California's Hawthorne Gets Another 6 Months

Officials at Hawthorne Financial Corp., hoping to turn things around after a two-year decline, said federal regulators will give them until yearend to raise up to $20 million.

Hawthorne, once one of the best-capitalized midsize thrifts in Southern California, is operating under a June 30 deadline to raise capital. But Scott Braly, chief executive, said the Office of Thrift Supervision has told management of the $725 million-asset thrift that it will approve their plan to raise capital by Jan. 1.

Hawthorne had informed the OTS that it would not be able to raise the capital by June 30.

The regulator apparently believes Hawthorne has a shot at survival given another six months, despite the spotty record of similar capital-raising efforts at community banks and thrifts in the region during the last two years.

Hawthorne's capital plan calls for it to raise $15 million to $20 million, most likely through some form of stock issuance.

"We will look at a variety of options to raise the capital," said Mr. Braly. "But while we have not yet fixed a particular form of issuance, we fully expect that by the end of 1995 we will raise it."

Mr. Braly said the thrift has not yet selected a financial adviser to help raise the capital. He added that the OTS should formally approve the capital plan in the next two weeks.

Several neighboring institutions, including Guardian Bancorp and Unionfed Financial Corp., raised capital in 1993 and 1994, only to see their real estate problems mount, and eventually fail.

Analysts say the appetite for troubled institutions in Southern California from outside investors is still keen but depends on a reasonable assurance that asset quality problems have at least stabilized.

But Steve Didion, who has followed the efforts of a number of Southern California thrifts to recapitalize, wasn't optimistic.

"The typical troubled thrift investor - the people who invested in Glenfed, CalFed, Unionfed, Fidelity, and on and on - are tired," he said. "I think they are just frustrated with the lack of improvement in the market, especially the multifamily market."

Hawthorne has the highest ratio of nonperforming assets to total assets of any institution in California, with 12% of its assets consisting of bad loans or foreclosed real estate. Most of Hawthorne's real estate problems are in large planned-unit residential developments that it is trying to repackage and sell to individual builders or homeowners - lot by lot. The strategy can pay off eventually, but eats up resources in the meantime.

Hawthorne's asset quality trend, however, is favorable. A year ago its nonperforming asset ratio stood at 17%, and on Dec. 31 it was 13%.

But it's the cost of managing the bad assets that has eaten away at Hawthorne's capital. A narrowing interest margin and the cost of investing in foreclosed properties to ready them for sale caused the thrift to lose millions in the last year.

In the first quarter, Hawthorne lost $9.4 million. Its core capital ratio stood at 3.83%, much less than the 6% ratio required in its OTS supervisory agreement.

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