On April 11, Metropolitan National Bank called a press conference in Little Rock to say the bank was making progress at improving its balance sheet and its Formal Agreement signed with federal regulators back in May 2008 was being replaced by a less severe Consent Order.
Bank officials signed the new order March 21, and while they discussed the order at the press conference, it was just recently made public on the website of the Office of the Comptroller of the Currency (OCC).
Metropolitan National reported a first quarter loss of $1.041 million in its March 31 filing with the Federal Deposit Insurance Corp. And while that was a notable improvement over the $4.05 million deficit a year ago, any net loss continues to siphon away the bank’s equity capital — which is considered to be at seriously low levels ordered by regulators.
Bank officials were careful to say the new order was less severe than the Formal Agreement it replaced. But according to written explanations obtained by The City Wire from the OCC Policy and Procedures Manual that isn’t likely the case.
A Consent Order, expressly a Cease and Desist Order like the one recently signed by Metropolitan executives, is a more severe action which can be enforced by the federal courts, according to the OCC manual. It requires the bank to report directly to federal regulators in Washington, bypassing the field office in Little Rock, to which the bank had previously been allowed to report.
The protocol allows regulators to ramp up the disciplinary oversight when a bank is out of compliance with a current enforcement action.
The Cease and Desist Consent Order recently signed by Metropolitan National is likely an additional level of scrutiny — not a lighter one, according to veteran banking expert John Dominick, who is also a professor at the University of Arkansas.
“The consent order is an outline to assist the bank as it continues to recover from the effects of the economic downturn that has impacted our communities and customers,” CEO Lunsford Bridges said during the April press conference.
He noted Metropolitan is already in compliance with 3 of the 5 provisions of the order. Those include: the bank’s existing oversight committee, its strategic plan and maintaining adequate loan loss reserves.
Normally 3 out of 5 would appear to be above average, but experts say the two areas drawing the most attention in any serious enforcement action would be inadequate capital and unsatisfactory asset quality — the two provisions which still are not being met by Metropolitan National.
Through March 31, the bank’s average equity capital was $63.317 million which equated to key capital ratios of 6.177% and 9.57%.
The order requires the bank raise those ratios to 8% and 12%, respectively, by July 20.
When asked about the target date, Bridges said it is a “date of encouragement, not a deadline.”
“I can confidently say that Metropolitan National Bank is in better condition today than at any point since we entered the formal agreement four years ago,” he said.
Dominick said no one would dispute the bank is making progress, but that regulators in Washington are watching to see if the capital concerns are addressed.
The order tells the bank to file a plan with regulators that spells out how it will raise the needed capital or find a buyer for the institution.
To reach compliance, the bank would need a cash infusion of more than $35 million given its shortfall. That would likely be just the beginning as the bank faced $76.750 million in non-performing loans at the end of March. The bank had another $53.261 million in restructured loans that were also were delinquent, according to the federal filings.
Analysts with Moody's agree community banks in general face an array of challenges when trying to raise capital while they are operating under regulatory actions.
Dominick said fire-sale priced institutions auctioned off by the FDIC just prior to closure are soaking up huge resources from the potential investor pool.
“Who could blame a sound bank for going after a FDIC sale with a handsome guaranty on investment. That makes it hard for banks with troubled assets and capital needs to compete for capital funds,” Dominick said.
He said Metropolitan’s management still has a lot of work in front of them, as do most banks with big loan exposure in Northwest Arkansas.
In 2011, there were nine banks in Northwest Arkansas under some type of heightened scrutiny. Parkway Bank in Rogers was the first to shake their order last year.
First Federal and Decatur State put themselves up for sale to address their capital concerns. Signature Bank, sold two branches to Camden-based First Bank to bring their capital levels into compliance. (Dominick is a shareholder and board member at Signature Bank.)
Legal experts say even banks under a cloud might be able to raise capital through private-equity firms, but every situation is different.
Bank investors typically look for strong core deposits, attractive markets and capable management.
The FDIC closed 22 banks in the first four months of this year, and last Friday (April 27) five banks went down. Capital shortfalls were common causes in each of those closures.
Metropolitan aggressively expanded into the Northwest Arkansas in 2005 investing $30 million in branch infrastructure. That investment has cost the bank far more in recent years in real estate losses. Since 2007 the bank has bled losses in excess of $97 million.
During that same period the bank’s capital has shrunk from $144 million down to $66 million as of March 31, which includes $25 million the bank received as a TARP participant.