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Federal regulators Wednesday afternoon took control of Empire of America Federal Savings Bank, leaving the bank's management in place but dismissing its board of directors.

"We stepped in because the bank was insolvent, it was continuing to lose money, and it cannot be recapitalized without government assistance," said Robert Albanese, senior deputy director for the New York District of the Office of Thrift Supervision.

The bank was placed in conservatorship, which means it will operate under supervision of the Resolution Trust Corp., the bailout agency Congress set up last August to clean up the mess in the thrift industry.

Despite the takeover, it will be business as usual at all 125 Empire offices throughout New York state, Florida, Michigan, Texas and California. All depositors' money remains insured up to $100,000 by the Federal Deposit Insurance Corp., an arm of the federal government.

The savings bank's 3,246 employees also remain on the job and are not affected by the takeover for the foreseeable future.

The takeover of Empire is the third largest so far for the Resolution Trust Corp., which has assumed control of 333 thrifts nationwide.

The bank had $8.8 billion in assets at the end of the year, down from $10.3 billion at the end of the third quarter.

The Office of Thrift Supervision estimates it may cost more
than $1 billion to recapitalize Empire of America to the point that it meets mandated capital requirements.

Empire's primary problem was lack of capital. Empire's tangible capital stood at negative $910 million as of Sept. 30.

More up-to-date fourth-quarter numbers were scheduled to be released today, but officials were uncertain whether that would take place.

The savings bank lost more than $1 billion in deposits last year, according to regulators, as its asset size shrunk by more than $1 billion in the fourth quarter alone. To erase its negative capital position, $910 million would have to be pumped into the institution. To reach the 1995 mandate of capital equal to 3 percent of assets, another $264 million -- 3 percent of $8.8 billion -- would have to be raised.

"It's not a surprise," said Rep. John J. LaFalce, D-Town of Tonawanda, a member of the House Banking Committee. "Everyone knew it was going to happen at some point in time."

"I want to assure all depositors that their deposits up to the federally insured limit of $100,000 are perfectly safe and that they can expect business to be conducted as usual," he said.

Another member of the House Banking Committee, Rep. Bill Paxon, R-Amherst, said he didn't know what, if anything, Empire could have done to avoid its current financial straits.

"Looking back, you could say that there are probably many actions that could have been taken by the federal government and the bank," he said. "But what you have to remember is that Empire is not alone in this situation. There are hundreds more banks like this out there."

The question now is what happens with Empire under conservatorship.

The new man in charge is Ralph L. Deacon, a managing agent with the Resolution Trust Corp.

He, Empire President-Chief Executive Officer Kent Dixon and another Resolution Trust Corp. officer, Harry Moore, will form a three-man management team. All other Empire managers will remain in place for now, reporting to them.

Empire's board of directors included many prominent Buffalo business people and community leaders:

Robert B. Adam, chairman and chief executive of the Adam, Meldrum & Anderson department store chain; the Very Rev. James M. Demske, president of Canisius College; L. Nelson Hopkins Jr., director and former chairman of the board of John W. Danforth Co.; Paschal C. Rubino, president of Rubino Memorial Home Inc.; David O. Smith, vice president of Westwood Pharmaceuticals, Inc.; John L. Surdam, president of Osmose Wood Preserving Co.; James M. Wadsworth, managing partner of Hodgson, Russ, Andrews, Woods and Goodyear; Sue M. Wardynski, a trustee of Children's Hospital and St. Bonaventure University; Paul A. Willax, Empire's chairman of the board, and Charles H. Wood, president and treasurer of Woods & Brooks Co.

For the moment, about 10 regulators are working on the Empire case, but by the end of the week, Resolution Trust spokeswoman Kate Spears said, that number should be down to just two -- Deacon and Moore.

They will be responsible for trying to minimize the bank's losses, conserve its assets and preserve its basic banking services. They also will try to limit the bank's growth and insure that its operations are conducted in a safe and sound manner, Ms. Spears said.

They also will become more familiar with the bank's operations, which will help them figure out the best way to solve Empire's problems -- a process that will take months, Ms. Spears said.

"This is a viable banking franchise and, ultimately, this franchise will continue to exist," Dixon said. "The real question is how that transaction will take shape and when it will happen."

Thrift industry experts contacted by The Buffalo News believe that the most logical and least expensive way for the government to handle Empire would be to break it into its statewide franchises and sell off the whole.

Empire's breakdown of branches by state includes 55 in New York, 20 in Florida, 19 in Michigan, 17 in California and 14 in Texas.

It's a "reasonable assumption" that the branches outside New York will be sold, said Dixon.

"With Empire, the government has almost no choice but to sell it in pieces," said Bert Ely, an industry analyst in Alexandria, Va. "No one wants to take the entire franchise unless it's presented nearly riskless, and that can't be done."

First Albany analyst Donald Kauth agreed with Ely that the logical approach would be to sell off Empire's far-flung endeavors state by state. He said that certain portions, including the New York branches, probably would draw a number of bidders.

"I think that the New York and Michigan franchises would be easy to sell," said Kauth. "The Texas franchises may not be so easy, given the problems in disposing of other franchises in Texas. A lot of banks would be interested in upstate offices."

Regardless of the government's approach, it's going to cost money. Kauth said a minimum of $1 billion would be needed, and after that it would be anyone's guess.

"The government is going to be trying to sell the loans Empire made, and in these situations they generally come with recourse to the buyer," said Kauth. "That means if a buyer purchases a loan and it turns bad, they can go back to the government for assistance."

Empire's troubles can be traced to the six-year period 1981 to 1986, when it acquired 13 distressed institutions in New York, Michigan, Florida, Texas and California.

As a result, Empire acquired assets of some $2.8 billion, plus $926 million of goodwill, or money paid over and above the tangible worth of the assets. It also assumed liabilities of $3.7 billion and received net cash from the now defunct Federal Savings and Loan Insurance Corp. of $79.2 million.

Forced to support the amortization of the goodwill and its attendant carrying costs, Empire's bottom line was being affected by approximately $100 million.

LaFalce said the "primary culprit" forcing Empire into conservatorship was the savings and loan bailout bill that Congress passed last August.

Under the bill, thrifts could no longer use "supervisory goodwill" -- an accounting fiction credited to thrifts like Empire that bailed out other institutions in the early 1980s -- as part of their capital base. Empire became insolvent when it could no longer count goodwill in that way.

LaFalce opposed the thrift bill partly because of that provision, saying it was tantamount to "breaching a contract that we had entered into" with thrifts across the country.

Asked if it would have been possible for Empire to recover from its financial troubles if it had been allowed to count goodwill among its assets, LaFalce said: "Sure, if the rules hadn't been changed in the middle of the game."

Since June, Empire has been working under a supervisory agreement with the government. It agreed to withdraw from risky ventures such as commercial, construction, land acquisition and development lending. It also agreed to sell off its credit card portfolio.

Empire already had struck a deal to sell the $650 million credit card portfolio and intended to sell its $900 million auto loan portfolio originated through auto dealers.

But a six-month examination last year helped convince regulators that nothing the thrift could do could save it from eventual takeover.

News business reporter David Robinson and News Washington Bureau reporter Jerry Zremski also contributed to this report.

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