Outside Capital May Be Hard To Come By
While Congress continues to debate whether to allow commercial and industrial companies to own financial institutions, a number of big nonbank firms have already rendered a verdict: It's not for them.
Disillusioned by reams of rules and regulations that pinch profitability, such companies as Dana Corp., Transamerica Corp., Capital Holding Corp., and the Weyerhaeuser Co. are pulling the plug on savings and loan businesses that they bought in the 1980s.
They got into the thrift industry in the flush of deregulation that invited corporate ownership as a source of needed capital. The capital-raising prospect is the very argument now heard from supporters of legislation that would remove the traditional barriers between commercial banking and other forms of commerce.
Andersen Study
The thrift owners' disappointing experiences raise doubts that nonbank capital is poised to flow into commercial banks, as Bush administration officials believe.
Supporting those doubts, a recent study on the future of banking by Andersen Consulting and the Bank Administration Institute concluded that "almost no new capital [is expected to be] generated by investments from or acquisitions by nonbanks."
Returns Fall Short
Although their thrifts have generally been conservative, sound, and profitable, the thrift-owning corporations say their investments no longer clear the required hurdles for return on investment. In these cases:
* Dana Corp., a manufacturer of auto parts, is nearing completion of a deal to sell Diamond Savings and Loan Co., Findlay, Ohio, with $878 million of assets, to Banc One Corp. of Columbus.
* Transamerica Financial Corp. has dismissed the chief executive officer of its Transamerica Savings and Loan Association and sold the deposits to Home Savings of America, Los Angeles. Once the insurance and finance company gets regulators' nod to absorb the thrift's assets - $14.3 million on March 31 - "then we close the doors," said an employee who fields calls at the San Luis Obispo, Calif., thrift.
* Capital Holding, a Louisville-based insurer, took the extreme step in January of liquidating First Deposit Savings Bank, a $78 million-asset thrift in Redding, Calif. It plowed the capital into its consumer "non-bank bank," First Deposit National Bank of Tilton, N.H.
* Weyerhaeuser, a forest-products giant, has systematically shrunk Republic Federal Savings and Loan of Woodland Hills, Calif., and intends to dismantle the $1 billion-asset thrift in 1992.
"If you have an opportunity to conduct business with more regulation or less regulation, it's easier to do business with less," said Timothy Breedlove, president and chief operating officer of Republic Federal.
Simon Group Divests
Other disappointed buyers have begun to exit the business. A group led by former Treasury Secretary William Simon recently sold Honfed Bank, a $3.2 billion-asset Honolulu thrift.
Would-be buyers are backing away, too.
General Electric Capital Corp. withdrew from the bidding for Goldome, the biggest thrift the government has sold this year. Also this year, America First Financial Fund, which was in the running for Goldome, refunded to investors $260 million that had been raised to invest in the thrift industry.
The nonbank owners, because of their management skills, "were a net plus to the thrift business," said Michael Patriarca, director of the western region of the Office of Thrift Supervision, San Francisco. "But it certainly is a different investment decision than it was in the 1980s."
The so-called firewalls, meant to insulate banks from their nonbank affiliates, "are about to be raised even higher," said Patrick A. Forte, president of the Association of Financial Services Holding Companies. "That will make it crystal clear that there's no good reason to invest in this business."
"It's going to be a very difficult sell," agreed John S. Simpson, a vice president of Dana Corp. in Toledo, Ohio, and chairman of Diamond Savings.
He said prospective buyers will ask, "Where can I get the best return for my investors? This is not going to be one of those areas."
The mix of commerce and financial services has worked best for companies like General Electric that own noninsured businesses which are more lightly regulated than banks. Such firms wring healthy profits by cross-marketing products and through cross-financing activities.
The Downside
There are numerous reasons why nonbanks are having second thoughts. Among them:
* Tougher capital requirements have dramatically limited the companies' ability to leverage their equity. "When you walk in and [the asset-capital ratio is] 33 to 1, and then it becomes 12 to 1, that's probably the biggest change," Mr. Breedlove said.
* Strict, detailed regulation is alien to most industrial corporations. "It's burdensome, quite frankly," said Mr. Simpson, who deals with three tiers of regulation at Diamond Savings.
* It is tricky for thrifts and affiliates to cross-sell products.
The whole point of linking a depository institution with insurance and securities companies is to offer more services, more efficiently. But thrift regulators are increasingly wary of such practices. Several states-including Pennsylvania and Georgia - have outlawed tie-ins between affiliates, according to Mr. Forte.
* Congress has its eye on investors' deep pockets. To cushion taxpayers from further deposit insurance losses, investors may be asked to guarantee that they will pay if a financial institution runs aground. The House is considering requiring investors to accept liability for 5% of a bank or thrift's assets.
If that measure become law, "people will run away into the night," Mr. Forte said.
* The competitive environment has changed dramatically - for all involved. Dana Corp. and Weyerhaeuser have developed restructuring plans for the 1990s that assign a more limited role to financial services. Like many banking companies, they want to refocus on core businesses.
A Contrarian in Texas
There are exceptions to the trend. Temple-Inland Inc., a paper and construction products company, began acquiring thrifts in 1986 and now controls $7.3 billion of deposits and 140 branches across Texas.
"I think our parent company sees an opportunity to expand the financial services part of Temple-Inland through RTC acquisitions," said Rex Whitten, chief executive of Temple-Inland's Kilgore Federal Savings and Loan unit.
L. William Seidman, former chairman of the Federal Deposit Insurance Corp., remains optimistic that commercial firms will plow capital into banks. "Eighty-eight percent of all banks are profitable. Hopefully, they will avoid getting involved with the other 12%."
Ford Motor Co. has no plans to shed First Nationwide Bank, San Francisco, though it has proved to be a costly acquisition. Ford has downstreamed $1.2 billion of capital to the thrift since acquiring it in 1985. It hasn't realized a nickel in dividends.
"It's a very important part of our consumer financial services strategy," said George V. Brown, executive director for strategic planning at Ford Financial Services Group, a $120 billion-asset subsidiary that houses Ford's thrift, auto loan, credit card, and home equity loan units.
Nevertheless, "the contraction within this sector will outpace the expansion," said Reid Nagle, president of SNL Securities, Charlottesville, Va.
That's not to say congressional action to remove the banking-commerce prohibition will be a nonevent.
"I think the appetite is going to go the other way," said Stephen T. McLin, president of America First Financial Fund in San Francisco. "More likely, commercial banks will buy commercial companies. It will be a one-way street."
