Bailout Package’s Capital Clause Draws Line for S

In the 1970s, major league baseball had something called the Mendoza Line, named after weak-hitting Pittsburgh Pirates infielder Mario Mendoza.

Players would search for Mendoza’s batting average in the Sunday papers, draw a line and compare their own average to his. No one wanted to fall below it.

Details of the savings and loan bailout package worked out this week by congressional negotiators provide a Mendoza Line of sorts for thrifts that none will want to fall below. The standard is the ratio of “tangible capital”--essentially cash--to assets and is intended to mark a clear point showing when an institution is a problem.

According to the S&L; bailout package approved late Thursday by a House-Senate conference committee, a savings and loan by June, 1991, must put up $1.50 of its own money for every $100 in loans. That limit will be raised in steps, to $3 per $100 in loans by 1995. Institutions that fail to meet that level risk having regulators step in to restrain their growth or take other measures.

The new standard effectively separates California thrifts into three groups. The strongest include such giants as Great Western, World Savings, Columbia Savings and Home Savings. Those thrifts already enjoy a solid cushion of capital above 3% to shield them against losses and will not feel pressure to bolster it.

In the second tier is a group that includes such thrifts as Glendale Federal, California Federal and Coast Federal--institutions whose capital as now measured includes large amounts of intangible assets known as goodwill. By 1995, an S&L; will not be allowed to count goodwill as capital in measuring whether it has $3 in capital for every $100 in loans.

These institutions, which now meet the 1.5% requirement, may feel pressure to limit growth to increase capital by 1995 to meet the 3% level and may not have the financial strength needed to compete for choice thrifts that come up for sale.

Some may be able to boost capital through earnings. If they cannot, they would have to shrink in size by disposing of assets, find a merger partner or attract new capital from investors, which industry officials say may be difficult because the new federal restrictions may make investors wary.

The third group is made up of what some industry executives call the “brain dead” institutions, many of them operating under regulatory supervision while they await federal funds. Those institutions will be closed or sold but first need money to pay off depositors or provide a sweetener for buyers.

Waiting for Burial

“They are waiting for federal funds for a decent burial,” said Alex Sheshunoff, an Austin, Tex.-based consultant to financial institutions.

Requiring more capital is a way to make sure that thrift owners have sufficient money at risk and a big enough cushion against losses. With more money at risk, the theory goes, it is less likely that thrift owners will use customer deposits to go on the kind of wild spending sprees that many went on during the early 1980s.

But already some critics are questioning whether the penalties for failing to meet the capital standards will be very stiff. They speculate that the most likely consequence may be a visit from regulators, who could force the institution to limit growth, suspend dividends or take some other measures to bolster capital. That, they argue, may not be very strict.

“There is no drop-dead provision. Nothing says that if you don’t meet the standards by this date you are out of business,” said Bert Ely, a financial industry consultant in Alexandria, Va.

Few thrifts of any size in California have tangible capital/assets ratio below 1.5% now. According to figures compiled by consultant Sheshunoff, 38 out of 191 thrifts in California, or 20%, fall below the level. Most are small institutions, and many, such as Gibraltar Savings of Beverly Hills and Lincoln Savings & Loan of Irvine, are operating under supervision of regulators.

Some of the institutions falling short of the 1.5% standard that are not under control of regulators, such as Mercury Savings in Huntington Beach and Imperial Corp. of America in San Diego, are already restructuring.

Earlier this month, Imperial disclosed a plan to shrink its assets by $2 billion, taking steps such as selling a $400-million auto lease portfolio, selling its $275-million credit card portfolio and trimming its commercial real estate lending.

Likewise, Mercury plans to shrink its assets to about $2 billon from about $2.25 billion today, is selling five branches in Northern California and has stopped paying a dividend on common stock. Mercury Chairman Leonard Shane said he expects that the institution will have no problem meeting the capital requirements.

Those falling below the 3% mark are another story. Of 191 savings and loans in California, 117, or 39%, are below that level now.

Executives with major thrifts that fall below said they are optimistic, arguing that five years is enough time to increase their capital through earnings.

“We are going to be all right even under the most drastic interpretations,” said Robert L. Lackovic, chairman and chief executive of First Nationwide in San Francisco. Ultimately, First Nationwide could tap corporate parent Ford Motor for more capital, although Lackovic said he prefers not to do that.

May Be Difficult

Likewise, Norman M. Coulson, chairman of GlenFed, parent of Glendale Federal, said the thrift should be able to use earnings to raise its level, although he acknowledges that “we won’t be flush with capital.”

Some analysts, however, say that raising capital by using earnings may be difficult if interest rates climb and the real estate market turns sour.

