Less Is More in the Case of Foothill’s Thrift Spinoff : Finance: Company awaits SEC approval to give shareholders stock in a new independent thrift. The subsidiary has been a drag on Foothill’s earnings.


What do you do if you’re a successful financial services firm with a growing commercial lending business, $650 million under management, and making lots of money investing in troubled companies--but you also own a sick thrift you can’t sell?

If you’re the Foothill Group, you spin off the thrift to your shareholders.

Foothill, with dual headquarters in Agoura Hills and Los Angeles, makes commercial loans that are secured by a borrower’s assets, such as a company’s accounts receivable, or money it is owed by its customers. Foothill also manages partnerships that invest in the debt of troubled companies.

And then there’s Foothill Thrift, which has been dragging down the parent company’s earnings because of its real estate losses.


Foothill hopes to spin off the thrift before the end of this year in a transaction that would give Foothill’s shareholders common stock in a new thrift holding company, Pacific Crest Capital Inc. Once the spinoff is completed, Pacific Crest would be a separate, public company.

Foothill executives declined to be interviewed for this story. However, Foothill said in documents filed with the Securities and Exchange Commission that after the spinoff, Pacific Crest would have no further connection with its former parent.

The company started its Foothill thrift back in 1974 to help finance its commercial lending business by making small commercial real estate loans. But in recent years, as California real estate values have declined, Foothill Thrift’s loan delinquencies soared.

As a result, the thrift posted a $5.2-million net loss in 1990, and since then has managed to eke out less than $1 million of annual net income. For the nine months ended Sept. 30, the thrift posted net income of $217,000, down from $772,000 a year earlier.


Because of the thrift’s real estate losses, “Foothill is worth more without the thrift than it is with it,” said Jackson Spears, an analyst at the Chicago Corp. investment firm.

Foothill Thrift is not a conventional savings and loan. Instead, it is a state-chartered industrial loan company. Industrial loan companies are generally more limited than S&Ls; or commercial banks in the financial services they can offer customers. For example, industrial loan companies cannot offer checking accounts.

Because of the thrift’s slowdown, it has been operating under a memorandum of understanding with the Federal Deposit Insurance Corp. and the state Department of Corporations since June 4. Among other things, it requires the thrift to increase the percentage of total assets it maintains in capital and reduce its non-performing loans. The company said in its SEC documents related to the proposed spinoff that it has taken steps to comply with the memorandum.

As a result of the collapse of many thrifts in the mid-1980s, depositors in industrial loan companies have the full protection of the FDIC. A 1984 California state law now requires all thrifts to be FDIC members.

In California, industrial loan companies also operate under rules and regulations of the state’s Department of Corporations. The department regulates, among other things, the companies’ collateral requirements for borrowers and maximum loan maturities.

Although the SEC must still approve the proposed thrift spinoff, the idea already has Wall Street’s approval. Combined with a recent surge in profits of Foothill’s other businesses, it has prompted analysts to raise their estimates of Foothill’s earnings for all of 1993.

Since the spinoff plan was announced in July, Foothill’s stock has climbed from about $12 a share to a closing price on Monday of $15.13 a share on the New York Stock Exchange.

Analyst Spears figures that spinning off the thrift would raise Foothill’s return on assets a full percentage point, to 4%. It would increase shareholders’ return on equity even more, to about 18% from 15% now.


Foothill also said in the SEC documents that its thrift currently has adequate capital. But immediately after the spinoff, Pacific Crest intends to raise $7 million to $15 million by selling preferred stock. Pacific Crest would use the additional equity in part to finance “managed growth” of its operations as the California economy recovers, according to the documents.

Foothill Group’s other businesses are doing well, and its combined net income more than doubled in the three months ended Sept. 30, to a record $5.6 million from $2.69 million a year earlier. For the nine months, Foothill Group earned $15.2 million, up 59% from the $9.5 million it earned in the same period last year. Analysts expect the combined company to earn $19 million for the full year, a 42% gain over the $12.7 million Foothill earned for 1992.

Because the spinoff will give Foothill’s shareholders common stock in Pacific Crest, “in effect, they’re getting something of value free,” Spears said.

Spears said he would value the thrift at between 50 cents and $1 a share. Frank Anderson, an analyst at Stephens Inc., a Little Rock, Ark.-based brokerage firm, said in a recent report on Foothill that he valued the thrift at less than $1 a share.

But analyst Spears noted the possibility that the thrift might do much better on its own.

“Foothill is taking it independent, raising capital for it and giving it a decent shot at building a business under a more focused management,” he said.

Foothill Group at a Glance

Foothill Group Inc. is a financial services company with executive offices in Agoura Hills and Los Angeles. Foothill makes business loans, manages money and invests in troubled companies. It also owns a thrift that makes commercial real estate loans and whose earnings have declined with the recession and a drop in real estate values. So Foothill plans to spin off the thrift to its shareholders by the end of the year.


For fiscal years ended December 31; in millions.

Source: Company reports