SAN DIEGO — Great American First Savings Bank on Monday called off its plan to acquire ailing United Bank of San Francisco and offered instead to help boost the bank's sagging net worth by buying nine of its branches for $9 million in cash.
The new proposal apparently is intended to shield Great American from United Bank's problem loan portfolio while satisfying a demand by federal regulators for the San Diego-based S&L to buy or bail out an ailing financial institution. Regulators have required Great American to assist another institution in order to win federal approval for its proposed $102-million acquisition of profitable Home Federal Savings & Loan of Arizona.
The scaled-back Great American offer would provide a much-needed capital infusion for United Bank, whose net worth as of Sept. 30 had dwindled to $2.2 million, or only about 0.3% of its $640 million in assets. Regulators normally require an S&L to maintain a net worth--the excess of assets over liabilities--of close to 3% of its assets as a cushion against losses.
The Great American offer also would maintain the independence of United Bank, which is owned by and caters to Asian-Americans.
Great American's previous bid to buy United Bank called for it to issue a $4-million no-interest note to the bank's shareholders. It also provided for Great American to absorb an undisclosed amount of losses over a three-year period.
Analysts lauded the new Great American offer, saying the deal would limit its exposure to United Bank's potential loan losses.
"Great American didn't want an open-ended liability," said Tom Klingenstein, an analyst with Wertheim & Co. in New York, an investment banking and securities brokerage.
"This is the best way for us to make an offer," said one Great American executive. "This could stabilize United Bank's situation and it limits (our) exposure and activities."
Publicly, officials of both banks downplayed the issue of United Bank's problem loans.
"This is a better approach (and) they can stay independent," said Great American President James Schmidt. "We have a track record of assisting minority-owned banks and savings and loans."
"Our goal has always been to remain independent (and) serve the Asian community," said Percy Duran, a United Bank senior vice president.
The terms of the new offer are for Great American to assume $81 million of United Bank's performing single-family home loans and $90 million in United Bank deposits. Great American also would pay United Bank $9 million in cash to cover the difference and "amortize it over a period of time (so) it affects our earnings only slightly," Schmidt said.
In addition, Great American would put $1 million in an escrow account for United Bank to use for real estate consulting "if we determine that we need" the help, Duran said.
Great American, which has $7.6 billion in assets and 122 offices in California, would take over nine of United Bank's 26 branches. Six of the branches are in Los Angeles, two are in Sacramento and one is in Stockton.
The deal is contingent on Federal Home Loan Bank Board approval of Great American's proposed merger with Home Federal.
Great American also recently agreed to acquire troubled Los Angeles Federal Savings Bank. If both mergers are approved, Great American would have $10.5 billion in assets and 189 offices in California and Arizona.
United Bank has suffered losses since the beginning of last year, primarily because of problem real estate loans. It reported losses of $10.6 million in the nine months ended Sept. 30, increasing its provision for loan losses by nearly $4.2 million in the third quarter.
Earlier this month, regulators ordered the bank to fire its outside auditor, KMG Main Hurdman, for allegedly understating loan losses last year. KMG Main Hurdman has denied the allegations.
Another accounting firm is now auditing United Bank's books to determine whether further loan loss reserves should be established.
Great American's stock, which hit a low of $21.375 during the day, closed Monday at $22.50, off 12.5 cents. United Bank's closed at $1.75, up 75 cents.