The most likely result of the savings and loan bailout package--if it receives final congressional approval and the signature of President Bush--is a string of mergers. For one thing, regulators will make available troubled thrifts as money becomes available to put together packages to sell them. In addition, numerous bank holding companies are looking to buy thrifts. Finally, some thrifts may opt to sell rather than struggle to raise their capital or shrink their assets.

“There will be buying frenzy. And this will be a buyer’s market,” said Peter Treadway, an analyst who follows thrifts for the investment firm of Smith Barney, Harris Upham in New York.

MAIN STORY: Part I, Page 1

CAPITAL LEVELS FOR BIG CALIFORNIA THRIFTS Figures represent estimated tangible capital levels for California thrifts with more than $1 billion in assets as of March 31.

Estimated Total Assets Tangible Capital % of Institution (billions) (millions) Total Citicorp Savings (San Francisco) 7.1 740 10.8 Eureka Federal (San Carlos) 1.7 105 6.0 Bay View Federal (San Mateo) 2.8 165 6.0 Pomona First Federal (Pomona) 1.2 74 6.0 Downey Savings (Costa Mesa) 3.8 219 5.9 Sacramento Savings (Sacramento) 2.3 131 5.7 Sears Savings (Glendale) 4.1 222 5.5 Columbia Savings (Beverly Hills) 13.0 675 5.2 First Federal (Santa Monica) 2.3 115 5.0 Western Financial (Orange) 2.6 124 4.8 Home Federal (San Diego) 16.8 776 4.7 Union Federal (Los Angeles) 2.3 101 4.5 Great Western (Beverly Hills) 32.9 1,444 4.4 Great American First (San Diego) 13.2 544 4.2 World Savings (Oakland) 18.0 711 4.0 Century Federal (Santa Monica) 1.1 44 3.8 Fidelity Federal (Gendale) 4.8 180 3.8 Home Savings (Los Angeles) 36.5 1,321 3.7 American (Stockton) 15.4 547 3.6 San Francisco Fed. (San Francisco) 4.5 154 3.5 Beverly Hills Fed. (Beverly Hills) 1.7 53 3.2 Household (Newport Beach) 5.0 149 3.0 Valley Federal (Van Nuys) 3.4 101 3.0 United Savings (San Francisco) 1.0 29 2.8 County Savings (Santa Barbara) 1.4 36 2.5 Far West (Newport Beach) 4.6 101 2.2 California Federal (Los Angeles) 25.5 527 2.1 Lincoln (Irvine) 5.3 98 1.9 Glendale Federal (Glendale) 24.8 445 1.8 Homestead (San Francisco) 5.4 98 1.8 Coast (Los Angeles) 12.9 227 1.8 First Nationwide (San Francisco) 26.2 432 1.7 Imperial (San Diego) 11.9 173 1.5 Western Federal (Marina Del Rey) 4.5 46 1.1 New West (Stockton) 22.0 200 0.9 Mercury (Huntington Beach) 2.5 12 0.5 Santa Barbara (Santa Barbara) 5.0 25 0.5 Republic (Altadena) 2.2 -3.3 -0.1 Gibraltar (Beverly Hills) 12.1 -67.5 -0.6 Southern California (Los Angeles) 2.0 -16.3 -0.8 Pacific Savings (Costa Mesa) 1.1 -250 -23.4

Source: Alex Sheshunoff & Co., Austin, Tex.

CAPITAL LEVELS FOR ADDITIONAL SOUTHERN CALIFORNIA THRIFTS Figures represent estimated tangible capital levels for thrifts with less than $1 billion in assets as of March 31.

