Between 1990 and today, some 8500 banks have disappeared. (Since the banking crisis in 2008, 525 banks have closed by regulators according to problembanklist.com) In most instances, FDIC insurance will protect deposits. The real harm often comes to commercial borrowers.
Danger Faced by Commercial Borrowers
When regulators close a bank, the FDIC (Federal Deposit Insurance Corporation) steps in as receiver. When possible, the FDIC finds another bank to take over the former bank’s loan portfolio. Assuming a new bank steps in, the new institution will most likely review all the loans it has acquired. Depending on the needs and strategic direction of the new bank, it may simply choose to end many relationships.
We watched when BMO Harris acquired the old M&I Bank. (And that was not even a forced marriage by the FDIC!) M&I was heavily invested in certain commercial industries that were of no interest to the BMO. Loans that had been routinely renewed were suddenly called at their due date.
Did BMO do anything wrong? Probably not. If you were one of the affected buyers, however, the news was disastrous.
Recently state regulators in Louisiana shut down First NBC Bank of New Orleans. With $4.74 billion in assets, the closure was one of the largest in recent times. The news was quick to point out that all deposits were safe. The FDIC acting as receiver transferred the assets to Whitney Bank.
But what about the loans? An FDIC notice told borrowers, “If you had a loan with First NBC Bank, you should continue to make your payments as usual. The terms of your loan will not change, because they are contractually agreed to in your promissory note.”
While that is technically true, many commercial notes are for short term and are renewed annually. The bank usually has no legal obligation to renew a commercial loan but because of long established relationships, does so almost automatically.
Not this time. We have heard from some First NBC Bank borrowers that they received notices from the FDIC that their notes are not being renewed and giving them just 60 days to pay in full.
Borrowers that were in default were also notified to pay up immediately. First NBC was willing to work with many borrowers that were in trouble. Because the FDIC couldn’t convince Whitney Bank to take over all of First NBC’s loans, however, the FDIC is now liquidating those loans.
If you have a commercial loan and your bank is under a consent order, cease and desist order or some other formal agreement with regulators, now is the time to develop a backup plan.
Even if your bank never goes under, struggling banks are required to shore up their financials. That may mean that the bank on its own could tighten up credit or even refuse to renew a loan.
In more sinister cases, some banks concoct a phony technical default (often called a nonpayment default or nonmonetary default) simply so they can seize collateral and shore up their balance sheet. It is perverse that borrowers with solid financials and collateral become more at risk for having their loans called and their collateral liquidated. Because they have good financials, struggling banks know they can get quick cash by calling those loans!
Should You Abandon an Unsafe Bank?
We certainly don’t advocate abandoning a bank simply because it has problems. But if your bank is under extra scrutiny from regulators, it may be time to find a new bank. For example, if a cease and desist order says the bank is engaged in unsafe practices, don’t be surprised when the bank is suddenly closed on a Friday evening. And if the bank has been cited for inadequate capital or reserves, don’t be surprised if the bank suddenly tries to foreclose on your valuable collateral.
Who Can Deem a Bank Unsafe?
There is no publically available list of unsafe banks. One would think that the government should publish such a list but that can cause a run on the bank. If people feel their bank is unsafe, hundreds could race to the bank hoping to get their money out. Even if a bank was completely sound, a run on the bank could have dire consequences.
Some banks are regulated by the states while others are regulated by the federal government. Much depends on the bank’s charter. The primary federal agencies that regulate banks are the OCC (Office of the Comptroller of the Currency) and the FRB (Federal Reserve Bank). Layer on the insurance provided by the FDIC and the NCUA (National Credit Union Administration) and one soon realizes that there is an alphabet soup of regulators. All of them can deem a bank unsafe.
The FDIC and other regulatory agencies maintain a list of unsafe banks but that list isn’t public. What is public, however, are consent orders, formal warnings and cease and desist orders. Of the three public documents, we consider cease and desist orders to be the most serious.
