FCA STILL MENDING, IT’S A MAVERICK AGAIN

Financial Corp. of America, still mending from a near failure that sent fearsome shudders through the nation’s banking system in 1984, is on its way to regaining its status as the biggest and best-known maverick in the savings and loan industry.

Following almost two years of relative quiet, FCA is drawing intense flak from competitors because of its supposed return to some of the same business practices that landed the behemoth financial institution in so much trouble in the first place. FCA’s operating subsidiary is American Savings & Loan, the nation’s biggest.

“It’s horrifying a lot of people,� one competitor said.

The hard feelings have eroded the good will that William J. Popejoy, a longtime industry insider, has enjoyed since he took over as FCA chief executive from Charles W. Knapp on Aug. 28, 1984. Industry regulators forced Knapp to resign because they felt that his lending practices were unsound.

The ovations--so loud when Popejoy took the helm--have given way to swelling feelings of doubt and anger, particularly in the executive suites of other large California savings and loan firms. These critics believe that Popejoy is going down the same path that led to Knapp’s downfall by relying on fast growth in assets and fixed-rate lending to generate profits. They contend that American Savings has done little to lessen its exposure to interest rate swings.

Angering powerful competitors in the highly regulated savings and loan business is no trifling matter, as Knapp learned. Savings and loan regulators ousted the former FCA chief following an intense lobbying campaign from industry leaders in California.

The feelings about American Savings are hardly unanimous, though. Supporters and neutral observers say Popejoy is only making the best of a very complex and difficult situation. Further, even some critics concede that he has few viable alternatives.

Some also believe that American Savings’ competitors are simply angry because the big financial institution is once again flexing its muscles in the marketplace. “Half of the complaints are sour grapes,� said real estate consultant Sanford R. Goodkin, an unabashed supporter of Popejoy. “Here’s a giant that is back as a legitimate competitor again.�

Indeed, American Savings’ actions have proved a boon for consumers. Much to the dismay of healthy competitors, American Savings has often offered high savings rates for deposits and recently slashed rates on long-term, fixed-payment mortgages. Unhappy competitors have no choice but to follow the lead.

Replies to Critics

Popejoy replies to his critics by saying that they do not understand his corporate strategy. Company operations are less risky today than they used to be, he says, in part because of hedging strategies that would protect the financial institution if interest rates begin to rise.

Nor, he adds resentfully, do his competitors fully appreciate the importance of keeping American Savings alive at no cost to the industry’s deposit insurance fund, administered by the Federal Savings and Loan Insurance Corp.

As it is, the FSLIC fund badly needs additional money to take over ailing savings and loans, one of its primary tasks. It also insures customer accounts up to $100,000.

“If we had failed, there would be no FSLIC today,� Popejoy said in an interview in his office, meaning that a failure of American Savings would have bankrupted the deposit insurance fund.

What happens at American Savings inevitably ripples through the entire savings and loan business. It is the undisputed industry front-runner in terms of size, with $34 billion in assets, and problem loans, which now total $1.66 billion.

With American Savings once again in the spotlight, a close look at the financial institution indicates that its prospects for long-term success are nearly as uncertain as when Popejoy took over 30 months ago. Financial experts generally agree that interest rates must continue to fall, or at least remain stable, in the coming years if the institution is to regain its health.

Popejoy saw American Savings through the dark days of late 1984 and early 1985 when regulatory and public confidence in the financial institution hit new lows. The nadir came in the summer of ’84 when a $6.84-billion run eroded more than a quarter of its deposit base.

Heavy Borrowings

Failure was narrowly avoided through heavy borrowings on Wall Street, and a measure of confidence in the institution was eventually restored after Popejoy did a series of television commercials promoting the thrift.

American Savings’ high-energy corporate culture was also transformed dramatically. FCA’s headquarters was moved from Wilshire Boulevard in Los Angeles to more modest digs off the San Diego Freeway in Irvine, near where Popejoy, 48, lives. (American Savings’ headquarters remains in Stockton.)

Costs were cut by slashing the 7,550-employee payroll nearly 25% and getting rid of the firm’s fleet of nine airplanes. Most of the 732 company cars were also sold. Losses on new loans were minimized and the deposit base has been stabilized. More than $700 million worth of problem property was sold last year.

The management efforts notwithstanding, the savings and loan is showing only marginal operating profits today. What profits have been made have come largely from the sale of high-yield loans and mortgage securities at a time of falling interest rates.

The company remains hobbled by billions of dollars of non-earnings assets, primarily loans inherited from the Knapp years, that are not paying off. Profits from asset sales have been all but wiped out by additions to reserves for loan losses.

Out of this dilemma evolved the feeling that the only way for FCA to survive as a stockholder-owned financial institution and restore its capital was to begin growing again. Acting on request, savings and loan regulators last year quietly gave American Savings special permission to balloon assets to $34 billion in 1986 from $27.4 billion at the end of 1985. American Savings achieved most of the growth with fixed-rate mortgage securities, financed by Wall Street investment houses.

Regulators normally place strict growth limits on savings and loans, especially those in weak financial condition. But a special allowance for American Savings was made after a year of debate in regulatory offices in San Francisco and Washington.

No Alternative

According to Popejoy, there was simply no alternative. “We had to assume some degree of risk because the alternative was probably failure,� he said during the interview.

But critics say fast asset growth is merely sowing the seeds of bigger trouble in the months and years ahead. The bigger American Savings gets, they warn, the harder it will be for FSLIC to handle if a failure does occur.

