Susie Smith Testimony Recounts Trials, Tribulations at Metropolitan National Bank

The Chapter 11 filing of Rogers Bancshares Inc. in July is a grim reality check of the five-year struggle to keep Metropolitan National Bank a viable ongoing concern.

Perhaps no one can appreciate the battle to save the $991 million-asset bank more than Susie Smith, Metropolitan’s senior executive vice president, chief operating officer and chief financial officer.

Her testimony at a July 26 hearing in Little Rock’s U.S. Bankruptcy Court offers a glimpse inside the embattled, former $1.8 billion-asset lender.

“Throughout the bank, we were all very scared, from top down to a teller level,” Smith said of the financial crisis that peaked in 2009. “We worked a great deal and being transparent with our staff, letting them know before we had a loss that we were announcing what was going to happen, so that they could be prepared to answer customer questions. They were all frightened. And we did lose quite a few employees in 2009 …”

“We had a reduction in forces where we cut staff back by about 20 percent, so that we could have some operating savings.”

Smith took the witness stand as part of a daylong proceeding to help sort out the details of Rogers Bancshares selling Metropolitan under the protection of bankruptcy court.

Her lengthy courtroom appearance also served as a platform to convince holding company creditors that every effort had been made to find a solution before resorting to Chapter 11.

Smith spoke of the bank’s dire need to resolve its near untenable situation through a bankruptcy sale led by the stalking horse bid of $16 million by Ford Financial Fund II of Dallas and Ford’s promise of sufficient cash to cure what the OCC described in its 2013 exam of Metropolitan as a “critically deficient” capital position.

Smith also described Metropolitan’s Catch 22 predicament of needing earnings to replenish lost capital and cover the holding company’s financial obligations but being unable to grow earnings because the bank was undercapitalized with an uncertain future.

“To have earnings, you have to have earning assets,” she testified. “To have loan growth, you have to have lenders. I cannot recruit new lenders at the bank, so it is very difficult, when I’m in troubled condition, to grow earning assets …

“In 2012, we have tried talking to some top key people throughout the state who would be a real boost to our lending staff and are unable to bring anyone on board of a troubled bank.

“So our operations, when you take the bank operations and the holding company debt service, and you look forward for three years, the bank, with luck, will get close to breaking even in three years.

“And that’s with luck. We have a $100 million in nonperforming assets; $70 million of that is real estate and about $55 million of that $70 million is raw land.

“We have not factored in those provisions, the three-year forecast, a significant decline in that land value. If there is a significant decline in that land value, we will go from a small profitability or near break-even to another large loss situation.

“The bank, with capital of $65 million, cannot earn out of it or doesn’t have the capital to get out of that $100 million in nonperforming assets.”

During her testimony, Smith recounted the trials and tribulations of fighting to work through a mountain of loan problems while trying in vain to find new capital through investors, lenders or buyers for months on end.

2009 was an especially trying year with huge losses rocking the bank despite the reassurances of continued profitability by CEO Lunsford Bridges in June 2008 shortly after the Office of the Comptroller of the Currency put the bank under a supervisory agreement.

The loan losses were so bad in 2009 that $25 million in TARP capital provided by the U.S. Treasury in January did little to stanch the hemorrhaging.

“We really thought that with the TARP money and with the work we had done on managing the risk of the bank, that we were in good shape to move forward,” Smith testified.

“What we did not realize was the critical underlying credit quality and deteriorating collateral and the distressed borrower situation which rapidly declined at the end of 2008 and the first part of 2009 ...”

“We posted unheard-of loss numbers. We lost $80 million over the course of 2009. And the headlines, every quarter, were stunning. And it took a huge amount of staff work and teamwork to keep our customers engaged.”

During 2009, bank consultants with Alvarez & Marsal were brought in to help cure the operating deficiencies outlined in the OCC order. The firm also helped organize the bank’s financials, so prospective investors could easily inspect the loan portfolio, balance sheet, debt structure and other important data that was updated quarterly.

Investment bankers at Keefe Bruyette & Woods also were hired to help find sources of capital. Months of constant trolling for investors ensued.

