New Trouble Looms For Some Georgia Banks
- Clay Westbrook
- Dec 12, 2014
- 3 min read
200 bank holding companies across the country deferred Trust Preferred Securities payments, 23 in Georgia.
The source of the trouble: a complex type of debt called “trust preferred securities” that some banks issued to raise money for expansions or beef up capital reserves. One of its features is a five-year deferral of payments to help banks weather recessions. Banks that had issued the debt and suspended payments during the past recession now face looming deadlines to start paybacks, with interest.
There's also a messaging problem at the Georgia Bankers' Association...
In June, [FMB, Farmer's & Merchant's Bank holding company] became the second banking company in the nation taken into involuntary bankruptcy proceedings over the debt issue. Another, Jonesboro-based Heritage Bank, faced the same thing, or perhaps a forced sale, before working out a deal to avoid that. “Our concern was we might end up with a hedge fund [owner]. Their first concern would not be about the community,” said Leonard Moreland, Heritage Bank’s CEO.
Funny thing: when the bank is the borrower in a distressed debt situation, they suddenly become concerned about how destroying a business affects the local community. But the trade association, as absolutely always (for any trade association, not just community banks), says this problem (1) isn't a problem, (2) the problem isn't serious, (3) the problem is serious but will be solved, and (4) although we didn't solve the problem, that's actually a good thing for the industry.
“This is not one of those panic things. It eventually will be worked out somehow,” said Joe Brannen, president of the Georgia Bankers Association. “If the bank is willing to sell itself, that is a decent out.”
In case you missed it, the biggest investment banks ran with the Trust Preferred Securities method of raising capital for small banks, and they kept going far past the point where the big blowup in 2008 became inevitable. As always, with proper underwriting and oversight, a proper distribution of risk between the investors (represented by the return on investment) and the company (represented by the income after servicing the debt) is a win-win. And as also always, too much capital demanding higher yield in a low rate environment ends in disaster.
Farmers and Merchants Bank’s holding company, FMB, raised $12 million through a hybrid debt deal engineered by JP Morgan, Morgan Keegan & Co. and others. The century-old bank had gone on an expansion spree that, in five years, boosted operations from one Lakeland office to six branches in five towns. The last was a Conyers branch added in 2008, just as real estate-related lending in metro Atlanta was drying up.
Lakeland is about as small a small town as you can get. How in the world does this little bank attract the attention of a JP Morgan and convince them to put $12 Million into a bank headquartered in a town with a population of 3,400 souls? Because JP Morgan knew it would collect the fees and had already offloaded the risk.
By then, however, JP Morgan and the other firms had packaged FMB’s and dozens of other banks’ IOUs into Trapeza CDO XII Ltd., a tax-sheltered investment vehicle. They then sold $541 million worth of securities backed by bank IOUs to investors in the U.S., Ireland and other countries.
Trapeza and FMB are locked in a bankruptcy battle. We think FMB likely has neither the law nor the politics on its side presently. But if a large number of the 200 banks that deferred TPS payments go into bankruptcy, the political side of the equation could turn, which of course turns the legal side in its own way. FMB's mistake was being among the first to take the deferment, but we suspect it was a last-ditch effort to stave off failure, and at the time nobody could imagine 465 bank failures were on the way.
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