About a decade ago the U.S. economy started to boom. Businesses were expanding and homes were built quickly in Northern and Eastern Illinois, and to some degree in La Salle County.
As a result, many entrepreneurs were borrowing millions to expand their businesses or build subdivisions.
But in 2009 the subprime mortgage crisis struck leaving the U.S. economy in shambles. And those once hopeful entrepreneurs could not get an adequate return on their investments leaving the banks that loaned them money with many troubled assets.
Citizens First National Bank was one of those banks. Now it’s holding firm, Princeton National Bankcorp, needs to raise $20 million in new capital in about 90 days to restore the bank’s reserves before it can be considered adequately capitalized based on its June 30 financial position.
If it fails, PNBC will be replaced by another holding firm.
“20 million dollars — it’s a big number,” said PNBC president and chief executive officer Tom Ogaard.
Last year, Citizens was one of the most undercapitalized banks in the U.S. and was forced by regulators to perform a number of actions to increase its capital as leverage against all of the bad debt it once held.
Citizens made improvements, but it still was downgraded recently to the classification of “critically undercapitalized,” which set the 90 day clock on PNBC which holds about 21 branches throughout the Illinois Valley.
Ogaard answered the following NewsTribune questions regarding the situation affecting all of Citizens’ banks throughout the Illinois Valley.
What caused the bank to become undercapitalized?
“Our capital issues came about from the major losses to our loan portfolio dating back to the late 2000s. These losses brought our capital to a point where intervention from our regulators occurred in 2010.
“The undercapitalization was neither foreclosures nor poor investments. It was the result of a large amount of land development loans primarily in our eastern and northern markets.
“Examples of those are residential land developments and commercial strip mall centers, which suffered once the economy took the downturn.
“As a result, property values for these loans have diminished. The bank still held the original loan at the former value of the property. The bank must write down the loan from its original value to current market value which results in a loss of capital as funds are needed to put into reserves to cover potential shortfalls.
“We’ve completed work-out agreements with borrowers on many of these large projects and have made greats inroads. The economy certainly has played a role in this, but many of these were problematic before 2009.”
Last year, PNBC had to submit a three-year financial plan to federal bank regulators. Why didn’t that plan work? What would you have done differently?
“The plan we submitted was actually a five-year plan and it is working. It has been successful in some ways and others are still in process. Because our capital is categorized as critically undercapitalized, there is a sense of urgency. It’s going to take us a longer period of time to work through the problem loans.
“On a positive note, they are half of what they were a year ago, so we have made progress, yet our challenges do remain. However, we are finally beginning to see the bottom of the erosion of market values.
“With regard to the organization, we are in a better position from a structure, process and procedural perspective than we were three years ago and we are proud of that progress.”
How has the bank improved its credit administration?
“In 2010, shortly after I became president, the bank created a credit administration department. Within this department we established new loan policies, a special assets group to focus on our loan workouts and also included the areas of credit risk analytics and loan servicing.
“This group has worked hard, although these workouts do not happen overnight. It takes time for us and the borrower to work through an understanding and the reality of their situation. Many factors come into play and in some cases involve legal action. Loan procedures have improved and as a result our delinquencies are down eight-fold from where they were a year ago.
Please give me a statement that reassures people the FDIC has your customer’s deposits insured up to $250,000.
Citizens is required by law to pay a premium to the FDIC to insure coverage up to $250,000 for customers’ deposits. The coverage is backed by the government and was established to protect customers should a bank fail. It’s important to note that since its creation in the 1930s, no depositor has ever lost any money on FDIC-insured deposits.
Our customers’ accounts are safe and secure. We have been working with our customers for many months to ensure they are covered. We continue to answer any questions they have in regard to their deposits. But we want to make the point clear that our customers’ deposits are secure. Customer deposits are guaranteed up to at least $250,000 and, actually depending on account ownership, could be substantially more.
Is the situation Citizens Bank is facing similar to the subprime mortgage mess but on a less complicated scale? Or perhaps a better way to ask is have ARM (adjustable rate mortgage) forclosures been a significant catalyst for the bank’s current hard times?
Subprime mortgages played no role whatsoever in the undercapitalization situation. In fact, our mortgage loan portfolio is very strong. Again, the majority of the loans that are at issue are large commercial developments — not home mortgages. Any foreclosures due to ARMs would have had minimal effect on the overall capital situation. This is primarily a commercial loan issue and they have had a cascading effect to our borrowers and ultimately the bank.
Given the “critically undercapitalized” status of the bank, what are your plans to turn things around in 90 days? Do you have investors lined up to help? If so, who? Also, has the bank considered closing any of its 21 branches to raise capital?
We are working diligently to correct the capital situation looking at every avenue available to us. A group of investors providing Citizens the capital to bring us to a level required by regulators is an option and investors have been contacted and those discussions continue.
We are also working on capital opportunities with positive progress in conjunction with our regulators. At this point, I cannot disclose specific details. However, if this were to occur, we may operate as Citizens or it could be we operate under a new bank name.
As to branch closings, this would not help our capital situation but may be perceived as a detriment by investors as they would want to keep those offices intact for future growth.
The 90-day notice was given to us as a timeframe in which to raise capital to an acceptable level. I am optimistic with what we have seen to this point, but cannot guarantee we will reach the needed amount. We continue to work it every day.
Please explain the process of receivership and how, if at all, it would affect your customers and employees?
The timeline for moving through a receivership situation, where one bank becomes another bank, usually happens over a single weekend. All banking activity would continue as normal. Regulators would transition control of Citizens to the new bank and customers would see little if any disruption. It would be banking as usual — except for a name change. In many regards, this would not be particularly different from a typical acquisition or a merger.
How is employee morale? Are people nervous? Also, about how many total employees does Citizens employ?
Our employees are professionals. They come to work every day to take care of our customers and they do it well and with the utmost professionalism. Do they sense uncertainty? Sure they do; we have been living with that for some time. The uncertainty is definitely challenging. We have worked hard to keep employees informed, as much as we are able to under the circumstances and because we are publicly traded.
But their first priority is our customers and that shows. It is because of our loyal customers and committed staff that I am confident there will be a positive outcome. I am proud to be part of an organization with such a high level of commitment even in the most challenging of times, and especially now as our time frame is so critical.
We have approximately 300 employees and more than half work in the Illinois Valley/Princeton/Henry area.
Our staff has gone above and beyond during these difficult times. The bank and our staff are committed to supporting the communities we serve as was seen just recently with Princeton’s Homestead Festival and currently with our partnership in the Make-A-Wish Foundation’s Million Penny Project.
Our staff focuses every day on their service to our customers. We continue to move forward every day to resolve our issues and keep a positive attitude in regard to the outcome of the bank’s situation.
Citizens is operating as we always have. We are opening accounts every day and we continue to make commercial, consumer and mortgage loans. Customers are being taken care by our staff just as Citizens has done for over 147 years. Our desires are to put our customers at ease, and for our staff to feel confident that we will soon have a resolution.
We know that with the trust and loyalty of our customers and staff we can look to the future when Citizens and our staff can put this behind us and focus on our deep core customer values and local commitment.
Kevin Caufield can be reached at (815) 220-6932 or firstname.lastname@example.org.