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Empire of America was about to report a massive fourth-quarter loss of $863 million when it was taken over by federal banking regulators last week.

A copy of the bank's quarterly financial statement, which was due to be made public last Thursday, made several dramatic revelations:

Empire lost $1.07 billion in 1989.

The bank's ability to earn money on its basic banking business declined sharply in 1989.

Empire decided to stop using an accounting gimmick that had helped balance its books for years. Its decision to write off "goodwill" cost it $665 million in the fourth quarter.

The bank made $11 million when it sold Metroteller Systems Inc., an electronic banking company, but lost small amounts of money on the sales of three other subsidiaries in 1989.

The status of the bank's quarterly financial statement was placed in limbo last Wednesday when the federal Office of Thrift Supervision placed Empire into conservatorship and the federal Resolution Trust Corp. began running the bank.

An RTC spokeswoman said last week that Empire would not release the quarterly report that had been prepared by its management.

That report would have shown a $58.45 loss per share of common stock for the fourth quarter, and a $72.15 loss per share for the year.

The 1989 loss was 19 times greater than the previous year's loss of $57 million.

The severe decline in income from Empire's basic banking business meant that it would have been virtually impossible for the bank to earn its way out of its financial difficulties.

In the fourth quarter the bank earned only $15.7 million in net interest income, compared with $42 million a year earlier.

Net interest income is the money earned on interest received from loans and investments, minus the interest paid by Empire to depositors and lenders.

Rising interest rates caused the decline; the bank had to pay out $100 million more in interest in 1989 compared with 1988, while only taking in $23 million in additional interest on its loans and investments.

At the rate of $15.7 million in net interest income per quarter, the bank never would have been able to raise $1.4 billion by 1995, which is the amount needed to meet tough new federal capital requirements.

Empire in December wrote off virtually all of the controversial goodwill it has had on its books since it began acquiring troubled savings banks in 1981.

In those transactions, which were done with federal assistance and approval, the banks that were acquired had big gaps on their balance sheets -- the value of their liabilities were greater than the value of their assets.

In order to keep its financial statement in balance and to remain solvent, at least on an accounting basis, Empire was allowed to create an asset called goodwill, which equaled the gap in assets and liabilities assumed from the troubled banks.

Empire has been writing that amount off over a 28-year period. However, a change in capital rules adopted by Congress in 1989 forces savings banks to write off goodwill over the next five years.

Empire's former management had argued that was unfair, because its deals with federal banking regulators allowed it to use goodwill over a much longer period. Several banks have sued the federal government over the change in the rules and executives at Empire had hinted they might sue as well.

Instead, the bank, acting on the advice of its auditors, decided to write off most of the remaining goodwill; at the end of the year the bank would have been left with $49 million in goodwill, compared with $714 million at the end of the third quarter.

Empire continued to lose deposits in the fourth quarter, continuing a steady pattern of withdrawals that occurred throughout the year as bad news emanated from the bank.

Deposits declined by $148 million during the fourth quarter and by $379 million during the year.

However, the bank had built up its liquidity over the last two quarters to nearly $1 billion, so the runoff in deposits did not hurt it.

Another contributor to the fourth-quarter loss was a larger-than-normal provision for loan losses.

Dixon set aside $109 million for possible future losses on loans during the quarter, compared to $25 million set aside by the bank's previous management a year earlier.

Much of the latest provision was directed into reserves against losses on automobile, credit card and other consumer loans.

Empire had invested heavily in those areas in 1988, hoping to improve its profitability. Instead, the consumer loan market brought a lot of losses; the bank sold its credit-card portfolio last year, and announced it would sell its $1 billion auto-loan portfolio.

The bank has set aside $32 million against an expected loss on the sale of the auto-loan portfolio, its quarterly statement shows.

Empire also sold four subsidiaries in 1989 and made a profit on only one sale, the quarterly statement shows.

The bank earned $11 million on its sale of its electronic banking subsidiary, Metroteller Systems Inc., to CoreStates Financial Corp. of Philadelphia.

The sale of Gallery of Homes, a real estate franchise operation, cost it $650,000, while it lost smaller amounts on the sale of Sherwin Greenberg Productions Inc. -- a video production firm -- and Asset Management & Disposition Inc., which specializes in working out problem loans.

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