Last Friday federal bank regulators walked into the executive offices of New Jersey's largest savings bank, ousted its top two officers, and took control of the bank.
The seizure of City Federal Savings Bank is not a good omen for Buffalo's Empire of America Federal Savings.
The action shows federal regulators are willing to move into the nation's biggest savings institutions soon after they become insolvent.
An insolvent bank has liabilities, such as deposits and borrowings, that are worth more than its assets, usually consisting of loans, cash and investment securities.
City Federal, with $9.9 billion in assets, was taken over by federal regulators because it had become insolvent, a spokeswoman for the federal Office of Thrift Supervision said.
Empire, with $10.4 billion in assets, announced on Sept. 28 that it had become insolvent.
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City Federal's seizure took place just one day after tough new guidelines went into effect that require savings institutions to maintain capital equal to 3 percent of their assets.
Insolvent banks have no capital and banks such as Empire have to raise a lot of money just to make the value of their assets match their liabilities; they then have to raise more to meet the 3 percent capital level.
Empire needs to raise about $1 billion in order to meet the new required capital levels.
In some respects Empire's financial condition appears worse than City Federal's, analysts said Monday.
City Federal was not as deeply insolvent as Empire. In fact, Empire leads the industry as the savings institution with the largest capital gap, according to Sheshunoff Information Services, a bank analysis firm based in Austin, Texas.
However, analysts noted that City Federal's financial difficulties were only revealed recently, while Empire's have been known to regulators for some time.
"These guys were into junk bonds and were considerably more creative than the Empires of the world," said Paul Bauer of Bauer's Financial Reports in Coral Gables, Fla. "The regulators may not have been getting the cooperation they needed" from City Federal.
City Federal lost $224 million during the third quarter, with much of the loss due to failing commercial real estate loans made by the bank.
At the time the loss was announced its president said the bank's continuing losses and its inability to meet new capital rules could result in a federal takeover of City Federal.
The wording of his announcement bore an eerie resemblance to a statement made by Kent Dixon, Empire's president, last summer after Empire suffered a $54 million loss (which was followed by a $158 million loss in the third quarter).
Because Empire does not meet the new capital rules, it must submit a formal plan to federal regulators stating how it intends to comply with the rules.
Submission of that plan may be an academic exercise, however, since an earlier agreement with federal regulators already has put in place all of the restrictions that banking regulators are authorized to place on institutions that do not maintain the required amount of capital.
The next step beyond those restrictions is federal seizure of an institution.
In City Federal's case, the bank was placed in federal receivership, meaning the government will own and operate it.
Customers of the bank are not affected by the seizure. Stockholders, however, are affected -- their shares automatically become worthless.
A spokesman for the Resolution Trust Corp. -- the federal agency now operating City Federal -- said the agency will try to conserve the value of the bank's assets while seeking a buyer.
Empire continues to seek a recapitalization and has asked banking regulators for enough assistance to raise the value of its assets to the value of its liabilities, in other words giving it a net worth of zero.
Empire believes the government is obligated to provide this assistance to replace non-financial accounting assistance the bank received earlier in the decade when it took over several failing savings institutions.
If the federal assistance is granted, the bank would raise additional capital on its own, the bank said.
Without federal assistance, the bank will not be able to meet the new capital standards, it has said.
Banking analysts have not been optimistic about Empire's prospects for getting the assistance. One unnamed investment banker last week told The Wall Street Journal that "zero is the closest round number to the odds of success" of Empire's plan.
Empire continues to explore alternate plans for recapitalization along with the request for federal assistance, an Empire spokeswoman said last week.
Meanwhile, the bank is waiting for the results of an examination conducted by the Office of Thrift Supervision in August.
While it waits, the bank continues to restructure its assets and liabilities, selling off investments that pay it a fixed rate of interest, while renegotiating liabilities on which the bank must pay a variable rate of interest.
It hopes that by doing so it will be less subject to losses when interest rates increase.
The bank recently acknowledged that adverse publicity is scaring away depositors. It lost $715 million in deposits during the first nine months of 1989, it said.
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