Reeling from the rapid decline of California's commercial real estate markets, the parent of HomeFed Bank on Thursday reported a $176-million fourth-quarter loss and said it expects to be short of one of the minimum regulatory capital requirements in the coming months.
HomeFed also announced Thursday that its problem assets had ballooned by $535 million in just three months, to $1.2 billion, or 6.4% of its $18.3 billion in total assets. The thrift also said it is suspending its quarterly dividend of 5 cents a share.
Taken together, the developments leave San Diego-based HomeFed badly weakened and prompt some analysts to question its chances of survival. The high percentage of bad loans--far above the 3% benchmark for healthy thrifts--is doubly damaging in that it reduces an S&L;'s income and necessitates loan write-offs down the road.
"I was expecting the worst and HomeFed delivered," said Campbell Chaney, an S&L; analyst with the Sutro & Co. investment firm in San Francisco.
"(HomeFed) is severely weakened, yes. Is it terminal? It's a question mark. It could go either way at this point, all depending on how the economy goes--specifically how the real estate market acts in the coming six months."
There could be more bad news ahead. Audits by the Office of Thrift Supervision and the Federal Deposit Insurance Corp. are only "in the initial stages" at HomeFed and will not be concluded until the end of March, HomeFed President Robert F. Adelizzi said in an interview. In the past, regulatory audits often have resulted in aggressive writedowns of some S&L; loans.
"I can't predict whether the worst is behind us," Adelizzi said. "We believe our (loan-loss) provisions are adequate and that we have done the best we can evaluating our loans."
As recently as a year ago, HomeFEd was viewed as one of the thrift industry's stalwarts and among the S&Ls; most likely to survive the severe shakeout that has befallen the industry. But HomeFed has been hurt by its deep involvement in commercial real estate lending and development. Only 60% of its loans are in single-family mortgages, contrasted with 90% at some still-healthy thrifts. The balance are in apartment and commercial real estate projects.
That commercial real estate loan portfolio is responsible for a disproportionate 95% share of HomeFed's problem loans, Adelizzi said.
And, because of its real estate development activities, HomeFed expects to run afoul of new capital requirements that take effect July 1. The federal regulations will significantly change the rules governing "risk-based" capital that HomeFEd and other S&Ls; must keep in reserve for real estate development projects. Although it conforms with all three current regulatory capital levels, HomeFEd said Thursday it does not expect to meet the new requirements.
Adelizzi said the capital shortfall will force HomeFed to file a capital plan with regulators outlining how it hopes to return to capital conformity. The filing of such plans usually causes regulators to impose a "broad range of operating restrictions" on S&Ls; in violation. Adelizzi did not discuss details of what the plan might entail for HomeFed, but he said he expectes to reduce the thrift's assets by $2 billion by the end of the year. The fourth-quarter loss, which contrasts with a profit of $33 million in the fourth quarter of 1989, was caused largely by a loan loss provision of $250 million. For all of 1990, HomeFEd lost $248 million, contrasted with a profit of $116 million in 1989.
HomeFed had announced in November that its loan portfolio had soured to the point that it expected its nonperforming assets to increase to at least $1 billion by Dec. 31, up from $749 million on Sept. 30 and $463 million at the end of 1989. At the time, Adelizzi blamed "across-the-board loan problems, including delinquent single-family mortgages."
The bad loans' impact on the S&L;'s earning power was evident in the drop in fourth-quarter net interest income to $91 million, down from $100 million in the fourth quarter of 1989. On Dec. 31, the company's weighted average interest rate spread--the difference between its yield on loans and investments and the cost of an S&L;'s deposits and borrowings--was 2.65%, off from 2.84% at the end of 1989.
HomeFed stock closed unchanged at $6.375 a share in New York Stock Exchange trading Thursday. Word of the loss came after the markets had closed, however.
Gareth Plank, an S&L; analyst with Dean Witter Reynolds in San Francisco, said it is an alarming sign "once earning assets start shrinking (because) you still got to pay the depositors."