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  • Letter from my failed bank…It's hard to say goodbye!

My bank was among the first 100 to be shut down by the FDIC and handed over to another bank. As an account holder, of course, my deposits were covered. As a shareholder, I lost my investment. Now it’s personal!

More banks are under FDIC Cease & Desist Orders:

Before I share with you the letter to the shareholders of my failed bank, let me say…
It ain’t over yet.

Just two weeks ago a bank that had a local program** scheduled emailed me that our ‘date’ was off. Their parent bank was hit with a Cease & Desist in early October and instead of hosting a  local session of ‘Tax Return Analysis in a Tough Lending Environment’ they’ll be hosting the FDIC. No question, they’d rather have me.

**Local programs: If you have any lenders to train and a space to do it

  • You and I get on the phone and find a total of 5 lenders confirmed.
  • I put it on our calendar and promote it.
  • I promise to show up for as few as five, although we often end up with more.
  • Your bank or credit union gets one free attendee, and does not have to travel to my usual open-enrollment locations or wait for my next program.

Then, at the end of an open-enrollment training I did this month, one of the lenders came up and confided that they are under a Cease & Desist as well. This lender was taking advantage of the ‘refresher’ option (open-enrollment attendees can attend again at no charge for up to 2 years) since the lender has some extra time right now and updating training is a good use of that time for everyone concerned.

The FDIC is very busy and community banks (and some credit unions) are seeing tougher times as commercial real estate loans come due (with impaired collateral) and commercial lines of credit come up for renewal (with some business borrowers weakened by the recession).

This feels like banking’s version of the swine flu!

My bank’s ‘Dear Shareholder’ letter:

Yes, it feels like a break-up. {I have taken out identifying information although if you really care, I am sure you can figure out who I am talking about.}

Dear Shareholder:

It is with deep regret and profound sadness that I write to inform you that {Bank Name} has lost its long, arduous battle to survive America’s worst economic crisis since The Great Depression.

Despite wide-ranging and intense efforts by your Board, management and executive teams to find sufficient new capital, the FDIC officially took control as receiver of the Bank on {Date}.

While the answers to some important questions remain unclear, others are now certain:

  • All deposits are fully protected by the FDIC. We have worked diligently to ensure that all of the nearly {amount} in deposits were covered and that no customer deposit loss is expected.
  • The FDIC entered into a purchase and assumption agreement with {Purchasing bank}.
  • We believe all value in the shares of the parent company, {Holding Company Name}, has been irretrievably lost. The corporation is insolvent and is unable to file financial reports for the fiscal years 2008 and 2009. Although the disposition of the liabilities of the holding company is yet to be determined, the primary asset ({Bank name}) is now in the possession and control of the government. We recommend you consult your tax advisor to determine how this loss may impact you.

We know you are asking how this could happen to a bank that effectively and profitably served the {geographic} area for more than {number of years}. Those of us who have worked day and night to save the bank know there is no short answer to this question. Nevertheless, it is our obligation to explain the facts as we know them.

At the heart of {bank name’s} demise was the loss of our investments in the mortgage giants Fannie Mae and Freddie Mac and the severe economic recession. As “Government Sponsored Enterprises (GSEs)”, preferred stock in these companies was considered safe and contained significant financial and tax incentives. At the time these companies were placed in conservatorship by the U.S. government, many large financial institutions and approximately 1,100 community banks were invested in this preferred stock.

When they were placed into conservatorship in September 2008, {bank name} lost more than $42 million. The Bank’s investment in each of these entities was only approximately 10% of our investment portfolio, but the loss was devastating. As a result, we had to immediately stop our $20 million preferred stock offering to accredited investors and reassess our capital needs and available options. 

At almost the same moment, a “perfect storm” of economic chaos struck the country. Nationally, the financial system became paralyzed; credit and capital markets froze, making it difficult for community banks to raise capital.

At the same time, the severe economic recession put intense pressure on our loan portfolio. Though we did not have any of the subprime loans that led to the crisis in the first place, the strain was significant. The resulting drop in collateral values, job losses and recessionary forces left many loan customers struggling to make payments on time. As a result, our nonperforming loans increased substantially as did our loan losses. We allocated more resources and worked diligently to collect our loans.

Due to these factors, {bank name} was not in a position to qualify for help under the government’s “TARP” capital purchase program.

We slashed costs. We reduced staff, eliminated salary increases, eliminated director’s fees and employee bonus plans, and our employees and directors forfeited stock options. We scoured other cost areas for reduction.

We hired investment bankers, legal advisors and consultants to help us raise capital. Our advisors searched the country for investors or potential buyers and merger partners, and we met with every potential investor expressing an interest and analyzed alternative ways to meet the capital challenge we faced.

Throughout most of the last year, investors were concerned about where the bottom of this recession might be. As credit markets began to show early signs of thawing, potential investors showed increasing interest in {bank name}. We had secured letters of intent to invest as much as half of what we needed and were poised to attract further investment.

But we recently faced two additional challenges with investors. First, some investors and banks are more interested in acquiring a bank from the FDIC out of receivership than traditional merger and acquisition transactions as they can obtain the FDIC’s guarantee against future losses. Second, the FDIC recently issued a policy statement that private equity investors would be required to maintain twice the amount of capital at the bank than would be required if it was not owned by private equity investors (such as other banks).

With the above factors in play, we were unable to find the capital we needed in a timely manner.

We fought. We fought early. We fought intensely. In spite of this, it became clear that we were schedule for a closure date on {date}. When that date was imminent, we took a step in an effort to east that transition for customers and employees. On {day}, {date} we acquiesced to the {state agency} for an orderly closure of the bank.

The number of community bank failures across the United States is a real shame. Community banks finance small business which is the economic engine of this country. The loss of community banks is tragic for this country; not only for their customers, but for the shareholders, employees, and community they serve.

We are intensely aware that the bank’s failure will adversely affect you and all of us who are shareholders in {holding company name}. We know the losses we all face may affect our lives into the future. We are all deeply sorry and saddened by this.

{Bank Holding Company Chairman}
{Bank President}

It is hard to say goodbye…

I am deciding this week if I’ll stay with the new bank. I have no relationship with this out-of-town financial institution. But I do have a relationship with (and care about) the people who are still there.

Then again, there are other banks in our community that I have also liked and I am inclined towards ‘the locals’. We’ll see…

Meanwhile I still have the cute mini-bank bag with the bank’s name on it from the last shareholder meeting. Think I can sell it on eBay?

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Linda Keith, CPA

Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis.
She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans.
Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.