First National Gets a Deadline : Banking: After another quarterly loss and more bad loans, it agrees to boost capital or face federal sanctions.
Announcing its third straight quarterly loss and a rising tide of bad loans, First National Bank said Wednesday that it has agreed with federal regulators to either boost capital by July 31 or face possible sanctions.
The six-branch bank’s first-quarter loss of $5.1 million follows a $10.3-million deficit for all of 1991, a year during which First National saw serious problems develop in its business loan portfolio. Over the first quarter last year, the San Diego-based bank posted a profit of $1.45 million.
Its agreement with the Office of the Comptroller of the Currency calls for the bank to effectively increase two capital ratios by raising $2 million in outside funds or by trimming assets by about $80 million by July 31, chief executive Robert D. Richley said Wednesday. As of March 31, First National’s assets totaled $586 million.
Failure to comply with the July 31 deadline for more capital could force the OCC to impose stringent measures, including a “cease-and-desist” order that would limit the bank’s lending activities. For now, terms of the OCC agreement require First National to suspend payment of its 5-cent quarterly dividend to shareholders.
Richley said the bank is currently in compliance with minimum “leverage” and “tier one” capital levels, the two capital ratios at issue, but that the OCC will raise the minimum acceptable for First National as of July 31.
The bank’s problems center around its bad business loans and a mix of assets that have suffered from declining interest rates and changes in regulatory capital requirements.
First National’s non-performing loans--those in default or foreclosure--rose to $38.2 million, or 6.5% of total assets, as of March 31, up from $35.7 million, or 5.9% of assets, in December. Last year at this time, First National’s bad loans were $11.4 million, or 1.94% of assets.
In an interview, Richley attributed the most recent jump in bad loans to a “further scouring” of the loan portfolio and the bank’s “recognizing the difficulties that are still facing some of the borrowers.”
The bank has also been stuck with assets that it once viewed as the key to a profitable future but which are now a lodestone. Those are its “purchased loan servicing rights,” or rights to collect, for a fee, payments on mortgage loans originated by outside lenders.
Recent changes in capital rules no longer make the rights profitable, and First National is trying to unload them, as are many financial institutions .
In an interview, Richley said the bank could achieve compliance with the OCC by selling its entire mortgage banking operation, a sale the bank has contemplated for several months but which has been stymied by a glut of sellers in the market.
Among the options the bank has proposed is spinning off the mortgage banking unit as a separate entity through an initial public stock offering.
Analysts have also faulted First National for making too many loans that were tied to prevailing interest rates, loans that suffer in the current environment of declining interest rates.
The adverse effects of those loans were apparent in the first quarter, as the bank’s net interest income declined to $4.96 million, down 32% from the $7.23 million in the first quarter of 1991. Net interest income is the difference between what a bank pays to depositors and the interest it collects from borrowers.
The bank’s net interest income is also being undercut by its growing pile of loans that are not producing any income.
The OCC agreement is the latest in a series of events that have rocked the bank. Last year, two First National branches were closed in cost-cutting moves. On the same January day that it reported its 1991 loss, President Michael West resigned according to a “mutual agreement” with the bank’s board.
Richley, who was First National president before leaving in 1988 to join a Houston bank, has shaken up the bank’s management since he was hired to replace West in February. Among the several changes was the resignation last month of Executive Vice President Tom La Hay.
On Wednesday, First National announced the resignation of board director Raymond V. Knowles. He was replaced by Martin A. Klingel, a “substantial shareholder” in First National.
