Mercury Savings to Sell 5 Branches in a Bid to Bolster Its Capital Ratio

Mercury Savings & Loan plans to sell its five Northern California branch offices and reduce its loan portfolio by 10% this year in order to meet next year’s increased requirements for capital, which is an institution’s last reserve for unexpected losses.

The sale of the branches and the reduced loan portfolio are the major components in the Huntington Beach thrift’s strategy to cut its assets 20% to $2 billion by the end of the year, according to a recent filing with the Securities and Exchange Commission.

The effort to bolster its capital also includes a continuing effort to cut costs and the recently announced elimination of its quarterly cash dividend of 10 cents a share.

Mercury revealed a month ago that it intended to reduce its assets this year. The SEC filing provides the first account of how the S&L; intends to achieve its goal.

Mercury is one of many S&Ls; nationwide faced with the task of raising more capital. The industry has been devastated with losses--mainly from bad loans, poor management, insider dealings and outright fraud--that have far outstripped the traditionally low amount of capital required of S&Ls.;

Mercury lost $13.8 million last year and $680,000 in the first quarter. The annual loss was recorded after regulators forced Mercury to reduce the value of some of its assets. The S&L; blamed the writedown on incorrect accounting assumptions made in previous years. The first-quarter loss was attributed to application of the new accounting assumptions.

The writedown ignited rumors that Mercury was experiencing a capital crunch that could force Chairman Leonard Shane to sell the institution he founded 25 years ago. The SEC filing states that Mercury has hired Montgomery Securities in San Francisco to advise the S&L; about “all available courses of action,” including a sale of Mercury. Shane has denied that the S&L; is for sale.

Shane, who last month said he did not intend to sell any of Mercury’s 25 branches, played down the details in the filing, saying his S&L; is constantly looking for ways to increase its capital. Mercury has been buying and selling branches, for instance, “for the last seven years,” he said. Last year, The S&L; bought five loan production offices and sold two branches, he said.

Mercury’s SEC filing states that the S&L; is offering to sell its five Northern California branches--four in Santa Clara County and one in San Mateo County--by the end of the year. The branches hold $253.9 million in savings deposits as of Dec. 31, which represents about 10% of Mercury’s assets and liabilities at the end of the year.

Mercury’s other branches are concentrated in Southern California.

Through a reduction in size, the SEC document states, Mercury will increase the ratio of its capital to its liabilities, a key ratio that federal regulators look at in determining an S&L;’s financial health.

Currently, Mercury’s capital ratio is slightly more than the required 3% of its liabilities, but that ratio is scheduled to increase to 4% at the start of 1990 and eventually to 6%, according to the document.

President Bush’s proposal to rescue the S&L; industry, currently pending in Congress, may change those capital requirements.