How Successful S&L; Operation Turned Sour : Thrifts: Great American Bank was an industry pioneer. But then it acquired a Tucson operation.

In the mid-1980s, Great American Bank seemed to have it all going its way.

Chairman Gordon Luce, a politically well connected and socially prominent Republican, had built the San Diego-based savings and loan into one of the industry’s powerhouses. By the end of 1985, Luce had grown it to 117 branches and $8.2 billion in assets, up from three offices and $300 million in assets when he joined the thrift, then known as San Diego Federal, in 1969.

By tracking the immense California population growth with new branches and by introducing a number of customer service and marketing innovations--from automated teller machines to standardized branch design--Luce helped pioneer the concept of a statewide S&L;, industry observers say.

Great American’s solid growth--combined with Luce’s close relationship with Ronald Reagan--made him one of the five or six most powerful men in the S&L; industry. An early political backer, fund-raiser and trusted adviser to the ex-actor, Luce was Governor Reagan’s state Secretary for Business and Transportation. After Reagan became president, Luce became a special United Nations delegate.

Luce’s political pull was demonstrated by the fact that two of his ex-lieutenants at Great American, Edwin J. Gray and Lawrence W. Taggart, got appointed as top S&L; industry regulators--Gray as Federal Home Loan Bank Board chairman and Taggart as state S&L; department chairman. Luce himself served a term as president of the California League of Savings Institutions, a statewide trade group.

But in 1986, Luce and Great American took a wrong turn, perhaps a fatal one, by acquiring Home Federal Savings of Tucson. What was designed as a bid to dramatically expand the scope of Great American’s branches and business activities instead has brought the S&L;, with its 213 branches and $15.9 billion in assets, to the brink of insolvency.

Great American thus joins a growing list of hundreds of once-successful thrifts that have fallen on hard times in recent years, part of a massive S&L; debacle that could easily cost taxpayers upwards of $200 billion to resolve.

But the downfall of the San Diego thrift is not your typical story of thrift failure. Its downfall was not due to fraud or questionable activities by industry outsiders, or due to investments in risky junk bonds or pie-in-the-sky real estate developments. Instead, it was due to simple mistakes and miscalculations by an experienced management team that had been well-respected in the industry.

As such, the thrift’s problems have dimmed the considerable prestige of the 64-year-old Luce, scion of a pioneer San Diego family and benefactor to various local arts and community causes.

In his 1986 annual report to shareholders, Luce said the acquisition of the Arizona S&L;, with its $2.4 billion in assets and 41 branches, would enable Great American to buy its way into a booming state where population, personal income and economic growth was far outstripping the rest of the nation.

As it turned out, Great American bought into an economic black hole, an overbuilt and deflating real estate market whose problems have yet to bottom. On Tuesday, Great American announced that its growing heap of bad loans, most acquired through the Arizona deal, had weakened it to the point that it faces a possible seizure by regulators unless it can merge with another financial institution or raise $350 million in outside capital by Dec. 31.

An extended review by auditor Deloitte & Touche of Great American’s fourth-quarter and full-year 1989 financial statements resulted in the S&L; taking bad-loan loss provisions for 1989 totaling $405 million, the bulk of which were attributed to the Arizona portfolio.

The write-offs brought Great American’s 1989 loss to $263.4 million, leaving it severely deficient in all three capital adequacy tests applied by the government as required by last summer’s S&L; bailout bill.

Hindsight enables anyone to observe that Great American’s move across state lines into Arizona had all the makings of a debacle because it overlooked the principle that successful real estate lending is built on management’s first-hand knowledge of local markets.

But even when Great American proposed the Arizona acquisition, the deal raised the hackles of regulators and some analysts. A spokesman for the Federal Home Loan Bank Board said at the time that a merger of the sort proposed by Great American “generally speaking has not been permitted.”

Because of the inherent risks involved, regulatory policy up to that point was “not to approve across-state-line mergers,” S&L; stock analyst Allan Bortel said then, although he pointed out there was no formal rule against the mergers.

Misgivings notwithstanding, regulators approved the move. And Great American wasn’t through with out-of-state deals. In 1987, it acquired Capital Savings of Olympia, Wash., which then operated 37 branches in Washington and Montana.

Great American’s strategy of expanding through out-of-state mergers contrasted sharply with that of HomeFed Bank, Great American’s San Diego-based rival, which now has $18 billion in assets. HomeFed has stubbornly stuck to a California-only growth plan and in the process has remained healthy.

It didn’t take long for Great American’s Arizona acquisition to go sour. The S&L;’s 1987 provisions for bad loans totaled $45 million, up 80% from the previous year, with the S&L; citing Arizona problems as the major cause. Things went rapidly downhill from there, with loan-loss provisions reaching $119.8 million in 1988 and $405 million last year.

With so many of its loans in trouble, Great American’s interest-rate spread--its loan income less the amount it pays to depositors--has become progressively thinner. For the nine months ended last Sept. 30, Great American’s spread was only 0.62 percentage points, significantly less than the 2-to-2.5-point spread seen at healthy S&Ls;, said William C. Ferguson, a Washington-based consultant to banks and S&Ls.;

HomeFed’s interest-rate spread as of Sept. 30, for example, was 2.02 points, Ferguson said.

The future looks decidedly bleak for Great American. Analysts see an acquisition by a larger bank such as Wells Fargo or Security Pacific--both of which say they’ve taken a look at Great American--as the best alternative for shareholders. Each bank in the past year has targeted San Diego for expansion. Security Pacific had done it through acquisitions of Southwest Bancorp of Vista and La Jolla Bank & Trust, while Wells Fargo is in the process of acquiring Torrey Pines Bank of Solana Beach.

If it is interested, Wells Fargo probably would have the inside track in buying Great American because of the bank’s strong stock price, which is increasingly becoming the currency used by bankers to acquire other financial institutions.

But pessimists say potential buyers may wait for regulators to seize the S&L; and take responsibility for the Arizona problems before making offers.

Times Staff Writer James Bates contributed to this story.