Pacific Savings Bank lost a staggering $109.5 million in 1986, largely because out-of-state real estate investments went sour for the Costa Mesa-based S&L, according to an audited financial statement released Tuesday.
The financial statement also shows that Pacific Savings ended the year with a negative net worth of $69.3 million, far below the $44.5-million positive net worth required by the Federal Savings and Loan Insurance Corp.
The huge loss prompted federal regulators to remove Pacific's top management earlier this month.
The S&L--a mutual association owned by its depositors--has lost a total of $121 million since the beginning of 1984.
But the troubled institution can work its way out of its problems partly by concentrating more on serving its everyday customers in Southern California, said Harvey A. Lynch, who was installed by regulators June 11 as the troubled savings and loan's new president and chief executive officer.
Lynch said about $68.3 million of the S&L's loss last year came when regulators required Pacific to set money aside as a reserve to cover potential losses on loans for apartment complexes and other multifamily structures in Texas and Louisiana--areas where the collapse of the oil industry has extensively damaged the housing market.
Though treated as an expense, the reserve is money that still is held by the S&L and is a one-time charge against earnings. If the loans eventually are paid off, the reserve goes back into the S&L's operating income.
The remaining portion of the 1986 loss represents operating losses from securities investments and from the high cost of jumbo certificates of deposit--volatile $100,000 accounts--that were acquired largely to bolster the S&L as it struggled to overcome its real estate losses. Such deposits are costly because an institution pays higher than market rate interest to attract them, and they are considered volatile because they are often withdrawn before the certificate term expires if another institution is offering an even higher rate.
The so-called jumbo CDs made up 28.8% of the institution's total $1.2 billion in deposits at the end of the 1986.
But Lynch believes that the S&L--the 29th largest in the state with $2 billion in assets--can cut those operating losses over time and can reduce the S&L's reliance on jumbo CDs.
"The remedial action is a return to basics, to quality assets with proper interest rate margins," he said. "The majority of the losses are caused by--for lack of a better term--non-traditional activities.
"What is blatantly obvious is the absence of a core of traditional retail products such as mortgage loans and consumer loans," he said. "The bank needs to build more on its retail strengths."
Previously, Pacific was heavily involved in commercial lending, financing projects that included the development of the $22-million Courtyards retail complex that serves as the centerpiece of Costa Mesa's downtown redevelopment program.
Lynch said that a new business plan to be formulated within the next two months will propose that Pacific Savings start relying on the traditional S&L activities rather than on the newer activities, especially the direct real estate investments that got it in trouble.
Lynch pointed out, for instance, that Pacific Savings has 11 full-service branch offices but has used them only to gather deposits, not to make loans. Seven other offices are used only for loan production. He said he intends to provide all of the S&L's services in each of the 18 offices.
He said the S&L will continue its mortgage banking activities--creating loans and selling them in the secondary market--but will try to slow down the S&L's previous heavy reliance on those activities. Mortgage banking creates fees and other income, he said, but does not generate earning assets the way a well-managed loan portfolio can.
Lynch said that previously disclosed talks concerning the purchase of Pacific Savings by HF Holdings, the San Francisco company headed by former Treasury Secretary William E. Simon, have been suspended.
The unusual change in management ordered by the Federal Home Loan Bank Board--the federal regulatory arm for S&Ls--makes it uncertain whether Pacific Savings still is an independent S&L or has become another member of the bank board's controversial management consignment program. The program is used to place insolvent S&Ls in receivership or conservatorship and to transfer control of continuing operations to a team of executives from healthy S&Ls.
Lynch said he was placed in charge of the S&L's daily operations as part of the program.
His appointment and the naming of a new majority to S&L's board of trustees constitutes a unique application of the bank board program, Lynch said.
But a bank board spokeswoman said she believes that the S&L is not part of the management program.
Lynch, 48, is an executive vice president at Glendale Federal S&L, which was hired by the bank board to manage Bell S&L in San Mateo when regulators took that institution over two years ago.
Lynch and GlenFed are working out a contract now with the bank board, but the unique aspect of the arrangement, Lynch said, is that Pacific Savings was not placed in receivership or conservatorship.
He said the arrangement also is unusual because the bank board did not get rid of top managers, as it usually does in a takeover. He said he does not plan to dismiss anyone, though he expects normal attrition to occur among the 550 employees. The bank board did replace the president--Verne Potter, who remains a board member--and all but three of the eight trustees.
Lynch said he feels like he is operating the S&L independently, not under the auspices of the bank board.