Mercury Savings Reverses Self, Reports ’88 Loss Instead of Profit

Anticipating a likely order from federal regulators, Mercury Savings & Loan in Huntington Beach changed its previously announced $6.1-million profit for last year and recorded a $7.4-million net loss instead.

Mercury executives made the $13.5-million adjustment Friday to the S&L;’s unaudited financial statement after debating with regulators the previous day over accounting methods used to report certain transactions, said Leonard Shane, the S&L;’s chairman and chief executive.

After completing a routine examination of the S&L;, federal regulators told Mercury that they planned to issue a formal report ordering the adjustment. Unable to persuade them that the exam results were not valid, Shane said he decided to accede to their wishes and make the adjustment before it was ordered in the formal report.

“I’m not happy about this. I don’t like to do this,” Shane said, “But on the other hand, in the long run this is not a particularly big deal. It leaves us unchanged operationally.”

The adjustment involves transactions that occurred before 1988, including loans that Mercury made on two properties and a house it received in a complex court settlement, he said. After the loss, the S&L; still has more capital, its insurance against losses, than regulators require, he said.

Shane would not discuss the details of the adjustment, which reflects a general increase in reserves for future loan losses and a write-down of certain assets.

While the effect of the adjustment on after-tax net income was a $13.5-million downward swing, the effect on pre-tax operating income was a $22.5-million swing. That larger amount had to be allocated to various categories on the fourth-quarter balance sheet, Shane said.

Most of that adjustment--$12.2 million--was allocated to loan loss reserves. Interest earned on loans was reduced $7.5 million, and interest from real estate operations was cut by $2.8 million, he said.

Shane said the adjustment is based on accounting assumptions and does not change the reality of the transactions. The loans in question, for instance, are being paid off in a timely fashion and are not delinquent, he said.