Scary Stories

Scary Stories

What's it like to be on the inside of a bank in crisis? It's a

mix of gray hairs, tears, fist pumps and lots of heartache.

banking by Mark Gordon | Managing Editor

Mike Winter put his three-decades long banking career - not to mention his sanity - to the test this past summer, when he joined a small team of bankers trying to save Bradenton-based First Priority Bank.

"In five months, you see where 28 years of banking experience is brought together," Winter recently told a room full of Sarasota-area bankers during a presentation entitled Scary Lending Stories. "You see why all the things you do make sense."

Winter and a few others were tasked with working through millions of dollars in non-performing loans at First Priority, an institution under scrutiny from state regulators due to those loan issues and a decreasing capital base. For Winter, who says he once spent three years working on a singular non-performing loan at SunTrust Bank, the gig was both graying and adrenaline pumping.

Winter and his new bank-rescue colleagues, such as Sarasota-banker Larry Rouse, were working through the problems while the bank's front line employees tried to move on with the daily facets of running a bank. And then there were the state regulators monitoring every move every working day for two straight months.

"There was a lot at stake," Rouse said in an e-mail. "Both our own jobs and the jobs of the existing line employees were at stake. The investment of the shareholders was also on the line, as well as our reputations in the industry."

The outcome of the First Priority effort has been well documented. Despite a room full of talent working sometimes seven days a week, the bank was doomed. Kevin Hale, who once ran Fifth-Third Bank's $9 billion Florida division, was brought in by First Priority's board to run the rescue operation, a mission Hale later deemed as too late to save the bank; regulators seized First Priority's $260 million in assets Aug 1.

But as the banking industry shakeout primes itself for 2009 - a year which includes the potential of even more regulation - Winter's and Rouse's experience, as well others who have been on the inside of a bank in crisis, could prove to be valuable to bankers up and down the Gulf Coast. That's because most bankers agree, even the most optimistic ones: The market for bank troubles hasn't hit bottom yet.

"I would suspect that we will have more bank failures this year," says Tramm Hudson, a Sarasota-based retired banking executive who now works as a consultant for other banks. "We have some more fundamental challenges ahead."

Winter is now a senior vice president of credit administration with Tampa-based NorthStar Bank. He declined to elaborate on comments he made in his Oct. 30 speech, which was sponsored by the Sarasota chapter of the Risk Management Association.

But what Winter did say that night underscores a theme many bankers are realizing, as non-performing loan problems and capitalization issues linger: Seeing is believing. Or says Hudson, who spent 10 months as a consultant for Bradenton-based Coast Bank in 2007, as that bank went through its own crisis: "Nothing is as it appears."

During his speech, for instance, Winter recounted the time he joined a senior lender for another bank he was working for to check on a loan the bank had with a church in Port Charlotte. The church had been telling the bank everything was fine, but that didn't jive with a few missed payments. So Winter drove down to the church to see for himself.

"You know you have a problem with a church loan," Winter said, "when you drive around the corner, see the church and there's a "For Sale" sign there in the yard."

Heartbreak days

The glimpse Winter and Rouse provide into the war-room like atmosphere of a troubled bank is a rarity. Most bankers that have been through it refuse to publicly talk about it, both for the negative connotations and future legal ramifications. Both Hale and David Zuern, president of Bradenton-based Freedom Bank, which was shut down by regulators Oct. 31, declined to comment for this story.

Rouse, who like Winter took the First Priority job after being approached by Hale, his onetime boss at another bank, only responded to questions through e-mail. Rouse now works for Sarasota-based Sabal Palm Bank - a job he got through a contact he made while working as an independent contractor assigned by the FDIC to dispose of First Priority's assets after the bank was shuttered.

According to Rouse, a secondary theme, behind seeing is believing, that comes into play in a troubled bank situation is that of getting hopes up - only to be dashed for one reason or another.

Says Rouse: "We would be introduced to what appeared to be promising sources of capital, would work with these sources in providing them information with which to conduct their due diligence, wait to see how they would respond, only to find out that they were not willing to inject the amount of capital needed due to the high level of actual and perceived risk."

Stephens Woodrough, a St. Petersburg-based attorney who represents banks in trouble as well as ones under official regulatory watch, says it makes sense that few bankers, especially ones sitting in the chief executive chair, wouldn't want to talk about their role in a bank that was ultimately shut down or sold for bad loan reasons. One good reason is it's a heartbreaking scene, with tears sometimes shed every day, says Woodrough, who previously worked as an attorney the Federal Deposit Insurance Corp.'s Atlanta office.

