Pacific Heritage: Conservative but Shortsighted : Banking: Regulators say its slow reaction to the California real estate crisis helped bring about its failure.

It was perhaps a testament to the strength of Pacific Heritage Bank that it took so long to die. But when the end finally came last month, it was no less stunning to those involved.

At the close of business on Friday, July 28, state regulators quietly pulled the plug on the 15-year-old institution, which had been founded in Torrance by a group of Japanese-American investors who wanted a bank to cater to their business community.

It was the third commercial bank to fail in California this year, all of them small, little-known operations, and the fifth nationally. California’s banks continue to show the symptoms of the stubborn economic downturn from which the rest of the industry largely recovered a couple of years ago.

For example, bank failures reached their recent peak nationally in 1989, with 206 failures, only one of them in California. But the number of failures nationally tailed off sharply after that, dwindling to 42 in 1993 and 13 last year.

Meanwhile, California bank failures peaked in 1993 at 16, then fell to eight last year. It’s just another way in which California’s recovery has lagged the rest of the country.

Pacific Heritage’s troubles stemmed from “speculative land loans, acquisition and development loans and unsecured commercial loans,” the California Banking Department said in a statement.

David Scott, deputy banking superintendent, said Pacific Heritage was a solid operation but that its executives were slow to react when real estate prices started slipping badly in the early 1990s, undercutting the collateral on a big part of the bank’s loan portfolio.

“They’d always been successful and didn’t really believe things could be as bad as they were,” Scott said of the executives.

The bank’s chairman, Vincent H. Okamoto of Torrance, did not return telephone calls seeking comment.

Under a deal struck in anticipation of the July 28 shutdown, the bank’s three offices and $138 million of its $146 million in deposits were turned over to California Federal Bank.

The $8 million difference represents the deposits of about 200 unlucky customers whose accounts exceeded $100,000. Since the Federal Deposit Insurance Corp. insures only up to $100,000, these customers will all lose money.

One of the big losers is Marshall Horsman, owner and administrator of Landmark Medical Center, a 95-bed psychiatric hospital in Pomona. Landmark had a little over $400,000 in the bank on the Friday it went down.

Horsman, 69, didn’t even realize what had happened until he heard a broadcast news report a few days later. “Then they started bouncing our checks,” he said.

Horsman was angry because he had enough money in a surplus money market account to cover the checks, but when the closure came, the general account on which the checks were written was drained.

Horsman said he had to scramble to call customers and explain what had happened.

For Horsman and others with accounts exceeding $100,000, the FDIC promised an advance payment of 48% of the uninsured amount.

After that payment, Horsman will still be out about $150,000. He may recover more after the FDIC, which has been appointed Pacific Heritage’s receiver, sells off the remaining assets.

Scott, the deputy banking superintendent, estimated that depositors might eventually get about 75% of their uninsured funds.

“At least no one got injured or killed,” Horsman said. “This is only money and I can earn it back. I’m in good health.”

There were other losers besides the depositors.

The bank’s stockholders, numbering 500 to 600 by Scott’s estimate, have lost their entire investment. That includes people who helped create the bank in its initial public offering in 1980, plus others who participated in a 1990 offering that raised more than $3 million.

Pacific Heritage had a reputation of being conservatively run and profitable.

Unlike some banks, it did not expand recklessly during the 1980s but stayed put in its original office in Torrance. It picked up its Gardena and Little Tokyo branches--natural locations for broadening its base in the Japanese-American community--at a bargain price in 1990 from the failed Charter Savings Bank of Newport Beach.

At that point, Pacific Heritage was riding high, coming off a year in which it had earned $2.4 million--impressive for a bank with assets of only $108 million.

However, California’s real estate crash proved too much to withstand. From 1992 through 1994, its net loan write-offs were $1.9 million, $3.8 million and $4.7 million, respectively. In the first half of this year, it charged off another $2.8 million.

Consequently, the profits turned to losses. Pacific Heritage lost $2.5 million in 1993, $7.1 million last year and $1.8 million through June 30 of this year. Stockholders’ equity withered from $14.6 million at the end of 1992 to $3.2 million on June 30.

Scott said the seriousness of the bank’s problems became apparent in early 1992, but it failed to take effective action--such as trying to raise more capital--for more than a year. By then it was too late.

“In trauma cases, they talk about that ‘golden hour,’ ” Scott said. “They wasted theirs.”