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D
STATEMENT ON
UNITED AMERICAN BANK IN KNOXVILLE
KNOXVILLE, TENNESSEE
PRESENTED TO
SUBCOMMITTEE ON COMMERCE, CONSUMER, AND MONETARY AFFAIRS
COMMITTEE ON GOVERNMENT OPERATIONS
HOUSE OF REPRESENTATIVES
?
WILLIAM M. ISAAC, CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
10:00 a.m.
Tuesday, March 15, 1983
Room 2154, Rayburn House O ffic e B u ild in g
(L O fo o T
$ ¡< ,0
l'M'knâk'y
04
t
Mr. Chairman, we appreciate this opportunity to appear
before your subcommittee to discuss the failure of United
American Bank in Knoxville, Tennessee (UAB).
We are sub
mitting for the record a detailed regulatory history of UAB
and the circumstances surrounding its failure.
My opening
statement will highlight the salient issues.
UAB for years operated on the fringe of soundness.
It
eschewed caution in favor of leverage, reasonable conserva
tism in.favor of aggressiveness, and diversification in
favor of real estate concentration and loans to insiders or
quasi-insiders and their interests.
With these policies,
UAB needlessly exposed itself to adversity if and when the
environment of economic expansion and inflation abated.
UAB
was a bank bordering on being out of control, both in an
operational sense and in credit administration.
Borrowers
called the shots, partly because of the leverage a weak
debtor always has over a creditor, but perhaps to a greater
degree due to personal and business relationships with the
man or men who made the decisions at UAB.
Jake F. Butcher acquired control of the bank in late
1974.
The bank for a number of years had been a marginal
performer with low earnings, comparatively high asset
classifications and a dependence on high-cost deposits.
2
The May 1975 examination by the Comptroller of the
Currency found the bank continuing to manifest problems in
about the same proportion as in 1974, with loan classifica
tions equal to 83% of capital (equity and reserves).
This
level of classifications was considered somewhat higher than
normal in the aftermath of the 1974-75 recession.
The April
1976 exam by the Comptroller showed conditions improving,
with higher earnings and adverse classifications reduced to
50% of capital.
In late 1976 the bank converted to a state charter.
The FDIC and the State of Tennessee examined the bank in
early 1977 and found a continuation of the improving trend,
with asset classifications at 30% of capital.
The Comptroller had been critical of the b a n k ’s
policies relating to dividends, executive remuneration and
credit life insurance premiums.
FDIC examiners visited the
bank immediately upon its conversion to a state charter to
gather information concerning the bank, especially insider
activities.
On January 11, 1977, the FDIC’s Regional
Director wrote to the UAB board requesting that it conform
to the FDIC’s policy on credit life insurance premiums,
3
which required reimbursement to the bank of its expenses and
disclosure of the arrangements to, and approval by, the
bank’s directors and stockholders.
Following the first FDIC exam, the FDIC Regional
Director expressed his concerns in the areas of liquidity,
capital, credit life commissions, adverse asset classi
fications, "official family" debt and out-of-area lending.
Corrective actions were promised.
At this stage, the bank
was considered a marginal operation but clearly not of any
serious concern.
Conditions remained stable through 1978, but the 1979
exam showed a significant, although not alarming, increase
in loan classifications.
Salaries and insider loans were
criticized at a meeting with the b a n k ’s board, and a com
mitment for capital augmentation was obtained.
The bank showed good improvement in 1980.
This did not
last long, however, as the 1981 exam again revealed signifi
cant deterioration in asset quality and liquidity.
The FDIC had a long-held, general sense of discomfort
about U A B , which was heightened by the 1981 exam.
The bank
had always been considered a "near-problem" or "borderline"
4
bank -- not sufficiently bad enough to trigger a formal
enforcement action but sufficient to require closer than
normal scrutiny and frequent "jawboning."
In May 1982, the FDIC met with the bank's board to
outline the FDIC's mounting concerns about the bank.
