Guaranty closure questioned

Investors were prepared to back bank with $100 million

New investors were on the verge of pumping $100 million into Guaranty Bank, a prospect that should have stopped federal regulators from shutting the Glendale-based institution last week, an investment banker who was working with the investors said Monday.

Steven D. Hovde, chief executive of Chicago-based Hovde Group, said the U.S. Office of the Comptroller of the Currency “pulled the rug out” from Guaranty Bank when it suddenly closed it down Friday night.

Hovde, who is widely known in Wisconsin and elsewhere for helping banks raise capital, said the feds knew that a recapitalization of about $100 million was in the works and might have been completed by the end of June. The money would have restored the bank’s capital to levels acceptable to regulators.

In addition, Hovde said, Guaranty was improving financially and had cleaned up many of the problems stemming from loans that started going bad during the Great Recession.

“There is no reason that bank should have been grabbed this past Friday, no reason at all,” Hovde said, calling it “a horrendous case of government overreach plain and simple.”

William Grassano, spokesman for the Office of the Comptroller of the Currency, said Monday that the agency had no further comment beyond the statement it released Friday night explaining the closure.

The statement read in part: “The OCC acted after finding that the bank had experienced substantial dissipation of assets or earnings due to unsafe or unsound practices. The OCC also found that the bank was significantly undercapitalized and failed to submit a capital restoration plan acceptable to the OCC.”

Regulators closely scrutinize banks when their capital, which serves as a cushion against loans that go bad, drops to low levels, as Guaranty’s did while it battled loan losses stemming from the economic downturn and foreclosure crisis. Capital consists of the value of common stock, retained earnings and other factors.

After the comptroller’s office closed the bank, the Federal Deposit Insurance Corp. immediately took over and passed Guaranty’s deposits and some of its loans to First Citizens Bank & Trust Co. of Raleigh, N.C. — the bank that took over North Milwaukee State Bank when it failed last year.

The FDIC said only 12 stand-alone Guaranty branches would reopen as branches of First Citizens; Guaranty’s 107 branches inside grocery and retail stores are to remain closed permanently. Each in-store branch has an average of four employees.

The closure cost the FDIC’s deposit insurance fund $146.4 million — money that Hovde said might have been saved if regulators had let the recapitalization effort play out.

“I can’t come up with any reason they did this suddenly last Friday,” Hovde said. “If we got to the end of June and the investors who were interested came in and said, ‘You know what, no we’re not interested, this just can’t happen,’ then I could see the regulators saying, ‘OK, let’s re-evaluate this and maybe it’s time to step in.’ But there was nothing in the process we were going through that had had hiccups.”

Hovde also said the number of potential bad loans on Guaranty’s books had been dropping and the bank had been profitable in eight of the last 10 months.

David Baris, a banking attorney in Washington, D.C., who has represented Guaranty Bank, said he also was baffled by the closure. He said most banks that have failed were closed as their financial condition was getting worse, not better.

“It was hugely disappointing, and from our perspective it was not justified,” Baris said Monday. “The bank had so much going for it. It has made huge strides to raise the necessary capital.”

In the last 10 calendar years, Guaranty posted a profit just twice, records from the FDIC show. Its worst calendar year loss was $52.6 million in 2009. In calendar year 2016, Guaranty lost $4.2 million.

In March, the comptroller’s office disclosed it had reiterated its orders that Guaranty increase capital, make sure its books were accurate and in compliance and develop a plan for restoring the health of the bank.

“The big losers are our customers, our employees,” said Doug Levy, chief executive of 94year-old Guaranty.

The company had about 1,000 employees, 600 of them in Wisconsin. Guaranty also had branches in Illinois, Michigan, Georgia and Minnesota.

“Everybody that we talk to asks the same question: Why, when the funds were available, would they take the risk of a huge loss to the FDIC fund?” said Gerald Levy, chairman of Guaranty. “We can’t answer that.”

Representatives from the FDIC were at all 107 closed-down grocery and retail branches Monday — as they were over the weekend — to assist bank customers, said FDIC spokeswoman Barbara Hagenbaugh.

With assets of about $1 billion, Guaranty was one of the 20 largest banks headquartered in Wisconsin.