Carteret Posts $149 Million Loss for Quarter
In an apparent last-ditch effort to attract capital, Carteret Savings Bank has moved to clear the decks of problem loans, resulting in a whopping $149 million second-quarter loss.
The move knocked the $5.3 billion-asset New Jersey thrift out of compliance with all three capital requirements. Carteret, a unit of AmBase Corp., remains solvent only because of a court decision allowing it to count supervisory goodwill, an intangible asset, as capital.
Regulators Treading Lightly
Nevertheless, observers said, regulators seem to be taking extra care to keep the thrift in private hands because the Resolution Trust Corp. is already struggling under a heavy caseload in New Jersey. The thrift bailout agency controls 18 failed thrifts with $5 billion in assets in New Jersey; in the aggregate, they are roughly the size of Carteret.
"They are definitely in a forbearance situation," said Jerry Baron, first vice president, Ryan, Beck & Co., West Orange, N.J. "The regulators are not looking for a several hundred million dollar headache at the moment."
Carteret announced Thursday that it had set aside $150 million in the quarter for possible loan losses. The provision, 13 times higher than in the first quarter, is intended to present a clean slate to potential investors, who will want an accurate picture of the thrift's financial condition and internal controls, said a Carteret official, speaking on background.
After covering its weakest assets with reserves, Carteret has strong core earnings potential and an excellent deposit franchise, this official said.
Carteret, New Jersey's largest thrift, has operated under intensive supervision for nearly a year. The thrift has been rattled by severe real estate losses, strict new capital rules, and a painful shake-up at its parent company that led in May to the ouster of Carteret's top management.
With the latest addition, the Morristown-based thrift's total loan-loss reserves now stand at $313 million.
On Thursday, Carteret chairman and chief executive officer Richard A. Bianco unveiled a restructuring plan that included the appointment of new executives and directors, a new independent auditor, a thorough asset review, and staff layoffs. The thrift is developing a capital plan in consultation with regulators.
Court Ruling on Goodwill
Carteret has been hanging by a thread, thanks to a federal judge's ruling in July that permitted the thrift to count $170 million of supervisory goodwill as capital. The OTS has appealed the ruling to the U.S. Court of Appeals for the Second Circuit in New York.
As of June 30, Carteret reported $78 million in tangible capital, or 1.4% of assets, just shy of the 1.5% level required. Its core capital was $81 million, or 1.5% - half the 3% requirement. And risk-based capital totaled $130 million, or 4% - short of the 7.2% needed.
But without counting goodwill, Carteret's tangible capital would plunge to negative $73 million, or a negative 1.4% of assets; core capital would fall to $10 million, or 0.2%; and risk-based capital would drop to $58 million, or 1.8%.
Thrift watchers said the reserve additions make sense, and should improve the thrift's prospects of attracting investor interest while keeping regulators at bay.
"They're probably gone in there with a hatchet and carved out every asset that could possibly come back to haunt them," said William C. Ferguson, chief executive of Ferguson & Co., Dallas. "This could be a turning point," he said, but added, "My gut feeling is that it's still going to be an uphill struggle."
Declining interest rates are one factor working in the thrift's favor, Mr. Baron said. "That helps carry the nonperformers, makes the pain a little bit less, and widens their spreads."
But the changing economic outlook may be too little, too late. "It is likely they will have to find a white knight," Mr. Baron said. "If they have truly identified all the problems, someone can probably pick up a very large institution for a very low cost." One of the Carteret's board nominees said the thrift's northern New Jersey franchise makes it a strong turnaround candidate.