The
board was informed that unless substantial improvements were
evident by year-end, a formal enforcement action would be
forthcoming.
The Butcher organization consisted of approximately 40
loosely-affiliated banks and S£Ls operating in two FDIC
regions and three different Federal Reserve Districts.
A
total of seven different regulatory agencies were respon
sible for supervising the various institutions.
The FDIC
decided that the 1982 exam should involve a coordinated
review of all of the major Butcher-affiliated banks.
The
Comptroller and the Federal Reserve were contacted to co
ordinate the examinations of their institutions.
The FDIC
committed 150 examiners and support personnel from three of
its regions to the simultaneous examination of 12 banks.
The results of that effort are now well known.
Massive
loan losses were identified in U A B , and the bank was closed
by the Tennessee Banking Commissioner.
5
A number of questions have been raised concerning the
UAB failure.
A.
I would like to address a few of them.
The Conversion to a State Charter.
Some people
have noted the bank's charter conversion in 1976, suggesting
that it may have been done to escape enforcement action by
the Comptroller's Office and that the FDIC may have been
derelict in pursuing the bank after the conversion.
Nothing
could be further from the truth.
First, the bank converted to a state charter primarily
for the purpose of withdrawing from the Federal Reserve
System, thereby avoiding very costly reserve requirements.
This same action was taken by over six hundred banks from
1970 until the passage of the Monetary Control Act of 1980.
No doubt a secondary consideration in the conversion was the
higher lending limits available under state law.
Second, UAB was monitored by the FDIC continuously from
the date of its conversion despite the fact that it was
clearly not identified as a problem bank and, indeed, its
condition was substantially improved as of the last exam by
the Comptroller.
The Comptroller had expressed concerns
about some of the bank's practices.
The FDIC expressed the
same concerns, and obtained corrections, following the
conversion.
It is important to recognize that none of those
6
items -- executive compensation, credit life commissions and
dividend policies -- played the slightest role in the b a n k ’s
failure.
Third, the FDIC was not then and is not now regarded as
an agency to which banks turn to escape supervision.
Our
very reason for being is to maintain stability and con
fidence in the banking system by preventing or correcting
problems whenever possible.
If the problems are too severe
to be corrected, we want the institution closed as quickly
as possible to mitigate the damage.
B.
The FDIC’s Motives.
Another charge we have heard
from some quarters is that the FDIC’s investigation of the
UAB situation was politically motivated -- that we were "out
to get" the controlling shareholder because he was a highprofile politician.
Any unbiased observer who might believe
that simply does not understand how the FDIC functions.
The
loan classifications, partly because they were so shocking,
were reviewed again and again at higher and higher levels
all the way up to the Director of our Division of Bank
Supervision.
The enforcement actions were unanimously
recommended by our senior staff and were unanimously ap
proved by our bipartisan board of directors.
7
In the end, however, the facts will have to speak for
themselves.
The losses in UAB are massive and that will be
borne out over time.
case.
We sincerely wish that were not the
Our staff is spread from one end of the continent to
the other working incredible hours handling a record number
of problem banks and failures;
superfluous work.
the last thing we need is
And no one is more acutely aware than we
of the hardships and personal tragedies that normally accompany
a bank failure.
C.
The Rapid Deterioration.
Other observers look at
the massive classifications in the 1982 exam compared to the
1981 exam and wonder whether the FDIC should have been able
to get on top of the situation more quickly.
That is a fair
question to which we do not have the complete answer at this
time.
Nearly half of the loans classified at the 1982 exam
were new loans since the 1981 exam.
Moreover, a large
portion of the remaining deterioration between 1981 and 1982
can be explained by the continuing decline in the economy
and high interest rates.
Finally, the simultaneous exams in
1982 were enormously useful in identifying troubled borrowers
by focusing on their borrowing activities at various
affiliated banks.
