O.C. Thrifts Jointly Lost $866.4 Million in ‘89, Agency Says

Orange County’s 32 savings and loan institutions posted a combined loss of $866.4 million in 1989 and lost nearly 20% of their aggregate assets, as federal regulators imposed stricter operating rules on thrifts nationwide.

According to figures released Tuesday by the federal Office of Thrift Supervision (OTS), the local industry was dragged down by a $1-billion loss at Irvine-based Lincoln Savings & Loan, which regulators seized in April. Lincoln lost $127.5 million in the fourth quarter.

Without Lincoln’s huge loss, the county’s other 31 thrifts had combined earnings of $144 million. But not all is well with other county thrifts: Twelve other institutions, including some of the largest, reported losses in the fourth quarter.

The 1989 loss by local thrifts is more than double the previous year’s $347.2-million loss. In 1987, local S&Ls; lost a still-record $920 million. But some of the institutions that contributed to those earlier losses have since been closed or taken over by federal regulators.

The continuing financial problems of some area thrifts reflect the difficulties they are having dealing with tougher S&L; regulations imposed by the federal law enacted in August to bail out the thrift deposit insurance system.

The regulations have forced some institutions to reduce their asset base to meet the tougher capital requirements of the new federal thrift law. Local thrift assets slipped from $70.4 billion in 1988 to $56.4 billion at the end of last year.

Lincoln has shown the largest reduction in assets, as regulators forced it to get rid of poorly performing loans and investments. At the end of 1989, Lincoln had $2.9 billion in assets, down from $5.4 billion a year earlier.

The drop in the size of the S&Ls; is of particular importance to consumers and home buyers, who may find it harder to obtain loans and mortgages from thrifts, industry officials said.

The effect of the bailout law has hurt even such healthy thrifts as Downey Savings & Loan in Newport Beach. Downey, long recognized as one of the best-run thrifts in the nation, reported that its annual net income was cut in half, to $13.6 million, because of losses it was forced to take in the last two quarters to comply with new accounting requirements and to meet or exceed regulations on capital. Downey lost $9.4 million in the fourth quarter.

The performance of county thrifts reflects the problems of the industry nationwide.

On Monday, OTS reported that U.S. S&Ls; lost $6.5 billion in the fourth quarter and $19.2 billion for the year, the worst financial performance in the industry’s history. Bad real estate and junk bond investments were largely blamed.

A few Orange County thrifts bucked the trend. The giant American Savings Bank in Irvine posted $215.7 million in net income for the year, including $107 million in the fourth quarter. The thrift, however, was helped by a federally assisted bailout in late 1988 that relieved the institution of its bad assets and gave it favorable tax benefits.

Other large local thrifts reported good earnings. Western Financial Savings Bank in Irvine turned in $12 million in 1989 profits, including $2.2 million in the fourth quarter. Household Bank in Newport Beach recorded $11.4 million in income for the year, including $5.3 million in the fourth quarter.

But the thrifts that were profitable last year could not make up for Lincoln.

The Irvine-based Lincoln S&L; was seized in April after its parent firm, American Continental Corp. in Phoenix, filed for bankruptcy. The failure of the thrift has been linked with Lincoln’s aggressive use of expanded powers granted by industry deregulation and alleged abuses by American Continental’s chairman, Charles H. Keating Jr.

Small investors in the parent company lost nearly $200 million in the collapse. They have filed 17 state and federal lawsuits, alleging that they were tricked into buying debt securities. Lincoln may cost taxpayers $2 billion to clean up, making it one of the nation’s costliest thrift failures.

Last year, regulators also seized two small thrifts: American Interstate Savings & Loan in Newport Beach, which lost $2.4 million in 1989, and Security Federal Savings & Loan in Garden Grove, which lost $5.3 million.

Even without Lincoln, the local thrift industry may face a tough time again this year. So far, federal regulators have seized three county thrifts, including Mercury Savings & Loan, a Huntington Beach thrift with $2.2 billion in assets. Mercury lost $39.8 million last year, including $34.4 million in the fourth quarter.

This year, regulators also seized Western Empire Savings & Loan in Yorba Linda, which lost $12.1 million last year, and Huntington Savings & Loan in Huntington Beach, which lost $431,000. Mercury and Huntington could not meet capital rules, and Western Empire’s business plan was eviscerated by the new federal law.

The federal law not only sets up three tough rules on capital--an institution’s last reserve against losses--but also requires thrifts to sell their portfolios of high-yield, high-risk junk bonds within five years.

The New York owners of Western Empire had banked on junk bonds, with regulatory approval, to revive the moribund thrift. But the change in the law called for wide writedowns that threw the S&L; into insolvency and brought in regulators.

The new rules also caused FarWest Savings in Newport Beach to write down its junk bond portfolio and take a loss of $38.7 million in 1989. The thrift also failed to meet capital rules and is working with regulators to come up with a remedial plan.

Kurt Kemper, general counsel at FarWest, blames Congress for overreacting to the thrift crisis by including the junk bond ban in the law at the last minute.

“If you don’t have to divest your junk bond portfolio, the losses would never have occurred,” Kemper said. “As soon as that bill was signed, billions of dollars were lost. It decapitalized the industry.”

COUNTY BASED SAVINGS AND LOANS

Ranked by Dec. 31, 1989 assets

Dollars in thousands

4th Total Quarter Savings and Loan Assets Net Income American Savings $16,290,515 $106,972 New West 9,534,872 0 Household Bank 7,074,872 5,273 Far West 4,354,699 -32,947 Downey 3,774,336 -9,420 Lincoln 2,906,307 -127,545 Western Financial 2,871,501 2,271 Mercury 2,158,830 -34,354 Beverly Hills 1,525,669 1,044 ITT Federal 951,834 2,116 United California 662,888 329 Pacific First 661,942 -633 Guardian 607,265 582 Western Empire 406,574 -9,118 Fullerton 351,032 -633 Charter 331,384 -881 San Clemente 323,070 1,021 Universal 268,262 692 Standard Pacific 240,988 51 Malibu 197,941 -991 Sterling 168,496 1,834 Huntington 120,438 -699 Beach 112,800 591 Irvine City 82,481 92 University 79,845 50 Security 69,427 -57 Plaza 69,199 877 Constitution 68,443 320 Delta 57,929 -7 Cornerstone 56,459 322 American Interstate 19,424 -1,589 Pioneer 11,349 -82 Orange County Totals $56,411,071 -94,519

Source: Office of Thrift Supervision