ANALYSIS : HomeFed: Same Road as Great American?

Could HomeFed Bank be headed down the same slow road to disaster that its long time San Diego rival, Great American Bank, embarked on a couple of years ago, a slide that culminated earlier this month with Great American’s agreement to sell its California branches to Wells Fargo?

The question is on the minds of many San Diegans in the aftermath of Homefed’s announcement last week that it lost $108 million in the second quarter after setting aside a record $234 million in reserves for probable loan and foreclosure sale losses.

Comparisons of the two thrifts are nothing new. Homefed and Great American were always measured against one another as they rose to prominence as two of the most successful and influential thrifts in the industry. For 20 years, they competed fiercely for depositors and branch locations and tried to outdo one another in community and philanthropic activities to gain local prestige.

Homefed’s second-quarter loss invites continued comparison with Great American, particularly because its loss was largely due to its out-of-state loan portfolio, the same bugaboo that has brought Great American to the verge of insolvency.

The turning point in Great American’s fortunes could be traced to an innocuous disclosure in its July, 1988, earnings statement that assets acquired through its 1986 merger with an Arizona thrift were “under (regulatory) review to assess reserve adequacy.”

Over the next seven quarters, Great American would set aside loss reserves totaling $525 million--the bulk of them attributable to bad Arizona loans--that led to huge net losses, shrunken capital, the threat of a government takeover and eventually the branch sale agreement with Wells Fargo. The downsizing of Great American that will result is also likely to cause hundreds of layoffs of Great American’s headquarters staff.

And now Homefed has an out-of state loan problem of its own.

A startling 12.7% or $447 million of Homefed’s $3.5 billion total out-of-state assets are “non-performing,” meaning on non-accrual or in foreclosure. That contrasts with a 2.1% ratio of non-performers to total loans and real estate owned in California. The picture is particularly grim in Florida, where $173 million or 29% of Homefed loans are either not earning interest or in foreclosure.

Of the S&L;’s $708-million total nonperforming assets--an alarming 3.73% of total assets--more than 60% result from loans that were made outside the state, Homefed said, while out-of-state loans account for only 20% of Homefed’s total assets.

Little wonder that Homefed simultaneously announced last week that it will no longer make out-of state loans except in Nevada. Homefed also announced that it will ease out of commercial real estate lending, a response to the grim statistic that $200 million, or 9% of Homefed’s $2.2 billion in commercial loans are delinquent.

In an interview this week, HomeFed President Robert F. Adelizzi argued strenuously that Homefed is not comparable to Great American. His S&L; has a “much stronger capital position” than Great American had two years ago when its Arizona loans began to unravel. That stronger capital position leaves Homefed in better condition to deal with problems in the future, he said.

A comparison of the two thrifts’ balance sheets supports Adelizzi. Despite Homefed’s $108-million second-quarter loss, the S&L;’s tangible capital as of June 30 was still $805 million, a healthy 4.2% of its $19 billion in total assets.

By contrast, Great American’s tangible capital at its June 30, 1988, “turning point” was $387.7 million or only 2.5% of its $15.7 billion in assets, which in retrospect was a thin safety cushion indeed for the problems that lay ahead.

Gary Gordon, a thrift industry analyst with PaineWebber in New York said Homefed “has far more capital that Great American ever had at its peak, even after the meaningful write-downs (Homefed) has taken.”

“Although Homefed does have a lot of exposure to risky real estate, that real estate is in what is today healthy economies----Florida; Washington, D.C., and California,” Gordon said. “If you look at Homefed’s exposure in economically weak areas, it’s minimal.

“Great American unfortunately bought (into) Arizona which was a lot of their assets and one of worst markets in the country,” Gordon said. “For this to really be deja vu , we would really need the real estate market in Florida and California to look like it does in Arizona----not a pretty thought.”

Adelizzi agreed that the California economy and the continuing strength in the housing market hold the keys to Homefed’s future. And he insists that the outlook in population and job formation is strong, despite the specter of defense layoffs which some pessimists say will bring to California the real estate deflation seen in other parts of the country.

Nancy Spady, a thrift industry analyst with Morgan Stanley investment firm in New York, praised Homefed for being forthright in dealing with the bad out-of-state loans by taking large reserves and deciding to shut down most non-California loan operations.

“There is no way (Homefed and Great American) are comparable at this early date,” Spady said, adding that Homefed’s large second-quarter loan loss provision was strong medicine that may prevent it from having to set aside a succession of big loss provisions over future quarters.

Sal Serrantino, president of California Research Corp., a Santa Monica-based S&L; consulting firm, said Homefed has hit a “few bumps along the road, but their strong capital position has held them in strong stead.”

“I don’t see them going down the path of Great American. (Homefed management) is too smart and more flexible than Great American’s was in the sense of (Great American) going down the course in Arizona whatever happens,” Serrantino said.

“Homefed on the other hand quickly cut its losses, said they would not make any more loans in the market and would move back to safe harbor,” Serrantino said.

Nevertheless, most industry observers long ago lost whatever illusions they may have had that any S&L; is immune to life-threatening problems.

“You never know. It’s unanalyzable,” Spady said when asked if Homefed’s loan problems were behind it. “We are talking about something that’s very difficult to figure out the depths of. It’s hard to say ahead of time how bad things can get when it comes to credit quality because (analysts) can’t look at every single loan.”

Particularly concerned about Homefed’s future are its shareholders, who have seen the S&L;’s stock price drop sharply in recent weeks. On Wednesday, the shares closed down $.25 at $13.50. As recently as June 25, Homefed shares closed at $21.875. Last October, Homefed shares sold for $47.50.