of the insolvent Butterfield Savings in Santa Ana, with a weary voice that echoes her message.

“It’s to the point that. . . . “ She stops, as if her thoughts, once revealed, would bring down the wrath of regulators or sour the negotiations for the sale of the S&L; to Downey Savings.

“Well, I just hope the sale to Downey goes through,” she says. “We’ve got a lot of good employees who may have a career at Downey.”

Downey has been negotiating with regulators to buy Butterfield, third largest of the state’s insolvent thrifts, for nearly a year. Downey’s top two executives--co-founders Maurice L. McAlister and Gerald H. McQuarrie--are also frustrated.

Barely three weeks ago, McQuarrie listened to regulators tell some 350 investors in a San Francisco meeting how they were ready to move fast to peddle insolvent thrifts. Upset, McQuarrie said in a hallway during the meeting that he was “fed up” with the Butterfield negotiations.

“We’ll close by the end of September, or we’re not going to close at all,” he said then.

The two executives, though, have been less willing to talk after regulators chastised Downey negotiators for the comments.

Still, the sale of Butterfield is the “No. 1” priority for regulators in California, said Roger Martin, one of the three members of the Federal Home Loan Bank Board, the primary U.S. thrift regulatory agency. A deal could be struck sometime in the next two weeks, he said.

Before Downey officials’ lips were sealed, McAlister said the main negotiating points were the amount of cash Downey would have to infuse, the extent to which Downey could take advantage of Butterfield’s tax benefits and the amount of money that regulators would provide to erase Butterfield’s $122.8-million deficit.

Butterfield had $578 million in assets at the end of March and would need nearly $20 million to raise its capital to the required level. Downey’s capital is so strong, though, that it could swallow Butterfield whole without a cash infusion and still show healthy ratios.

With $3.2 billion in assets, Downey has more than twice the amount of capital that regulators require.

Butterfield once had stakes in such untraditional investments as Wendy’s and Love’s restaurants, insurance and property management businesses, real estate limited partnerships and rundown apartments across the nation.

Under Bacon, Butterfield has shed itself of just about everything except part of its problem real estate investments, reducing its staff to about 140 employees from a high of 1,200. While some industry consultants think Butterfield is a prime candidate for liquidation, Downey figures that its own expertise in real estate could solve Butterfield’s remaining problems.

Besides, it was a Downey management team headed by McQuarrie and Bacon, then a Downey executive, that regulators hired to manage Butterfield. Downey eventually pulled out of the contract, but Bacon left her employer to continue on as head of Butterfield.

Pacific Costa Mesa S&L; Is Considered ‘Best Buy’ by Those in Industry

If regulators had a “best buy” in California, industry executives say, it would be Pacific Savings Bank in Costa Mesa, now the largest of the state’s insolvent institutions on the bank board’s auction block.

“As far as I’m concerned, it’s ready for sale,” said Harvey A. Lynch, an executive vice president at Glendale Federal Savings, which regulators hired in June, 1987, to run Pacific Savings. “We’ve done just about all we could.”

Prospective buyers may find Pacific Savings attractive because Lynch has revitalized its moribund branch network, decimated by prior management, and introduced a number of new products and services, such as consumer loans, variable rate loans, insurance and insurance brokerage transactions. It also increased its marketing effort and restructured its management team.

The effort helped the S&L; cut its losses a bit this year. A $17.7-million loss for the first six months was $500,000 less than what management expected, Lynch said. More important, the thrift has cut its non-earning assets in 15 months to 7% of total assets from 20%, while at the same time trimming its total assets to $1.3 billion from $1.8 million.

Most of the troubled assets have been sold or are in the process of being sold, he said. The biggest problems are loans and direct investments in apartment complexes and other real estate in Texas and Louisiana--states where the collapse of the oil industry has ruined the housing market.

Pacific Savings still has troubled assets, as well as a $191-million deficit it must service with high-interest deposits.

“It’s a good S&L; for someone to buy,” said Preston Martin, a former bank board chairman.

An investor group headed by Martin and former Treasury Secretary William E. Simon tried to acquire the S&L; early last year, but talks were shelved as the group went after other savings institutions. Martin said the group is “still interested” in Pacific Savings, but he wouldn’t say if talks have resumed.

About half a dozen potential buyers recently reviewed the S&L;’s books as part of the “due diligence” required before making bids to buy Pacific Savings, he said. The interest has been great enough that two previous deadlines for cutting off bids were extended, Martin said.

Once negotiations get under way, one of the bargaining points certainly will be the amount of capital buyers must bring to the table. Assuming the bank board’s Federal Savings and Loan Insurance Corp. unit can pay off the deficit, a buyer would need to add at least $39 million to bring the S&L;’s capital base up to the minimum level required by regulators.

Beverly Hills ‘It’s Not a Real Hot Candidate,’ Chief Hired by Bank Board Says

One thrift that is not ready to be sold is Beverly Hills Savings, said its bank board-hired president, David Bretoi, a First Nationwide Savings executive.

“We’ve been put on the market on and off by the bank board,” Bretoi said. “But with a large deficit net worth and not many good assets left, it’s not a real hot candidate.”

Even the bank board’s Martin acknowledged that the S&L; “is not the greatest franchise in the world.”

