Thrift Fears Regulators May Upset Merger
Great American First Savings Bank agreed Thursday to buy financially ailing United Bank of San Francisco, but it said the deal would be called off if regulators do not approve its merger with profitable Home Federal Savings & Loan of Arizona.
Federal regulators in the past have strongly suggested that permission for the expansion-minded Great American’s proposed interstate merger with Home Federal may hinge on the purchase of one or more poorly performing institutions.
Under the agreement, San Diego-based Great American will issue a $4-million, non-interest-bearing note to United Bank’s shareholders. The note will be held in escrow and will be payable in three years.
Great American also will absorb United Bank’s losses during that period, although the exact amount to be assumed is still being negotiated with federal regulators, Great American President James C. Schmidt said.
United Bank, with $640 million in assets, has virtually exhausted its net worth. On Thursday, it reported that its net worth had dwindled to $2.2 million, or about 0.3% of its total assets, far below the 3% net worth to assets regulatory standard.
In addition, United Bank reported a net loss of $10.6 million for the nine months ended Sept. 30, after increasing its provision for loan losses by $4.2 million.
Further loan losses are anticipated in light of state and federal regulators’ suggestions that additional reserves be established, the company said.
Great American said it has discussed the possibility of the Federal Savings and Loan Insurance Corp. shouldering some of United Bank’s future losses, and it said Thursday that “such an arrangement may be possible.”
Great American’s pending merger with Home Federal in Arizona, which has $2 billion in assets, requires the San Diego-based company, with about $7.5 billion in assets, to refrain from any action that would materially affect its stock value.
As a result, Great American’s agreement with United Bank calls for any losses greater than the agreed-upon amount to be absorbed by United Bank shareholders--the sum being subtracted from the $4-million note. If the losses are less, then Great American would increase its eventual payment to United Bank stockholders.
“This is a very good opportunity for us because there are some excellent United Bank branches (in San Francisco) and an operating cost structure that’s (positive),” Great American Senior Executive Vice President Roger Lindland said.
Despite United Bank’s financial woes, the company has “had a good performance with a good interest rate spread,” he said, adding that United Bank’s problems were sparked by “some major loans that turned sour.”
Great American also has agreed to merge with Los Angeles Federal Savings Bank, a bank with $664 million in assets that has lost $10.7 million since 1981. The bank is now operating in the black, according to Lindland.
If all three mergers are approved by shareholders and regulators, Great American will have $11.1 billion in assets and 206 branches.
