Citing New Fed Rules, Citizens Holdings Kills Deals to Buy 2 Banks

Blaming new federal banking policies, Citizens Holdings said Wednesday that it has terminated negotiations to acquire two area banks in deals that would have made the Newport Beach firm the largest banking company in Orange County.

The new policies also killed Citizens’ plan to build a chain of mid-size banks that would operate autonomously with their names and managements intact, said Paige V. Simpson, a company director.

Citizens had been prepared to sign a definitive agreement Wednesday to acquire Eldorado Bank in Tustin, and it planned to sign a similar agreement next week with Rancho Santa Fe National Bank in northern San Diego County.

Under the new policies, Simpson said, the Federal Reserve Board would have required Citizens to add at least $17 million to its capital base had the acquisitions been completed.

The policies--aimed at exerting more control over offshore conglomerates that own interests in American banks--also were blamed for the termination of a $750-million deal Monday between Banca Commerciale Italiana in Milan and Irving Bank Corp. in New York. The Fed requirements would have increased the cost of the deal by as much as $450 million.

Whom Rules Affect

The Fed’s new rules also will probably make it more difficult for East Coast bank holding companies to acquire California banks once full interstate banking becomes effective in 1991, said Gerry Findley, a Brea industry consultant.

Findley said that some of the new Fed policies took effect within the last three months and that others will be implemented soon.

Only bank holding companies are affected by the Fed’s rules. The rules do not affect bank mergers and acquisitions by other banks, Findley said.

In contrast with the Irving Bank transaction, the Citizens deals were tiny. It was offering to buy Eldorado Bank for $34 million in cash and Rancho Santa Fe National for $12 million in cash.

The acquisitions would have created the largest banking company in Orange County, with more than $600 million in assets.

Citizens is owned through seven levels of companies by a trust established for the children of Australian industrialist Richard Pratt.

Termination ‘Regretted’

During talks over the past month, regulators said that they knew and respected Pratt and the banks involved, Simpson said, “but they said they were applying the policies elsewhere and couldn’t do differently here.”

Executives at Citizens and Eldorado said they “regretted” the termination of their deal.

James Boyce, president of Rancho Santa Fe National, said neither he nor the bank’s chairman had been notified that Citizens had called a halt to the deal. Boyce said, though, that he knew that the new rules were causing problems and that he understood why Citizens would call off the acquisition.

According to Simpson and Chuck Camps, a Citizens vice president, two new policies in particular led to the scrapping of the deals Citizens was putting together.

One is a requirement to immediately eliminate “good will” from the holding company’s capital base. Good will is that part of the purchase price that exceeds the book value, or net worth, of the bank being acquired.

Estimates of Worth

Camps estimated that Eldorado’s net worth--assets minus liabilities--would have been about $20 million at the close of the deal, putting its good will at about $14 million. He put Rancho Santa Fe National’s good will at $4 million, although Boyce believes that it would have been less.

Banks previously have been able to write off good will--essentially reducing capital--over 15 years. But the new Fed rule eliminates good will immediately from purchases, thus reducing equity capital.

The Fed’s other requirement is to raise the amount of equity, which means cash or cash equivalents, in the holding company. The Fed wants holding companies to have capital totaling 8% of assets, with 5.5% of that amount in cash or cash equivalents such as Treasury bills.

Citizens’ $30 million in capital is 6% of its assets. But $17 million, or 57%, of that capital is in the form of internal debt--obligations among the seven levels of ownership, Camps said.

The Fed disregarded the internal debt in figuring its capital-to-assets ratio, effectively reducing the amount of capital the holding company would have, he said.

‘$50-Million Deal’

“They said we needed $17 million more in capital in the holding company just to acquire Eldorado,” Simpson said. “That makes it a $50- million deal, and the return just isn’t there to make the deal feasible.”

The Fed’s approach “changes our plan,” said Simpson, an architect of the company’s unusual strategy for growing into a $1-billion banking firm.

Citizens’ plan was to acquire healthy, well-managed banks from Long Beach to San Diego and to let them operate autonomously under the same directors and management.

Now, to avoid the need for the Fed’s approval, Citizens will use the two banks it already owns--Citizens Bank of Costa Mesa and El Camino Bank in Anaheim--to acquire and merge banks into the existing subsidiaries, he said.

And rather than look for a string of banks on the coast, the company will search inland for deals.

“That’s not what we wanted to do because we get into the problem of ego--two chairmen, two presidents and who will stay,” Simpson said. “But we’ll find the banks. We’ll go on with our plan.”