The problems at Beverly Hills Savings are more widespread than they are at other insolvent S&Ls;, he explained. The thrift’s woes run throughout its loan and securities portfolios and its direct investments, especially in the apartments and office buildings it owns in the devastated Southwest.

“We’ve sold a little over $350 million worth of problem loans,” Bretoi said. “Our strategy is to sell at fair market value. But the problem is that when you’ve got properties in Texas and Colorado, the purchase price is at fair market value, but it may be only 60% to 80% of the original price.”

Bretoi also has sold profitable operations. This year, he sold a pension-consulting subsidiary and a Visa credit card operation for a total of more than $43 million. He expects to collect nearly $20 million more on the pending sale of a loan-servicing unit.

But Beverly Hills Savings still has about $400 million in non-earning assets dragging it down, he pointed out. It had $1.7 billion in deposits at the end of June, and $1.1 billion of that was in high-interest jumbo certificates of deposit.

The deposits worry regulators. If Beverly Hills Savings were to be liquidated, the FSLIC would have to refund the deposits. That would surpass the record $1.14 billion paid to depositors in June to close American Diversified Savings Bank in Costa Mesa.

Under normal business accounting rules, the S&L; had $975 million in assets at the end of June, giving it a $973-million deficit. Under more relaxed regulatory accounting, it had $1.3 billion in assets and a $582-million deficit. Either way, Beverly Hills Savings has the biggest deficit of any insolvent S&L; in the nation.

“We’ve been in a liquidation mode for quite a while,” Bretoi said. “There hasn’t been any due diligence by potential buyers in some time.”

Worse, the S&L;’s main attraction--tax benefits a profitable institution could use to reduce its own taxes--may not be available. To transfer the tax benefit in a sale, a sick S&L; must be a “qualified” thrift. That means 60% of its assets must be in home mortgages.

Bretoi said accountants earlier had decided that Beverly Hills Savings was not a qualified thrift, because up to half of its assets were direct real estate investments.

And last Thursday, Bretoi shut down the S&L;’s seven loan-production offices, effectively taking Beverly Hills Savings out of the home-loan business. The operation had been losing money in recent months and no buyers could be found for it, he said.

About the only bright spot Bretoi sees is that some company in Northern California or out of state might want to pick up the S&L;’s small branch network. The five branches, which hold $600 million in small deposits from local residents, are in the affluent areas of La Jolla, Corona del Mar, Century City and Beverly Hills, home to two branches.

But it will be six months to a year, he said, before Beverly Hills Savings is trimmed down enough to attract some buyers.

Perpetual Thrift Nears Sale of Property That Has Been a Monthly Loser

A small Orange County thrift that could be sold by regulators this year is Perpetual Savings in Santa Ana.

Perpetual is about to rid itself of the albatross that represents nearly 40% of its assets and has been causing it to lose about $75,000 a month: The tiny S&L; hopes to close the sale of a triangular-shaped, 2.75-acre commercial property in West Hollywood by the end of the month, said Michael G. Rombold, Perpetual’s chief executive officer.

“Once the triangle property is sold, it will leave us with an organization that is fairly small and healthy,” Rombold said. “The remaining assets are strong.”

Perpetual has not been making any loans, but it has been bringing in revenue by buying loans made by other lenders.

With $45 million in assets and a deficit of only $10 million at the end of March, Perpetual could be sold quickly once regulators put it up for bidding, Rombold said, but it would have little more than $25 million in assets.

That bidding will likely start, he said, as soon as the triangle property is sold, reportedly for nearly $17 million. The S&L; already has invested more than $17 million and will likely end up with a loss close to $1 million, far less than first expected.

Rombold is a first vice president with Great American First Savings Bank in San Diego, which regulators hired to manage both Perpetual, seized in March, 1987, and First California Savings in Orange, seized in October, 1987. Rombold is chief executive officer of both insolvent S&Ls.;

First California Lawsuit Is Clouding This Thrift’s Future

The outlook for First California Savings, plagued with bad loans and investments that have gone sour, is a bit more bleak, Rombold acknowledged.

It also faces a lawsuit that clouds the ownership of four properties that had been used to prop up its capital base.

Most of the S&L;’s problems involve foreclosed commercial properties--office buildings and apartments mainly in California, Rombold said, adding, “People just aren’t making payments.”

He said the thrift would not be in shape to be sold for at least six months.

Founded in 1970 as Camino Real Savings Bank, the S&L; was one of the state’s first institutions to be owned and managed by Latinos. But it had a chaotic history of bad loans and foreclosed real estate.

The institution was on the verge of failing in 1985 when developer Mervyn Phelan of Orange bought it. He paid shareholders $2.5 million in cash and contributed $16.3 million worth of equity in three hotels and an apartment complex to the S&L;’s capital base, according to a U.S. District Court suit he filed against the institution earlier this year.

Phelan, who wants to get those properties back, claims the S&L;, accountants and regulators falsely told him that his investment would save the S&L; by raising its capital to the required level. In fact, he claims in the suit, Camino Real was $40 million underwater when he bought it.

At the end of March, First California’s deficit had expanded to $67.2 million. Its assets were $199.6 million.

Although its headquarters are in Orange, the S&L; does not have any branches open to the public in the county. Its only branches are in San Fernando and the City of Commerce.