OCC Agreement Reveals MNB Struggles

Metropolitan National Bank has a Northwest Arkansas problem, and it isn’t just Tom Terminella’s lawsuit.

However, the Little Rock-based, $1.8 billion institution insists its May 22 agreement with the Office of the Comptroller of the Currency is not the harbinger of doom it was for ANB Bancshares of Bentonville. ANB signed an agreement with the OCC last summer and was eventually taken over by the Federal Deposit Insurance Corp. on May 9.

The OCC found “unsafe and unsound” practices in place at both ANB and MNB. But Metropolitan CEO Lunsford Bridges used the opposite words in an assertive statement following the news on June 16 to combat any parallels to ANB.

“We want to assure our customers, employees and friends that Metropolitan National Bank is financially safe and sound,” Bridges said in a written statement.

“Our capital remains strong and our customers’ deposits are secure.”

Ten months before the OCC agreement, Terminella, a Fayetteville developer, put MNB’s conduct on trial with a $25 million lawsuit alleging breach of contract and acting in bad faith after the bank initiated foreclosure action against him on May 30, 2007.

Terminella and his attorneys have made a strongly worded case both in public statements and legal filings against MNB. The showdown is set for trial Oct. 20 in Washington County Circuit Court.

“I knew I was being deceived, but I was not sure why,” Terminella said in a statement issued June 20. “Now that the OCC has found Metropolitan has been engaging in unsafe and unsound banking practices, I am beginning to understand why Metropolitan decided to breach our agreement.”

MNB, which has refused to comment on the litigation publicly while waging battles in the courtroom over depositions and discovery with Terminella, broke its norm after reading his statement.

“I felt that the latest inflammatory statements made by Mr. Terminella in the press today warranted a brief response from our organization,” Bridges said in a statement issued June 23.

“Mr. Terminella and his legal team have attempted time and time again to try this case in the media by making unprofessional, reckless and patently false statements in an effort to paint Metropolitan National Bank in the worst possible light.

“When this legal matter is resolved, Metropolitan will be completely vindicated. Mr. Terminella’s default on his loan with our bank has absolutely nothing to do with our Formal Agreement with The Office of the Comptroller of the Currency.”

Differences Noted

There is no doubt MNB is far more stable than ANB, whose CEO Dan Dykema also downplayed the significance of the OCC agreement.

On Aug. 14, Dykema called ANB’s agreement “innocuous,” much to the incredulity of anyone who looked at its past due loans and skewed ratio of brokered deposits.

Bridges pointed out MNB made $12.5 million in 2007 (compared to a $120 million loss for ANB) and is on course for a $10 million profit in 2008.

The OCC found “unsafe and unsound” practices related to “some aspects of credit risk management, capital adequacy and concentration risk management at the bank.”

Metropolitan’s loan-loss allowance is now $16.5 million, nearly double from the end of 2005, or 1.26 percent of its total loans.

“Many financial institutions are being challenged by the downturn of the commercial real estate industry,” Bridges said in his statement.

Nearly 100 percent of MNB’s problem loans are in the construction and commercial real estate industries and the OCC agreement requires attention in that area, namely a “commercial real estate concentration risk management program” and an “overall CRE lending strategy.”

Other requirements of the OCC include:

• Tier 1 capital equal to 8 percent of total assets by June 30. Bridges said the current ratio is 7.92 percent.
• Total risk-based capital equal to 12 percent of risk-weighted assets by September 30. Bridges said the current ratio is 11.48 percent.
• A three-year capital program including projections for growth, capital requirements, the timing and sourcing of capital and contingency plans.
• Problem loan identification, including training, accountability and timeliness of loan grading in addition to “processes, personnel and control systems for implementation and adherence.”
• Approval from the OCC to acquire more brokered deposits. MNB currently has $111 million in brokered deposits, or 8.33 percent of its total.

MNB’s past due and nonperforming loans total $43.7 million as of May 31, far short of the $388 million in nonaccruing loans ANB reported at the end of 2007.

As of May 31, Metropolitan recorded total assets of $1.8 billion and a five-month profit of nearly $5.7 million. The bank posted annual profits of $11.4 million in 2005, $11.7 million in 2006 and nearly $12.5 million in 2007.

The bank has invested almost $700 million in Washington and Benton counties since 2005 and hasn’t yet seen anything close to a commensurate return in deposits.

Waiting on Returns

Mortgage reports from January 2005 to May 2008 show MNB has written more than $646 million in loans in the two counties, or 52 percent of its $1.2 billion loan portfolio.

That raw number doesn’t factor in the amounts of loans written by MNB that were participated out to other banks – such as a $77 million loan for the John Q. Hammons Center in Rogers – or loans MNB participated in – such as a $16.7 million loan for the Legacy Building in Fayetteville written by Legacy National Bank.

The 12 branches MNB built in the two counties, at a cost of around $35 million, account for 21 percent of its 55 offices in Arkansas.

But the $70.6 million in deposits (at the nine branches for which data was available as of June 30, 2007) accounts for just more than 5 percent of the bank’s total deposits of more than $1.3 billion.

As of June 30, 2007, two Benton County branches had less in deposits than the average $3 million cost per branch. Ranked ahead of only a few one-branch operations, MNB is essentially last in deposit market share in Northwest Arkansas despite its massive investment.

MNB’s deposit performance in Northwest Arkansas neither compares favorably to its peers in the two-county area, nor to its own operations outside the Little Rock market.

In Saline County, MNB has three offices and $78.1 million in deposits. In Faulkner and Lonoke counties, MNB has 10 offices and $71.1 million in deposits.

The combined population of those three counties is 248,993 according to 2005 census estimates. The combined population of Benton and Washington counties is 367,295.

Terminella v. MNB

In his statement, Bridges said two thirds of MNB’s nonperforming assets, or about $29.1 million, are in Northwest Arkansas and that the bank expects nonperforming loans to increase “in the short term.”

Nearly half of the nonperforming total is tied up in two loans to Terminella.

Terminella alleges MNB wrongfully ceased funding a $9.6 million construction loan to complete a Springdale subdivision in December 2006 despite his contention the loan was in good standing and well secured at the time.

“Metropolitan made too many bad loans and overextended itself in Northwest Arkansas,” Terminella said. “The bottom line is Metropolitan needed cash to cover its bet in Northwest Arkansas and breached our agreement so it wouldn’t have to fund the remaining $2.6 million of my loan.”

Terminella even took Bridges to task for blaming the bank’s problems on a downturn in the two-county real estate market.

“Mr. Bridges has the cart before the horse,” Terminella said.

“The reason there is a downturn in the real estate market is precisely because Metropolitan, as well as other banks in the country, have made too many bad loans to folks who had no experience in real estate development.

“Now Metropolitan can’t spit without permission from the OCC. All I can say is that it’s about time Metropolitan got caught before it ruined any more lives here in Northwest Arkansas.”