Woodrough says the experience can also be personal, with regulators sometimes seeking one or two people to put the blame on. And since the past year is the first major banking crisis to hit the country in more than 15 years, some young executives are dealing with these issues for the first time. "There's a heightened sensitivity to everything," Woodrough says.

Hudson, who once ran the Gulf Coast division of RBC Centura Bank and has been in banking for 25 years, has just one experience working for a bank in crisis: Bradenton-based Coast Bank, which was sold to St. Louis-based First Banks, Inc. Nov. 30, 2007.

Hudson spent 10 months in the Coast Bank battle room, working with a few others on that bank's 481 non-performing loans. That job, Hudson recalls, was a blur of bouncing from problem to problem, trying to take some time to celebrate small victories here and there.

The first inkling that Hudson was about to enter a battle actual happened Jan. 26, 2007, mere seconds after he parked his car in the Coast Bank parking lot in downtown Bradenton on his first day as a bank consultant. That's when Hudson got out of his car, looked up and was staring at a few men he called "blue suits" - code for banking regulators.

The first few weeks at Coast were 15-hour marathons daily, with one bank-saving mission occupying the bulk of the time: Liquidity. That challenge was heightened, Hudson says, when Coast's correspondent bank pulled its line of credit soon after the loan problems were disclosed. The next few months were just as intense.

Despite Hudson's varied banking experiences, he had little preparation for the challenges Coast presented. "It's nothing that you learn in banking school," says Hudson. "You use a lot of the stuff you have learned in your banking career."

'Hindsight quarterbacks'

Woodrough, recalling both his work as a bank prosecutor and defender, says one of the most trying aspects of working at a bank under regulatory watch is just that: being watched all the time.

"FDIC regulators breathe paper, not air," says Woodrough. "They spend a great deal of time on paperwork."

Hudson adds that by the nature of their jobs, many times these regulators become "hindsight quarterbacks."

But Winter cautions against looking at regulators as the archenemy. To be sure, the relationship is certain to be adversarial at times, but Winter says it's best to make friends with the government, as they have a difficult job, too.

"I've been in banks where there is an us versus them attitude with the regulators," Winter says. "But that is absolutely not the way to go."

On the other hand, Winter, during his Scary Lending Stories presentation, did warn his fellow bankers about what he considers a real enemy: The media. Winter says that on at least four occasions while he was at First Priority, a newspaper story or a radio report harping on the bank's problems would lead to a mini-run on the bank.

One time, says Winter, a Tampa radio station went as far as to say a "run was coming," a report broadcast several times during the day. That report, Winter says, led the FDIC to put a SWAT team on standby, ready to begin the shutdown process.

Ultimately, it was the declining capital base that did in First Priority - although even as late Aug. 1, the bank's official last day, employees were still conducting regular transactions. At the close of business that day, Rouse said a state regulator assembled all of the bank's employees and read a proclamation detailing the seizure.

"We had hopes right up to the very last day that something positive might occur," Rouse says, "maybe something similar to First Banks' acquisition of Coast Bank."

Like Hudson at Coast Bank, Winter says the first few weeks at First Priority were spent chasing liquidity, as without that, the bank would be shut down in a matter of days. And like Hale, the former Fifth-Third executive who brought Winter to First Priority, Winter says the task was started to late, a fact only cemented with the late summer economic slide that carried into the fall.

"Had management been brought in a year earlier," says Winter, "it might have been different."

Winter's

Discontent

Mike Winter, a senior vice president of credit administration with NorthStar Bank in Tampa, has spent parts of his 28-year banking career working on troubled loans and assets. His most recent experience came from working at Bradenton-based First Priority Bank, which was shut down by state regulators Aug. 1.

Winter says he used a trio of banking truisms, which he picked up from his days working in SunTrust's loan department, as a daily guide at First Priority. Winter recently shared the mantras with a room full of bankers at a Sarasota event entitled Scary Lending Stories. He declined formal interview requests. The truisms include:

• Net worth has never repaid a loan. It's all about cash flow;

• Collateral doesn't make for a good loan. It only protects you from a loss;

• An asset is worth what you pay for it. Don't say you paid $600,000 for something worth $1 million.