“The magnitude of a (potential) crash is increased, and that’s what concerns a lot of us,� said an executive at one Los Angeles-area savings and loan. As with other critics, he agreed to be interviewed only if he and his company were not identified by name.

One immediate danger is that a sustained rise in interest rates would depress the value of the recently purchased mortgage securities. That in turn could force FCA to report heavy losses that would further erode its already inadequate base of capital.

American Savings’ behavior has some competitors wondering if it would not have been wiser in the summer of 1984 to put the savings and loan into a government conservatorship.

Though that would have wiped out the shareholders’ stake in the company, it would have put less pressure on new management. A conservatorship, they argue, would have allowed the company to shrink slowly and gradually.

As it is now, “the stockholders are rewarded� if American Savings’ strategies succeed, said a top official at a savings and loan in San Diego. “If they lose, FSLIC picks up the pieces.�

Until recently, American Savings had been operating largely without controversy in what was a welcome respite from the bleak news of 1984.

In late December, though, Forbes magazine blistered Popejoy in a story headlined, “Shades of Charlie Knapp.� The article stated that Popejoy was taking Knapp-style interest rate risks by acquiring long-term assets with short-term funds.

“As they say,� the article concluded, “it’s deja vu all over again.�

Popejoy drew additional attention to the article by firing off a protest letter to editor-in-chief Malcolm Forbes, with copies to competitors and reporters. “The article is not only misleading,� Popejoy charged, “it is flatly wrong.�

But it was the recent news that American Savings had slashed interest rates on 15-year, fixed-rate loans to 8.75% that caused the real to-do.

Though American Savings did not announce the cut, it got wide attention after a wire service reporter discovered the news when looking for a mortgage loan, according to company spokeswoman Layna Browdy.

Seethed With Anger

After the reporter wrote a story that was picked up by the nation’s major newspapers, competitors seethed with anger. Industry executives protested to regulators that a savings and loan in American Savings’ condition should not be allowed to set market trends, particularly for loans that have risky fixed rates.

“In retrospect, politically, it probably was not very smart,� Popejoy conceded, but he added that the move was a “slam dunk� for new business.

Being likened to Knapp is not especially flattering for Popejoy, who was hired in part because he is the antithesis of his predecessor.

Popejoy has the image of a wholesome and clean-cut banker who tries not to be controversial. Knapp, on the other hand, was a colorful and go-go innovator who was always in the news as head of FCA, and delighted in tweaking his competitors’ noses.

Like Knapp, though, Popejoy now finds himself bedeviled by the words of anonymous competitors, whose criticism often gets back to him through the industry grapevine.

“The degree of pettiness and envy,� Popejoy said, his thought trailing off. “This industry deserves better.�

One significant difference between Popejoy and Knapp is their relations with Edwin J. Gray, head of the Federal Home Loan Bank Board and Federal Savings and Loan Insurance Corp. It was Gray who led the move to oust Knapp and replace him with Popejoy.

Whereas Knapp’s lending practices eventually proved to be his downfall, similar policies by Popejoy apparently have Gray’s endorsement. (Gray declined to be interviewed for this story.)

“We had to get permission (from the regulators),� Popejoy said. The current lending strategy, he added, “was approved after many months, and it was a thoroughly and hotly debated process.�

A key part of the strategy calls for the extensive use of hedges, such as financial instruments known as interest rate swaps, that are intended to mitigate the adverse cost effect should interest rates begin to rise.

FCA could have boosted its 1986 earnings of $95.4 million by more than 50% if it had not used hedging tools to effectively stretch out the maturity of its borrowings, Popejoy said. The longer it takes the borrowings to mature, the more costs are insulated from short-term gyrations in interest rates.

But the company has made little attempt to explain the fine points of this growth strategy. “In many cases, we haven’t communicated to the industry what we are doing,� Popejoy said.

Most of American Savings’ large competitors hedge against interest rate risk by making adjustable-rate loans, or ARMs as they are known. Interest rates of these mortgages change from month to month and year to year according to various financial indexes, such as the one-year Treasury bill rate.

That means that if interest rates go up, so will mortgage payments. Fixed-rate loans, on the other hand, always have the same payment, no matter what happens. The danger is, the fixed-rate loans will become money losers if interest rate rises drive up deposit costs.

Popejoy says American Savings cannot afford to make too many ARM loans because profit margins are narrower than on fixed-rate loans. American Savings needs an especially wide earnings spread on its mortgage loans in order to pick up the slack caused by its non-performing loans.

“You don’t have to be a third-grader to know an adjustable-rate loan is a sure loss for us,� Popejoy said.

Dwarfed Expectations

The problems in the loan portfolio have dwarfed initial expectations, and no one is saying that the worst is over yet. Losses on these loans have doomed the company to treading water.

In the fourth quarter of 1986, for example, FCA made $304 million from selling loans and mortgage securities but had expenses of $302 million from further additions to its reserves for loan losses.

But Popejoy has been blessed with interest rates that began falling at almost the same time he took over as chairman and chief executive.

For example, the interest rate on six-month Treasury bills, one reliable indicator of bank costs, was 10.75% in early September, 1984. By last week, the six-month Treasury bill rate had fallen more than 5 percentage points.

The break in rates has sharply cut deposit costs and meant hundreds of millions of dollars in profits.

So, will American Savings survive?

“If interest rates stay the same, yes,� said Anthony Frank, chairman of First Nationwide Financial in San Francisco. “If they go down, absolutely. If they go up, no.