Market Watch : Bottom Fishing for S

The lower California savings and loan stocks fall, the larger two questions loom: When do more big-money players, corporate and individual, decide the stocks finally are too cheap to ignore? And when do the S&Ls; themselves decide it's time to do something to boost the stocks, to give beleaguered shareholders a reason to hang on?

On the first front, there clearly is movement. Northern California hotel operator Theodore Kruttschnitt has taken substantial stakes in Coast Savings Financial and in Bay View Capital. As recently as Aug. 30, Kruttschnitt bought 232,000 more Coast shares at $4 each, raising his stake to 8%.

In mid-July, US Bancorp of Portland, Ore., announced a $25-a-share stock-swap takeover bid for Auburn, Calif.-based HeartFed Financial. HeartFed stock jumped to $20 from $13.75.

Last week, investment banker Sutro & Co.'s team of financial institution experts was in Los Angeles, talking with well-heeled investors. Allan Bortel, who helped form the Sutro team earlier this year after 15 years as an S&L; stock analyst with Shearson Lehman, said he met with "a large investor in Los Angeles who's looking closely at taking larger pieces of (S&Ls;) where the fundamentals just jump off the page."

Sutro, like other investment firms, hopes to work with private investors who see screaming opportunities in the S&L; stocks' plunge, which has gone on almost nonstop since last fall.

The big attraction in the S&Ls; now is the chance to pay 50 cents for assets that are worth $1. As investors have fled the S&L; stocks on worries about problem loans and the institutions' capital levels, the stock prices have fallen well below adjusted book value. That's the theoretical net value of the assets, after paying all debt and subtracting intangible assets such as accounting goodwill. The shares of Glenfed, CalFed, Downey Savings and most other S&Ls; now trade for sharp discounts to their book values, as shown in the accompanying chart prepared by Sutro analyst Campbell Chaney.

The problem with book value is the theoretical part, Chaney concedes: Who knows what the S&Ls;' assets are really worth? You can guess at a fair price, but in a weakening real estate market, who knows if Glenfed stock really sells for a 45% discount to book, a 15% discount or none at all.

Still, the size of the discounts suggests that, even if the S&Ls; were forced to further write down the value of some assets, their stocks still could be priced well below the companies' real value.

Earlier this year, the great hope was that major commercial banks would see the S&L; stock discounts as a cheap way to buy new markets, via takeovers. But the banks suddenly have severe capital problems of their own, and US Bancorp's bid for HeartFed is more the exception than the rule this year. "Certainly, we have a banking industry that is less able to do (deals)" because of the banks' own loan problems, Bortel says.

That leaves individuals such as Kruttschnitt, or non-bank companies, to grab the S&L; stocks and make some noise. The problem here is that takeovers of S&Ls; by individuals or non-bank companies aren't easy. To buy more than 10% of an S&L;'s stock, an investor has to file an application with the federal government. And at the 25% ownership level, an investor becomes a bank holding company in the government's eyes. The regulatory restrictions can become a nightmare.

And underlying everything is the simple question of whether the S&L; business will be profitable enough in the 1990s to make buying an S&L; worthwhile.

Even so, the stocks' severely depressed prices are an open invitation for big-money investors to buy in and take an active role in finding ways to get the stocks up. That may be exactly what some S&L; managers need, because shareholders can argue that their interests aren't even considered these days.

Many California S&Ls; fully meet the government's capital requirements and could be using at least some of their quarterly profits to buy back stock. That could well be the highest-return use of corporate cash right now, but S&Ls; aren't doing it, fearing the regulators would have a fit.

"It's a delicate balance between maintaining capital and buying back stock," argues Samuel McCarver, chief operating officer of Citadel Holding, the Glendale-based parent of Fidelity Federal.

Many California S&Ls; also should be looking for merger partners within their industry, rather than betting that they'll be among the survivors in the '90s, many analysts concede. But S&L; managers' desire to keep their own fiefdoms generally precludes talk of friendly mergers, even though shareholders would almost certainly benefit.

CalFed and Glenfed had merger talks last year, "but they didn't get anywhere," Bortel notes.

As an extreme, an S&L; manager who truly considers shareholders' needs would be mulling the outright liquidation of the institution as the only way to realize full value. But managers' self-preservation instinct obviously bars that route.

Nonetheless, as the stocks languish, S&L; managers may be forced to take more radical steps to boost shareholder value--or have outside investors make the decision for them.


How some California S&L; stocks are priced now, versus the net value of the firms' assets--their theoretical "book value" per share.

Stock Book Stock S&L; price value vs. book Golden West $26.00 $13.10 +98% Ahmanson 16.63 15.37 +8% Grt. Western 14.13 14.52 -3% Downey 13.38 14.90 -10% Citadel 36.00 57.17 -37% Glenfed 9.88 17.97 -45% Bay View 15.00 28.48 -47% Coast 4.50 11.70 -62% CalFed 8.25 32.96 -75% HomeFed 7.25 37.49 -81%

Source: Sutro & Co.

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