Download Overview of First National Bank

CSBS Examiners Forum
The Anatomy of a Troubled Bank
June 23, 2009
Presented by:
Paul A. O’Connor
Managing Partner
(312) 771-0077
[email protected]
Angkor Strategic Advisors
Table of Contents
1. Overview of First National Bank
2. Regulatory Action Program
3. Action Plan
4. Case Study
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Tab 1
History of the Situation
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Overview of the Bank
First National Bank
•$250.0 million Midwestern community bank
• focused on low risk mortgages and rental properties
• community provided stable, low cost deposit base
• profitable company, well capitalized
• Family owned bank for over 45 years
• Third generation ready to take the reins
• CAMEL one rated bank for 25 years
• Expanded into a fast growing, but new market
• Original market was slow growth, but provided significant core deposit franchise
• Borrowed senior debt from its correspondent bank to repurchase stock
• Formed ESOP to link employees with bank strategy and finance stock repurchases
• Issued Trust Preferred securities to finance growth
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Overview of First National Bank
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The bank experienced rapid growth in its new market, primarily
through commercial real estate lending
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Loan growth was funded by higher cost CDs
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Share repurchases continued and debt expanded
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Parent company only senior debt of $8.0 million, trust preferred
$5.0 million and equity capital of $7.5 million. Used proceeds
to buy-out older shareholders
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One year ago the Comptroller of the Currency (OCC) came in
for a regularly scheduled examination
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The findings:
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A family member lent four times the legal lending limit on one real estate
project. Loan is classified substandard and the bank has a legal lending
limit violation
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Structure
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Numerous violations of rules and regulations were found
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Now Texas ratio exceeds 140%
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10 troubled relationships account for 90% of NPAs
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4 relationships account for 60% of NPAs
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Family member responsible for most of the lending issues dies tragically.
CEO in self admitted fog for two years
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OCC issues Written Agreement requiring 8.5% Tier 1/Average Assets and
11.0% total capital ratio
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Regulatory relations between the CEO and the examiner in charge
became strained
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Overview of the Bank
CEO and former director reach out to me
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What do I find?
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Inexperienced lenders given too much lending authority with minimal oversight
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No one understood the complexity of the loans made in the new market
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Loan renewals pile up and violations of law do not get corrected
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Losses difficult to quantify, but progress being made through foreclosure actions
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Key question: is the reserve for loan losses adequate?
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Is there depth of management to handle the problems?
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What is the board’s viewpoint on the bank’s condition and quality of management?
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Triage
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Due diligence focused on liquidity, asset quality, capital adequacy and management strength
To meet the tenets of the regulatory order, management needs to communicate findings to
the board and the regulators
Prepare Regulatory Action Plan
• Assemble team of experienced advisors, including investment banking, legal and
regulatory compliance firms
• Update regulators on management changes
• Determine level of compliance with the Order, particularly with the bank’s asset quality
issues/violations of law
• Analysis of top 10 problem loans and current status
• Capital alternatives - How we meet the regulatory requirements
• Liquidity overview
Plan of Action on:
• Non-performing assets
• Liquidity
• Capital
• Financial implications of our Action Plan
– Request from regulator
– 2009 financial projections
– Next steps
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How do we fix the problems?
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What are our options to meet regulatory capital minimums?
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Complete independent assessment of the loan portfolio, a determination of the level of asset
quality problems and the estimated loss potential
Assessment of the current management team and its strengths and weaknesses
Assess liquidity position; check lines with FHLB, Fed discount window , correspondent bank
and our ability to issue brokered CDs
Senior debt, subordinated debt, trust preferred, convertible subordinated debt, noncumulative perpetual preferred stock and common equity
Shrinking the balance sheet
Combination of the first two options
The environment facing bank holding companies today
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Restricted or no payment of dividends from the bank to the parent company permitted
Company is likely to be in default of one or more covenants in its senior debt line of credit.
Need to refinance, restructure or repay the note. Most correspondent banks have left or are
leaving the business. To encourage banks to leave, correspondent banks now charging
Libor plus 10% for 90 day renewals
Pooled trust preferred market is on life support. Many companies deferring trust preferred
dividend
Board of directors unable or unwilling to put in more capital
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What’s our game plan? Regulators are more forgiving about solving asset
quality issues than raising capital. Survival mode includes:
– maximizing liquidity
• Establishing and testing lines of credit with the FHLB, the Federal Reserve Discount
Window and possibly with a correspondent bank. Advance rates on collateral at FHLB,
Federal Reserve Discount window and at correspondent banks have been reduced from
80%-90% to 50% on average.
– Shrink as fast as is prudent, given the need to preserve liquidity.
– Ideally, move out weaker credits, but the more likely scenario is to kick out your
best borrowers which can refinance elsewhere. This leaves the bank with a
higher concentration of troubled borrowers.
– Using brokered CDs to lengthen your deposit maturities
– Establishing and testing lines of credit with the FHLB and the Federal Reserve
discount window. Get assets pledged to liquidity providers to ensure lines
remain open
– Hiring work-out specialists when available
– Hunting for capital at every opportunity
– Determine your public relations strategy to explain the regulatory agreement.
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• What the regulators don’t understand!
– Increasing the bank’s capital ratios is the wrong solution to the problem
in the near-term
– The higher the capital ratio requirement, the harder it is to operate the
bank in a safe and sound manner. Ironically, regulators give you more
time to fix asset quality problems than to build capital.
• Liquidity is strained because shrinkage is the first way to meet higher
capital requirements
– Ideally, move out weakest credits
– Most likely scenario, best clients get kicked-out of the bank
– Strain liquidity, increasing the likelihood of bank failing in the
near-term. Banks more often fail from lack of liquidity than lack
of capital. Ie: WAMU, Bear Stearns, Lehman
– Doesn’t really improve your capital position, but the regulators
feel better
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• Who are the capital providers?
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Existing shareholders, friends and customers of the bank
Accredited investors who specialize in bank stocks
Institutional investors
Private equity
• What are equity investors looking for?
– The holding company senior debt and trust preferred really does matter
when you are raising capital
• Investors will not commit to situations where they cannot determine
the value/safety of their investment
• Fear of the correspondent bank foreclosing on the bank stock
collateral prevents many investors from buying newly issued stock
• BHC expenses, principally interest expense, lowers book value, the
key measure of bank stock values in today’s environment
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