At least seven savings and loans in Orange County need cash infusions to help them meet tougher capital regulations imposed under the $166-billion industry bailout bill that President Bush is expected to sign Wednesday.
Ranging from healthy to nearly insolvent, the S&Ls are among nearly 1,000 thrifts nationwide that do not now meet one or both of the new requirements for capital, and their futures may depend on their ability to raise the needed funds.
At least three of the seven S&Ls based in Orange County already are nearly insolvent but have not been seized by regulators. At least four of them are actively looking for merger partners that would provide new capital.
"The bill is going to have the effect of causing the additional closure of about 500 S&Ls nationwide that do not have the prospect of raising the necessary capital," said Edward Carpenter of Southport/Carpenter Group, a Santa Ana financial-institutions consultant.
Capital is an institution's final cushion against losses. It is the amount investors put up to start the business and any additional amount put in, through retained earnings and subsequent stock offerings, to help it grow. S&L regulations offered a set of additional items to bolster sagging capital levels in the 1980s, but the new bill strips those items away.
"A tougher capital requirement means S&L owners will have more of their own money at stake," said Alex Sheshunoff, an Austin, Tex., industry consultant. "No longer will a handful of S&Ls be able to simply bet taxpayer-insured dollars in hopes of a profit."
The bailout bill also means that a separate S&L industry is an endangered species, said Gerry Findley, a Brea industry consultant. Besides imposing tougher regulations, the bill will allow banks to buy healthy S&Ls, and Findley expects the industry to disappear slowly through mergers and consolidations.
The measure will turn S&L survivors into different kinds of institutions, said Charles H. Green, acting president of FarWest Savings & Loan in Newport Beach.
"The bill requires you to engage in a narrower business, to pay higher premiums for insurance deposit and to increase your capital," he said. "Those elements don't work well together, and many institutions will fail. And the survivors will be converting to banks sooner or later."
FarWest is one of the seven Orange County thrifts that must raise capital. But it needs only a slight amount, for its size, and is a healthy institution with a financially sound parent that could meet the new requirements easily, Green and consultants said.
The other S&Ls needing capital are Charter Savings Bank in Newport Beach, Mercury Savings & Loan in Huntington Beach, Delta Savings Bank in Westminster, Constitution Federal Savings & Loan in Tustin, Huntington Savings & Loan in Huntington Beach and Security Federal Savings & Loan in Garden Grove.
The list does not include four insolvent county S&Ls already seized by regulators. They are Lincoln Savings & Loan in Irvine, Pacific Savings Bank in Costa Mesa, First California Savings in Orange and Perpetual Savings Assn. in Santa Ana.
The bill spells out two capital tests that S&Ls must meet. Under one test, S&Ls will need 1.5% of their assets in what is called tangible capital--the basic cash that has been put into the institutions over the years. Over five years, that ratio must be raised to 3%.
Under the other test, they must maintain a 3% ratio of core capital to assets. Core capital includes "good will," which is the value that one company pays in excess for the basic value of a firm it acquires. Good will now must be written off over 20 to 40 years, but the new bill requires that it be eliminated within five years.
The healthiest of the Orange County thrifts facing capital problems is FarWest, with $4.6 billion in assets. The S&L has an estimated tangible capital ratio of 2.21% and a core capital ratio of 2.58%, according to March 31 regulatory figures compiled by Sheshunoff's firm.
Based on Sheshunoff's report on March financial results, other county S&Ls need more help:
- Charter Savings would have negative tangible capital but would almost have enough core capital. Its problem is about $13 million in good will it took on from the acquisition last year of the failed Merit Savings Bank in Los Angeles. Saying Charter is "no different" than it was a year ago, Jon Maddox, its president, said the S&L's owner, Mola Development Co., "will do whatever is necessary to comply" with the new regulations, even if it means putting $4 million more into Charter and reducing its assets to $300 million from its June 30 level of $429 million.