Imperial to Comply With Cap on Assets

Imperial Corp. of America, which last week established $50 million in reserves to cover anticipated loan losses, also will comply with a Federal Home Loan Bank Board request that it restrict asset growth during 1989 to last year’s level of $12.3 billion.

The FHLBB expects that the asset growth cap, along with loan loss reserves announced Friday, will improve the capital-to-asset ratio at Imperial, the parent company of Imperial Savings & Loan, according to Imperial spokesman Tim Larrick.

That ratio, which is an indicator of an S&L;’s financial health, stood at 3.96% Sept. 30, nearly a full percentage point above the 3% regulatory minimum. Imperial now has an estimated $430 million in regulatory capital, Larrick said.

Portfolio of Junk Bonds

However, federal regulators for the past year have been pressing Imperial to increase loss reserves in order to insulate the San Diego-based company from potential losses created by its non-traditional S&L; businesses--including its portfolio of junk bonds, which accounts for 15% of Imperial’s $12.3 billion in assets.

Of the $50 million in loan loss reserves announced Friday, $18 million were the result of “negotiations” with federal regulators, according to Imperial Senior Vice President Michael Lea. The reserves demanded by the FHLBB will cover possible losses on Imperial’s junk bond portfolio, real estate loans in Colorado and Texas and certain consumer loans.

The remaining $32 million will cover losses on fraudulent or defaulted car loans acquired from Grand Wilshire Finance Corp., a Los Angeles-based auto finance company that is in federal bankruptcy proceedings, and a troubled loan to Global Motors, a New York-based car distributor, Larrick said.

The asset cap and the $18-million reserve will force Imperial to modify its business plan, Larrick said.

“Our strategic plan always was geared toward growth and profitability, but now we’re also going to place more of an emphasis on capital growth,” Larrick said.

However, Lea maintained that Imperial will not draw back from the junk bond market that promises hefty returns and the potential for relatively high losses. “We have capped the amount of investment in dollar amounts, and we’re not going to grow the portfolio, but we are not planning to pull back,” he said.

No Change in Rules

Of the $18 million in loan loss reserves that were created to satisfy regulators, $5 million will cover loss exposure created by the junk bond portfolio.

During 1988, federal regulators pressured Imperial to add about $10 million to its junk bond loss reserves, Lea said. By comparison, Imperial had about $5 million in junk bond loss reserves on Sept. 30, 1987.

The increased reserves that regulators demanded at Imperial were not mandated by an FHLBB rule change, Larrick said, but resulted from negotiations between regulators and Imperial executives.

Those negotiations occurred because there is now no fast rule that determines what level of reserves is adequate to meet the loss exposure created by junk bond assets, according to Kirk Hallahan, spokesman for the Los Angeles-based California Assn. of Savings Institutions. Usually reserves are negotiated--or ordered--on a case-by-case basis as regulators review the credit-worthiness of an institution’s portfolio.

The additional $5-million reserve will “make it more expensive” for Imperial to conduct its junk bond business, according to Peter Treadway, a New York-based analyst with the Smith Barney, Harris Upham & Co. investment firm.

“There’s no reason why Imperial shouldn’t be in the junk bond market, but they should have more capital on hand,” Treadway said. “The federal government is saying they’re not going to let undercapitalized companies into these riskier businesses.”

Not Uncommon in Industry

“Other segments of the market will look more attractive now,” Larrick acknowledged.

Negotiations such as those that led to the $18-million loss reserve and the capital cap are not uncommon, according to S&L; industry observers.

Regulators have wide latitude to negotiate capital requirements for individual institutions, according to bank board spokeswoman Amy Stewart. The FHLBB “always has the option of discussing capital levels and asking to raise them above the minimum,” she said.

Those discussions run the gamut from “formally raising their capital requirements to less formal methods, such as negotiation,” Stewart said. With Imperial, regulators and the S&L;’s executives negotiated the cap and loss reserves.

Regulators and S&L; executives generally “have some degree of disagreement on whether assets are substandard, doubtful or a loss,” Hallahan said. “There’s an awful lot of judgment involved when an asset is determined to be substandard or not.”

In proposed regulations released in late December, the FHLBB took “its first stab” at categorizing risks associated with assets held by S&Ls;, Hallahan said. FHLBB regulations do not now differentiate among assets that might bear different risk factors.

Regulators are “very aware that every asset is going to have a certain risk factor associated with it,” Hallahan said. “The thinking is that, if you’re going to take higher risks, you’re going to need higher levels of capital. I don’t think many people in the business would disagree with that.”

S&L; executives probably will disagree with federal regulators on “how to properly classify the risks associated with different assets,” Hallahan said.

“They could make it, way down the road, more expensive than it would pay to invest in (junk bonds),” Lea said. “But I really don’t think they’ll be that punitive.”