Deliverance for California's suffering small thrifts might be at hand in the form of a crowd of ready buyers waiting for Congress to act on thrift deposit insurance.
A rush on the Golden State's 51 savings and loans with less than $500 million in assets is just around the corner, according to one analyst. All that's holding up a flurry of acquisitions is the status of the Savings Association Insurance Fund, currently being debated by Congress.
"Once SAIF is finalized, there'll be a wave of takeover activity in the savings and loan industry," said Jerry A. Jones, who tracks the California banking market as managing director of mergers and acquisitions for Duff & Phelps Capital Markets Co., Los Angeles. "Right now, it's keeping mergers in the savings and loan industry to a minimum."
Mr. Jones said potential suitors - mostly community banks and out-of- state holding companies - are reluctant to buy into something they may have to pony up additional money for down the road. Current congressional proposals to recapitalize the insurance fund call for thrifts to make a one-time payment.
One aspect driving small thrifts here to look for partners is their abysmal performance. While the state's community banks have recovered nicely from the early '90s recession, smaller thrifts are still struggling with bum multifamily loans and a stubbornly soft housing market, especially in Southern California.
And Mr. Jones isn't optimistic about their future. He said little thrifts are on the verge of extinction.
"The future for small community banks, especially thrifts, is consolidation," he said. "If they don't increase their asset size to take advantage of economies of scale, their shareholder value is going to be diminished."
At least three California savings and loans are officially up for sale: Allied Bank, a subsidiary of Redwood Empire Bancorp, Santa Rosa; Tracy Federal Bank; and Summit Savings, Rohnert Park. Several more, both in the north and south, are also rumored to be on the block.
Town and Country Finance and Thrift, Turlock; Northbay Savings Bank, Petaluma; Los Padres Savings Bank, Solvang; and California Thrift and Loan and La Cumbra Savings Bank, both in Santa Barbara, were all sellers in deals announced within the past year.
According to Mr. Jones, there's just not enough business to go around to keep small thrifts in the black. Nearly half of all small California thrifts (22 of 51) were unprofitable last year, and just five had a return on assets above 1%. The average ROA for the group was a negative 0.16%.
With their bottom lines in such rotten shape, thrift managements are doing some soul searching.
"I think most financial institutions are really thinking through how they can best serve their shareholders," said Claude B. Hutchinson, managing director at Smith & Crowley Inc., San Francisco. "And clearly there are many financial institutions that are looking for ways to band together and establish economies of scale."
"Those institutions that realize they can't grow internally would be wise to consider their options," Mr. Jones added.
But at least one thrift executive who's on the buying side said it's important that potential buyers not get swept up in the merger frenzy.
"There's a lot of people for sale, but you have to ask yourself, at what price victory?" said J. Robert Eichinger, chief executive of Hemet Federal, which is acquiring Palm Springs Savings Bank. "If you look at the current deals going on, they range all over the place as far as price to book and price to earnings."
