Under Richard I. Linhart, Millennium Bankshares Corp. of Reston, Va., is getting back to basics.
When Mr. Linhart joined the company in July, its mortgage subsidiary had millions of dollars of nonperforming subprime loans on its books, its speculative construction and development loans in far-flung markets were starting to look shaky, and the company was relying too heavily on certificates of deposit for funding.
Then, just days after he began his tenure, its bank's regulator came in for an examination and later put the bank under an enforcement order requiring it to be adequately capitalized by March 31.
Mr. Linhart, 64, knew what he had to do.
In recent months Millennium has unloaded the subprime loans, sold off two branches outside its main market, and stopped making construction and development loans. Mr. Linhart, formerly the chief operating officer at James Monroe Bancorp in Arlington, has added local loan officers to focus on bringing in commercial and industrial loans and local deposits.
As a result of the changes, Millennium is about 25% smaller than it was at the end of last year, with $381 million of assets, but its asset quality is improving slowly. Its ratio of nonperforming assets to total assets dropped 107 basis points from a quarter earlier, to 4.25% as of March 31 — still far above the industry average but heading in the right direction.
"My job is to refocus the bank, change its paradigm to a community bank in northern Virginia," Mr. Linhart said. "We're not out of the hole, but we're closer to the top then we were nine months ago, no question about it."
Still, challenges remain. The real estate downturn has hit northern Virginia hard and could hamper Millennium's recovery. And so far generating core deposits has been easier said than done.
Millennium's first-quarter earnings of $5.1 million, or 57 cents a share, included an $8.3 million pretax gain on the sale of the two branches, and Mr. Linhart is making no projections about future earnings, except to say, "I don't think anybody should expect miracles."
His message to investors: "I clearly do not have the exposure that I had nine months ago. It's time to catch our breath and see what earnings level we can produce."
Mr. Linhart, who succeeded Carroll C. Markley as Millennium's president and CEO and was named its chairman in March, said the problem with the company, founded in 1999, was that it never had a "core focus." For example, the large, speculative construction and developments loans made before Mr. Linhart's arrival in such locations as Atlanta, Jacksonville, and Hilton Head Island, S.C., "were heading toward default or nonaccrual status."
Millennium has stopped making development loans in these markets, as well as in northern Virginia, and it is working to sell off the nonperformers. Development loans make up 22% of its portfolio but have shrunk 21% since June 30, to $51 million.
Before Mr. Linhart arrived Millennium had already shut down the mortgage subsidiary that had been making the subprime loans, but when he joined it was still holding the bag for 150 subprime loans in roughly 20 states, he said.
In February it sold those loans, valued at $31.3 million, at 43.55 cents on the dollar in a bulk sale to Beltway Capital LLC of Hunt Valley, Md. The price was $13.6 million plus accrued interest. Millennium took a fourth-quarter charge of $10.8 million, or $7.1 million after taxes, on the sale.
"It hurt, but it was only going to get worse," Mr. Linhart said. "It was better to get out early rather than have it torture us for the next two or three years."
In March, Millennium sold the two Richmond branches it opened in 2002 to Eastern Virginia Bankshares Inc. in Tappahannock for a pretax gain of $8.5 million (or $5.6 million after taxes). The branches had $91.9 million of deposits and $48.9 million of "quality loans." The sale reduced Millennium's branch total to four, all in the northern part of the state.
The fact that the Richmond branches were profitable, with only one bad loan, made the decision to sell them difficult, Mr. Linhart said, but ultimately "it made no sense to have those two branches down there when we're trying to build a northern Virginia franchise."
Millennium also sold or called to par about $104 million of investment securities in December and the first quarter. Doing so helped the branch sale, because Millennium had to help Eastern Virginia Bankshares fund deposit liabilities, he said.
The branch and securities sales also improved Millennium's capital base to a level that should satisfy regulators, Mr. Linhart said. The January order from the Office of the Comptroller of the Currency required Millennium Bank to have risk-based capital equal to 13% of risk-weighted assets and Tier 1 capital equal to 12% of risk-weighted assets. As of March 31 the bank's risk-based capital was 18.24% of risk-weighted assets, and its Tier 1 capital ratio was 19%.
A banker for about 40 years, Mr. Linhart had been with the $530 million-asset James Monroe from its formation in 1998 until Mercantile Bankshares Corp. of Baltimore bought it in July 2006 for $142.9 million. (PNC Financial Services Group Inc. acquired Mercantile last year.)
Lewis Sosnowik, the vice president for bank securities at Koonce Securities Inc. in Bethesda, Md., said Mr. Linhart was "replicating what he did at James Monroe, hiring the right kind of people," such as long term-loan officers who know the local market.
Bryce W. Rowe, and analyst with Robert W. Baird Inc., said Mr. Linhart "was clearly a good operator" at James Monroe. "It was a pretty clean company and made shareholders money. That's why he was brought in to Millennium to turn that situation around."
Mr. Rowe said if Mr. Linhart succeeds in cleaning up Millennium's balance sheet, it will still need to deal with the weak real estate market in northern Virginia, where homes are sitting on the market for nine to 16 months and values in some places have dropped 35% to 45%.
Another of Mr. Linhart's key initiatives is lowering his company's funding costs by reducing its reliance on CDs and brokered deposits and attracting more traditional demand deposit accounts. Millennium is making modest strides there. Demand deposits now make up about 7% of its total, versus 6.4% in June of last year, and its ratio of brokered deposits to total deposits has declined slightly.
Still, Christopher W. Marinac, an analyst with FIG Partners LLC, said it has very little in core deposits.
"There's a lot of brokered CDs, a lot of high-priced CDs," he said. "They need to do some soul searching and look for [core] deposits. Right now the bank is in survival mode and trying to get to some base of profits. It's almost as if the bank has to start over."