Estimated Total Tangible Assets Capital % of Institution (millions) (millions) Total Ontario S&L; Assoc. (Ontrario) 114 19 16.9 Mutual Savings (Pasadena) 338 51 15.0 Mission Savings (Riverside) 15 2 13.8 First Deposit Svgs Bnk (Redding) 78 9 11.0 Standard Savings (Los Angeles) 185 18 9.8 Sterling Savings (Irvine) 198 19 9.7 First Public Savings (Los Angeles) 165 14 8.6 Quaker City FS&LA; (Whitter) 342 28 8.3 Secure Savings (Fontana) 48 37 7.8 Hawthorne Savings (Hawthorn) 956 68 7.2 La Jolla Savings Bank (La Jolla) 90 6 6.9 Fullerton S&L; (Fullerton) 346 23 6.8 Butterfield Savings (Santa Ana) 703 47 6.7 Brentwood Square (Los Angeles) 124 8 6.6 Palomar Savings (Escondido) 73 5 6.4 First Global Savings (Los Angeles) 42 3 6.3 Westside Savings (Los Angeles) 90 6 6.3 Plaza Savings (Santa Ana) 57 4 6.2 Standard Pacific Svgs (Newport Bch.) 252 15 6.1 Highland FS&LA-L.A.; (Los Angeles) 318 19 6.0 Eastern Savings Bank (Alhambra) 82 5 5.9 Hemit FS&LA; (Hemit) 517 30 5.8 Redlands FS&LA; (Redlands) 720 41 5.8 Provident Savings Bank (Riverside) 507 28 5.5 Newport Balboa Svgs (Newport Bch.) 622 33 5.4 Cornerstone Savings (Mission Viejo) 66 4 5.4 Vista Savings Bank (Encino) 96 5 5.4 United Calif. Savings (Anaheim) 677 35 5.1 Intl Savings Bank (San Diego) 207 11 5.1 Frontier Savings (Redondo Bch.) 58 3 4.9 Western Fin. Savings Bk. (Orange) 258 124 4.8 Life Savings Bank (San Brdu.) 71 3 4.6 First Savings (Beverly Hills) 114 5 4.6 Irvine City S&LA; (Irvine) 91 4 4.4 Inland Savings (Hemit) 112 5 4.2 Torrance Savings (Torrance) 110 5 4.2 Beach Savings (Huntington Bch.) 97 4 4.2 Universal Savings Bank (Rosemead) 254 10 4.1 Girard Savings Bank (San Diego) 224 9 4.1 Newamerica Savings (Camarillo) 120 5 3.9 Guardian Savings (Long Beach) 604 23 3.9 First FS&LA-S.G.Vlly; (Covina) 361 14 3.9 Malibu Savings Bank (Malibu) 202 7 3.6 US Community Svgs Bnk (Encinitas) 53 2 3.6 Unity Savings (Beverly Hills) 488 18 3.6 Broadway FS&LA; (Los Angeles) 95 3 3.6 Malaga Savings (Palos Verdes) 11 4 3.5 Network Svgs (Los Angeles) 532 18 3.4 Pioneer Savings (Newport Bch.) 15 0.5 3.4 Encino Savings (Encino) 223 8 3.4 Del Amo Savings (Torrance) 145 5 3.3 Palm Springs Svgs (Palm Springs) 137 4 3.2 San Clemente Savings (San Clemente) 330 10 3.1 Hancock Savings (Los Angeles) 211 6 3.0 Rancho Bernardo Svgs Bnk (San Diego) 130 4 3.0 Executive Savings (Marina Del Rey) 69 2 3.0 Long Beach Savings (Long Beach) 744 21 2.9 Liberty Savings (Huntington Pk) 54 2 2.8 Bel Air Savings (Los Angeles) 573 15 2.7 Heartlannd Savings (El Cajon) 127 3 2.6 East-West Fed Bnk (Los Angeles) 481 11 2.5 Century City Savings (Los Angeles) 20 0.5 2.4 Flagship FSB (San Diego) 99 2 2.4 Trust Savings Bank (Monterey Pk.) 188 4 2.3 Antelope Valley S&LA; (Lancaster) 298 7 2.3 Brookside Savings (Los Angeles) 628 14 2.3 Santa Paula Savings (Santa Paula) 336 7 2.2 Sherman Oaks Savings (Sherman Oaks) 44 1 2.2 Wilshire Savings (Los Angeles) 100 2 2.0 Progressive Savings (Alhambra) 421 8 2.0 Western Empire Savings (Yorba Linda) 246 4 1.9 Westcoast Savings (Pacific Pal.) 81 2 1.8 Enterprise S&LA; (Compton) 17 0.3 1.82 Amer Interstate Svgs (Los Angeles) 27 0.4 1.6 Investment Savings (Woodland Hills) 285 4 1.4 Constitution FS&LA; (Tustin) 75 0.3 0.3 Huntington Savings (Huntinton Bch.) 123 0.2 0.2 Family Savings (Los Angeles) 145 0.2 0.2 Delta Savings Bank (Westminster) 57 -0.07 -0.1 First FS&LA; (San Brdu) 137 -0.6 -0.5 Sierra FS&LA; (Beverly Hills) 49 -0.3 -0.7 Charter Savings (Huntington Bch.) 458 -4 -0.9 Viking S&LA; (Santa Monica) 24 -0.3 -1.3 City S&LA; (Westlake Vl) 33 -2 -4.6 Security FS&LA; (Garden Grove) 77 -3 -4.7 Westco Savings Bank (Wilmington) 188 -11 -6.0 Southwest Savings (Los Angeles) 897 -624 -7.0 Founders Savings (Los Angeles) 135 -44 -32.7 First Calif. Svgs FSA (Orange) 161 -77 -47.7 Arrowhead Pacific SB (San Brdu) 60 -30 -50.2 Perpetual SA (Santa Ana) 19 -11 -57.7 Unified Savings (Northridge) 35 -21 -59.1 Westwood S&LA; (Los Angeles) 315 -224 -71.0

Source: Alex Sheshunoff & Co., Austin, Tex.