Great Western, Other S&Ls; Yield on Writeoffs

Testily bowing to reality, 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 more than $800 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.

Great Western, headquartered in Beverly Hills, 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.

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.

Though it is an arcane accounting dispute on one level, the issue has broad importance for many savings and loan firms because a reduction of assets reduces net worth, which is a measure of assets minus liabilities.

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, himself trained as an accountant, to challenge the regulatory and accounting treatment of the secondary reserve.

Other large California-based savings and loans, such as 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 from 1961 to 1973 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 writeoffs’ 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.