FCA Profit Plunges 81% in Quarter as Firm Enlarges Its Loan-Loss Reserves

Financial Corp. of America reported a plunge in profit Wednesday as part of a first-quarter financial report that included another hefty addition to reserves for loan losses.

FCA earned $9.2 million in the first three months of 1987, off 81% from a year ago. It added $79.8 million to loan-loss reserves, bringing the firm’s total reserves to $854 million. These reserves, which are set aside to handle problem loans, cut directly into profits.

The financial results, coupled with major turbulence this month in the nation’s mortgage securities market, indicates that FCA has yet to turn the corner in its 2 1/2-year-long battle to regain financial health. On an operating basis, for example, FCA reported a loss of $17.3 million in the first quarter.

The financial results come at a time when there is a renewed push to find a buyer or provide new capital for Irvine-based FCA, whose operating subsidiary is American Savings & Loan. American Savings has nearly $34 billion in assets, making it the largest thrift in the United States, but its capital falls more than $1 billion below federal regulatory requirements.

Company sources speculate possible buyers or investors might include out-of-state financial institutions that want to enter the California market, profitable corporations that could use FCA’s tax-loss credits to offset their own earnings or real estate investors experienced at working out problem real estate loans.

But would-be investors probably won’t want to buy American Savings or provide new capital until interest rates drop further and they’re assured the firm’s severe loan problems are under control, company sources say. And the latest results don’t appear to go very far in providing those assurances.

“We wish we could have turned the proverbial corner a long time ago,” Chairman William J. Popejoy said in a phone interview, “but so many forces are beyond our control.”

FCA’s loan portfolio continues to be hurt by falling real estate prices in states such as Texas, Oklahoma and Colorado, where local economies remain depressed in the wake of last year’s plunge in crude oil prices. Further, last year’s tax reform legislation stripped income-producing real estate of tax benefits that made them economical and attractive to investors in the first place. As a result, American Savings has had to lower interest rates on these kinds of loans to keep them from going into default, Popejoy said.

In recent weeks, FCA has also found itself hurt by a sudden move upward in interest rates, a turn that abruptly ended nearly three years of dropping rates. That move down in rates had allowed FCA to earn nearly $1 billion in the past 18 months, largely through the sale of high-yield, mortgage-backed securities. FCA’s assets include $17.7 billion in mortgage-backed securities.

But in a rising interest-rate environment, the sale of those securities could result in losses, not profits. That’s because the value of mortgage-backed securities normally drops as interest rates rise. Thus, profits in the future may not include non-operating gains from these asset sales, Popejoy said.