“It was very clear to us the gravity of the situation and that we were going to need help to raise capital,” Smith testified.

In September 2009, Rogers Bancshares was put under a written agreement by the Federal Reserve. The move ended all dividend and interest payments to trust preferred holders and preferred shareholders, including TARP payments to the U.S. Treasury.

“At this point, we had $260 million in nonperforming as-sets,” Smith testified. “That’s 20 percent of our asset base. It is highly unusual for a bank to even be open with 20 percent nonperforming assets.

“Any numbers usually over 3 to 4 percent are considered severe numbers. So we had tremendously severe nonperforming asset numbers. And that really compounded the marketing process problems. We continued marketing throughout 2010, constantly meeting with other banks, private investors, trying to find groups to bring us capital.”

Despite significantly reducing its nonperforming assets, the bank was unable to attract a capital partner. Smith described a revolving door of would-be investors performing due diligence on the bank since 2009.

She said the closest thing to a genuine offer occurred in 2010, a nonbinding letter of intent to provide $50 million in capital if the bank could find investors who would match that with an additional $50 million.

“We spent a tremendous amount of time, over a year, trying to find different groups to match that $50 million and talked to a great number of people that KBW brought to the table,” Smith testified.

“What ended up being told to us, time and time again, is our $1 billion bank is too small. The groups that have this type money are looking for an investment of a $100 million and more for just 25 percent or less of the bank.

“And it was ‘no,’ ‘no,’ ‘no’ over and over from every private investor we heard from.”

At the same time, banks that had looked at Metropolitan in 2009 were back performing loan due diligence. Those same unnamed groups came back for new rounds of due diligence in 2011 and 2012.

“In 2010, my sense was they were just in there getting prepared

in case the bank failed,” Smith testified. “When a bank fails, prior to the day it fails, the FDIC will market the bank to other banks for bids. And our bank, with 20 percent nonperforming assets in 2010, had just in 2009 lost $80 million, in 2010, we lost $12 million …

“Most outside parties thought we would be a bank failure. And I think that’s the reason, after all the marketing efforts in 2010, we didn’t have any bites or takers from other banks. And I think that the reason we didn’t get any takers on the private equity side is the groups that were doing funding needed us to be a bigger bank to put those type contributions in.”

Other steps were taken to make Metropolitan more appealing to investors, efforts to lighten the holding company’s load of obligations that were weighing on the bank.

“In 2012, TARP is starting to try to close down their program,” Smith testified. “They want to get out of their TARP borrowings because many banks have been able to successfully pay back the program and the remaining banks in the program are mostly troubled banks.

“So they have devised a situation where they’re going to try to pool and auction some of this debt off to sell to outside investors. And during 2012, as they would contact us, we were always agreeable and would say, ‘Yes, you can have us included in one of your auction pools.’”

“We also used it to go out to possible investors in private equity, asking them, ‘If you’ll work with us, we can get a discount at least from Treasury on their debt as part of a capital raise.’”

But to no avail, and the marketing efforts continued throughout 2012 and into 2013.

“As we continued to survive, which is what we were doing, we knew that over and over we were hearing from investors that they thought that the bank might have their arms around the risk in the balance sheet, but there is no way that they would take on the holding company debt. And it was a repeated message we heard in 2011.”

The solvency of Metropolitan National Bank was maintained at the cost of its parent company’s insolvency, and would-be investors interested in Metropolitan National Bank balked at taking on the financial obligations of Rogers Bancshares.

The holding company owes $47 million on a series of trust preferred securities sold in 2005, 2006 and 2007. That debt total includes $5.1 million in unpaid dividends.

The bankruptcy sale will allow the Little Rock bank to separate itself from its debt-ridden holding company and wipe clean the equity obligations associated with stockholders.

Smith spoke proudly of the bank’s staff who have stayed on board despite no 401(k) contributions, no bonuses and scant increase in pay since 2009.

“Our existing executive staff and officers have been so loyal the last 4 1/2 years,” she testified. “It has been a passion and a sense of duty, of care and loyalty, that the folks who have remained at the bank and have seen it through this 4 1/2 years are still there, and they are being recruited heavily by other banks.”