Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, February 17, 1991 TAG: 9102150028
SECTION: BUSINESS PAGE: E-1 EDITION: METRO
SOURCE: MAG POFF BUSINESS WRITER
DATELINE: LENGTH: Long
One possibility, said the economics professor at Richmond's Virginia Commonwealth University, is a thrift founded so recently that it's portfolio isn't dragged down by decades-old mortgages granted at far below today's interest rates.
Or, O'Toole said, there could be thrifts that have been "very conservative in their lending policies."
Among this region's institutions, Southwest Virginia and Virginia First savings banks fall into the latter category, according to their officers.
Bill Rakes, president of Southwest Virginia, attributes its strong capital position to the fact it remained a local institution, promoting traditional values of thrift and home ownership.
"It's a cliche, but it's what we've stuck to," he said.
"We've been conservative, watched our expenses and kept our operations at a controlled level," Rakes said.
Southwest Virginia, which has four offices in the Roanoke Valley, owns no foreclosed properties. It has only two loans that have been reported to regulators as troubled.
Virginia First, according to senior vice president Paul Walk, has never varied in its 103-year history from serving the average middle-class family. Nor did the Petersburg-based thrift ever stray from its home base across Virginia's southern tier from Southside through Fredericksburg and Richmond to Roanoke.
"We were criticized during the good times" of the 1980s for failure to grow, Walk said. But "bigness is not greatness."
Both institutions have issued reports suggesting they comfortably exceed the minimum standards that government regulators are using to measure capital strength. Those standards are:
Risk-weighted assets, a measurement that assigns weights to a thrift's loans and other assets based on the degree of risks of the investments that back them. Government securities, for example, require less capital than residential housing. Yet loan portfolios with home mortgages, however, are considered less risky than backing commercial loans.
> Core capital ratio, a measure that represents a rule saying a thrift's capital investment must constitute 3 percent of total loans. That ratio is based on generally accepted accounting standards with a small allowance for goodwill, or the difference from the institution's net book value carried on its balance sheets.
> Tangible capital excludes all goodwill and refers to hard assets such as cash, real property and government securities that the institution actually holds.
Charter Federal Savings Bank of Bristol and Investors Savings Bank of Richmond both fall short of the standards. Both institutions operate offices in Roanoke. Investors, however, is in a positive position while Charter declined to release any figures.
Charter was formed in 1982 when First Federal of Bristol, a healthy institution, adopted Peoples Federal of Roanoke and First Federal of New River Valley, both of which had a negative net worth at that time.
It also acquired from another thrift the former First Federal of Montgomery County, which also had negative figures.
In order to encourage such mergers, the government promised the rescuing thrifts that they could rebuild their capital over a long period, drawing on institutional goodwill as an accounting credit. That credit was withdrawn in December 1989, plunging Charter and similar institutions into red ink.
Charter was hit as well by a bad credit card portfolio in east Tennessee, requiring it to write off $6.22 million in bad debts. That loss equaled 10 percent of its credit card business, more than double the industry average of 4 to 5 percent. The company later sold its credit card portfolio.
Charter is now involved in two lawsuits. One seeks to prevent government seizure on the ground that abolition of the goodwill credit is a breach of the contract signed when Charter took over the failed thrifts. The other is to recover $2.5 million it claims was embezzled by Cheryl Benson Perry, a former vice president in Roanoke.
Aubrey Goodson, a consultant to Charter and its retired president, said the 1982 mergers created most of its problems. He said Charter has never done business outside Southwest Virginia nor invested heavily in commercial loans.
Steven DeLaney, president of Investors Savings Bank, said that Richmond-based thrift had $40 million in tangible equity at the end of last year. Although it falls short of the government's current standards, he said Investors is in a positive financial position.
Despite speculation in the region's financial industry that Investors may be slated for takeover, DeLaney noted that the government has not assumed control over any thrift anywhere in the country if it has positive net worth.
He said he expects the Office of Thrift Supervision to approve its proposed recovery plan and allow Investors to work toward full compliance.
Investors lost $18.8 million in 1990, after taking a $18.3 million provision for loan loss reserves. It had another $16 million in costs related to problem loans.
A news release issued earlier this month attributed its problems to a decline in the real estate market.
O'Toole, the Virginia Commonwealth professor, contends that government policies - not the few well-publicized instances of fraud - caused the thrift crisis.
The rules changed in 1980 when the government deregulated the interest rates that financial institutions could pay to savers, O'Toole said.
At that time, he said, savings earned 15 percent or more.
Although that stemmed the flow of deposits out of banks and thrifts, he said, it instantly created a wide negative spread between the rates paid on deposits and the interest on long-term fixed mortgages.
The government action, he said, left virtually all thrifts "basically insolvent." Many thrifts even then were "on the ropes," O'Toole said.
Rescue would have cost the government only $20 billion then, according to O'Toole, but the insurance fund fell far short of that amount.
The same deregulation law gave thrifts more latitude, O'Toole said, and many of them got into commercial lending without experience in that field. Others issued or purchased junk bonds.
Thrifts had to follow those risky paths because they were already insolvent, he contended.
The government compounded the problem in 1986, he said, when it changed the tax law on depreciation. This caused a negative impact on the real estate market.
O'Toole said thrifts should issue mortgages with variable rates that rise or fall with the market. That would balance the spread between the interest thrifts pay on deposits and the interest they earn from loans.
The professor said no institution can survive when it must pay market rates for volatile deposits, which then are used to finance fixed-rate loans running as long as 30 years. "We can't have people doing this," he said.
He favors a provision in a proposed new banking law that would prohibit brokerage houses from placing client funds in insured deposits at thrifts. Those deposits, O'Toole said, helped to support inefficient thrifts.
Walk of Virginia First also cited problems caused by a declining economy and tightening government regulations.
"These are very difficult times," Walk said. "If it worsens, it's going to pinch us. If it stabilized, it's going to help everybody. These are difficult economic times and difficult regulatory times."
Rakes of Southwest Virginia agreed that the economy is a major concern. The stability of business in Roanoke has been a factor in the thrift's success.
Rakes said financial institutions must build capital during good times to sustain them during downturns. "You never know what will happen to the economy," Rakes said.
Thrifts in trouble get all the publicity, Rakes said, but nationwide "1,800 of us are doing well."
He believes that thrifts are needed in order to finance home mortgages. "This country needs a specialized home lender. This is a nation of homes. That's our tradition."
by CNB