FarWest Insolvent After S&L; Regulators Order Reserve Hike
FarWest Savings said Friday that it is being forced by federal regulators to set aside about $60 million in reserves for bad real estate loans, an action that renders the thrift insolvent and moves it closer to a federal takeover.
The thrift also said it has been ordered by the federal Office of Thrift Supervision to withhold September’s quarterly interest payments on about $46 million in debt securities held by institutional investors. The action puts FarWest in default.
FarWest Savings, which had $3.9 billion in assets at the end of June, has been hurt by investments in junk bonds and a deteriorating real estate loan portfolio. The institution is working on a plan to raise more money, but OTS had rejected two previous capital plans.
Analysts have said FarWest was likely to be seized by federal regulators unless its majority owners, the wealthy Belzberg brothers of Canada, invest more money in it. But the Belzbergs, who own the thrift’s parent company, FarWest Financial Corp. in Beverly Hills, have given no indication they would risk more of their own funds.
William Belzberg, the company’s chairman, could not be reached Friday for comment.
FarWest said the federal regulators have just completed an examination of the thrift and preliminary indications are that it will be forced to write down some of its real estate loans and foreclosed properties.
The action means that it must increase its reserves against possible loan losses by $60 million, wiping out its capital base. As a result of the set-aside, FarWest’s tangible capital--a strict regulatory measure of an institution’s final reserve against losses--would be a negative $37 million at the end of August. The thrift said it would need an infusion of about $91 million to pull itself out of the hole and to meet the federal requirement for tangible capital.
The writedowns also put the savings and loan in red ink under the other two strict capital standards mandated by last year’s federal law that restructured the thrift industry, said Kurt C. Kemper, general counsel of FarWest Financial.
The problems with bad loans and foreclosed property are centered primarily in Texas and Colorado where the thrift once financed commercial properties such as shopping centers and large apartment buildings, said Charles H. Green, the S&L;’s president.
Most of the loans were on income-producing properties, he said. Green pointed out that setting aside reserves “is not a precise science” and that formulas can change in the future to the thrift’s advantage.
Regulators also are valuing the properties on a liquidation basis, forcing the thrift to state the values as if the properties were to be sold immediately, Kemper said.
“We may agree, for instance, loan A is troubled, but how troubled is the issue,” Kemper said. “You can get into an interesting discussion with regulators over that.
FarWest’s mounting real estate problems come after the S&L; has been battered for the last year by writedowns in its junk bond portfolio, which it must dispose of by mid-1994 under the year-old federal law. The thrift once held more than $600 million in junk bonds--high-risk, high-yield debt securities. As of June 30, its portfolio was valued at $395 million.
Those writedowns were primarily responsible for the thrift posting losses of $46.1 million last year and $29.4 million in the first six months of this year.
The moratorium on interest on debentures sold in 1984 could present additional problems for the thrift. The investors, who can demand their money back once an interest payment is missed, really have few options, though. That’s because regulators must approve any payments first.
