My brothers and I were third-generation bankers when the FDIC took over our bank. I had been in the business since 1982. Back then, as the farm crisis set in, I was a loan officer and became the workout specialist at the bank. At one point, I was running six repossessed dairy farms. Cattle and other collateral would disappear down dirt roads on flatbeds during the night. If we were lucky, we had at least some real estate behind an ag loan. I was really glad when that decade ended. We made it through, and I expected never to see another period like that.
What we just went through in this economy made the 1980s look like a cakewalk.
After the ag bust, it was clear that farm loans would be a declining part of our business, and we started to develop into more of a commercial bank that dealt with small businesses. We evolved to stay healthy and growing.
When I started in the business, community banks like ours made lots of ag loans, personal loans, car loans and home loans. Credit unions had not been allowed to grow untaxed like they have in recent years. But then the government started competing with us — big-time — for ag loans. Big-bank credit cards replaced personal loans. Auto dealers captured the market for car loans, and mortgage companies — well, I’ll get back to that in a minute.
We tried for some time in the 1990s to locate the right opportunity to acquire another bank. We had been a single-location, small-town bank since 1890, and we were looking for ways to grow. Ten years ago we found an opportunity that matched our strategic vision. We branched into Stillwater, Minn. It was a great fit for us. It had a small town sensibility and an affluent population. People were eager to move there, and our niche in small business banking suited the town and the time.
Things Pile Up
Ten years ago — even four years ago — no one would criticize you for making home loans or loans to people who built homes. The federal government has traditionally played an active role in promoting housing and certainly did nothing to discourage us from home lending. In fact, traditionally, that has been a huge role for community banks.
It was a competitive business and we evolved to compete. We started a title company and branded our mortgage department as Jennings Home Mortgage, because by then customers were so used to aggressive promotions from mortgage companies that too often they would not check with their community banks when shopping for a mortgage.
We had customers who wanted us to do interest-only products and negative-amortization deals. We didn’t touch them. Occasionally, an established customer walked away from us when we refused to sell them one of those products. We would not have any part of it because we knew that those were bad products.
When we made a mortgage loan, state examiners looked at it; federal examiners looked at it. We had to do all this reporting and collect all this data, all at a cost to us. We were under a microscope for every real estate loan we made. The examiners said they were passable loans. Compare that to the non-existent enforcement of the same real estate lending laws when it came to loans made by the non-bank mortgage companies. For them it was the wild, wild West and the federal government absolutely looked the other way: no examinations, no enforcement, no nothing.
But as the real estate market deteriorated, the FDIC began to criticize us for loans with inadequate collateral. If I had made a home equity loan to a customer who had 20 percent equity, and the market went down 40 percent, as it has in Stillwater, could the FDIC really say we loaned with inadequate collateral? They did. Is it fair? Is it misleading? No, it is not fair, and it is absolutely misleading. Banks, including community banks like ours, have been broadly blamed for the housing market collapse. What did we have to do with the outrageously bad management at Freddie Mac and Fannie Mae? It was the federal government that allowed that disaster to occur and allowed them to purchase and hold their own junk bonds even after it was well recognized that there was a problem.
But bad things piled up for us, not just the housing downturn, but an extensive employee fraud and later the large theft of collateral used to secure a car dealer’s floor-plan loan.
When the FDIC came in to issue our C&D, I said: “You guys left something out. You’ve said nothing about our real estate concentration and are not requiring us to stop doing home lending.” They said nothing. Can you imagine the hubbub that would be raised in the press if they actually started publicly criticizing banks for engaging in residential-related lending?
A Worse-Than-Expected End
People we respected in the banking business told us to get lawyers and defend ourselves against the C&D, but we didn’t use or consult outside legal counsel. We didn’t think it necessary because we knew we’d done nothing wrong. Everything the owners had was tied up in that bank. We had to find a way to make it through. The FDIC said things we did not necessarily agree with; we felt they were being unfair in some instances, but we decided not to fight with them. Our best chance for survival was to use our resources to get the bank back on track. It came down to: What are they asking us to do, and can we do it? We said, “Yes; it’s going to be hard, but yes.” And we did — to the letter. We worked closely with the local FDIC examiners; if they had any suggestions to help us through, believe me, we were all ears.
We had three joint regulatory examinations in the last two years plus two 10-day, on-site visitations, as is normal for banks under a C&D. This was in addition to weekly and quarterly reports and countless phone conversations. They knew everything that was going on in the bank. We had to get annual appraisals on all our OREO (repossessed) properties, and we wrote them down immediately as required. OREO losses just snow-balled, but we stayed focused and did a good job of selling off OREO and other repossessed assets.
Even when we knew that we would probably be left with nothing, we stayed and ran the bank. Just walking away never occurred to us. Instead, we were determined to stay and do a professional job right up to the end — whatever we could do to assure the FDIC would not have a loss, help our customers, save our employees’ jobs and make sure our hometown at least had a bank when it was all through.
When it comes down to it, the bank failed because we were concentrated in an area that went through a once-in-a-century contraction, and also because when we had to sell there was no market for banks. At any other time in history we could have raised the needed capital or at least found buyers.
We couldn’t have gone on. We weren’t surprised when the closing came. But we were in no way prepared for what happened when the resolution team moved in. These were not the FDIC people we had been working with for two years. It was a different team with a different attitude, mission and motivation.
A week before they closed us down, FDIC started asking about our fidelity bonds and our insurance policies, which they said the acquiring bank was asking for. It seemed strange that any buyer would be interested in those policies but we provided what was requested. Then the night we were closed the resolution team “interviewed” (interrogated) bank employees with special attention to the management team. They informed us it was “standard practice” for the FDIC to make a claim against the failed bank’s policies if they could find any way at all to allege a basis. They said if we had a problem with that to talk to the on-site ombudsman. This person was apparently put there as window dressing because the first question we asked her she refused to answer.
Now it appears we may need to gear up to defend ourselves against a purely frivolous claim by our government aimed at exacting money from our insurance carriers. Not only is this abusive, but it is also a terrible way for our federal government to be conducting itself against its own citizens.
I had a good career. I’m proud of it, and our family is proud of what we’ve done in banking. It’s an unfortunate end to what had been a successful family business.
Paul Jennings can be reached at paul(at)dpauljennings.com.
This article originally appeared in the Nov. 1, 2009, edition of NorthWestern Financial Review. It is reprinted here with permission.
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