Regulatory Delays Threaten to Scuttle Proposed Mergers of Healthy Thrifts
Federal regulators are peddling insolvent savings and loans across the nation as fast as they can, but they have been slow to approve mergers or acquisitions involving some healthier institutions.
And even though this week’s agreement to sell American Savings to the Robert M. Bass Group of Ft. Worth eliminates the industry’s biggest headache, the deal isn’t likely to shorten the long waits facing some investors who want to buy solvent S&Ls.;
The regulatory delays are threatening to undermine deals made long ago and may account for some of the 82 merger and acquisition applications withdrawn by investors over the last 19 months, according to investors, consultants and savings executives.
“It’s an outrage,” said Thomas T. Hammond, chairman and president of the Hammond Co., a mortgage banking firm in Irvine.
Hammond has been waiting more than a year for approval of his application to buy Mission Savings in Riverside, a thrift with $15 million in assets.
Now he worries that the deal is not the same as it was a year ago.
“Rational businessmen cannot go into these situations with this kind of treatment,” he said. “Regulators can’t expect people like us to put money into S&Ls; when we’re treated this way.”
Another deal in California that has had an unusually long incubation period is the pending sale of East-West Federal Bank in Los Angeles’ Chinatown to Talley Industries, a Phoenix conglomerate involved in defense work and the development of automobile air bags.
The deal has been pending before federal regulators since Aug. 1, 1987, and may not be completed before the end of this year, a Talley executive said.
While refusing to talk about specific S&Ls;, federal regulators said most deals are getting done rather quickly, usually within three to six months. But that is longer than most executives in private business are used to, they acknowledged.
The longer delays for some S&Ls;, they said, tend to be caused by novel issues or policy concerns that must be resolved by officials at the Federal Home Loan Bank Board in Washington.
Often applications are incomplete and additional information is needed, which also cause delays, they said.
Two regulatory executives, who asked that their names not be used, said that as long as an application is complete and does not present new issues or policy concerns, federal regulators in California can approve a deal without referring it to Washington.
They said they knew of only six pending applications for sales of healthy California thrifts. Only two of those applications--Mission Savings and East-West Federal--have been pending for more than a year. Both present the kind of issues that the three-member bank board in Washington must review, they said.
That is the same board that also is devising programs to rid the nation of the sick S&Ls; that have been depleting the federal deposit insurance fund.
“We do our darndest to decide that applications are complete as soon as possible and get them processed as soon as possible,” one of the regulators said. “We have to make sure that the new institution has proper management, capital and internal controls to do the job.”
The bank board even devised a new “applications” manual to facilitate the process for approving mergers and acquisitions. The manual was sent to the 12 district banks in the bank board system this week.
But industry executives and consultants see the bank board’s own process as the biggest obstacle to getting deals approved quickly.
The caseload of insolvent thrifts that the board must deal with is “so huge it’s almost overwhelming the regulators,” said Stephen Skaggs, vice president of Alex Sheshunoff & Co., an Austin, Tex., industry consulting firm.
“Also, the bank board is placing greater scrutiny on buyers because the industry’s problems were caused partially by so many unscrupulous operators who gained control of thrifts,” he said. “The board doesn’t want to be caught in that trap again.”
Finally, Skaggs said, the “overlying fundamental cause” of delay is the agency’s own factional interests. Different divisions review separate aspects of each application for such things as economic feasibility of the business plan, financial adequacy of the buyer, legal ramifications of various conditions and the deal’s effect on bank board policy.
Questions From Regulators
“It makes it frustrating for someone in private industry,” he said. “The buyer submits what the board wants, waits three months and then gets a simple question out of the blue. He wonders why the regulators didn’t ask him that back at the beginning.”
The reason is simply because the application has moved on to a new reviewer, he said.
Skaggs is skeptical about statements regulators have made at recent trade meetings about efforts to “streamline” the process. “I’ve been hearing that for five years,” he said.
Mark Dickerson, general counsel of Talley Industries, said regulators have raised old questions or new issues and, once the company has responded, have found more questions to ask on the response.
“It’s very frustrating to go through mountains of paper to get the application moved along,” he said. “But at this point, the application is still progressing.”
During the time the applications are pending, said Dickerson and Hammond, regulators also may devise new policies or rules, which require more information from prospective buyers.
Both Hammond and Talley, for instance, are now negotiating a recent regulatory proposal to have them guarantee that they will make up any drop in the required amount of capital at the respective institutions.
Delays Affect Deals
The biggest problem with long delays is that the terms of a deal arranged a year ago may no longer be satisfactory today, they said. That’s especially true for Hammond.
When he made the deal to buy Mission Savings, Hammond was looking at an S&L; with nearly $20 million in assets. Although it had recorded about $200,000 in losses over the previous 18 months, it had enough capital--more than $2.5 million--to keep the S&L; well above regulatory requirements.
As of June 30, though, Mission’s assets had dropped to $15 million, its loss in the first six months amounted to $214,500 and its capital had slipped to $2.3 million.
The purchase price is to be based on Mission’s net worth at the time the deal is consummated, said Andrew C. Herrity, the S&L;'s president. Because Mission’s operating losses have lowered its net worth, the purchase price will be lower.
“It has certainly crossed our minds to bail out of the transaction because of declining net worth, but at this point, we’re still resolved to go ahead,” Herrity said.
Herrity said the delays have made it impossible to do any business planning because the S&L;'s future is to be decided by the Hammond Co. if the acquisition is completed. So Mission Savings hasn’t been aggressive in the last year in getting new business, he said.
Hammond, who believes that his mortgage banking operations fit in with regulatory intent to keep the S&L; in the home mortgage business, said he will fold his operations into the S&L; once regulators approve the nearly $3-million transaction.
Talley Industries doesn’t have to worry about any deterioration at East-West Federal, which has $397 million in assets. But Dickerson said his company is worried about whether shareholders still want to go through with the $26-million deal because “X number of dollars a year ago is different from X number of dollars today.”
He said Talley wants to keep shareholders happy because they also are depositors.
“It’s been a long engagement,” said Kellogg Chan, chairman and president of East-West Federal. “Fortunately, we have become very comfortable with each other. Talley will be able to furnish capital we need to be more aggressive in our market.
“But there’s always uncertainty in the back of your mind. Our position is, if it happens, it happens. If it doesn’t, we’ll go on.”