Sterling S&L; Decides to Turn In Charter : Once Fast-Growing Thrift Says 1989 Law Was So Onerous That It Folded Its Tent
Sterling Savings & Loan has quietly closed its doors.
A healthy, once fast-growing thrift buoyed by its real estate development subsidiaries, Sterling turned in its charter to the Office of Thrift Supervision, a little more than three months shy of what would have been its ninth anniversary.
Sterling was not troubled. It was not seized by regulators, and its closing did not cost the government a dime. In fact, it was the state’s top-rated S&L; for several years running.
The thrift part of the Sterling operation produced profits during every month of its existence. In its last days, Sterling enjoyed its highest profit margin ever--5%, well above the industry’s 2.9% average. And its owners ended up with $16 million on their initial $6.2-million investment.
So why did they call it quits?
They saw the handwriting on the wall in the spring of 1989, and it told them that they couldn’t do business the way they wanted, Robert K. Parker, the thrift’s president and chief executive, said late last month as boxes and equipment were being moved to storage.
The message came in what was then the legislative bill to restructure the ailing thrift industry. That bill, which passed in August, 1989, is known as the Financial Institutions Reform, Recovery and Enforcement Act. Nearly everything that made Sterling work so well was outlawed or heavily restricted by the law, commonly known by the acronym FIRREA.
“We determined that it would be better to employ our capital outside the savings and loan industry,” said Parker, a 30-year banking veteran.
Their decision was no secret to either regulators or the industry.
“We’ve had a lot of calls from people who wanted to know what we’re doing,” he said. “They said they’re sorry to see us go because we’ve been one of the good guys.”
Sterling is the fourth thrift in the state, the first in Orange County, to self-liquidate since FIRREA became law. At least two other county thrifts may be thinking about closing their doors, an industry source says.
Only 12 S&Ls; in the nation--all in the past two years--have been approved by federal regulators for self-liquidation, and another request is pending approval, according to the Office of Thrift Supervision, the regulatory agency created by FIRREA.
Small thrifts especially have felt pressured to merge or otherwise get out of business as ever stricter regulations have made competing too expensive for them. They also are more vulnerable to economic hardship because, for many, the souring of only a few big loans can leave the institutions financially weak. And they often have to deal with the younger, more inexperienced--and more autocratic--OTS examiners.
OTS Director T. Timothy Ryan, who announced Monday that he is quitting, has said previously that the thrift industry is a narrow specialty field and is not for everyone. Still, regulators don’t expect many more self-liquidations, especially in an age when so many thrifts are failing, thus reducing the competition. In the past decade, the industry has lost 41% of its S&Ls; most of them failed. Only 1,965 thrifts are left.
During the Great Depression, many thrifts saw the need for consolidation and embarked on self-liquidation plans. In 1940 alone, about 2,000 thrifts began the slow process of paying off all depositors, with interest due, and closing their doors, according to the OTS.
For Sterling, the catalyst was FIRREA. The law, among its more onerous provisions, requires all thrifts to reduce their direct investments in such ventures as real estate development and home building to 2% of assets within five years.
Started in 1984 by developer Robert H. Lintz, Sterling had invested as much as $41 million in two real estate subsidiaries. Those two operations at one point amounted to more than 28% of the thrift’s assets. Sterling Builders Inc. was the thrift’s home construction arm, and Sterling General Inc. was its joint-venture operation in developing residential tracts.
A little more than four years later, the S&L; had grown to nearly $200 million in assets and was earning several million dollars a year when most thrifts its age were happy with a few hundred thousand dollars in annual profit.
But shortly after President Bush took office, the massive thrift industry restructuring bill was proposed. With the industry’s federal deposit insurance fund bankrupt, the emergency measure appeared certain to pass with few major changes.
Parker said he and other top officers took a look at what the law provided, at what the thrift and real estate industries would be like in the long term and at what Sterling could do in the future. Though several directors thought the S&L; would still be a good little business, they agreed with Parker and Lintz to close the thrift operation.
The executives also figured that they would have some stiff competition soon in the market to sell assets. The Resolution Trust Corp., also created by FIRREA, took over all assets from failed thrifts, thus becoming the nation’s biggest landowner. In the process of selling those loans and properties quickly, often at a loss, the agency helped to push down real estate prices.
Sterling figured that the market would go soft, Parker said, so it got rid of its more difficult assets first.
“We focused on our income property first because we knew we would have trouble selling it later on,” he said. “Now, S&Ls; aren’t even making loans for those properties.”
Despite its orderly withdrawal from the industry, Sterling wasn’t immune to the long recession. Red ink from write-downs, reserves and real estate sales at the S&L;’s subsidiaries caused the thrift to post big losses for the past 18 months, but that barely dented the huge amount of capital it had built up.
Besides, the thrift operation itself continued to be profitable, Parker said. As it sold its loans and other assets from its one-office branch in the Centerpointe development at MacArthur Boulevard and Jamboree Road in Irvine, it refunded deposits.
The thrift never sought deposits from local residents. Instead, it used a money desk operation to solicit large funds directly from money managers and institutional investors. That made the deposit payoff easier, Parker said. The last depositor was paid off in full with interest due on Oct. 15.
Parker plans to continue working with Lintz and the remaining real estate operation. The large banking industry, as well as the thrift industry, is consolidating, and the bankers are going to have to find other jobs.
He has no regrets about the decision to close Sterling.
“It was a good business,” he said, “but we made the right decision.”
Sterling Going Out on Top
Sterling Savings & Loan, a profitable eight-year-old Irvine thrift, closed its doors late last month--and not because it failed or was seized. Rather, Sterling management feels that government regulations enacted three years ago in an effort to clean up the savings and loan industry are too restrictive.
Assets
Sterling’s assets--loans, securities and real estate holdings, and investments--increased steadily, peaking at $192 million in 1988. They began shrinking in 1989 after new government regulations were enacted. Assets at the end of June this year were $43.5 million. (In millions of dollars) 1984: $40.4 1985: $91.1 1986: $124.9 1987: $161.4 1988: $192.0 1989: $168.5 1990: $92.1 1991: $53.5
Profit
The same general pattern is true for the thrift’s earnings, which soared through 1989 but suddenly turned negative in 1990. For the first six months of this year, Sterling lost $709,000. (In millions of dollars) 1984: $0.4 (profit) 1985: $2.3 (profit) 1986: $2.4 (profit) 1987: $3.5 (profit) 1988: $4.1 (profit) 1989: $6.3 (profit) 1990: $5.7 (loss) 1991: $3.5 (loss)
Shareholder Equity
The thrift more than tripled its shareholder equity--net worth--between 1984 and 1989. In the next two years, however, it declined 30%. (In millions of dollars) 1984: $6.6 1985: $8.9 1986: $11.3 1987: $14.3 1988: $18.3 1989: $23.4 1990: $19.8 1991: $16.3 Sources: Office of Thrift Supervision; Findley Reports Inc., Anaheim
Researched by JAMES S. GRANELLI / Los Angeles Times
