Crocker Expects Loss of About $215 Million in 4th Quarter of 1984
Reeling from additional loan losses in energy, agriculture and real estate, Crocker National Corp. said Wednesday that it will report a loss of about $215 million for 1984’s fourth quarter, one of the largest quarterly losses in U.S. banking history.
The deficit, stemming from a move by Crocker to add $326 million to its reserves to absorb current and future loan losses, will give the troubled San Francisco-based parent of the nation’s 12th-largest bank a loss of about $324 million for all of 1984. That is expected to become the second-largest annual loss ever among U.S. banks.
The $326-million addition to the loan-loss reserves includes $253 million in loans written off in the quarter and $73 million added to previous reserves.
Capital Increased
Although Crocker officials acknowledged that the loss was evidence that the company’s problems are far worse than previously believed, the problems are not nearly as severe as those that led to the near-collapse last summer of Chicago’s Continental Illinois Corp.
Crocker’s deposit base is more stable and its parent company, Midland Bank PLC of London, moved Wednesday to bolster its capital position.
The loss followed an examination of the bank by the Comptroller of the Currency, the federal agency that regulates national banks.
Crocker Chairman and Chief Executive Frank V. Cahouet said that the addition to the loan-loss reserves, with its resulting quarterly loss, was not forced upon the bank by the regulators but that the regulators agreed that it was appropriate.
Analysts said Crocker’s move reflects a crackdown by regulators concerned about weakness in banks’ loans to troubled energy, agricultural and Third World borrowers. Accordingly, regulators are expected to prod other major banks to make similar increases in their loan-loss reserves and capital levels, which could result in reduced earnings or outright losses.
Transaction Terms Weakened
“There is no question that regulators have got the heat on banks, particularly those with heavy exposure to energy and agricultural loans,” said James J. McDermott, research director for New York-based Keefe, Bruyette & Woods Inc., a securities firm specializing in bank stocks.
The loss prompted Midland Bank, which owns 57% of Crocker, to shore up Crocker’s financial condition by injecting $375 million in new capital, giving the California bank a capital-to-assets ratio of 6.23%, one of the highest among major U.S. banks. Large banks are required by federal regulators to have a 5% ratio.
But the loss also prompted Midland to weaken the terms of a transaction under which it has agreed to acquire the 43% of Crocker it does not already own. The new offer, under which Midland will exchange stock worth about $27 per share for each Crocker share, is valued at about $224 million, or as much as $49 million less than the previous offer.
In New York Stock Exchange trading, Crocker stock fell $1.125 per share to close at $24.25; more than 1.9 million shares were traded.
The latest loss comes after Crocker’s top officials and many banking analysts had expressed confidence that the bank’s problems were finally behind it. Moving to bolster its loan-loss reserves to act as a cushion against massive problem loans, Crocker had reported losses of $57 million in the fourth quarter of 1983 and $121 million in the first quarter of 1984.
Cahouet, a highly respected banker who joined Crocker from Los Angeles-based Security Pacific Corp. last March to lead a turnaround, had said after those losses that they were “the end of the bombshells.” Crocker then posted profits of $6.1 million and $6.4 million in the second and third quarters of 1984, respectively.
However, he said, the latest loss was the result of a “hard-headed” look at the bank’s loan portfolio by his new management, which found that Crocker’s problems were worse than previously believed. He said the move also reflected some deterioration in the bank’s portfolio in the fourth quarter.
However, Cahouet expressed confidence that this new loss will be the last and said that he expects to report profits for the current first quarter and for all of 1985.
Actions Not Forced
“We looked at our portfolio very realistically and we believe our problems are behind us,” he said at a press conference here, adding that if management believed that there were more problem loans to account for, “we would’ve gone for” a higher loss.
Quarterly provisions for loan losses, which are charged against earnings, are expected “to return to more normal levels during 1985,” he said.
Cahouet said that federal regulators have not forced the bank to increase capital or reserves or to undertake other actions to shore up its business.
He added that the bank has not had any problems with withdrawals of deposits, although it recently has sought longer maturities for some of its jumbo deposits that are larger than the $100,000 limit on federal insurance. He said the company would not need to reduce the current dividend of 10 cents, reduced from 30 cents last June.
About 40% of Crocker’s deposits are from institutions and other large depositors, who, because much of their funds are uninsured, are more likely than ordinary consumers to withdraw funds at the first hint of trouble at a bank.
Such withdrawals precipitated the federal rescue last summer of Continental Illinois, then the nation’s eighth-largest bank.
Crocker said the $326-million addition to its reserves against loan losses will be partially eaten into by the $253 million in loan write-offs for the quarter--including $163 million in commercial loans (mostly energy and agriculture), $48 million in real estate credits and $37 million in foreign loans. Crocker’s troubled portfolio includes a number of expensive condominium projects in West Los Angeles and vineyards in the San Joaquin Valley.
That will give Crocker a net addition to its reserves of about $73 million, giving it total reserves at the end of 1984 of about $300 million, or 1.9% of its total loans, far above the 1.4% at the end of the third quarter and the levels of about 1% to 1.2% at many other major banks.
Because of the higher reserves and capital levels, “Crocker’s financial position is probably stronger than a quarter ago and uncertainty has been substantially reduced,” said Paul H. Baastad, research director and banking analyst for the San Francisco-based investment research firm of S. G. Warburg, Rowe & Pitman, Akroyd Inc.
Crocker’s fourth-quarter loss, however, would have been even worse were it not for an $85-million after-tax gain in the quarter from the sale of its headquarters building. The $358-million sale to Prudential Insurance Co. of America was closed about two weeks ago, Cahouet said.
Crocker’s non-performing loans--those on which interest is more than 90 days overdue--rose to $1.17 billion from $1.1 billion at the end of the third quarter.
Revised Takoever Offer
Crocker’s projected $324-million loss for all of 1984 is expected to become the second-largest annual red ink for a U.S. banking firm, behind the expected loss of more than $1 billion for 1984 at Continental Illinois.
Under Midland’s revised takeover offer for Crocker, the British bank will offer stock with a stated value of $27 per share, instead of $30 in the earlier offer.
In addition, Midland withdrew a provision to pay Crocker shareholders up to $3 per share contingent on Crocker’s profitability and other factors.
Crocker and Midland said they expect to complete a merger agreement by the middle of this month, earlier than expected.
