First National Bank May Miss July Deadline to Raise Capital
First National Bank executives said Thursday that they may be unable to meet a July 31 deadline to raise the bank’s capital to minimum regulatory levels.
Although the bank is hopeful that the Office of the Comptroller of the Currency will grant an extension, failure to meet the deadline could result in regulators placing stringent limits on the troubled bank’s activities, including a cease-and-desist order that would bar the bank from making certain kinds of loans.
The bank also announced at its annual shareholders meeting that its portfolio of bad loans continues to grow. By the end of June, total non-performing assets will be $1 million or $2 million above the $38.2-million total on March 31, said Nancy Celick, the chief financial officer. Non-performers represented 6.5% of total assets March 31.
The OCC imposed the capital deadline in April, after First National reported a $5.1-million first-quarter loss that followed a $10.3-million loss for all of 1991.
To meet the requirement, the bank has been rapidly shrinking its assets, which is one way a bank can increase capital, because regulators measure it as a percentage of assets. By June 30, the bank’s assets will be down to as low as $450 million from $587 million March 31, Celick said. By Sept. 30, assets could be as low as $320 million, she said.
The bank also has been trying to sell its mortgage banking operation for the better part of a year because changes in capital requirements no longer make it profitable. A sale of the unit is a key part of the bank’s capital enhancement strategy because the sale would at once shrink assets by $80 million and generate cash.
But, at Thursday’s meeting, President Robert Richley said First National still had not found a buyer for the mortgage unit. And, whereas Richley said in April that the bank could meet its capital levels merely by selling the mortgage banking unit, he said Thursday that the bank expects to take a loss on the sale, and that it may still have to raise additional capital from other sources even if a buyer is found.
For a time, First National considered spinning off the mortgage operation as an independent entity in an initial public stock offering but scrapped the plan because of an unreceptive stock market.
The bank has also tried to sell the unit to another mortgage firm, but the transaction has been frustrated by the glut of mortgages in the market and by the limited appeal of First National’s operation by virtue of its 100 loan-servicing and support employees. A well-informed industry source said Thursday that most prospective buyers would rather buy just loans without the personnel.
Richley said First National has hired Countrywide Servicing Exchange of Pasadena as an agent to help it sell the mortgage banking operation. Richley said the bank expects to lose money on the sale, but that it will not sell the unit if the loss is unacceptably high. He would not say how high a loss was acceptable.
To raise outside capital, Chairman Malin Burnham said Thursday, the bank is considering a rights offering, a securities offering in which existing shareholders pay for a future right to buy First National stock. First National shares closed Thursday at $3, down 12.5 cents in American Stock Exchange trading.
“I think it would be difficult for us to hit the capital ratios on July 31, but the OCC has told us that, as long as they can see the progress, then they are not going to have a problem,” Celick said.