Reasons for Cease and Desist Orders
A cease and desist order is a finding by the government that a bank is engaging in unsound banking practices. Usually, the bank is entitled to a hearing but most often, targeted banks simply consent to the order. By agreeing to the order, they usually do not have to admit to any wrongdoing and avoid messy public disclosures.
The common reasons for entry of a cease and desist order are:
(a) operating with management whose policies and practices are detrimental to the bank and jeopardize the safety of its deposits;
(b) operating with a board of directors which has failed to provide adequate supervision over and direction to the active management of the bank;
(c) operating with inadequate capital in relation to the kind and quality of assets held by the bank;
(d) operating with an inadequate loan valuation reserve;
(e) operating with a large volume of poor quality loans;
(f) engaging in unsatisfactory lending and collection practices;
(g) operating in such a manner as to produce operating losses;
(h) operating in such a manner as to produce low earnings;
(i) operating with inadequate provisions for liquidity; and
(j) operating in apparent violation of laws, regulations and interagency policies.
For banks, a cease and desist order is a scarlet letter but surprisingly, the public is usually unaware that their bank may be teetering on failure.
Although public documents, cease and desist orders and other similar decrees from regulators aren’t exactly headline news. To avoid runs on the bank, regulators don’t call press conferences when issuing a warning. Obviously, neither do the banks.
Even when the press does pick up on a story, dishonest bankers often spin the story into something that seems harmless. Take for example the former head of Guaranty Bank, Douglas Levy.
In March of this year, the OCC gave Guaranty Bank a final warning and told the bank it was under risk of being closed down. After the local press published a story about the directive, Levy told reporters, “Nothing is new or alarming or a surprise to us. Basically, these are things that the OCC believes that we need to be doing in order to turn around the bank... And things are going well for us.”
Going well? Just a few weeks later the FDIC and OCC shuttered the bank. After the shutdown, an OCC notice said the bank had been engaged in “unsafe or unsound practices.” The public, including borrowers, had been warned but no one listened.
List of Banks Under Cease and Desist Orders
So, who are the banks under a cease and desist order? As of January 2017, the following banks were operating under a cease and desist order.*
Gunnison Valley Bank – Gunnison Utah
Guaranty Bank – Milwaukee WI CLOSED BY FDIC APRIL 2017
Americana Community Bank – Sleepy Eye Minnesota
First City Bank of Florida – Ft. Walton Beach
First National Bank of Griffin – Griffin Georgia
Grand Mountain Bank – Granby Colorado
Gwinnett Community Bank – Duluth Georgia
Hometown Bank – Carthage Missouri
Liberty Bank – Salt Lake City
Northside Bank – Adairsville Georgia
Providence Bank – Alpharetta Georgia
*The above list was compiled from public sources and is believed accurate as of January 2017. If you have any corrections, please email [hidden email]
MahanyLaw and Judge, Lang & Katers – America’s Lender Liability Lawyers
When it’s time to sue your bank or to have an experienced pro at the negotiation table, rely on MahanyLaw and Judge, Lang & Katers for your legal needs. Why? We sue banks for a living and banks know we certainly aren’t afraid to go toe to toe with them.
Sadly, most lender liability lawyers work for banks or lack the confidence to face down a large bank.
Suing banks and litigation is usually not the answer but banks need to know that you are ready to fight and have experienced lawyers ready to fight. We believe the best way to success at the negotiation table is having experienced bank litigators at that table. Banks know that most lawyers won’t sue. Arrogant bankers simply don’t take borrowers or most lawyers seriously.
We are the exception. And we have helped our clients and the government recover billions from banks.
MahanyLaw and Judge, Lang & Katers are two national boutique law firms that work together on lender liability matters. We represent commercial borrowers and high net worth individuals with losses or risk exposure of $5 million or more. (Depending on where you are located, we often take smaller cases.) And we never represent banks or lenders.
Whether you are a small business owner or a Fortune 500 company, we can handle all your banking litigation and transactional needs.
For more information, contact attorney Chris Katers at [hidden email] or by phone at 414-777-0778. The author of this post, attorney Brian Mahany, can be reached at [hidden email].