Mercury S&L; Blames Accounting Changes for Continued Losses

Mercury Savings & Loan, stung last year by accounting changes that sunk it into red ink, posted a $1.5-million loss for the first six months of this year.

The Huntington Beach institution reported a net loss of $851,000 for the second quarter, contrasted with net income of $1.5 million for last year’s second quarter. For the six-month period last year, Mercury reported net income of $2.6 million.

Mercury Chairman Leonard Shane said the six-month loss, like the $13.8-million loss last year, was a direct result of the accounting changes required by regulators earlier this year.

The accounting changes were necessary, he said, because incorrect assumptions had been made for several years involving profits recorded on the sale of loans. In addition, assumptions that had been used to figure Mercury’s tax liability were incorrect, he said.

The loss was not generated by the S&L;’s continuing, traditional operations, which have been profitable, Shane said. The S&L; turned a profit in June and will record an annual profit this year, barring unforeseen setbacks, he said.

“Things are pretty well straightened around now,” he said.

Mercury’s second-quarter revenue rose 8.4% to $65.1 million from $59.6 million last year. For the first six months, revenue grew 8.7% to $126.7 million from $116.6 million in the same period last year.

Shane denied persistent rumors that the S&L; is actively seeking a buyer.

Except for the previously announced effort to sell Mercury’s five branches in Northern California, there are no serious talks with anyone about the sale of assets or the entire thrift, said Alan E. Rothenberg, a senior consultant at Montgomery Securities, a San Francisco investment bank hired by Mercury 18 months ago.

But industry analysts doubt whether Mercury can remain independent under new capital requirements that President Bush’s industry rescue effort will impose soon unless it sells up to half its 26 branches.

“I don’t see any alternative but to sell” the S&L; or a substantial chunk of the branches, said James F. Wilson, an analyst at Sutro & Co. in San Francisco.

Capital is an institution’s last reserve against losses. For most companies, it is the amount of money that shareholders put into the firm plus the annual earnings that companies retain.

But in the last decade, capital for S&Ls; has included a number of other items that have helped to prop up the sagging industry. Those other items would be eliminated under the Bush rescue plan, and all S&Ls; would be required to maintain a 1.5% ratio of tangible capital to assets.

Shane said Mercury currently exceeds regulatory requirements for capital and will continue to do so. He said the S&L;’s capital at the end of March was $76.2 million and that about $36 million of that amount must be written off over time under the pending legislation.

He said the S&L;’s previously announced plan to sell the Northern California branches, to cut Mercury’s assets to $2 billion by the end of the year and to eliminate cash dividends should help it meet capital requirements.

MERCURY SAVINGS AT A GLANCE

Mercury Savings & Loan, founded in 1964 by Leonard Shane, now has 25 branches across the state and $2.3 billion in assets. Shane and his family own about 15% of the stock.

2nd Qtr ’89 1st Qtr ’89 1988 1987 Revenue (millions) $65.1 $61.6 $247 $233 Net Income (loss) ($851,000) ($680,000) ($13.8 mil) $5.1 mil Assets $2.3 bil $2.47 bil $2.5 bil

1986 Revenue (millions) $263 Net Income (loss) $9.4 mil. Assets

Employees: 1,000 Shares outstanding: 6.3 million 12-month price range: $4.75-$9 Tuesday close (NYSE): $4.875 unchanged