Huntington Beach-Based S&L; in a Crunch : Downward Slide Hits Down-Home Mercury

Mercury Savings & Loan Chairman Leonard Shane might be called a little old-fashioned.

Until a few years ago, one of his favorite marketing tools was to hire schoolteachers to walk door-to-door and encourage neighbors to visit the nearest Mercury branch, where they could pick up a free pad of personalized stationery.

And he still prefers to promote the Huntington Beach-based S&L; by sponsoring lunches for local civic groups rather than by taking out newspaper ads as his competitors do.

“A basic, good idea doesn’t get dated,� Shane said in a recent interview.

Basic is the word to describe Mercury S&L;, which was founded by Shane in 1964.

While some S&Ls; have evolved into brokers of junk bonds and wholesale car loans, Shane has stuck with conventional mortgages, preached the value of home ownership and criticized less traditional thrift operators who pushed industry deregulation to the limit.

Recently, however, the 66-year-old Shane has had problems of his own with regulators and accountants, and his institution is stumbling. Shane has brought his son William back as manager of branch operations for Mercury’s 25-branch network, a key role in the institution, and the chairman said he hopes he can retire soon. William Shane left in late 1987, citing a desire to “pursue other ideas.� He opened a sports novelty business.

Earlier this year, regulators forced Mercury to reduce the value of some of its assets. The reduction turned a $6.1-million profit originally reported for 1988 into a $7.4-million loss. The writedown ended many years of profitability. James Wilson, an analyst at Sutro & Co., a San Francisco brokerage firm, said the writedown has ignited rumors that Mercury is experiencing a capital crunch that could force Shane to sell.

Shane said he is not negotiating a sale of the S&L.;

Analysts said the return of William Shane, who was Mercury president before resigning, might mean that Leonard Shane intends to keep control of the thrift in his family. Members of the Shane family own about 15% of Mercury’s stock.

A dozen years before Shane started Mercury, the Chicago native was an outspoken political advocate of the social, as well as economic, importance of national policy that promoted home ownership. A former journalist and advertising executive, Shane gained prominence in the 1950s by running national campaigns of Democratic presidential hopefuls, including Estes Kefauver.

Shane said he remains a party activist and was one of Orange County’s biggest financial backers of Michael S. Dukakis, the unsuccessful 1988 Democratic presidential candidate.

Shane, a heavy-set, sometimes loud and exuberant and sometimes gentle and grandfatherly man, admits to delivering emotion-packed speeches.

“If I believe in something, I put all my effort behind it, whether it is with politics or business or religion,� he said.

For decades, Shane, currently national vice chairman of the United Jewish Appeal, has led educational missions around the world to increase awareness of the rights of Jews.

It was only in the early 1980s that Shane stopped hiring schoolteachers to go door-to-door through new housing developments to encourage neighbors to stop in the nearby Mercury Savings & Loan branch for a memo pad and a friendly hello.

Shane said he stopped that approach only because neighborhoods surrounding most of Mercury’s branches are now developed.

The memo pads are still free to anyone who drops into one of Mercury’s 25 branches, and most locations have rooms for local civic groups to conduct meetings, with full lunches paid for by Mercury. The money spent on the lunches and memo pads makes up most of Mercury’s promotional budget. No money is spent on media advertising.

Carl Frederick, president of Frederick Research in New York, said Mercury’s down-home style as the trustworthy safe keeper for a neighborhood’s deposits has established one of the most loyal customer bases in a business where depositors hop from one institution to another chasing interest rates.

“You won’t find that style anywhere else in California. I don’t know where you would find it,� Frederick said.

Old-style ways of doing business often are not the most cost-effective, and observers said that over the years that fact has not been lost on Mercury.

“There are cost improvements that could have been made at Mercury. And Leonard knows that. He’s been making them the last couple of years to boost Mercury’s value,� said Wilson, the Sutro analyst.

Another analyst said some of the inefficiency is caused by centralized decision making that revolves around Shane. One former employee, exaggerating the point, said every loan considered by Mercury is reviewed by Shane.

No Computer in Office

While Mercury’s operation is automated, Shane doesn’t have a computer in his office. An old manual typewriter, a historical showpiece in some offices, is a practical tool in Shane’s.

Shane’s approach was not questioned through much of the 1980s while Mercury was prospering and other S&Ls; were failing.

