FarWest Bond Writedown Results in Loss
FarWest Savings posted a $22.9-million third-quarter loss Tuesday because it was required to write down the value of its junk bond holdings, becoming the latest Orange County thrift to be hit hard by strict new federal laws.
As a result, FarWest’s chief financial officer said, the S&L; will not be able to meet two of the three new capital requirements that take effect Dec. 7.
Chief financial officer Charles Green said the S&L;’s entire third-quarter loss was a result of a new law that requires all so-called junk bond investments to be carried on the books at current market values rather than at purchase price.
Had FarWest not been required to write down the value of its junk bonds, it would have posted a $1.5-million profit for the three months ended Sept. 30, Green said.
A junk bond is a high-yield debt instrument that is not rated as investment grade by the major credit rating services such as Standard and Poor’s. The new federal rules require all S&Ls; to get rid of junk bond investment by 1994.
The S&L;’s third-quarter loss contrasts with a third-quarter profit of $1.5 million last year. For the first nine months, FarWest, which has $4.7 billion in assets, reported a loss of $6.6 million, against a $6.3-million profit a year ago.
FarWest is a subsidiary of FarWest Financial Corp., which is controlled by the billionaire Belzberg brothers of Vancouver, Canada.
Other Orange County thrifts have felt the sting of tougher regulations that were adopted as part of an extensive package of legislation intended to bail out the thrift industry.
Westcorp, parent of Western Financial Savings Bank in Orange, a $2.6-billion thrift, recently blamed a 62% drop in its third-quarter earnings to the requirement that junk bonds be carried at market value.
Last week, Downey S&L; in Newport Beach said the new federal accounting rules forced it to restate its third-quarter financial situation to show a $3.7-million loss for the period instead of the previously reported $2.4-million profit. Downey had to revise the value of its investment-grade, mortgage-backed securities.
And earlier this year, Mercury S&L; in Huntington Beach said federal regulators required it to turn its previously reported $6.1-million profit for 1988 into a $13.8-million loss. While the writedown of assets occurred before the bailout bill was approved, it was part of federal regulators’ new war on what they see as lax S&L; accounting standards.
In a brief interview, Green complained that Congress “did not understand the impact under generally accepted accounting principles that these things would have on our balance sheets.” The rules, he said, “do not show a lot of economic sense.”
That criticism has been voiced by many in the thrift industry. But one goal of the legislation is to weed out the weaker thrifts and eliminate the riskier investment policies that contributed to the failure of hundreds of thrifts in the late 1980s.
When the new rules were announced last week, federal regulators said about 800 of the nation’s 2,700 thrifts would not be able to meet the new capital requirements. Among those were seven in Orange County, including Mercury and FarWest.
Regulators and industry analysts estimate that as many as 300 of those S&Ls; will be put out of business by the end of the year. In addition, federal regulators already have seized control of 257 thrifts that either are insolvent or were being operated in an unsafe manner.
Green said FarWest is preparing a plan for complying with the new federal capital requirements and will submit it for government approval by the Jan. 6 deadline.
He said that while FarWest’s 1.9% ratio of capital to tangible assets as of Sept. 30 exceeded the 1.5% ratio that will be required as of Dec. 7, the firm was not able to meet the 3% capital to liquid assets ratio or the 5% capital to at-risk assets ratio.
While FarWest waited until after the stock markets closed Tuesday to announce its third quarter, the holding company’s stock was caught in a general sell-off of high-risk S&L; shares.
FarWest Financial Corp. common stock dropped 50 cents a share in moderate trading on the New York Stock Exchange to close for the day at $7.38.
Separately, Downey S&L; stock dropped 75 cents a share to close at $18.50 on the New York exchange.
