Inside a Community Bank's Aggressive Turnaround

Reliance Bancshares (RLBS) is finally ready to go on the offensive in St. Louis.

Such a push would have seemed unimaginable a year ago. The $1 billion-asset company was dealing with problem loans and regulatory orders. Capital had been depleted.

In March, Tom Brouster led a group that pumped $31 million into Reliance. He now owns about 60% of the company. Before the investment he and his team became familiar with Reliance as consultants, spending months tackling a stack of its troublesome real estate loans.

Reliance, which at one point had a Texas ratio well above the average investor's comfort level, has returned to profitability and earlier this year had all its regulatory orders lifted.

During a wide-ranging interview from his office in St. Louis, Brouster, who speaks with a gravelly voice and projects a lot of confidence, explained how Reliance turned things around, his plans to redeem shares tied to the Troubled Asset Relief Program and the bank's efforts to avoid past mistakes. Here is an edited excerpt.

How did Reliance get into trouble?

THOMAS BROUSTER: It was cranking along and making a lot of loans. Many of those loans were in commercial real estate. It had formed a loan production office in Houston and another in Phoenix at the wrong time because the economy began to tank.

As a result the bank had problems with its loan portfolio and came under regulatory orders. It also received $42 million in Tarp dollars. At one point it was a $1.6 billion-asset bank. Reliance has now shrunk to about $1 billion.

In July 2010, I was approached about getting involved with the bank. My history and background has been about turning around problem banks. This is my 15th one. Of those, I have bought nine and sold eight. I [have turned around] banks with common characteristics, primarily involving problem loans. The situation at Reliance was compounded by earnings problems and a need for capital.

When did you get involved?

It really wasn't until late 2011 that I really became that interested. In early 2012 we decided to get involved as consultants. [Business partner Gaines Dittrich] had consulted for them before that time. The bank was in pretty bad shape, and we began to institute our turnaround procedures and solve some of the problems, mostly involving problem credits.

What was your best decision?

The best decision involved reducing our big problems to smaller units. We had so many credits to work out. My office was a war room. All we had in here was a desk, a table and some chairs. Two walls had white boards where we listed all the problem loans from the largest to the smallest.

We met with borrowers, restructured and sold loans, foreclosed some properties, and we had some chargeoffs. We began a very intensive loan workout situation in early 2012. We implemented a really strict collections system, which has resulted in 20 months of having no loans that are 30 days or more past due. Nothing new is going in the bucket.

The bank lost about $111 million from 2009 to 2011. It created major capital issues, so the regulators wanted to make certain that directors and others would inject more capital. That was certainly one of our objectives.

What attracted you to the bank?

I saw a retail franchise with 20 branches, a good customer base and a great opportunity to fill a niche as a larger community bank in St. Louis. I was semi-retired at the time and ready to jump back in.

You sold eight of your nine prior investments. How does Reliance compare?

At those banks, we primarily grew internally. It was a different market. Banks that wanted to sell were too expensive. My prior investments involved adding branches rather than acquisitions.

This one is a lot different. The economy has changed. There are too many banks and there is opportunity to roll up some of them. It could make sense, to the extent that there was the right partner of a similar size, for us to double our assets to offer more products and services and have an even better chance to take market share.

I'm an entrepreneur. That's not to say that this is a quick turnaround to sell. I had Pioneer Bank for 14 years [before selling it to National City in late 2005]. We want to build this bank, and we are growing.

How sick was Reliance?

In 2012 the bank would have lost about $11 million, based on a continued need to fund the loan-loss reserve. At one point, our Texas ratio was about 150%. Now we're at about 38%.

The problem portfolio was draining earnings. Once we fixed that, all of a sudden our earnings started building and we were able to build our capital base. As that took place, we made a profit in 2012 after three years of substantial losses. In 2013, our budget is projected to earn about $7 million this year.

The turnaround also required capital, right?

In March, my investor group put $31 million into the bank. It changed everything. The combination of addressing problem loans and adding capital put Reliance back on its feet. That capital took our Tier 1 capital ratio over 10%. We have no past-due loans, and nonaccruals are very minimal. The watch list, which was close to $400 million, is down to about $38 million. All those things helped get us beyond the turnaround and have given us a lot of cash to lend. So we're back in the lending business.

How do you lend without repeating past mistakes?

Our philosophy has always been that, if you give us a good borrower, we'll give them a quality rate. When Reliance got in trouble, it was using brokered deposits. We have tried to cherry-pick some of the top borrowers that we have known. We have a team of 11 loan officers who are working hard to reach out to get the best customers that they can.

Yes, we've have made some commercial real estate loans, but we're making them right. These are loans with low loan-to-value ratios and debt service coverage [multiples] of 1.4 and higher. And we're dealing with customers that we know and trust, while looking at commercial and industrial and consumer loans.

Your Tarp was auctioned earlier this year. Any plans to redeem those shares?

We had an interesting challenge. The decision involved raising money to pay off the Tarp, put capital in the bank, or both. Doing both is a pretty expense proposition, so we chose to put capital into the bank. We worked closely with the Treasury over a year and half to determine how to fulfill our obligation and satisfy taxpayers. Our Tarp was successfully sold in September . . . at a premium. We can say with great joy that we were able to make taxpayers whole.

We know who the buyers are, but we haven't had the opportunity [to talk with them]. They can't control the corporation and they don't have voting control. We'd like to think they looked at us and the progress we've made and thought it was a good investment. I think they're interested in riding the train and acting as a passive investor to see what the future opportunities are.

I also think they saw a bank that had future value. As investment bankers, future opportunities are there. If Reliance wants to make an acquisition, they probably want to know how they can get in and assist with that down the road. I think that's a primary reason - an opportunity for new business and to join in on a capital raise.

Any interest in redeeming the shares before your dividend rate spikes in February?

If you go back three years ago and look at debt instruments, [Tarp] was a good deal. It is always possible [to find cheaper capital], but do you go out and raise capital to take out the preferred shareholders or use that capital for growth or acquisitions? That is the challenge for banks that participated in Tarp.