Toss Out Top 3, and County S&Ls; Look Healthy

At first glance, last year’s rebound in the savings and loan industry seems to have passed by Orange County.

Federal regulatory reports, recently made available, reveal that the 33 county-based S&Ls;, as a group, saw declines last year in total deposits, loans and net worth. Total assets increased just fractionally.

The only bright spot was that the group lost less money last year than it did the year before.

But take out the three major troubled institutions--American, Beverly Hills and Butterfield S&Ls--and; the county’s savings institutions suddenly look healthier, showing improvements in every segment and even turning a bigger profit.

That kind of improvement would be more in line with the industry’s performance statewide. The 119 S&Ls; in the state at the end of the year posted record earnings of $1.06 billion, according to the California League of Savings Institutions, the industry’s trade association.

California-based institutions control 25% of the industry’s assets nationwide, and eight of the nation’s 10 largest S&Ls; are headquartered in the state. Orange County’s S&Ls; account for 17% of the industry’s assets statewide, and one S&L--American; Savings--is the second largest in the state and in the nation.

“We’re not likely to have as much adverse experience as we’ve had before,” said Gerry Findley, a Brea financial institutions consultant and publisher of the Findley Reports on California Savings and Loans.

“The worst of the bad apples have been taken over (by regulators),” he said. “A number are still marginal situations that are creating some problems. It’s possible more may fail, but fewer people will be affected.”

A review of financial results based on reports from Federal Home Loan Bank Board, the primary regulator, indicates that:

- Three-quarters or more of Orange County’s savings institutions in existence both years grew or improved in such critical areas as net income, total assets, deposits, loans and net worth (assets minus liabilities). Earnings for a dozen S&Ls; doubled or tripled.

- Excluding the troubled Big Three--American, Beverly Hills and Butterfield--total assets of the remaining 30 S&Ls; grew 17.1% to $17 billion and net income rose sixfold to $163 million more than the previous year. Including the Big Three, total assets rose 0.8% to $47.7 billion and the annual net loss was reduced 89.8% to $56 million.

- Despite restrictive growth rules, tougher regulatory enforcement and thinner profit margins, four new savings institutions opened in 1985 and ended the year in a relatively strong position, though one had a net loss.

- Beverly Hills and Butterfield had combined losses of $310.3 million last year, with two-thirds of that coming in Beverly Hills’ last quarter. Some consultants and legal experts believe such losses show that the bank board’s management consignment program, which turns failed institutions over to new managers for continued operations, is not working.

Debatable Point

Whether the Big Three should be included in any industry statistics is debatable.

“You should take those three out of the statistics because they are effectively government-run and are in a special class,” said Los Angeles lawyer Ernest Leff, a savings and loan specialist. “They are not private enterprises in any sense of the word.”

Beverly Hills, based in Mission Viejo, and Butterfield, in Santa Ana, were taken over last year by regulators, who hired management teams from healthy S&Ls; to operate them.

American Savings, a unit of Irvine-based Financial Corp. of America, has been under such severe regulatory supervision by the bank board that, Leff said, it “exists at the sufferance of the bank board.”

American’s president and chief executive, William J. Popejoy, disputes Leff’s characterization, saying the association is independently operated in spite of a 1984 agreement giving the bank board wide powers over the company, including the right to hire and fire all officers and directors. American, he said, has steadily improved, now showing profits after suffering the worst loss of any S&L; nationwide in 1984.

In any event, Leff said, the institutions that are in the consignment program unfairly drag down the good performances of most of the rest of the industry.

$1 Billion in Losses

“The program is still hemorrhaging money,” he said. “The industry nationwide earned $4.8 billion last year. The 25 S&Ls; in the management consignment program lost $1 billion.”

But a bank board spokesman said the program is only two years old, and the institutions in it need time to be turned around. One New York City savings institution in the program was improved enough to be sold recently, David Loveday, the spokesman, said.

The bank board also took over two other Orange County S&Ls--American; Diversified and Consolidated savings banks--this year, and hired management teams to keep them operating.

