Lincoln Savings Requires More Capital, Federal Regulators Say

Federal regulators have told Lincoln Savings & Loan that it does not have enough capital to support its far-flung operations and should halt its non-traditional S&L; activities--at least until regulators can review the pending sale of the Irvine-based S&L.;

Executives at Lincoln and its parent company, American Continental, disputed the regulators’ findings on Thursday, saying that a fundamental error in their calculations led to their conclusion that Lincoln should have more capital.

However, William Fulwider, a spokesman for the Federal Home Loan Bank Board, which regulates S&Ls;, said he doubts that the examiners had erred. The 7-month review of Lincoln was “thorough and objective” and was conducted by senior examiners from several bank board districts as well as bank board staff in Washington.

“We’ll work with them in implementing the findings of the examination and in expediting the process for approval of the sale of the institution,” Fulwider said.

The recommendations contained in the bank board’s report are not binding yet. The S&L; and American Continental have until Jan. 17 to respond before the report is enforced.

American Continental said the report raised concerns in the areas of capital adequacy, asset quality, earnings, management and compliance with bank board regulations.

Robert J. Kielty, American Continental’s senior vice president and general counsel, said the report should have no impact on the planned sale of Lincoln to a group of investors headed by Spencer Scott, former chairman and chief executive of Fidelity Federal Savings & Loan in Glendale and its parent, Citadel Holding. The agreement was reached Tuesday.

Typically, such reports by the bank board are confidential, but American Continental executives decided to release limited information from the report and an accompanying letter written by the chief examiner.

Kielty said the company decided to release the information because American Continental is a public firm and because it is in the process of selling Lincoln. “In our case, information is subject to leaks and people trying to misconstrue it,” he said.

Company officials and thrift regulators have had a history of bitter confrontations over the operation of the S&L.; Regulators have never wholly accepted the S&L;’s embracing expanded powers under state law to engage in non-traditional activities such as trading in stocks, “junk bonds,” commodities and foreign currencies.

The report calls for a halt to those activities and for the S&L; to stop making certain commercial loans and investments in unimproved real estate.

Kielty contended that federal examiners failed to include about $50 million in reserves for loan losses as part of the S&L;’s capital structure. He said he believes that examiners simply want the S&L; to avoid engaging in risky activities until the sale to Scott is approved.

He said he is confident that American Continental, headquartered in Phoenix, will be able to satisfy regulators’ concerns in the company’s formal response to the report. With reserves included, the S&L; would have $255 million in capital, Kielty said, enough to support its $6.5 billion in assets at the time the examination was completed earlier this month. The S&L; now has $6.8 billion in assets.

Scott, who could not be reached for comment, had said Tuesday that his group was aware of the concerns regulators have about Lincoln.