Loan Reserves : FCA Expecting $150-Million Loss for 2nd Quarter

Financial Corp. of America said Wednesday that it expects to report a net loss of $150 million to $200 million for the second quarter, primarily because of a change in the way the company accounts for certain problem loans.

The loss is another blow to FCA, which has been struggling to return to financial health. Federal regulators are seeking a buyer for the company, which is the parent of American Savings, the nation’s largest savings and loan association.

FCA Chairman and Chief Executive William J. Popejoy said he expects “substantial improvement” in the second quarter’s operating loss compared to that of the previous three months. In the first quarter, FCA reported a $17.3-million operating loss and net income of $9.2 million.

A year ago, the company posted an operating loss of $14.1 million and net income of $11.6 million. FCA has reported net profits for seven of the last eight quarters but, as of March 31, it had $561 million in regulatory capital and needed an additional $1.1 billion to meet regulatory requirements.

Ruling by CPA Group

“It’s certainly a setback for us because we’ve been making a great deal of progress toward rebuilding our capital,” Popejoy said in a telephone interview. But, he added, “We’ve been through setbacks before and we’ve weathered them.”

The bulk of the expected loss is the result of a recent ruling by the Emerging Issues Task Force of the American Institute of Certified Public Accountants that S&Ls; should set aside additional reserves for troubled debt that has been restructured.

When troubled debt is restructured, typically the interest rates are lowered or the maturities are lengthened to help prevent foreclosure. S&Ls; have been accounting for restructured troubled debt under its higher potential value, assuming that they can recoup principal and interest in the near future. But the accounting change requires the companies to carry the loans at a discounted value and to set aside reserves in case there are future losses.

FCA had $1.6 billion of troubled restructured debt as of March 31, the company said.

“Foreclosure consistently is the most costly solution to a troubled debt situation,” Popejoy said, adding that most of the additional losses involved loans made before 1985.

Also contributing to the company’s anticipated loss in the second quarter is the writedown required on its contributions to the secondary reserve of the Federal Savings & Loan Insurance Corp., additions to the reserves for losses on loans and real estate and higher interest rates.

FCA’s $23-million investment in the secondary reserve must be written off because FSLIC recently was declared technically insolvent. Previously, that investment was carried on the books of savings and loan firms as an asset.

The anticipated loss “makes it necessary for us to raise more capital” but also makes that task more difficult, Popejoy said. The company continues to explore ways of raising new capital, but any merger discussions are “still tentative,” he said.