Combining Construction, Retail Strengths : Charter Savings Bank to Buy Merit

Charter Savings Bank in Huntington Beach said Monday that it has reached an agreement to acquire financially troubled Merit Savings Bank, the only savings and loan catering to the Japanese-American community in Southern California, for $1 million in cash.

The acquisition would give the one-office Charter $410 million in assets and branches in Japanese-American communities in downtown Los Angeles, Fullerton, Torrance and Monterey Park.

All Merit employees would be retained, and Merit directors would continue as advisory board members, said Jon Maddox, Charter’s president.

The planned acquisition, which must be approved by regulators and shareholders at each savings and loan, is “a very good marriage,” said Bruce Kaji, chairman of Los Angeles-based Merit.

“The most important thing is Merit will be a strong base of savings for Charter. There are people out there supporting us who are thrifty and solid savers.”

Maddox expects the savings and loans to complement each other because Charter--whose strength lies in construction and property management and development--has lacked a consumer-oriented retail base. It has acted mainly as a wholesale operation by buying packages of loans at discounts from other lenders.

“We look to continue all of Merit’s relationships,” he said. “They get all their deposits from the community, and we intend to keep that retail operation.”

As part of the deal, Charter and its owner, Mola Development Corp., would be required to add more capital--anywhere from $2 million to $14 million, depending on regulatory demands--to shore up troubled assets at Merit.

About 14% of Merit’s $220 million in assets at the end of 1987 consisted of foreclosed real estate and poor or non-performing loans.

“We are prepared to do whatever regulators want us to do to raise capital,” Maddox said.

Merit, founded in 1962 by Japanese-Americans to serve their community, ran into problems in 1985 when it tried to expand beyond its retail services and single-family mortgages to make large construction loans throughout Southern California.

Construction company bankruptcies and repeated cost over-runs eventually sapped Merit of most of its capital and left it with a $500,000 regulatory net worth. It ended 1987 with about $19 million in foreclosed real estate and $12 million in bad loans. It lost about $2 million during the last two years, nearly all of it from write-downs on its construction lending operations, Kaji said.

But the areas that caused problems for Merit are familiar territory for Charter and Mola Development.

“We’ve been looking for about six months for a possible merger partner,” Maddox said. “We looked at a lot of problem savings and loans that did not fit in with our expertise. We felt Merit, because of its specific problems with construction projects, fit our niche.”

Negotiations between the two savings and loans took about a month, Maddox said, before the definitive agreement was reached late last week. Under the agreement, Charter will pay some 300 Merit shareholders about $7.90 a share.

Charter, with $190 million in assets, reported $2.5 million in net income last year, Maddox said.