Hawthorne Financial Corp., three years ago one of the best-capitalized thrifts in the Los Angeles area, said last week that it will seek at least $10 million in new capital to shore up its collapsing real estate loan operation.
"We're looking at all options," said David Hardin, executive vice president. "We're talking to investment bankers fight now."
Mr. Hardin didn't role out a sale of the $763 million-asset thrift but indicated Hawthorne hopes to remain independent.
Scott Braly, Hawthorne's chief executive, who was hired two years ago to turn the bank around, was in New York meetings with investment bankers and couldn't be reached for comment.
Last month, the company entered into a supervisory agreement with the Office of Thrift Supervision, calling for it to maintain 6% core and 11% risk-based capital ratios. The company currently has core and risk-based capital ratios of 5.35% and 9.25%, respectively.
Once one of the most successful financiers of homes and planned-unit developments in western Los Angeles County, Hawthorne fell ill during the real estate recession that hit the southern half of the state in 1991. More woes have hit the thrift recently, however, in the form of higher interest rates that have slowed loan originations and squeezed interest margins.
Now, management doesn't project a profit at Hawthorne before the end of 1995.
A bevy of thrifts and community banks in the region have had similar problems to varying degrees this year, showing that the recovery from the state's recession has been spotty for community financial institutions.
Unionfed Financial Corp., Brea, Calif., raised $45 million in a stock fights offering last fall, but losses have continued to eat away at its capital, and the $900 million-asset institution is again exploring ways of raising equity or finding a merger partner, American Banker reported last week.
Hawthorne, owner of Hawthorne Savings and Loan Association, earned $800,000 in the third quarter but has lost $51.7 million in the last 2 1/2 years. It has shrunk, as well, from more than $1.1 billion of assets in 1990, and has sold or consolidated more than half its 21-branch network. It now has 10 branches.
A West Coast analyst who is familiar with Hawthorne but declined to be named said he doubts it could pull off a stock sale or rights offering because of such deals' spotty record in the past year in California. He did say that Hawthorne could be sold to a private investment group or be merged, however.
Hawthorne cited the woes that have put it in this position.
For example, the thrift has taken back several residential developments from borrowers. The projects are listed as real estate owned, which takes up huge amounts of capital and expense, and Hawthorne is trying to sell the properties lot by lot instead of in bulk. The strategy will likely yield a higher return over the long haul but is costly in the short term.
Hawthorne has the highest percentage of nonperforming assets of any thrift in the West, with 14.7% -- or $112 million -- of its assets classified as non-performing. The thrift is making progress, however, selling OREO with a gross investment of $101 million so far this year and financing only 5% of the sales itself.
Adding salt to Hawthorne's wounds is the current interest rate environment.
In California, where most adjustable-rate mortgage loans are tied to the 11th District Cost of Funds Index, asset yields rise more slowly than deposit costs at many institutions. Hawthorne is in the middle of this squeeze, which is worsened by its high level of no-yield non-performers.
Its net interest margin fell from 2.14% a year ago, to 1.73% last quarter. Hawthorne Financial At a Glance Headquarters: Hawthorne, Calif.Assets: $763 millionBranches: 10CEO: Scott BralyROA: 0.4%Core capital ratio: 5.35%ROE: 7.1%Branches: 10