In 1984, when Shane headed the U.S. League of Savings Institutions, the central trade group for S&Ls;, he gave impassioned speeches and Senate testimony warning of the dangers of deregulation.

Shane said then, and three years earlier when he headed the California Savings & Loan League, that institutions involved in more speculative activities were a major threat to themselves and the economy. A more vocal group of S&L; operators argued at the time that the industry must be deregulated for it to survive.

“Leonard has always seemed to understand what the industry is about. And he’s always been proved right,� said Jim Grohl, an executive with the U.S. League in Washington.

For many years, Shane was able to juggle the management of his institution with extensive civic duties, such as being a member of the Los Angeles Coliseum Commission and a local school board. However, some analysts said the time he committed to the U.S. League in 1984 eventually took its toll on Mercury.

At the company’s shareholder meeting in 1986, Shane predicted that 1986 profit would top the record earnings of $11.1 million in 1985. Instead, 1986 marked the start of an earnings slide. Earnings that year reached only $9.4 million, as Mercury increased by $27.6 million its reserve for loan and real estate losses. That was a sixfold jump from the amount of a year earlier.

In 1987, Mercury’s losses from loans, foreclosed losses in real estate and direct involvement in real estate totaled $23.4 million, compared to only $2 million two years earlier.

Hard to Determine

Mercury is now among the S&L; money losers. And its health has become difficult to determine because Mercury, which has yet to hire a new accountant to audit its books, missed the Securities and Exchange Commission April 15 deadline to file 1988 financial results. At the end of 1987, the institution did have more than the required 3% of assets in capital.

In Mercury’s recent battle with federal regulators, Shane said regulators disagreed with Mercury’s accounting of some transactions and loan-loss reserves dating to 1984. The fight ended with Mercury writing down the value of some assets and increasing its general loss reserves by $12.2 million. Mercury has not reported its total loss reserves.

Last year’s loss, which one analyst said was caused by overvaluing mortgage income in previous years, reduces the company’s capital and raises concern that Mercury might not be able to meet higher capital requirements that analysts expect Congress to impose. The capital is the institution’s insurance against losses.

“There may be little choice but to sell,� said Henry Dahlgren, an analyst at Cruttenden & Co., a brokerage in Newport Beach.

Boost May Be in Store

As part of its multibillion-dollar bailout of the virtually bankrupt Federal Savings and Loan Insurance Corp., Congress is studying a recommendation from the Bush Administration that S&Ls; double their capital reserve to 6% of their assets by 1991.

Others said Shane will be able to maintain control of the institution.

“Leonard Shane has friends all over Wall Street. If he needs money, he can come here,� Frederick said.

Shane apparently considered a sale in late 1987. One week after William Shane resigned as president after 13 years as a Mercury employee, Mercury directors announced that they hired Montgomery Securities, a San Francisco investment banking firm, to handle inquiries about the possible sale of part or all of the institution.

Shane’s interest in selling at that time may have come from a growing dismay about troubled institutions in the industry, and a growing interest in other areas. In 1987, Shane joined the board of the Orange County Performing Arts Center. In 1988, he served as chairman of the U.S. League’s legislative committee.

“The negatives in the industry of the last couple of years have taken a little bit of the enjoyment off his work,� said William Shane. “But the intensity of his passion for Mercury is no less now.�

This year’s run-ins with accountants and regulators have taken a toll on Shane, friends said.

“I’ve been worried about Leonard, and I’ve hoped for some time that he could relax,� said Paul Prior, a longtime personal friend of Shane, who is chairman of Ameriana Savings in New Castle, Ind.

“I know he is distressed with the regulators,� said Prior, also a leader in the U.S. League. “William’s return might be what Leonard needs. William is a very good manager.�

MERCURY SAVINGS AT A GLANCE Mercury Savings & Loan, founded in 1964 by Leonard Shane, now has 25 branches across the state and $2.5 billion in assets. Shane and his family own about 15% of the stock.

Year ended Dec. 31 ’88 ’87 ’86 Revenue (millions) $247 $233 $263 Net income (loss) (millions) (7.4) 5.1 9.4

Assets $2.5 billion

Employees 1,000

Shares outstanding 6 million

12-mo. price range $4.375-$10.25

Mon. close (NYSE) $5, unchanged