Amid the failures, however, are many success stories:

- Mercury S&L;, a 22-year-old Orange County institution with $2.2 billion in assets, rebounded from the bad economic conditions of the early 1980s to post a record $11 million in net income last year, more than twice the $4.9 million it earned the previous year. (The bank board report indicates a $2.8-million profit in 1984.) And Leonard Shane, president and chief executive, is predicting another record year in 1986.

- Downey S&L;, a $2.6-billion association, posted net profits of $52.5 million, more than triple the $15.5 million it earned in 1984. The 29-year-old association moved to Costa Mesa eight years ago.

- Far West S&L;, a $2.4-billion operation that recently raised $40.7 million in a stock offering, reported record earnings of $15.8 million last year.

- Newport Balboa, San Clemente, Sterling and Irvine City S&Ls; reaped the benefits of a more stable economy to push earnings up.

Evaluating Statistics

Still, statistics gleaned from the bank board reports must be viewed with a cautious eye for several reasons.

First, American Savings is so huge that it wreaks havoc with any statistics, said Douglas J. Weeks, president and chief executive of Irvine City S&L.; American Savings is more than 600 times larger than Irvine City.

American, the nation’s largest savings institution until two months ago, had $27.3 billion in assets at the end of the year, more than the combined assets of the remaining 32 Orange County-based S&Ls.; The next largest county-based S&L; is Lincoln Savings with $2.8 billion in assets. Twenty of the county’s S&Ls; have less than $300 million in assets, and 13 of those have less than $100 million in assets.

Secondly, while the bank board reports accurately state the information turned in by the S&Ls;, the figures could mislead those who follow an institution’s holding company, warned Layna J. Browdy, spokeswoman for Financial Corp. of America (FCA).

Bank board statistics represent only the S&L;’s financial results, not the holding company’s figures. American, for instance, earned $19.6 million more last year than what its widely publicized parent, FCA, showed on consolidated financial statements.

Finally, differences between regulatory accounting principles (RAP) demanded by the bank board and generally accepted accounting principles (GAAP) used on Wall Street can be so drastic that an institution can show a profit under one set of rules and a loss under another.

Difference in Results

For instance, Household Bank, a federal savings bank in Newport Beach, reported net income under RAP of $308,000 last year, while GAAP procedures produced a $175,000 loss. Michael Rombold, president and chief executive, said the difference had to do with how certain dividend income was to be reported.

The differences between RAP and GAAP procedures, largely putting groups of numbers in different places on the balance sheet, “boggle the minds of people who understand them,” said Edward Gotschall, senior vice president and controller at Pacific Savings Bank in Costa Mesa.

Largely because of accounting differences, he said, Pacific Savings produces an array of reports and results. For federal regulators, the association had a net income last year of nearly $6.2 million. A report to state regulators shows the income as $4.4 million. A later audited report to state regulators reveals earnings of $4.6 million, the figure Gotschall said is accurate.

Adding to this confusion, some institutions amend their reports at a later date to reflect audited, and presumably more reliable, financial statements.

At Beach Savings Bank in Huntington Beach, the pressure of reporting the quarterly results within 15 days after the quarter ends led the institution to shortchange its net income. Beach first reported a $9,000 profit, said Alfred I. Puchner, the S&L;’s president and chief executive, and later had to file an amended report showing a $37,000 income.

Other S&L; operators also complained about short deadlines giving rise to inaccurate reporting. But their complaints fall on deaf ears.

Loveday’s Criticism

“We’re talking about financial institutions whose job is to keep track of money coming in and going out,” said the bank board’s Loveday. “With a proper system in place, a report can be done at any time. Sure, it creates some work, but it’s not insurmountable.”

One of six proposed regulations the bank board has put out for comment would change regulatory reporting to require S&Ls; to file reports on a GAAP basis with a separate section reconciling the figures to RAP accounting. While S&L; executives are wary about what will be included in the regulatory aspect, Loveday said most of the comments have been favorable so far. The comment period ends July 7.

