San Joaquin Bank's final hours
BANK: Earlier campaign might have made difference
| Saturday, Oct 24 2009 08:11 PM
Last Updated Monday, Oct 26 2009 09:29 AM
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Henry A. Barrios / The Californian Members of the news media gather outside the San Joaquin Bank 17th Street headquarters in downtown Bakersfield after regulators shut down the bank Oct. 16. The bank reopened Oct.19 as Citizens Business Bank.
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Elation over the last-minute rescue of San Joaquin Bank halted with the ring of a cell phone at 3:11 p.m. on Oct. 16.
It was the state banking commissioner calling San Joaquin's chairman: The Bakersfield community's heroic final push to recapitalize the bank was for naught. The commissioner was pulling the plug, taking control of the bank and forcing the sale of its assets.
The news devastated a group of bank officials and investors who had spent the previous 24 hours in an all-out effort to meet a $27 million target set by regulators. Several local individuals -- some of whom had already put up large sums in previous weeks -- deposited close to $3 million that day, enough to surpass the target by at least $400,000.
But by that time, the capital goal was beside the point. Too many customers had withdrawn money from their accounts. In the commissioner's opinion, there was now too great a risk that cash would run out.
So ended a year-long drive to address financial damage caused primarily by San Joaquin's loans to real estate developers who ultimately could not keep up their payments as the recession deepened.
For all the second-guessing about what might have been done earlier to save the bank and head off what some describe as a run on the bank, there remains a measure of pride among people who from the inside witnessed the bank's last 24 hours. As they see it, the community pulled together and came close to preserving a bank that over its 29 years had become a beloved Bakersfield institution.
Every consideration
Even among those closest to the situation, the decision to shut down the bank came as something of a surprise. They had been told that the banking commissioner had extended a deadline that officially passed the night before, on Oct. 15, and that if the $27 million goal could be met by the end of the next business day, San Joaquin would be spared.
"That's not what I said," the commissioner of the state Department of Financial Institutions, William Haraf, said in an interview last week, in which he defended his decision to close the bank.
"I gave the bank every possible consideration," Haraf said. "It was done in close consultation with my colleagues at the department and with other regulatory bodies" at the federal level.
There was no accepting this fate the afternoon before the shutdown at a four-hour board meeting of the bank's holding company. Huddled inside San Joaquin's 17th Street headquarters, board members decided to go forward with a strategy that the bank's founder and former chairman, Bruce Maclin, said had brought the bank to within $2 million of its $27 million goal.
Leaving the building shortly after 6:30 p.m., President and CEO Bart Hill declined to discuss what lay ahead. But two hours later, the subject line of an e-mail from board Chairman Rogers Brandon to The Californian said it all: "The work continues."
Of course, the recapitalization effort had already gone on for some time. But never before had it been as focused as it would become on the bank's last day of operation.
A year's work
In November of last year, the bank's holding company entered into an informal agreement with regulators to shore up San Joaquin's finances. The deal, formalized in a written agreement in April, required the bank to write off bad loans, overhaul its lending practices, shift money to its loan-loss fund and maintain an adequate level of capital.
To anyone watching the company's earnings reports, the trouble had become evident: The bank holding company reported net income of $2.5 million in the fourth quarter of last year, a 74 percent drop from the same period in 2007. Then, in the first quarter of this year, the company reported losing more than $18 million, $10.7 million of that attributed to loans that had to be charged off.
Much of the work demanded by regulators was done in a few months; the hard part was keeping an adequate level of cash.
Various unsuccessful fundraising options were explored: sell the bank (Maclin said several suitors came forward but none made a formal proposal); conduct a private placement that board members said would give certain outsiders stock, or warrants to buy stock, in exchange for their investment; and a pledge by 11 Indian investors to raise a total of $38 million in exchange for a combined 62 percent stake in the bank.
In public statements, bank officials put the most hope in the last of these prospects, the proposal from India. But board members later said regulators in India and the United States were holding up the money as they looked into the investors' backgrounds. Maclin said there were also worries among U.S. regulators that the group would act as a single investor and wield too much influence over the bank.
