Financial Corp. of America said Monday that it lost $512.1 million in last year's fourth quarter and $590.5 million for all of 1984, due primarily to a $421.6-million provision for anticipated losses on loans and real estate.
The Irvine-based parent of American Savings & Loan Assn. also disclosed that its auditor had qualified its 1984 financial statements and that two investigations will be launched into its problems, one an internal probe by management and the other by the Securities and Exchange Commission.
The loss, which came within the company's March 8 forecast that it would lose between $500 million and $700 million in 1984, is the second-largest annual loss by a U.S. financial institution, following Continental Illinois Corp.'s $1.09-billion deficit in 1984.
The loss whittled the net worth of Stockton-based American, the nation's largest S&L, to only about $366.7 million, far below regulatory requirements. That net worth, which includes shareholders' equity and certain kinds of subordinated debt, could quickly be wiped out by additional loan losses resulting from a rise in interest rates, analysts said.
"The company is in a very difficult position," said Jonathan Gray, analyst at the New York-based investment research firm of Sanford C. Bernstein & Co. "Their level of risk relative to their net worth is without equal among major thrift institutions."
The low net worth, along with the firm's potential liability from lawsuits, led the company's independent auditors, Peat, Marwick, Mitchell & Co., to qualify FCA's financial statements for 1984.
"The ability of the company to continue as a going concern is dependent primarily upon the company's achieving a profitable level of operations, which is dependent, in significant measure, upon the future course of market interest rates and the continuing forbearance of the federal and California state regulatory authorities," Peat, Marwick said.
The losses, FCA said, also will spur the company to undertake an internal investigation of the "origin and nature" of its loan problems. The SEC will probe the firm's prior practices in setting aside loan-loss reserves, FCA said.
However, the company noted, state and federal regulators do not intend to take supervisory action against FCA or American for failing to meet net-worth standards.
The Federal Home Loan Bank Board, chief federal regulator of S&Ls, repeated Monday that "it is pleased that American's new management team has identified and is seeking to identify problems" it inherited.
Grew From Obscurity
The large loss reflects an effort by FCA's new chairman and chief executive, William J. Popejoy, to fully account for problem real estate loans made under his predecessor, Charles W. Knapp, who was ousted last August amid regulatory concern about his high-risk lending strategy.
Under Knapp, FCA had grown from obscurity to become the nation's largest S&L company. But many regulators and industry officials say that Knapp achieved this growth in part by lending to many developers deemed not credit-worthy by other lenders.
"(Popejoy) has attempted to do as thorough a housecleaning as possible," said Jerome I. Baron, an analyst for the New York-based investment banking firm of First Boston Corp.
FCA also attributed part of the 1984 loss to a $42-million provision for accounting adjustments, a $38.2-million addition to the reserve for losses on accrued interest and a $28.6-million write-down of physical assets and other contingencies. The firm also lost $60.1 million on other operations.
The firm earned $56.3 million in 1983's fourth quarter and $172.5 million for all of 1983. The $421.6-million provision for loan losses raised FCA's total reserves for loan losses to $472.5 million at year-end 1984, or about 1.66% of total assets of $28.5 billion. The firm had $1.13 billion in bad loans and foreclosed property on its books at year-end.
Popejoy said he did not foresee any major new reserves or write-offs. "If there were additional problems, they would have been included as part of this report," he said.
He declined, however, to predict whether FCA would return to profitability in the first quarter of 1985, which ended Sunday, or for all of 1985.
"If interest rates stay where they are or continue to move down somewhat, we have a very good chance of being profitable for the whole year," he said.
However, if interest rates rise, the firm faces a precarious future, analysts said Monday.
FCA still carries a large portfolio of fixed-rate real estate loans, which lose value if interest rates rise. Each rise of one percentage point in interest rates could result in $160 million in losses, analyst Gray said.
In addition, FCA has not been writing many new loans and thus has not been generating much new loan fee income. FCA's profit margins have been hurt because its shaky financial condition has forced it to pay as much as one-half of a percentage point more for its deposits than many of its competitors.