Columbia S&L; Puts Its Loss at $226.3 Million : Earnings: The Beverly Hills thrift said new regulations and lower prices in the junk bond market forced it to devalue its investment portfolio.
Columbia Savings & Loan, the Beverly Hills thrift that has bet heavily on high-yield, high-risk junk bonds to produce profits, disclosed a $226.3-million quarterly loss Wednesday stemming from the recent hammering of the junk bond market combined with the effect of new federal thrift regulations.
In taking the loss for the third quarter ended Sept. 30, Columbia is devaluing its junk bonds and other investments by $357 million, a reflection of the sagging prices that the bonds are fetching in the market. Columbia executives said the thrift’s junk bond portfolio is now valued at $3.75 billion, or about 30% of Columbia’s $12.7 billion in total assets.
Under normal circumstances, Columbia would not have to devalue the bonds to their market values and suffer a loss, provided that it could make a case that it planned to hold the junk bonds until they mature instead of selling them to investors.
But Columbia is prohibited from holding most of its bonds to maturity by the new thrift legislation signed into law by President Bush in August. That law requires Columbia and other thrifts to divest themselves of junk bonds before July 1, 1994. About 85% of Columbia’s junk bonds mature after that date.
Junk bond prices have suffered in recent weeks from a number of developments, a major one being problems surfacing at high-profile, junk bond-financed concerns such as Robert Campeau’s Allied Stores and Merv Griffin’s Resorts International.
Investors also are growing reluctant to buy junk bonds because of economic uncertainty and the recent stock market turmoil, which tends to chase investors away from riskier investments into safer ones.
Columbia, under the leadership of Chief Executive Thomas Spiegel, has forged close ties to Drexel Burnham Lambert and its junk bond division, riding the boom in junk bonds earlier this decade to huge profits. Columbia for several years has been one of the nation’s most profitable thrifts, earning $193.5 million in 1986 alone.
Specifically, Columbia is pumping $227.3 million into its reserves for losses that it expects on its holdings. Beyond that, Columbia is marking down the value of its overall junk bond portfolio by an additional $130.2 million.
The $226.3-million quarterly loss, a record for Columbia, contrasts with a profit of $16.3 million earned a year earlier. In the nine months ended Sept. 30, Columbia lost $212 million, in contrast with a profit of $48.7 million in the year-earlier period.
Columbia is not the only thrift to write down its junk bonds. Imperial Corp. of America, the San Diego-based parent of Imperial Savings, earlier disclosed its after-tax losses from its junk bond holdings will total $88.9 million for the quarter.
Some 200 thrifts nationwide own junk bonds, although none hold anywhere near the amount owned by Columbia. Analysts have estimated that thrifts may write down as much as $1 billion in their portfolios.
“They might as well step up to the line and take it,” said Donald H. Livingstone, a partner in Los Angeles with the Arthur Andersen & Co. accounting firm.
Columbia said there was no pressure from regulators to increase reserves for the junk-bond holdings. Executives added that they chose to devalue its entire portfolio, including those bonds that mature before 1994, to give it flexibility in selling them.
Despite the loss, Columbia executives said the thrift’s capital position remains strong, well in excess of federal standards required under the new thrift bailout.
As of Sept. 30, Columbia’s tangible equity as a percentage of its assets stood at 3.6%, meaning that the thrift has about $3.60 of its own money invested for every $100 in assets. That number, however, is down from 5.2% before the accounting adjustments were made.
Columbia said it believes that after it makes it accounting adjustments, it will rank third in its percentage of equity to capital among California thrifts, behind Great Western and Home Federal.
In addition, Columbia executives said the thrift holds valuable assets in the form of warrants, options and other securities issued in corporate buyouts and restructurings. They said those securities cost $90 million but are expected to ultimately produce gains of $200 million to $300 million.
Columbia executives said they wrote off about $35.6 million in junk bond investments in the quarter, the amount of which was taken out of the reserve.
Columbia’s reserves against junk bond losses, which act as a cushion, now total $300 million, or nearly 7% of its junk bond portfolio.
Columbia executives said they believe that amount is more than adequate. Accountants and analysts said it is difficult to determine whether the amount is enough because Columbia’s operation is so different from those of other thrifts due to its junk bond activity and the fact its bond holdings are a closely guarded secret.
COLUMBIA S&L;’S PORTFOLIO
Percentages are based on total assets of $12.7 billion
20% Loans: $2.6 billion
22% Other: $2.6 billion*
28% Junk bond holdings: $2.6 billion
30% Mortgage-backed securities: $2.6 billion
Source: Columbia S&L; annual report
* Equity securities, other investment securities and other assets
Los Angeles Times
