The reclassification of non-paying loans made by Lincoln Savings & Loan of Irvine has erased the troubled thrift's capital base and left it insolvent, a federal regulator said Wednesday.
Although Lincoln is now operating with a negative net worth, the regulator would not disclose the amount by which the S&L's liabilities exceed its assets.
Federal regulators, who seized the institution on April 14, are continuing to operate Lincoln as they develop a plan for its future, said Mark Randall, a Federal Deposit Insurance Corp. official who is the managing agent for Lincoln.
Federal regulators took over the S&L the day after its Phoenix-based parent company, American Continental Corp., filed for bankruptcy. Regulators claimed that American Continental had been operating Lincoln unsafely and had been dissipating its $5.3 billion in assets.
Capital Has Evaporated
Although Lincoln was not considered insolvent when it was seized, its capital base has evaporated as regulators have reclassified its loans.
Monthly reports filed by Lincoln's government overseers with the California Department of Savings and Loan show that the S&L has more liabilities than assets, Randall said. And it isn't making enough money to reverse the downward spiral.
"The S&L is certainly bringing in considerable income, but its losses are exceeding its revenue," Randall said.
Regulators and industry consultants have estimated that cleaning up Lincoln will cost from $500 million to more than $2 billion.
Charles H. Keating Jr., chairman of American Continental, Tuesday contended that regulators are damaging the S&L through leaks of confidential financial information, some of which he said is inaccurate.
The crisis in the S&L industry in the last few years as well as Lincoln's financial condition since the government takeover have been exacerbated by regulators' mismanagement, Keating claimed.
He said leaks and regulatory interference caused Lincoln to incur pretax losses of $28 million in 1988's final quarter and $40 million in the first quarter this year.
Randall, who disagreed that regulators are to blame for any losses, said Keating's loss figures were "close to being accurate."
As of the end of December, Lincoln's capital base was reported to regulators as $221 million. All of that $221 million, plus an unspecified additional amount, has since disappeared, Randall said.
The decline reflects the reclassification of many major loans as non-paying loans. Under American Continental, Randall said, many loans were accruing interest and were listed as earning assets when in fact the borrowers were not making payments. The S&L's major loans were made to developers, most of whom had projects in Arizona where real estate values have sunk.
Under government regulations, such loans must be considered non-paying loans, and special reserves must be set up to cover the likelihood that the loans will never be repaid in full, Randall said.
By reclassifying the loans and setting up the special reserves, regulators have determined that the S&L never really had the $221 million in capital that it stated at the end of 1988.
Regulators are more than halfway through the loan portfolio and expect to reclassify even more loans, Randall said.
In addition, about $395 million in deposits "has gone out the door" since the April 14 takeover, Randall said.
He attributed more than half the loss to depositors who withdrew their funds within the first two weeks. Many of those depositors were people who had also bought American Continental debt securities and were angry that the company's bankruptcy appeared to make their securities worthless, he said.
"Basically, we're merely recognizing losses that have been here a long time but had not been recognized previously," Randall said. "We are establishing reserves that were not established before. We can't change the loans, but we can state them more realistically."
Meanwhile, a Phoenix judge on Wednesday ordered two attorneys and a Tempe, Ariz., real estate developer to turn over to a Phoenix newspaper two copies of a cassette tape they claim proves that federal regulators illegally leaked classified material about Lincoln to reporters.
A Maricopa County Superior Court judge said Phoenix Gazette reporter Leslie Irwin's constitutional right of free expression outweighs questions of whether the information on the tape includes confidential matters about Lincoln.
The three defendants "absolutely" will appeal the decision, said A. Melvin McDonald, a lawyer for American Continental. The other defendants are Tempe developer Conley Wolfswinkel and his lawyer, Barry Tarlow of Los Angeles.
Superior Court Justice Stanley Z. Goodfarb gave the three defendants until 11:30 a.m. Friday to turn over copies of the tape, unless they win an appellate court stay of his order.
Goodfarb's ruling also forbids the defendants from disseminating information on the tape for 10 days, except to forward its contents to any law enforcement agencies they believe will investigate the alleged leaks.
Free-lance writer Steve Webb in Phoenix contributed to this story.