Federal regulators yesterday pledged $1.3 billion to prop up Vernon Savings and Loan Association in Dallas in the largest such government rescue of a savings institution.
The Federal Home Loan Bank Board, regulator of 3,200 thrift institutions nationwide, said it was transferring Vernon's insured deposits to the newly created Montfort Savings Association.
The new entity will receive $200 million in cash and a $1.1 billion note from the Federal Savings and Loan Insurance Corp., which guarantees S&L deposits up to $100,000.
It will operate as a mutual association owned by depositors under management selected by the bank board, said Martha Gravlee, a spokeswoman for the bank board.
Regulators hope to sell Montfort eventually, reducing the cost of the bailout, she said. FSLIC also may reduce the size of the note over time by transferring healthy assets, such as paying loans, to Montfort.
It is the biggest rescue ever in terms of the cost to the FSLIC, she said. The largest previous S&L rescue was the $681 million bailout in 1986 of Sunrise Savings and Loan Association of Boynton Beach, Fla.
Those transactions are exceeded only by the $4.5 billion bailout in 1984 of Continental Illinois Bank & Trust of Chicago by the Federal Deposit Insurance Corp., a separate agency that insures commercial banks.
Vernon's 10 offices will be closed today and will reopen Monday under the new Montfort name, honoring the same rates and terms on all certificates of deposit. Depositors with less than $100,000 in the institution will have immediate access to their money Monday. Depositors with more than that must apply for access in writing.
Gravlee said a small number of deposits were above the insurance limit, but she said the bank board could not yet put a dollar limit on the amount.
The bank board closed the institution because it was hopelessly insolvent and its problems were getting worse, said board chairman M. Danny Wall. He said the agency has no immediate plans to close any other large problem thrifts in Texas.
Vernon's net worth had sunk to negative $716.8 million by Sept. 30 and was projected to top $1 billion by next year. At the end of September, it had assets of $1.17 billion and deposits of $1.4 billion.
"The damage done to Vernon by the management before March of this year was irreparable," Wall said in a statement. The current management, appointed by the bank board March 20, inherited a portfolio in which 96 percent of the loans were not paying.
Under the direction of Donald R. Dixon, who acquired Vernon in January 1982, the institution increased its assets tenfold by making large, speculative development and construction loans, according to the bank board.
FSLIC filed suit in April for $100 million against Dixon and other former officers, charging fraud and other breaches of the officers' duties.
Montfort will be run by the same management installed by regulators upon Dixon's ouster in March when Vernon was converted from a state charter to a federal charter.
Tom B. Scott Jr., president of Unifirst Bank for Savings of Jackson, Miss., will serve as chairman of Montfort.
Vernon is the 16th association to be liquidated by the bank board so far this year, the second in Texas. The board liquidated 21 institutions last year, and Wall this month predicted that 33 liquidations would occur this year and more than 50 next year.
The bank board had been hamstrung in dealing with the problem of ailing thrift institutions, particularly in oil patch states like Texas, because its insurance fund was technically insolvent.
It was forced to keep many insolvent S&Ls, so-called "zombie thrifts," afloat because it lacked the money to pay off depositors.