WASHINGTON — The failure of Guaranty Bank in Milwaukee was not unexpected, but the bank’s longtime executives insist that it could have been avoided if regulators had been just a little more patient.
Though the $1 billion-asset bank had been severely undercapitalized for years and had been operating under the harshest of enforcement orders since February, CEO Doug Levy and his father, Chairman and Chief Operating Officer Jerry Levy, said that Guaranty had turned a corner in recent quarters and was a month or two away from raising the funds it needed to be deemed “well-capitalized” by regulators.
The investment banker they hired, Hovde Group’s Steven Hovde, told American Banker that two well-known private-equity groups had tentatively agreed to invest $50 million in the bank, and three others were planning to do “on-site due diligence” later this week.
“We don’t get why this happened,” Doug Levy said of the failure Friday that will cost the Deposit Insurance Fund roughly $146 million. “We had been profitable in 10 of the last 13 months, we hadn’t been taking credit losses, and we were attracting investors.”
A spokesman for the Office of the Comptroller of the Currency, Guaranty’s primary regulator, declined to comment on why the bank, which primarily served low- and moderate-income consumers through a sprawling, five-state branch network, was shuttered and sold to the $33 billion-asset First Citizens Bank & Trust in Raleigh, N.C. The Federal Deposit Insurance Corp. also declined to comment.
Guaranty’s 12 freestanding branches in Wisconsin, Illinois and Minnesota opened Monday as branches of First Citizens, a unit of First Citizens BancShares. The other 107 branches, all in grocery or other retail stores in those states, as well as in Georgia and Michigan, were not reopened.
Guaranty’s struggles date to the financial crisis, when it suffered staggering losses on residential real estate loans. Its problems were exacerbated in 2014, when federal regulators ordered Guaranty and a handful of other banks to stop offering so-called deposit-advance loans to customers unless they could fully document a borrower’s ability to repay.
The loans, which critics likened to payday loans, carried high interest rates but were nonetheless popular with Guaranty’s customers, many of whom lived paycheck to paycheck, Jerry Levy said. “Our files are filled with applications from people who needed $150 because their car broke down and they needed the money immediately so they could get to work,” he said.
They had also become a significant source of revenue for Guaranty as it shifted away from mortgage lending, and when it stopped making them in May 2014, its fee income plummeted.
Jerry Levy said Monday that the federal crackdown on deposit-advance lending “absolutely” contributed to the bank’s failure.
“The loss of deposit advance just made it that much more challenging to turn around the bank,” he said. “If that were still in place, we wouldn’t be having this conversation because we would have been adequately capitalized.”
But other observers said Guaranty’s failure was a long time coming. They pointed out that even when the bank was making significant income from deposit-advance loans in the years following the crisis, it still remained severely undercapitalized due to the losses it suffered in mortgage lending. In the six-year period starting in 2007, the bank lost close to $200 million, according to FDIC data.
“The reason for the failure was a poor business plan — grocery store branches with deposits used to generate loans in states where they didn't know the market that well and when the recession hit they experienced significant loan problems,” James Friedman, a partner with Quarles & Brady in Milwaukee, said in an email. “I think everyone was surprised it took this long for them to be closed.”
“It’s surprising that a bank that size has been troubled that long, without some sort of recapitalization, some sort of sale,” added Jon Winick, CEO at Clark Street Capital in Chicago.
Many executives of failed banks probably thought they still had a chance to turn things around, but few speak out publicly once regulators move in, and the Levys and others close to the 94-year-old bank pointed to several reasons for their optimism.
The bank sold its mortgage operation to a private-equity group in 2013 and its new business model — buying mortgages from other banks and mortgage companies — was starting to show promise, they said. “Over the last three or four years, we didn’t have a single chargeoff, and we had only a handful of delinquencies,” Doug Levy said.
Though the bank was deemed “critically” undercapitalized by the OCC in February, Hovde, the investment banker, pointed out that capital levels had risen by the end of March. It was still undercapitalized, but no longer critically so, he said. He also noted that classified assets as a percentage of capital had fallen from 2.1% at Sept. 30 to 1.16% by March 31.
“Across all performance metrics, the bank, quarter after quarter, was getting cleaner,” Hovde said. Regulators “had nothing to lose and everything to gain by waiting a month or two to see how the capital raise played out.”
Guaranty had roughly $21 million of capital at the end of March, according to call reports, and Hovde said it was on its way to raising between $60 million and $100 million. He had told regulators that he expected the capital raise to be completed by the end of June.
“We were telling the OCC that we had a high degree of confidence in getting this capital raise done, and for some unknown reason they walked in and pulled the plug,” he said.
David Baris, a partner at Buckley Sandler who had been working with the bank, said he hopes Congress will investigate why Guaranty was shuttered when it seemed close to raising the capital it needed.
“The logical time to have closed this bank would have been 2011 or 2012, when it hit bottom,” Baris said. “Why now? There was a lot of interest on the part of investors — very substantial and experienced investors, who have been through the regulatory process before. It’s a real head-scratcher.”