Big Increase in S&L; Consolidations Predicted : Newport Expert Notes Tax Benefits Are Scheduled to Be Eliminated Next Year
The great year-end rush to buy insolvent savings and loans may be only a precursor to a greater number of mergers and acquisitions in the S&L; industry this year, a local accounting expert predicted.
Remaining tax benefits coupled with other incentives will fuel a “substantial increase” in S&L; consolidations in 1989, said Peter Capobianco, national director of Kenneth Leventhal & Co.'s financial institutions group.
Capobianco, who works out of Leventhal’s Newport Beach office, would not estimate how many insolvent S&Ls; would be acquired this year, but he pointed out that about 400 insolvent institutions are still operating nationwide.
Last year, federal regulators merged 179 bankrupt S&Ls; into healthy firms, closed 26 more and infused cash and notes into 18 others to stabilize them.
Most of the major basket cases, such as American Savings & Loan and Beverly Hills Savings & Loan, were revived with new owners and federal assistance.
“This coming year could be the final opportunity for investors who seek to buy out troubled thrifts to take advantage of tax credits,” Capobianco said. The tax benefits that spurred so many mergers last year have been reduced this year and are scheduled to be eliminated next year, under current tax laws.
The Federal Home Loan Bank Board is urging the Congress to reinstate the full effect of the tax benefits to aid the agency’s effort to salvage the insolvent S&Ls.;
Capobianco’s prediction of more mergers comes amid howls from Congress that the tax benefits are robbing the U.S. Treasury of billions of dollars in taxes that should be paid in the coming years by profitable companies that have picked up the insolvent S&Ls.;
In December alone, federal regulators said they gave buyers nearly $17 billion in assistance in arranging the mergers and acquisitions of 75 S&Ls; nationwide. That assistance will generate about $4 billion in tax breaks, about half of which will go to buyers and the rest to the bank board’s deposit insurance unit, the Federal Savings and Loan Insurance Corp.
Last year in Orange County, the state’s biggest graveyard for failed S&Ls;, regulators spent or pledged more than $5.7 billion in rescuing four insolvent S&Ls; and closing two others. The assistance to the four S&Ls; rescued should generate at least $1.1 billion more in tax benefits, according to figures provided by Capobianco and the bank board.
The companies that bought insolvent county S&Ls; last year can take advantage of hefty benefits for the next 10 years:
-New American Holdings Inc., the Irvine company used by the Robert M. Bass Group of Ft. Worth to buy American Savings & Loan, received $1.7 billion in federal assistance, which will generate about $870 million in tax breaks. The company will get 25% of the benefits, FSLIC the rest.
-Michigan National Corp., a suburban Detroit banking firm that bought Beverly Hills Savings & Loan in Mission Viejo, received $983 million in federal assistance, which will generate $159 million in tax breaks. The company will get $87.5 million, with the rest going to FSLIC.
-Downey Savings & Loan in Newport Beach, which bought Butterfield Savings & Loan in Santa Ana, received $281.1 million in assistance and will get to use $150 million of the tax benefits generated, Capobianco said.
Total figures for deals involving Butterfield and Ramona Savings & Loan in Orange, which was bought last February by Midwest Federal Savings & Loan in Minneapolis, were not available.
Those tax benefits do not include an unknown amount of so-called tax loss carry-forwards, which are tax benefits that insolvent institutions get from losses sustained in previous years, said Bobby Hughes, the bank board’s tax specialist.
The bank board is calculating how much in total tax benefits, including the tax loss carry-forwards, has been generated by nearly $39 billion in federal assistance involved in all deals in recent years. More than $37 billion of that assistance from the bank board’s deposit insurance unit, the Federal Savings and Loan Insurance Corp., came during 1988.
“Without the tax benefits included in the transactions, it would probably cost us more to fix the problems caused by all these insolvent” savings and loans, said William Fulwider, a bank board spokesman.
Capobianco said the bank board offers other incentives, such as waivers from certain federal regulations and cash assistance and FSLIC promissory notes.