Savings Bank Seeks California Cure for Balance Sheet Ills
Lots of people have moved to California from Rust Belt cities around the Great Lakes. But Peter A. Carr wasn’t drawn by the weather.
Carr heads the California subsidiary of Empire of America, a big Buffalo-based savings bank whose plans in this consumer financial market, the nation’s richest, are anything but modest.
Already the country’s 13th-largest savings bank, Empire projects that it will have more than $1 billion in California assets within five years and $400 million in 12 months--even though it had only $216 million in California assets on Oct. 31.
Expansionist Style
That’s small potatoes in a state that is home to eight of America’s 10 biggest savings institutions, and some analysts privately question whether Empire can succeed here. Yet such expansion would be characteristic of the aptly named Great Lakes financial institution, whose total assets had ballooned to $8.95 billion by Sept. 30, from $2.77 billion in 1981.
But profit has been another matter. Empire has lost money on operations for several years running. Perhaps as a result, its first public offering in November did not set Wall Street on fire, despite the recent popularity of stocks of savings institutions.
“The market’s just been buried with” such stocks, complained Jerome Baron, an analyst with First Boston Corp. “In the case of Empire, it’s not a high-quality balance sheet.”
Indeed, Empire closed on the American Stock Exchange Monday at $5.50, down from an initial price of $5.61.
Crucial Period for Firm
Empire’s efforts to turn around rest heavily on California, which it entered in May, 1984, by acquiring for an undisclosed price Pacific Thrift & Loan, a $95-million Los Angeles financial institution that needed more capital.
Its acquisition last July of two troubled Bay Area institutions--San Francisco-based Atlas Savings & Loan, the nation’s first savings institution owned by and operated for homosexuals, and Windsor-based Golden Pacific Savings & Loan, whose combined assets were about $140 million--gave it a total of 11 branches in Southern California and five in Northern California.
In an interview at Empire’s California headquarters, in Woodland Hills, Carr said the bank plans to grow by emphasizing consumer banking and by buying other financial institutions. A major advertising campaign will begin soon to promote the bank, he said.
“We will be expanding in years to come in Los Angeles, San Francisco, San Diego, and other coastal cities,” he said. “We’ve made a major commitment to be a major player in California.”
Empire would not break out its California earnings, but an informed source said it showed a slight loss for the nine months ended Sept. 30. Excluding asset sales and extraordinary items, the entire company lost $44.2 million on operations for the first nine months of 1986, after losing $64.4 million on operations for all of 1985.
Empire showed net income in both periods--$78.5 million and $10.8 million respectively--but mostly by selling assets. Empire’s regulatory net worth of $229.4 million on Sept. 30 was just 2.6% of assets, less than the 3% generally required by federal regulators.
Intangible Assets
More than 14% of Empire’s assets were non-earning on June 30, thanks mostly to $800.3 million in “good will” on its balance sheet. Good will is the premium paid for troubled savings institutions, and at twice net worth, Baron said, Empire has a lot of it.
Such figures help explain why the bank’s first public offering did not come off without a hitch. Previously depositor-owned, Empire was one of many savings institutions converting to public ownership last year. But it raised only $69 million instead of the $114 million it had hoped for.
Despite Empire’s unimpressive earnings, analysts and competitors say the bank’s management has performed about as well as possible given the difficult economic circumstances.
Until 1980, Empire was hurt by the state of New York’s 8.5% mortgage-rate usury ceiling, the lowest in the country. Federal law repealed such ceilings in 1980 but also removed ceilings on how much interest banks could pay depositors.
Behind Operating Loss
As a result, in the early 1980s Empire and other savings institutions still had huge, low-yield mortgage portfolios on their books when deregulation and rising interest rates drastically increased their cost of funds. This all but ensured that they would operate at a loss.
Simultaneously, Empire was hurt by the economic decline of Buffalo, which lost many of its jobs in steel and auto making, as well as a good chunk of population.
To grow--and to skirt interstate banking laws--Empire took to acquiring troubled financial institutions, something that federal regulators sometimes permit across state lines. Since 1981, it has acquired 15 savings firms in Michigan, Texas, Florida and California, as well as New York, embarking on a daring course of self-transformation to reach beyond Buffalo and multiply its asset base.
Empire has also moved heavily into commercial and consumer lending, which offer shorter maturities, greater yields and more risk than traditional mortgage lending. Commercial and consumer loans represented about 22% of Empire’s assets as of June 30, up from about 6% in 1981.
Empire has even reached beyond banking. Under its 46-year-old chairman, Paul A. Willax, it has grown to encompass 43 subsidiaries, including an advertising agency, a stock brokerage and an insurance agency.
“Empire Savings Bank is one of the more progressive savings banks in the U.S.,” said Edward Carpenter, a bank consultant based in Los Angeles.
Despite Empire’s past problems, some savings-watchers think the firm will succeed here.
‘Huge Market’ Foreseen
“We’re talking about a huge market,” Carpenter said. “And we’re talking about a company entering with an established base.”
Citicorp is already doing well in California, he noted. The New York-based financial giant acquired troubled Fidelity Savings & Loan in Oakland, which became Citicorp Thrift and now has $4.7 billion in assets. Citicorp also has other businesses in the state.
Bruce Harding, a thrift analyst at Kidder, Peabody, the underwriter of the Empire stock issue, predicted that Empire will show operating earnings of $18.8 million, or $1.25 a share, for 1987. In the bank’s favor, he said, is its more than $500 million in tax-loss credits to offset future income, and its ratio of assets to market capitalization of more than 100 to 1, contrasted with an industry average of 30 to 1.
Analysts and Buffalo bankers agree that Empire’s great strength is marketing, which it will need a lot of to expand its beachhead in California.
Carr, 44, whose title is executive vice president and managing officer for Empire of America-California, previously led Empire’s expansion into Florida and then Texas. He started out as a mail clerk with Empire at the age of 18, and has been with the company ever since.
California has been a strong area for savings institutions. In the first half of 1986, California’s 219 savings institutions earned $773 million. They had $302.9 billion in assets on Oct. 31, or 26% of the nation’s $1.15 trillion in assets in such institutions.
That whopping share makes California the biggest market for savings institutions in the country. Whether there is room for yet another big player is the question facing Empire now.
EMPIRE OF AMERICA
California Company subsidiary Assets* $8.95 billion $220 million Net worth* 2.6% 4.2% as % of assets 9-mo. earnings* $78.5million NA Branches 141 16 Employees 3,881 150 Headquarters Buffalo Woodland N.Y. Hills
* at Sept. 30
