RTC Sells N.Y. Thrift at No Cost to Taxpayers

Last month's resolution of Larchmont Federal Savings and Loan Association, a $126 million-asset mutual in Westchester County, N.Y., was a small step for the Resolution Trust Corp., which has closed 430 thrifts with $136 billion in assets since August 1989. But the Larchmont resolution was a giant leap for taxpayers -- the first to cost the government nothing.

And not just the taxpayers did well. Peoples Westchester Savings Bank, the $1.7 billion-asset acquirer, got a $5 million franchise for a $75,000 premium (equal to the RTC's administrative costs), according to Peoples president and CEO William F. Olson. Peoples also expanded its 27-office franchise into Sound Shore, the last area of the county where the savings bank felt that it did not have a sufficient presence.

All of Larchmont's 26 fulltime and seven part-time employees were offered jobs by Peoples. Larchmont's former CEO, Eliot W. Howard Jr., became a vice president of People's.

Rates Won't Change

And Peoples promised to honor Larchmont's interest rates on all loans and certificates of deposit. Larchmont had relatively low deposit costs and loyal customers, according to Mr. Olson.

The RTC handled Larchmont under its accelerated resolution program, in which institutions are closed without first being placed into conservatorship. The institution does pass through a technical receivership, lasting a few minutes, so that legal liabilities are extinguished.

Under the program, the acquiring institution takes all of a failed thrift's assets and liabilities, without put options, and pays only a nominal premium, usually equal to the RTC's estimated administrative costs.

Larchmont was the first accelerated resolution in which the RTC did not advance the acquiring institution anything to cover an anticipated shortfall between the failed thrift's assets and liabilities.

Hollow Condo Deal

Larchmont, a 66-year-old mutual, failed largely because of one bad loan to a massive condominium project dubbed the "Legend of Irvington," which was begun in 1985 and in foreclosure proceedings by 1987. Several local thrifts invested in the project, but Larchmont as lead lender lost the most, $3.5 million.

The legend arises from the huge losses and legal costs associated with the failed project. According to Stephen C. Byelick, president of Tarrytown and North Tarrytown Savings and Loan Association, which also lent money to the project, "I needed two guys to carry" the Legend of Irvington file to the auditors.

Overall, Westchester County has been good to its six savings and loans, which averaged a return on average assets of 0.62% in 1990, nearly double the New York State average of 0.32%. At the more conservative thrifts in the county, such as Yonkers Savings and Loan, profits actually rose in 1990.

"It used to be that size was important," said Yonkers president Richard Komosinski. "Now we think that strength is more important."

Even Yonkers, though, lost a modest $175,000 in the Legend of Irvington project. Larchmont took quick action when problems surfaced. "We decided that we [wouldn't] be an ostrich and stick our head in the sand," Mr. Howard, a former Green Beret, said at the time. Larchmont submitted a recapitalization plan to the OTS and looked for a partner for a supervisory merger-conversion.

Larchmont increased its loan reserve to cover fully its exposure in the Legend of Irvington. Otherwise, the balance sheet was clean and profitable, with less than $2 million in nonperforming loans, just 1.7% of assets.

Several banks "shopped" for Larchmont, according to John Lyons of Lyons, Zomback & Ostrowski Inc., which advised Peoples Westchester on the deal.

Peoples and Larchmont came close to a deal, but a supervisory merger-conversion still promised to be significantly more expensive for People's than an accelerated resolution, as a result of possible legal liabilities arising from the Legend of Irvington project.

So Peoples decided to "go to the RTC and say, |We can solve this problem for you,'" said Mr. Lyons. Larchmont's managers, who had no shareholders and therefore no fiduciary duty to avert an RTC resolution, cooperated fully.

According to Anthony Scalzi, the RTC's director of resolutions and operations, most of the worst-case thrifts have already been resolved, and more accelerated resolutions like that of Larchmont can be expected in similar situations: a failed thrift with a relatively clean balance sheet, adequate loan-loss reserves, a loyal customer base, a traditional portfolio of core deposits and local lending, and legal liabilities that render a supervisory conversion unattractive.

People's treatment of Larchmont's employees and customers, and Larchmont's cooperation, resulted in a good economic outcome for everyone involved -- an instructive as well as a profitable transaction.

Not all the players in the S&L debacle are villains and fools. Increasingly, as at Larchmont, thoughtful cooperation and good ethics can be good business as well.

Mr. McRae is a senior editor of Bank Mergers and Acquisitions, a newsletter published by SNL Securities. The data base and publishing firm, based in Charlottesville, Va., specializes in the banking and thrift industries.

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