Once-Thriving Empire Savings Seeking Federal Help to Survive

Empire of America Federal Savings Bank, the nation’s 12th largest savings institution by assets, grew quickly in the 1980s by gobbling up 13 failing S&Ls; with the support of federal regulators.

Empire, a Buffalo, N.Y.-based concern that was seeking to expand across the country, bought S&Ls; in Texas, Florida, New York, Michigan and California. The California acquisitions were to serve as a springboard for a major push into the state by Empire, which set up local headquarters in Woodland Hills.

But now it’s Empire that needs support--lots of it. Saddled with major losses stemming from its acquisitions, the $10.3-billion (assets) thrift recently said it is insolvent and is looking for federal help to survive.

On Sept. 28, Empire announced that its stockholders’ equity--that is, the amount of its assets minus its liabilities, or net worth--had vanished because of the thrift’s ongoing losses.

Despite its problems, Empire noted that customers’ deposits, up to $100,000 per account, remain insured by the U.S. government. Thus far regulators have not seized Empire as part of the recently enacted federal savings-and-loan bailout program, which is being overseen by a new agency called the Resolution Trust Corp.

The federal government might provide Empire with the necessary money to stay in business; then again, Empire might eventually be seized by the government or merged with another institution instead.

Meanwhile, it is business as usual at Empire’s 17 branches in California, including those in Fountain Valley, Costa Mesa and Irvine, said Jeffrey M. Reinhardt, division marketing officer for Empire’s California unit.

The offices in Fountain Valley and Irvine were picked up when S&L; regulators sold the insolvent Equitable Savings & Loan in Irvine to Empire in March, 1987. Equitable also had an office in Bellflower, which Empire operates. The Costa Mesa office was converted to an S&L; from a branch of Empire’s Pacific Thrift & Loan subsidiary.

As for Empire’s 125 workers in California, there is “no change in their status,” Reinhardt said.

In the nine months ended Sept. 30, Empire lost $209.3 million, after losing $57.3 million for all of 1988. The red ink wiped out its capital, leaving it with $53.5 million more in liabilities than assets.

What went wrong? Empire tried to expand its banking empire in a hurry by buying sickly S&Ls;, and in doing so it ran into a growing problem with the accounting rules governing takeovers. As Empire bought these S&Ls;, it found that the S&Ls;’ liabilities--which mostly consist of deposits and so can be withdrawn at any time--exceeded the value of the S&Ls;’ assets by $926 million.

To make its accounts balance, Empire added $926 million of “good will” to its assets. In accounting, good will is a non-cash asset, yet it must be written off, or amortized, over a number of years as a charge against the company’s income. So every year, Empire found that good will was draining $95 million to $110 million from its profit.

At the same time, Empire was unable to generate enough earnings from its operations to offset the “good-will drag,” as Empire calls it. And the resulting losses steadily eroded Empire’s net worth.

Empire’s descent into insolvency was not unexpected, however. In July, when the company reported a second-quarter loss of $54.2 million, it said continuing losses would eat up its net worth by the end of 1989.

Also, Empire had asked the federal government in February for $900 million to overcome the problems stemming from its purchase of the troubled thrifts. Empire said that if the government came through with that support, Empire’s investment banker, Drexel Burnham Lambert, hoped to raise an additional $675 million from private investors.

The cash infusions then would have enabled Empire to meet new, stricter capital minimums required under the new S&L; legislation. In general, capital reflects the net worth of an S&L;, and the tougher capital requirements are meant to strengthen the thrifts’ cushion against future losses.

Empire’s initial plea for cash was made to the Federal Savings and Loan Insurance Corp., but that agency was abolished under the S&L; bailout plan. So on Sept. 20, Empire filed a new application for aid with the Federal Deposit Insurance Corp., which is helping direct the bailout program.

In its latest application, Empire did not list the dollar amount it needs. Carol G. Corr, an Empire senior vice president, said the exact amount would depend on when the government decided to help. At that point, all of Empire’s assets would be rechecked for their current market value, and then the amount would be established, she said.

There is no guarantee, however, that the government will step in.

But Corr said Empire does not regret its move into California.

“I could not say we’re sorry we went into California or Texas or Florida,” she said. At the time, the mergers “were then appropriate and made sense,” but since then “a lot of things have happened to change the value of the mergers. I’m certain there are no regrets.”

THE O.C. ANGLE

Empire has 17 branches in California, including those in Costa Mesa, Fountain Valley and Irvine. The latter two were acquired in the March, 1987, sale by federal regulators of the insolvent Equitable Savings & Loan, based in Irvine. Equitable also had an office in Bellflower, which Empire operates.