Passing the plate
A high-level meeting was called the morning of the shutdown. The bank's executive vice president and chief operating officer, Steve Annis, sounded cautiously optimistic.
"If it happens, it's going to be very good news," he said moments before leaving the bank's downtown headquarters to join the gathering of board members and investors at a private office across town.
He declined to say much beyond expressing hopes that the rest of the $27 million would come through soon. It was only a matter of "getting things lined up," he said mid-morning on the day of the closure.
"There's so many different moving pieces and parts," he said.
Wealthy individuals came and went throughout the meeting, and some who had already contributed to the cause put up even more money, said Maclin, who stepped down as chairman in early October but remained a major shareholder. Maclin added that he kicked in an additional $500,000 that Friday.
"People were very enthusiastic because they thought the goal was reachable," he said. "It was right around the corner."
At the same time, the company continued to negotiate by phone with regulators, Brandon said.
Just as no one involved in the final push wanted the bank to close, no one wanted regulators to walk off with the investors' money in case the bank was ultimately shut down. For that reason, a method was devised in which investors made deposits into checking accounts on the condition that the money could be instantaneously moved into the bank's capital account, Brandon said. The checking accounts were fully insured even if the bank were closed; if all failed, investors would get their money back.
New investments topped the $27 million mark that Friday afternoon. Brandon said he had already made it back to the bank headquarters to arrange the necessary deposits when he got the fateful phone call: San Joaquin had been closed, becoming the 99th failed bank in the nation this year.
Then, shortly before 6 p.m., employees of the Federal Deposit Insurance Corp. converged on the bank to make the official announcement and give employees instructions on how the shutdown would proceed. By the following Monday morning, virtually all of San Joaquin's assets and liabilities were sold to Ontario-based Citizens Business Bank, as negotiated by regulators after a confidential bidding process conducted before the closure.
Liquidity concerns
Commissioner Haraf said he is prohibited by confidentiality rules from discussing certain aspects of the decision to close the bank. But he did say that San Joaquin's liquidity became a big concern in the bank's last days. He had been getting daily reports on the bank's access to cash, and they weren't looking good.
"Liquidity had dried up," he said. "All the contingent sources of liquidity were nearly completely tapped out."
He acknowledged that the timing was a shame.
"We wanted the bank to succeed, and it was tragic that it was not until literally the day of the closure that the capital commitment had been lined up," he said.
Brandon emphasized that the bank had maintained adequate borrowing power, and that at no point was the bank unable to meet depositors' demands for cash, including on its last day of operation.
Behind the scenes, though, liquidity had been a growing concern. It had been a problem for months, Maclin said. And two days before the closure, Hill, the bank's president and CEO, issued a statement reassuring checking account holders that their deposits were 100 percent insured by the FDIC.
Regulators and bank officials declined to say just how fast depositors were pulling out their money -- and how close the bank came to being unable to give them cash.
But Brandon said that on the day of the closure, many customers were indeed moving their money out of San Joaquin into other banks. He pointed out that not all of these customers were closing their accounts.
"We had not lost as many customers as we had lost deposits," he said.
Hill could not be reached for comment for this report.
Any rush to withdraw money might be the result of customers misunderstanding what it means to have deposits FDIC-insured, board member Donald Andrews said.
"There may have been a run on the deposits because of somebody just not understanding how the system works," he said, "and that's unfortunate."
One of the problems with declining liquidity is that it can turn a goal for raising new capital into more of a moving target, said FDIC spokesman David Barr.
"If enough money comes out, then much more money is going to have to come in at some point," he said.
Looking back
Hindsight has led some bank officials to suggest that the final strategy of turning to wealthy local investors should have begun sooner.
"Maybe if we'd been successful a week earlier, they might not have closed us," Maclin said.
Commissioner Haraf agreed.
"Had this (recapitalization drive) happened earlier," he said, "it is possible that the bank would've been in a better position to survive."
Andrews pointed out that the root problem may have been the financial trouble that hit real estate developers. Despite the immensity of that challenge, he noted, a number of "patriots of this community" very nearly saved the bank by pledging their own money.
Though the effort was unsuccessful, he said, "It sure wasn't for lack of effort."
