Heavy Losses in Credit Card Program Blamed : Home Federal Sees Earnings Drop

SAN DIEGO — Home Federal Savings & Loan, buffeted by abrupt and dramatic losses in its heavily promoted consumer credit card program, said Wednesday that its third-quarter earnings will be “significantly below” projections.

Home Federal officials said they do not yet know how much earnings will suffer.

However, analysts suggested that increases in Home Federal’s provisions for losses on receivables could, conservatively, trim its projected third-quarter profits of about $20 million by more than two-thirds.

Earnings Forecast Cut

Salomon Bros. in New York cut its 1985 earnings forecast to between $3.50 and $3.60 per share from $4.25. Home Federal, with more than 20 million shares of common outstanding, reported earnings of $41.4 million for the six months ended June 30.

Home Federal’s stock closed Wednesday at $21.125, down $2.50.

“We don’t know what the total loss reserve will be (but we) hope that everything will be charged” in the third quarter, said Bob Chaut, a Salomon Bros. analyst. “If it’s just a one-shot, third-quarter thing and then they go back to normal earnings, then I think the stock is attractive,” he said.

Less sanguine was Tom Klingenstein, an analyst with Wertheim & Co. in New York, who has revised his projection of a $37-million quarterly pretax profit. Now, he said, Home Federal might eke out only a small profit in the third quarter because of increases in balance-sheet reserves and income-statement provisions for credit card losses that could total between $30 million and $35 million.

The company has heavily solicited credit card customers in the past year. The number of credit card accounts has more than tripled to 321,698, and the total credit available to those customers has risen 69% to $305 million.

But its provision for such losses was only $5.8 million, or about 2% of the $305-million credit card portfolio and less than the industry’s 3% to 4% average.

The company by year-end will increase the reserves on its $375 million in total consumer receivables to 4%, or $15 million, according to President and Chief Operating Officer Robert F. Adelizzi.

“We’re surprised that (the credit card performance) would change so abruptly,” Adelizzi said. “It may be a cyclical event, (but) it’s something that won’t continue.”

Most of the credit card losses were from personal bankruptcies of MasterCard customers, Adelizzi said. With the losses, Home Federal’s credit card expansion program is now “pretty close to a break-even point,” he added.

Background Checks Lax

Home Federal could have done a better job of checking the background of its credit card customers, Chaut said. Before soliciting customers, Home Federal ran credit checks on the names of potential customers it gleaned from purchased lists, he said. But the company failed to later re-check their credit to reflect changes between the time the lists were purchased and the time the credit cards were sent, he said.

Unlike banks, S&Ls; may not deduct such losses from their taxes.

Home Federal is the nation’s ninth-largest S&L; with $9.5 billion in assets and 158 branches in the state. Its $650 million in stockholders equity is nearly 7% of its total asset base and relatively high by industry standards.