Glendale Federal may have more time to boost capital; thrift also wins a round in legal hassle with regulators.

Glendale Federal Bank announced last week that it has filed a plan with the Office of Thrift Supervision to recapitalize and that the regulatory agency "may be willing to extend" its deadline for the thrift to do so beyond June 30.

GlenFed Inc., parent of Glendale Federal, said it "contemplates a series of transactions" to recapitalize the thrift and that the OTS has expressed a "preliminary non-objection" to the plan.

The thrift has been under an order from the OTS to inject $400 million in capital June 30. Glendale Federal does not currently meet federal capital standards and must recapitalize under federal law, or face severe regulatory action, including possible seizure.

If it fails to attain mandated capital standards and is seized, Glendale Federal Bank, with $17 billion in assets and more than 3,000 employees would be one of the largest savings and loan failures in U.S. history.

Meanwhile, a federal court judge in Washington last week granted GlenFed's request to take depositions from two OTS officials in its ongoing battle to settle a $1.4 billion lawsuit against the U.S. government.

"It's a very important step forward," GlenFed attorney Jerry Stouck said.

If the government settles, Glendale Federal would have more than enough capital to satisfy regulators. But the question remains: If there is a settlement, will it come in time to save the thrift?

"Is there enough time?" Stouck said. "Well, a lot of things can happen. I can't answer that."

The court case centers around a July 1992 federal court ruling that the U.S. government breached a contract with GlenFed when it stopped allowing the holding company's subsidiary, Glendale Federal Bank, to count "goodwill" towards its capital ratios.

In the 1980s, institutions received goodwill, an intangible asset, when they bought failed savings and loans from the U.S. government. Glendale Federal was allowed to count $734 million in goodwill towards its capital base after taking over First Federal Savings & Loan of Broward County, Fla.

But in 1989 Congress passed the Financial Institutions Reform, Recovery and Enforcement Act, which began phasing out goodwill. Because it has lost more than $500 million in goodwill, Glendale Federal does not currently meet federal standards for capital ratios.

In court last week, U.S. Department of Justice Attorney Pat Leitner argued that goodwill had no value, although she admitted that Glendale Federal had been "hurt" when it lost goodwill, according to a transcript of the proceedings.

U.S. Claims Court Chief Judge Loren A. Smith said, "Well, it has value if taking it away hurts you. That's the definition of value."

Smith said he would allow GlenFed to take depositions from two OTS officials, despite arguments by Leitner that allowing the depositions "could impede the agency's ability to perform its regulatory function."

Stouck told the Business Journal that the depositions may help "narrow the issues" and could lead to a settlement.

Attorneys for Glendale Federal have asserted that the thrift would have earned about $1.38 billion more over 30 years if this goodwill had not been stripped from the institution. But GlenFed officials have said they are willing to settle the case for $700 million.

Glendale Chairman Stephen Trafton has warned that if the case is not settled, taxpayers may have to pay $3 billion to $4 billion to bail out Glendale Federal and then pay more than $1 billion in court-ordered damages.

GlenFed officials have previously maintained that they were not counting on a court settlement to save Glendale Federal from seizure. But up until last week, the thrift had not stated that it had filed a plan with the OTS to recapitalize the thrift.

In the announcement last week, Glendale Federal provided no details of its recapitalization plan. Glendale Federal will provide more details in late May, said spokeswoman Judy Cunningham.

The company has previously stated in filings with the Securities and Exchange Commission that a recapitalization could include a debt restructuring, a shareholders' rights issue, a sale of the thrift's assets or "the sale of control or merger of the company and/or bank."

"What they need to find is a white knight investor," said Campbell Chaney, a financial institutions analyst with Sutro & Co. in San Francisco. He said he thinks the OTS will extend Glendale Federal's deadline for obtaining $400 million in capital "for at least six months."

But whether the bank is ultimately able to recapitalize is still up in the air, Chaney said. "I wish them the best of luck," he said.

Also last week, GlenFed announced net earnings of $45.2 million, or $1.28 a share, for the fiscal third quarter ended March 31. However, it reported an operating loss of $50.4 million.

The net profit compares with a net loss of $146.6 million, or $4.48 a share, a year before. For the nine months ended March 31, GlenFed lost $50.9 million compared to a loss of $94.9 million a year earlier.

"In all honesty, it really doesn't matter," Chaney said. "When you're talking several hundred million dollars (that GlenFed needs in new capital), earnings lose their materiality."