Firm Will Take Over 12 Failing Thrifts in Texas : Complex Deal by Non-Financial Company to Cost S&L; Insurance Fund $1.3 Billion Over 10 Years
With major financial help from outside the thrift industry, the Federal Home Loan Bank Board said Thursday that it has approved the acquisition of 12 failing Texas savings and loan associations by a diversified steel and high-technology firm.
The complex rescue package, expected to cost the nation’s S&L; insurance fund $1.3 billion over 10 years, was a major boost for the bank board’s high-priority effort to rebuild the crippled thrift industry in Texas. Depressed oil and real estate prices, combined with bad management, have devastated many financial institutions.
The major new player entering the S&L; business is LSST Financial Services, which will invest $48 million in cash to buy the 12 failing thrifts and combine them to make a new $3.7-billion institution, to be called American Federal Bank.
LSST is a subsidiary of Lone Star Technologies, the parent company of the former Lone Star Steel. The firm makes tubular pipe and produces equipment and instruments for high-temperature operations.
The infusion of money from LSST marks the first time federal regulators have gone beyond the thrift industry to help with their ambitious Southwest Plan for merging, selling or shutting 109 insolvent Texas S&Ls.;
The deal disclosed Thursday is just the first of several “where capital will be infused from sources outside the thrift industry,” FHLBB Chairman M. Danny Wall told reporters at a news conference.
Group Will Run S&L;
“Today’s transaction shows that private investors are willing to bring in hard cash for the opportunity of participating in the Texas thrift recovery,” Wall said.
Joining LSST in the acquisition is the Gibson Group, which will run the new S&L.; It is a private investment organization organized by William E. Gibson, executive vice president of Continental Illinois National Bank in Chicago. He will become president and chief executive of the new American Federal.
Gibson faces a daunting task. The institutions coming under his control had an aggregate loss of $105 million during the first quarter of the year. One of them, Richardson S&L; of Dallas, lost $77.6 million during the first quarter of the year, the 10th-worst loss among the nation’s S&Ls.;
The 12 institutions, located in the region around Dallas, had assets of nearly $2.4 billion and liabilities of $3 billion. However, Roger Martin, a member of the bank board, said the new American Federal should be making a profit by its second full fiscal year.
Several of the ailing S&Ls; were paying some of the highest rates offered anywhere in the nation to attract savings deposits. The unified, healthier institution will not be compelled to pay these extraordinary rates.
Insurance Fund to Help
“We want to get control of high-cost deposits,” Martin said. “This will make a substantial difference to the industry.” As the financially shaky institutions are acquired by healthy organizations, there will be less pressure throughout the thrift industry to pay costly rates.
The deal disclosed Thursday was designed to minimize costs at the Federal Savings and Loan Insurance Corp., the arm of the bank board that guarantees deposits up to $100,000 and that pays the costs of bailing out or closing down failed S&Ls.;
The insurance fund will give the new S&L; a note for $499 million and will pay $48 million for preferred stock. In addition, the insurance fund will provide a guarantee of protection for the new American Federal against any losses from the assets it assumes from the failing S&Ls.;
The ultimate cost to the insurance fund is estimated at $1.3 billion over 10 years, according to Stuart Root, FSLIC’s executive director.
Wall, the bank board chairman, has expressed confidence that the fund’s cash flow over the next 10 years, estimated at $42 billion, will be sufficient to handle the problem of failing thrifts without a direct infusion of taxpayer funds. The insurance system gets its money from premiums paid by member S&Ls.;
Thrifts Receive Preference
The bank board, with Thursday’s announcement, now has disposed of 24 of the 109 Texas S&Ls; that were insolvent--with liabilities exceeding assets--when the regulators launched the Southwest Plan three months ago.
In seeking merger partners for shaky thrifts, the FHLBB gives preference to thrift industry firms when they can supply the needed capital. But Wall has decided that other sound businesses with surplus capital can also do an effective job of running troubled S&Ls.;
He said he seeks any firms that have both capital and management expertise or can hire the expertise.
The S&Ls; involved in the latest rescue plan are: Richardson S&L; of Dallas; Mercury Savings of Wichita Falls; Ben Milam Savings of Cameron; Commerce Federal Savings of Commerce; Gladewater Federal of Gladewater; Irving Savings of Irving; Longview Savings of Longview; Majestic Savings of McKinney; Paris Savings of Paris; Skyline Savings of Dallas; Southland Savings of Longview, and American Banc of Irving.
