Regulators Veto FarWest Plan to Raise Capital : Thrifts: The rejection, plus new curbs on the S&L;’s ability to do business, raise questions on whether it can survive.
In a stunning blow to FarWest Savings & Loan, federal regulators have rejected the thrift’s plan to raise new capital and have imposed harsh new restrictions on its ability to do business, the ailing firm said Thursday.
For the time being, FarWest will not be able to make new loans without regulatory approval.
The action raises new questions about whether FarWest, owned by the billionaire Belzberg brothers of Canada, can survive. Newport Beach-based FarWest is among the few thrifts that invested heavily in risky junk bonds to so far avoid government seizure.
The action also appears to bring added pressure upon the Belzbergs to shore up the firm’s capital base--or possibly risk losing their investment.
The 28-branch FarWest, principal subsidiary of Los Angeles-based FarWest Financial Corp., said it was appealing to Washington officials the rejection of its capital plan by the Office of Thrift Supervision in San Francisco.
The S&L; also reported new losses Thursday, apparently caused by growing problems in its portfolio of real estate loans. FarWest said it lost $3.7 million in the second quarter after setting aside new reserves of $16.9 million--almost three times its first-quarter reserve--to cover potential loan and investment losses.
FarWest’s losses for the first half of the year now total $29.9 million. The S&L; lost $46.1 million last year, all in the final six months. Much of the red ink has been attributed to the government-mandated writedown of its junk bond portfolio, which was valued at $412 million as of March 31.
While the appeal of its capital plan rejection is pending in Washington, the thrift has been barred from selling or purchasing assets or making new loans without prior approval of the Office of Thrift Supervision’s San Francisco office.
The thrift will continue to service already issued loans and maintain other operations as normal. Deposits will continue to be insured up to $100,000 per account category.
Selling a large chunk of its assets to raise cash was a key ingredient of FarWest’s capital improvement plan. FarWest officials have said they intended to shrink the S&L;’s asset base to $2.7 billion from $3.7 billion now.
FarWest Financial said the capital plan “depended in part on the liquidation of a wholly owned subsidiary into FarWest Savings,” but federal regulators in San Francisco opposed the sale. FarWest would not identify the subsidiary.
Rejection of the plan by the regional OTS office “is a fairly significant action,” said thrift analyst Ken Thomas, president of KH Thomas Associates in Miami. “There are many steps along the way that we look at for signs of when the government will get into the situation, and this is always considered a very big step. The rejection of a capital plan is not to be taken lightly.”
If the thrift’s capital improvement plan is not reinstated by the Federal Deposit Insurance Corp., which oversees thrift regulation, FarWest S&L; said its net worth would plunge to somewhere between negative $23.6 million and negative $75 million.
The company currently has a net worth of $37.7 million, which means the thrift is still solvent, but it is still below capital standards mandated by the federal thrift law.
FarWest officials emphasized the thrift continues to be profitable on an operating basis.
The unanswered question in FarWest S&L;’s case is whether the Belzbergs are now willing to pump more of their own money into the thrift to keep it alive.
Charles Green, FarWest S&L;’s president and chief executive, said Thursday that he has not been informed of any investment decision by the Belzbergs.
Green declined to characterize the impact of the OTS decision on FarWest, but said the restrictions on loans and disposition of assets shouldn’t impose a hardship. “I believe we will be able to get approved what we want approved,” he said.
Green also said regulators have not set a time limit on the thrift’s efforts to raise capital.
A cash injection from the three Belzberg brothers, whose wealth stems from a diversified real estate, energy and financial services empire and from success in corporate raids, was not part of the capital improvement plan rejected by the OTS.
“The capital plan clearly didn’t contemplate money from the brothers,” analyst Thomas said. “Just because they’ve got deep pockets doesn’t mean they are going to dig into them.”
FarWest is among a handful of thrifts that invested heavily in junk bonds, the high-risk, high-yield debt securities that helped pay for many corporate mergers in the 1980s. But Congress last year passed legislation requiring thrifts to dispose of those portfolios by 1994.
As a result, the junk bond market has suffered and many thrifts with large holdings have been hurt, including Columbia Savings in Beverly Hills, Lincoln Savings in Irvine, Imperial Savings in San Diego, Gibraltar Savings in Beverly Hills, CenTrust Bank in Miami and Silverado Banking, Savings & Loan in Denver.
FarWest Financial said Thursday that the federally mandated capital improvement plan for the S&L;, which was filed with regulators Dec. 26, was rejected when thrift regulators in San Francisco determined that the proposed liquidation of a major subsidiary was not feasible.
Gerry Finley, a Brea-based thrift analyst, said the liquidation plan appears to have been an attempt by FarWest to claim the net worth of the subsidiary unit as its own.
FarWest did not identify the subsidiary, but some analysts believe it is the thrift’s stock and direct real estate investment unit, which had a $463-million portfolio as of April 12. New investments by thrifts in those areas now are barred by federal law.
FarWest also said it is currently undergoing its regular annual audit by state and federal regulators. The examination could result in the thrift being forced to establish higher reserves for loans.
