Imperial Capital Bank has entered into a written agreement with federal and state banking regulators to fix several potential trouble spots found in a recent examination, including reducing its exposure to some types of loans.
The La Jolla-based bank, which has seen a surge in delinquent construction loans, revealed the agreement – called a memorandum of understanding – in a filing with the U.S. Securities and Exchange Commission late last week.
The bank's filing contained unclear language about the actions required. Bank officials did not return a phone call seeking comment. The Federal Deposit Insurance Corp. does not comment on specific institutions.
The agreement, signed Aug. 8, stems from the most recent examination by the FDIC and the state Department of Financial Institutions.
In most cases, bank examiners present findings to a bank's board of directors in a letter without entering into a memorandum of understanding. That said, the agreement is a relatively mild action – though it sometimes leads to harsher steps if improvements aren't made, such as a cease and desist order.
“The memorandum of understanding is on the informal side, whereas a cease and desist order is a very formal, legal document enforceable by a court of law,” said David Barr, an FDIC spokesman.
Banking industry experts say regulators appear to be growing more strict in pointing out areas for improvement, given the current concern about potential bank failures as the housing market continues to decline.
Imperial Capital remains “well capitalized,” the highest designation given by the FDIC, with assets of $4.1 billion.
Among the moves required by the FDIC was making a plan to reduce the bank's exposure to unspecified types of loans. Imperial Capital's delinquent loans and bank-owned foreclosure property surged to $137.7 million in the second quarter, up from $57 million at year's end. The increase was mostly due to bad construction loans to developers for homes and condos, as well as land development loans.
The agreement also calls for the bank to improve the way it determines how much to set aside in reserves for loan losses. It currently has about $50 million in reserves, which the bank said is adequate given the collateral backing the loans, according to SEC filings.
The bank also agreed to reduce its reliance on volatile funding sources. Imperial has boosted brokered deposits – typically certificates of deposit that the bank acquires from a third party outside the local market.
Brokered deposits tend to disappear as soon as they mature – forcing the bank to scramble to replace them. That sometimes involves paying high interest rates to lure depositors.
Imperial's brokered deposits increased from $379 million at year's end to almost $700 million in the second quarter, said David Ely, a banking professor at San Diego State University.
The FDIC also wants the bank to develop a plan to improve earnings and other financial ratios.
To that end, Imperial Capital has purchased $784 million in collateralized mortgage obligations backed by Alt-A mortgages. The bank expects to earn a 4.5 percent yield on the investments.
Alt-A mortgages are less risky than subprime loans but more risky than prime mortgages.
Julianna Balicka, an analyst with Keefe, Bruyette & Woods in San Francisco, said the bank planned to buy more of these securities to make up for its declining income for interest on loans.
“We believe the (memorandum of understanding) may additionally restrict the bank's maneuverability in this regard,” Balicka wrote in a note to clients.
Imperial Capital shares rose 68 cents yesterday to close at $11.19 on the New York Stock Exchange. The shares have surged 92 percent in the past month.
Mike Freeman: (760) 476-8209; mike.freeman@uniontrib.com
