A Tale of 2 S&Ls; Valley Fed, Glenfed Cope With New Rules : Glenfed: The giant thrift is thinking of selling its home-building unit to maintain new federal capital levels, even though the unit is profitable.

Glenfed Inc., the giant savings and loan holding company in Glendale, is mulling whether to shed its home-building business--even though the unit is profitable.

Glenfed, with $25 billion in assets, is the parent of Glendale Federal Bank. It also has been building houses since 1971 through its Glenfed Development Corp. unit, an Encino-based concern that builds single-family houses, condominiums and apartments in Southern California by itself and through joint ventures.

In Glenfed’s fiscal year that ended June 30, the home-building unit contributed $26 million, or 14%, of Glenfed’s $189 million in total pretax profit. Glenfed typically does not break out the financial results of each division, but it found Glenfed Development’s showing so exceptional in fiscal 1989 that it touted the unit’s profit in its annual report.

But profitable or not, the home-building division has become a burden to Glenfed because of the federal government’s new capital requirements for savings and loans that took effect last Thursday, said Norman M. Coulson, Glenfed’s president and chief executive. So Glenfed is considering whether to sell the division, although no decision has been made, he said.

The new federal requirements are meant to force S&Ls; to raise their capital--which includes cash and stockholders’ equity, among other items--as a percentage of their total assets so as to cushion the thrifts against future losses from bad loans. The idea is to avoid the enormous S&L; failures that the federal government is now bailing out.

The requirements are designed to redirect S&Ls;’ focus toward their basic business of making mortgage loans, and they make it difficult for S&Ls; to continue making direct investments in real estate and other businesses thought to carry higher risk.

Specifically, the new rules mean Glenfed can no longer add its investment in Glenfed Development--an amount the thrift does not disclose--to the parent company’s overall capital base, Coulson said.

In other words, Glenfed would still have Glenfed Development’s assets on its books but not its capital. In that case, at least, Glenfed’s overall capital-to-assets ratio would go down instead of going up, as the new law demands.

“So it becomes an issue of whether you can make enough money” in home-building “to take that kind of hit away from your capital,” Coulson said. At the moment, he said, Glenfed Development’s profits are not sufficient.

Glenfed Development builds about 500 houses a year in various price ranges. In a recent newspaper advertisement, the division was selling Laguna Hills condominiums starting at $158,900 and single-family houses in West Covina that started at $469,900.

Although Glenfed has made no decision on selling the home-building division, Coulson acknowledged that several entities have asked Glenfed about possibly buying the business. The outside parties, which were not identified, “have shown quite a bit of interest” in Glenfed Development, he said.

Nationally, S&Ls; that have been unable to raise more capital, for example, by selling additional stock, have been reducing their assets to meet the new capital-to-assets rules. Two weeks ago Glenfed sold $350 million of loans, enabling it to satisfy the terms of the new law for at least a year.

But the capital thresholds are scheduled to climb even higher over the next five years, forcing Glenfed and other thrifts to find ways to continue raising their capital levels.

“If we don’t meet those capital guidelines, we become a second-class financial institution,” Coulson said.

UNDERSTANDING THE NEW S&L; REGULATIONS

As part of the federal government’s attempt to avoid another disaster in the savings and loan industry, last week regulations took effect forcing S&Ls; to raise their financial reserves as a cushion against future losses from bad loans. The rules require S&Ls; to meet various yardsticks. Listed below are some of the new rules and their key terms:

Capital: Capital is generally counted by adding up an S&L;’s total assets (loans, cash and investments) and subtracting its total liabilities (deposits and other borrowed money). The resulting figure is essentially a thrift’s “net worth.”

Tangible Capital: This is an S&L;’s capital minus its so-called “intangible assets.” One type of intangible asset is “goodwill,” the premium paid for a company above the value of all its individual assets. S&Ls; are now required to have tangible capital equal to 1.5% of total assets.

Core Capital: This is a less stringent standard that allows a thrift to count both tangible capital, plus a certain amount of “supervisory goodwill,” which is goodwill acquired in the purchase of another troubled S&L.; Thrifts are now required to have core capital equal to 3% of total assets.

Risk-based Capital: Just another way of counting capital and assets, this requirement is designed to ensure that S&Ls; carry more capital for its assets that are deemed risky, such as junk bonds or unsecured commercial loans. S&Ls; must now maintain capital equal to 6.4% of risk-based assets.