S&Ls; Succumb to Pressure to Write Off Assets

Testily bowing to reality, Beverly Hills-based Great Western Financial said Thursday that it will reduce second-quarter earnings by $26.3 million, a move that reflects recent pressure from accounting regulators to write off $824 million in assets from the books of the savings and loan industry.

Great Western’s move was followed later in the day by similar actions by other major savings and loan companies in California, including Great American First Savings Bank, Imperial Corp. of America and Gibraltar Financial.

The S&Ls; acted after learning that the Financial Accounting Standards Board, the accounting industry’s rule-making body, has decided that the nation’s S&Ls; should write off their $824-million investment in the so-called secondary reserve of the Federal Savings and Loan Insurance Corp.

Great American, which had reported record second-quarter earnings of $25.6 million, restated its earnings to $21.4 million after taking an after-tax writeoff of $4.2 million for its $7.9-million investment in the secondary reserve.

“Great American’s net worth of nearly $600 million is not significantly impacted by this fairly minor charge,” Chief Operating Officer Roger K. Lindland said.

Great American officials described the $4.2-million writeoff as having “a minor impact” on the San Diego-based S&L.;

San Diego-based Imperial Corp., the parent company of Imperial Savings & Loan, had previously reported second-quarter earnings of $16.5 million. The S&L; wrote off its $15.7-million investment in the secondary reserve, a move that resulted in restated second-quarter earnings of $6.4 million.

The accounting board’s decision is due to be made public this week through a letter to the Securities and Exchange Commission, according to a board spokesman.

It is merely an arcane accounting dispute on one level, but the issue has broad importance for many savings and loan firms because a reduction of assets reduces net worth, which is computed by subtracting liabilities from assets.

Great Western announced its decision in a strongly worded statement from its chairman, James F. Montgomery. “We are disappointed that for the first time in our history we are required to issue financial statements that we believe to be incorrect and misleading,” Montgomery said.

Great Western’s restatement will reduce second-quarter earnings to $53.7 million from $80 million, a drop of 33%. The firm’s principal subsidiary is Great Western Bank (formerly Great Western Savings), one of the nation’s largest savings and loans.

Great Western’s decision marks the end of a three-month effort by Montgomery, who was trained as an accountant, to challenge the regulatory and accounting treatment of the secondary reserve.

Other large California-based savings and loans--such as San Diego-based Home Federal Savings & Loan, American Savings and Home Savings of America--chose not to fight and have written off the investment. Still another, California Federal Savings, has yet to make a decision.

The secondary reserve was accumulated in 1961-73 by industry payments as a way of bolstering the coffers of the FSLIC. Those who contributed recorded the payments as an asset because it was intended that the money would eventually be repaid.

But the reserve was wiped out in May following heavy losses by the FSLIC, which had been declared insolvent by government auditors. FSLIC insures customer accounts up to $100,000 should an S&L; fail.

Because the secondary reserve payments were based on company size, with the largest firms paying most, the write-off’s effect is most pronounced in California, where the nation’s largest S&Ls; are located.

A bill to recapitalize the FSLIC--and restore the secondary reserve over a five-year period, starting next year--was signed into law this week by President Reagan.

But the accounting board argued that continued uncertainty about the FSLIC recapitalization makes it imperative that financial institutions be allowed to replace the assets on their books only gradually as the reserve is restored--not all at once, as Montgomery and other industry executives had hoped.