S.D.-Based Imperial S&L; Fails : Finance: Federal regulators have seized the troubled thrift, but officials say it will be business as usual for customers.
Federal regulators Friday seized San Diego-based Imperial Savings Assn., the nation’s 16th-largest S&L;, ending speculation over the fate of the thrift that earlier in the year was ordered to stop making even the most common kinds of loans and investments.
Imperial becomes the largest financial institution ever to fail in San Diego County. It is one of the largest thrifts ever seized by the federal government and the largest in California now under government supervision, surpassing Gibraltar Savings in Simi Valley.
Regulators on Friday said that Imperial’s 80 branches throughout California will remain open, but that day-to-day management has been transferred to Resolution Trust Corp., which disposes of failed thrifts and banks.
For Imperial customers, “It’s business as usual, during normally scheduled hours,” said Kevin Shields, spokesman for the federal Office of Thrift Supervision, which turned the thrift over to Resolution Trust. Deposits of up to $100,000 are protected by federal insurance.
Also on Friday, regulators seized Mercury Savings & Loan Assn. of Huntington Beach, a thrift with $2.16 billion in assets and negative net worth of $33 million.
The seizure of the ailing thrifts had been anticipated after both were put under severe operating restrictions last month as their financial conditions worsened. Those restrictions, which prohibited the thrifts from making even a home or car loan, were widely viewed as a way to control losses while regulators prepared to take over.
Still, Friday’s seizures were sobering news for the S&L; industry because they showed that regulators are unlikely to permit troubled thrift operators to stay in business long if they cannot meet the tough new capital standards that took effect in December. Those regulations require S&Ls; to maintain a stronger financial safety net to protect against losses. The new standards are part of the nation’s massive S&L; bailout, which is expected to cost taxpayers more than $200 billion.
Some industry observers said they viewed the seizures of Imperial and Mercury as a sign that regulators are stepping up their efforts in dealing with large, troubled thrifts amid criticism from Congress that they are moving too slowly. Nationwide, 12 S&Ls; were seized Friday, bringing the total number of thrifts seized since early last year to about 360. Nearly 60 nationwide and seven in California have been seized since the first of the year.
This month alone, such large problem institutions as Franklin Savings Assn. in Kansas, Ben Franklin Federal Savings in Oregon and CenTrust Bank in Florida were seized.
Imperial’s seizure was not unexpected by shareholders of Imperial Corp. of America, Imperial’s parent company. ICA’s stock, which just two years ago traded for $19 a share, has traded at a dollar or less in recent months. Regulators did not seize control of ICA, but Imperial was by far ICA’s most important asset.
“Imperial’s failure was inevitable,” said Irving Katz, director of research for Thomas Green/San Diego Securities. “The stock price indicated that there was no way they could survive. It was a basket case.”
Imperial, which had $9.7 billion in assets on Dec. 31, had liabilities, or debts, of $9.6 billion. The thrift’s supply of available capital had fallen to a negative $60.1 million. Federal regulators said that Imperial’s failure was driven by “a high level of risky or poor-quality assets and non-performing consumer and mortgage loans.”
Unlike Huntington, which operated largely as a “traditional” thrift making low-risk loans, most of Imperial’s recent problems were linked to its foray into the now-troubled junk bond market.
As of Dec. 31, Imperial held slightly more than $1 billion in junk bonds, making it the second-largest holder of junk bonds among thrifts nationwide. S&Ls; are required under federal law to sell all their junk-bond holdings by 1994.
Junk bonds have tumbled in value the past six months largely because of recession fears and troubles with junk-bond issuers such as Robert Campeau’s department store chains. Imperial also suffered from problem car and mobile-home loans.
Imperial’s heavy investment in junk bonds was orchestrated largely by former President Kenneth Thygerson. Imperial purchased most of its junk bonds through Drexel Burnham Lambert, the Wall Street firm that collapsed last week.
As the value of Imperial’s junk bonds plummeted, regulators forced the thrift to write down their value by more than $200 million. Largely due to those write-downs, Imperial’s parent company reported a $136.2-million net loss for the nine-month period ended Sept. 31.
Hoping to stem the S&L;’s financial woes, federal regulators on Jan. 6 took the highly unusual action of prohibiting Imperial from making any more loans or investments. The federal Office of Thrift Supervision also ordered Imperial’s managers to submit a plan that explained how Imperial could meet the strict, new capital requirements.
S&L; industry analysts viewed the restriction against making new loans and investments as a way to stem further losses until regulators could take over Imperial.
“Imperial is going to make a good book for someone” to write, said Mike Abrahams, an S&L; industry analyst in Los Angeles with Bateman Eichler, Hill Richards.
While Abrahams said that “junk bonds were a big issue with Imperial,” he maintained that the S&L;’s woes began with a $900-million wholesale consumer loan portfolio “that had a lot of problems . . . there was a complete lack of managerial control over that group.”
“It was the Imperial touch,” Abrahams said. “Everything they touched was junk to begin with. I think that, as time goes by, (lawsuits) will dig deeper and we’ll find even more problems.”
Katz said the S&L; ran into trouble when its consumer loan portfolio went sour, but that “the icing on the cake was when the feds ordered them to (value) their junk bonds at market price, not by what they paid for them.
“That really put them under. They had negative net worth, they don’t meet any of the new capital requirements, and they obviously weren’t going to meet them.”
“I’ll be darned . . . that’s ugly, really, really ugly,” said ICA shareholder Jim Wagner, upon hearing that regulators had seized Imperial. “It looks like old Ken Thygerson really pulled the old shell trick on us.”
Wagner, who lives in southern Los Angeles County, had purchased $24,000 of ICA stock before realizing that it was facing problems linked to its junk bonds and the ill-fated consumer loan portfolio.
The only shareholder to publicly attack ICA’s investment and loan strategy during last year’s ICA annual meeting, Wagner on Friday blamed the thrift’s failure on ICA’s board of directors and federal regulators.
Mercury, which has $2.15 billion in assets, lost $13.8 million in 1988 and $5.4 million in the first nine months of last year, mainly from accounting adjustments it was forced to take because people paid off adjustable-rate mortgages sooner than expected. Mercury had been claiming future profits by assuming those mortgages would have a much longer life.
Mercury also had problems with two large loans that financed hotels in Irvine and Tulsa, Okla. Last month, it began foreclosure proceedings on the loans, which total $60.7 million.
The seizure of Mercury is an especially humbling blow for Leonard Shane, 67, who served as chairman since the S&L; was founded 26 years ago. Shane is former president of the thrift industry’s main trade group, the U.S. League of Savings Institutions, and was often outspoken about wayward thrifts.
Imperial and Mercury had sought unsuccessfully to persuade regulators that they could turn around, and publicly expressed confidence they could recover. Mercury had been shopped around by investment bankers for some time, but no buyer was found.
Regulators said that although both institutions have been losing money, they hope to whip them into shape and sell them.
Mercury is only $100,000 in the red under the common definition of insolvency, which is assets minus liabilities. But under the new federal thrift law’s restrictive definitions, Mercury has a negative $33.3 million in tangible capital, the basic cash available to act as a last resort against losses.
“Mercury is not deeply insolvent, not way in the hole like so many other S&Ls;,” said Janis Smith, a spokeswoman for the federal Office of Thrift Supervision. “There’s a good deal of marketability there, and the conservator will preserve what can be preserved.”
Mercury’s 24 branches will remain open under normal business hours, regulators said. As is the case with Imperial, the federal government will insure deposits up to $100,000.
Times staff writer James S. Granelli in Orange County contributed to this story. Johnson reported from San Diego and Bates reported from Los Angeles.