The effect of the change, nevertheless, could be devastating, according to a report from the Los Angeles office of Strook & Strook & Lavan, a New York-based law firm. The firm said that under RAP procedures, 1,570 institutions nationwide were insolvent or had low net worth last year. On a GAAP basis, 2,498 S&Ls; were insolvent or had low net worth.

The differences between the two accounting procedures grew out of the collapse in the real estate market because of sky-high interest rates in the early 1980s. Federal regulators quickly saw that the number of possible S&L; failures could wipe out the Federal Savings and Loan Insurance Corp., which insures deposits up to $100,000. They came up with a host of accounting principles that pumped up an institution’s net worth, a critical factor in a S&L;’s condition.

William J. Crawford, California’s savings and loan commissioner, said such measures artificially bloat net worth and hide the true conditions of savings institutions.

Net Worth, Net Loss

“One company in Orange County has a RAP net worth of $17 million and a GAAP net worth of minus $4 million and is losing $2 million a year and can do that for the next five years,” said Ed Carpenter, a Newport Beach financial institutions’ consultant declining to identify the institution.

With the bust in the real estate market behind them and the interest rates brought back to earth, savings institutions are facing their biggest problems in maintaining good management and good profit margins between the interest they pay and the interest they earn, Findley, the consultant, said.

Yet some institutions, he said, are doing things that could hurt them, such as lending more money than they have in deposits. Those S&Ls; have to borrow the money themselves to make the loans, and they usually pay higher interest for money they borrow from federal and private credit agencies. Such a practice could impair earnings and net worth, Findley said.

Newer institutions, especially, also are falling prey to the tendency to loan too much money to the people who formed the associations, he said. Federal regulators, for instance, claim that 2-year-old Consolidated made too many loans to the S&L;’s sole owner, Robert A. Ferrante, and his associates and went over its lending limit on one loan.

But Crawford, the state commissioner, is not overly worried any more. The S&Ls; presenting the biggest problems have been taken over by regulators already, he said, and “the problems facing us now are all small ones.”

ORANGE COUNTY SAVING AND LOAN SCOREBOARD

in millions in m INSTITUTION ASSETS DEP 1985 1984 1985 American S&L; 27,340 28,918 17,434 Lincoln S&L; 2,806 2,240 2,409 Downey S&L; 2,612 2,278 1,930 Beverly Hills FS&L; * 2,475 2,949 1,614 Far West S&L; 2,443 2,084 1,727 Mercury S&L; 2,180 2,123 1,648 Pacific SB 1,447 1,743 1,004 Household Bank FSB 1,209 670 977 American Diversified SB * 978 790 959 Butterfield FS&L; * 795 831 724 Western Financial SB 763 444 535 United California SB 514 628 346 Fullerton S&L; 316 306 279 Newport Balboa S&L; 270 184 184 North America S&L; 208 171 198 San Clemente S&L; 159 54 135 Charter SB 134 139 112 Western Empire S&L; 112 104 101 Ramona S&L; 103 93 79 Huntington S&L; 101 101 82 Westport SB 93 62 89 Security Federal S&L; 89 78 76 Equitable S&L; 89 53 81 Consolidated SB * 88 22 81 Sterling S&L; 83 39 36 South Bay S&L; 73 94 73 Irvine City S&L; 43 24 37 Westmark SB 32 19 29 Delta S&L; 26 19 25 Beach SB 23 --- 21 Cornerstone S&L; 21 --- 18 Plaza S&L; 18 --- 15 Pioneer S&L; 15 --- 13 TOTALS: 4,658 47,260 33,071 PERCENT CHANGES 0.8% -5.5%

