Several County S&Ls; Need Cash to Meet Rules of Bailout Bill

At least seven savings and loans in Orange County need cash infusions to help them meet tougher capital regulations imposed under the $166-billion industry bailout bill that President Bush is expected to sign Wednesday.

Ranging from healthy to nearly insolvent, the S&Ls; are among nearly 1,000 thrifts nationwide that do not now meet one or both of the new requirements for capital, and their futures may depend on their ability to raise the needed funds.

At least three of the seven S&Ls; based in Orange County already are nearly insolvent but have not been seized by regulators. At least four of them are actively looking for merger partners that would provide new capital.

“The bill is going to have the effect of causing the additional closure of about 500 S&Ls; nationwide that do not have the prospect of raising the necessary capital,” said Edward Carpenter of Southport/Carpenter Group, a Santa Ana financial-institutions consultant.

Capital is an institution’s final cushion against losses. It is the amount investors put up to start the business and any additional amount put in, through retained earnings and subsequent stock offerings, to help it grow. S&L; regulations offered a set of additional items to bolster sagging capital levels in the 1980s, but the new bill strips those items away.

“A tougher capital requirement means S&L; owners will have more of their own money at stake,” said Alex Sheshunoff, an Austin, Tex., industry consultant. “No longer will a handful of S&Ls; be able to simply bet taxpayer-insured dollars in hopes of a profit.”

The bailout bill also means that a separate S&L; industry is an endangered species, said Gerry Findley, a Brea industry consultant. Besides imposing tougher regulations, the bill will allow banks to buy healthy S&Ls;, and Findley expects the industry to disappear slowly through mergers and consolidations.

The measure will turn S&L; survivors into different kinds of institutions, said Charles H. Green, acting president of FarWest Savings & Loan in Newport Beach.

“The bill requires you to engage in a narrower business, to pay higher premiums for insurance deposit and to increase your capital,” he said. “Those elements don’t work well together, and many institutions will fail. And the survivors will be converting to banks sooner or later.”

FarWest is one of the seven Orange County thrifts that must raise capital. But it needs only a slight amount, for its size, and is a healthy institution with a financially sound parent that could meet the new requirements easily, Green and consultants said.

The other S&Ls; needing capital are Charter Savings Bank in Newport Beach, Mercury Savings & Loan in Huntington Beach, Delta Savings Bank in Westminster, Constitution Federal Savings & Loan in Tustin, Huntington Savings & Loan in Huntington Beach and Security Federal Savings & Loan in Garden Grove.

The list does not include four insolvent county S&Ls; already seized by regulators. They are Lincoln Savings & Loan in Irvine, Pacific Savings Bank in Costa Mesa, First California Savings in Orange and Perpetual Savings Assn. in Santa Ana.

The bill spells out two capital tests that S&Ls; must meet. Under one test, S&Ls; will need 1.5% of their assets in what is called tangible capital--the basic cash that has been put into the institutions over the years. Over five years, that ratio must be raised to 3%.

Under the other test, they must maintain a 3% ratio of core capital to assets. Core capital includes “good will,” which is the value that one company pays in excess for the basic value of a firm it acquires. Good will now must be written off over 20 to 40 years, but the new bill requires that it be eliminated within five years.

The healthiest of the Orange County thrifts facing capital problems is FarWest, with $4.6 billion in assets. The S&L; has an estimated tangible capital ratio of 2.21% and a core capital ratio of 2.58%, according to March 31 regulatory figures compiled by Sheshunoff’s firm.

Based on Sheshunoff’s report on March financial results, other county S&Ls; need more help:

- Charter Savings would have negative tangible capital but would almost have enough core capital. Its problem is about $13 million in good will it took on from the acquisition last year of the failed Merit Savings Bank in Los Angeles. Saying Charter is “no different” than it was a year ago, Jon Maddox, its president, said the S&L;’s owner, Mola Development Co., “will do whatever is necessary to comply” with the new regulations, even if it means putting $4 million more into Charter and reducing its assets to $300 million from its June 30 level of $429 million.

- Mercury Savings, which had a well-publicized fight with its auditors and posted $13.8 million in red ink last year, comes up short under both capital tests. It is a solvent institution, and its chairman, Leonard Shane, has said repeatedly that it meets current regulatory levels for capital and will continue to meet new requirements. He also has repeatedly denied that the S&L; he co-founded 25 years ago is on the block and has said he is not actively soliciting bids for Mercury.

- Delta Savings would fall short of one test and drop into insolvency under the other. But four investors are awaiting regulatory approval to take a 64% stake in the S&L; and pump $2 million in cash into the capital base, said Joseph Gaskill, Delta’s president. The S&L;, which caters to the Vietnamese community, has been cutting losses that were generated from bad loans that went sour up to six years ago, and should be well off once regulators approve the change in control, he said.

- Constitution Federal’s capital was 0.34% of its assets under either test. The S&L;, wracked by $6 million in losses over six years, has turned in modest profits for the last two years, said its president, Joseph Helleis. An ownership fight involving a 63% stake has dragged on for three years, he said, hindering merger efforts. He said the S&L; will end up “pretty close” to the 1.5% tangible capital level in October.

- Huntington Savings, often wooed but never wed, had little more than $200,000 in capital, only 0.17% of its assets and far below either test. With its operations turned around, according to previous statements, it has been trying to raise up to $6 million in new capital from current shareholders and new investors. Officers could not be reached for comment Monday.

- Security Federal would be insolvent under either test in the bill. It had less than $1 million in capital and was heading toward insolvency. Regulators installed new management at the Garden Grove thrift in June without seizing it, and the new management team said then that it believes that the S&L; can be turned around--with some more capital and a good business plan. Officers could not be reached for comment Monday.

For all the emphasis on capital levels, at least one industry consultant believes that it won’t have as much effect as industry critics would like.

“Regulators have a lot of latitude to let thrifts operate below the capital limits,” said Bert Ely of Ely & Co. in Alexandria, Va. “The consequences of failing to comply is that the regulators can grant exemptions.”

COUNTY SAVINGS AND LOANS THAT NEED CAPITAL Ranked by ratio of tangible capital to assets.

Total Estimated Estimated Assets Tangible Tangible Savings and Loan (millions) Capital (mil.) Capital/Assets Security Federal $77.5 $-3.4 -4.65% Savings & Loan Charter Savings Bank 458.2 -3.8 -0.87 Delta Savings Bank 57.3 -0.065 -0.11 Huntington Savings & 122.6 0.206 0.17 Loan Constitution Federal 74.9 0.254 0.34 Saving & Loan Mercury Savings & Loan 2,490.8 12.4 0.51 FarWest Savings & Loan 4,604.9 101.2 2.21

Core Capital/ Savings and Loan Assets Security Federal -4.65% Savings & Loan Charter Savings Bank 2.96 Delta Savings Bank 0.74 Huntington Savings & 0.17 Loan Constitution Federal 0.34 Saving & Loan Mercury Savings & Loan 1.86 FarWest Savings & Loan 2.58

Source: Sheshunoff Information Services Inc., Austin, Tex.