illions in millions in thousands in thousands in percentages NET WORTH INSTITUTION OSITS LOANS NET INCOME NET WORTH RATIO 1984 1985 1984 1985 1984 1985 1984 1985 1984 American S&L; 20,547 22,873 25,209 72,909 (565,000) 439,106 841,121 1.6 2.9 Lincoln S&L; 1,677 983 1,502 79,526 13,020 148,952 76,685 5.3 3.4 Downey S&L; 1,760 1,739 1,702 52,525 13,287 133,257 84,687 5.1 3.7 Beverly Hills FS&L; * 2,299 1,762 2,181 (277,448) (12,463) (7,889) 56,227 (0.3) 1.9 Far West S&L; 1,370 1,918 1,365 15,778 12,961 142,175 61,934 5.8 3.0 Mercury S&L; 1,645 1,668 1,741 11,072 2,770 75,636 65,128 3.5 3.0 Pacific SB 1,354 929 1,343 6,189 (6,793) 51,409 57,407 3.6 3.3 Household Bank FSB 587 970 614 308 (1,869) 105,093 28,992 8.7 4.3 American Diversified SB * 737 206 86 (13,926) 3,720 9,372 25,868 .9 3.3 Butterfield FS&L; * 746 518 615 (32,875) (19,258) 23,476 14,676 3.0 1.8 Western Financial SB 414 611 264 7,640 2,953 43,010 22,225 5.6 5.0 United California SB 556 250 331 3,494 11,896 36,680 33,886 7.1 5.4 Fullerton S&L; 249 247 257 4,813 119 14,421 9,608 4.6 3.1 Newport Balboa S&L; 151 251 179 4,629 3,618 20,562 9,650 7.6 5.3 North America S&L; 148 187 130 (2,506) 258 8,578 10,681 4.1 6.3 San Clemente S&L; 49 130 40 1,442 42 6,940 5,357 4.4 9.8 Charter SB 122 103 98 (281) (963) 8,092 3,182 6.0 2.3 Western Empire S&L; 100 97 115 123 2 3,871 2,671 3.4 2.6 Ramona S&L; 86 60 18 4,519 1,235 8,581 5,783 8.4 6.2 Huntington S&L; 69 100 86 (515) (745) 1,071 1,595 1.1 1.6 Westport SB 58 86 50 742 501 3,869 2,578 4.1 4.1 Security Federal S&L; 72 59 66 2,251 (982) 4,015 1,764 4.8 2.3 Equitable S&L; 51 55 45 (67) (1,588) 3,728 (931) 4.2 (1.8) Consolidated SB * 20 84 16 2,649 (62) 4,588 1,939 5.2 8.6 Sterling S&L; 18 49 31 2,347 364 8,919 6,572 10.7 16.8 South Bay S&L; 90 59 77 (1,710) (2,488) (825) 884 (1.1) 0.9 Irvine City S&L; 20 33 17 414 (366) 3,249 2,103 7.5 8.9 Westmark SB 16 30 10 161 (328) 2,533 2,172 7.9 11.2 Delta S&L; 17 24 12 (176) (121) 1,533 1,710 5.8 8.9 Beach SB --- 28 --- 9 --- 2,008 --- 8.7 --- Cornerstone S&L; --- 9 --- 247 --- 2,942 --- 13.8 --- Plaza S&L; --- 17 --- 217 --- 2,549 --- 13.9 --- Pioneer S&L; --- 9 --- (454) --- 1,573 --- 10.8 --- TOTALS: 34,988 36,144 38,200 (55,954) (546,280) 1,313,074 1,436,154 PERCENT CHANGES -5.4% 89.8% -8.6%

* American Diversified and Consolidated were put into conservatorship in February and in May, respectively, and both remain state-chartered institutions. Beverly Hills and Butterfield were put into receivership in 1985 and were converted to federally chartered mutual associations.

In 1985, Pioneer opened as South Coast S&L; in January and soon changed its name, Beach opened in June, Cornerstone opened in August and Plaza opened in September. In 1984, Consolidated and Sterling opened in February and Irvine City and Westmark opened in June.

Formerly Orange Coast S&L.;

Figures are based on Federal Home Loan Bank Board reports.