Nevertheless, we believe some loans were
underclassified in 1981 -- that weaknesses could have been
found in some loans had management’s explanations been
disregarded in favor of some deeper analytical work.
We will, of course, learn everything we can from our
experiences at U A B , but we are satisfied that our overall
performance was about as good as could have been expected
under the circumstances.
To uncover the UAB problems we had
to weave our way through one of the most complex and tangled
webs we have ever encountered.
The effort tied up nearly
101 of our nationwide field force for the better part of
three months.
Once we uncovered the problems, we acted appropriately
to protect the public interest.
We gave the bank every
opportunity we could to contest our findings or come up with
a solution.
When the bank issued what we believed to be a
misleading public statement regarding its 1982 results, we
moved decisively to obtain corrected disclosure.
D.
The Bidding Process.
The final area of contro
versy I want to address involves the fairness of the bidding
process.
Some people believe that we showed favoritism
toward First Tennessee in permitting it to submit a noncon
forming bid.
The detailed statement we have submitted to
9
the subcommittee, including the transcript of our board
meeting, clearly demonstrates the contrary.
The First
Tennessee proposal was negotiated Sunday night when we were
making an intense, though futile, effort to arrange a merger
with one of three in-state firms to avoid the necessity of
closing the bank.
After the Commissioner closed the bank,
we instructed First Tennessee to submit its bid on the same
basis as all the other bidders.
When it failed to do so, we
selected the C$S bid even though most of our staff and I
believed the First Tennessee bid to be superior from the
FDIC’s standpoint.
It was not until C§S was unable to
settle its differences with the Comptroller that we turned
to First Tennessee.
Others contend that the process was too hurried and
some bidders may have been precluded from bidding as a
result.
The observation is accurate; the process was in
fact more compressed than we desired it to be, and I do not
doubt that some potential bidders may have been excluded due
to time pressures.
actions.
However, I cannot apologize for our
We were faced with a crisis.
I and a large number
of FDIC personnel spent two consecutive days and sleepless
nights to resolve the situation in the most orderly way
possible to minimize the disruption to U A B 's customers and
maintain public confidence in the banking system.
Those
10
objectives simply had to have priority over the objective of
giving potential bidders all the time they might need to
submit their proposals.
Mr. Chairman, I am gratified that you have given us
this opportunity to answer some of the many que s tions that
have been raised regarding the failure of U A B .
I would be
remiss, however, if I did not at least mention some of the
larger issues with which we believe the Congres s should be
concerned.
UAB was a comparatively large failure and involved a
high-profile political figure.
In view of these factors,
the special attention it is receiving in the media is
perhaps understandable.
But behind all of that, it is just
another bank failure, not too dissimilar in terms of its
underlying causes from nearly 50 others since the beginning
of last year.
It is important that we not get lost in the trees -that we step back and take a good, hard look at the forest.
We should do more than question whether the regulators
committed any errors in judgment with respect to the failure
of UAB.
I would be the first to acknowledge our fallibility.
11
In our judgment, a far more important question is
whether our system of bank regulation and insurance is
adequate to cope with an increasingly deregulated, complex
and competitive banking environment.
We believe it is not.
There is too much fragmentation in the regulation of
banks and thrifts.
Seven different agencies shared re
sponsibility for UAB and its affiliates.
That is at least
several too many.
But no regulator or regulatory system will be able to
stay on top of the problems we see emerging unless we get
some help from the marketplace.
A fast-paced, deregulated
banking system, which we believe is in the public interest
and fully support, will require substantially more discipline
from the marketplace than is evident today.
This spring we will submit to the Congress a number of
proposals for reforming the insurance system.
They may
include merging the deposit insurance funds, instituting
risk-related insurance premiums, providing better disclosure
concerning the activities and condition of depository
institutions, and moving away from the notion that all
creditors at the larger banks and thrifts will always be
made whole when an institution fails.
12
I urge you and other thoughtful members of Congress to
give these proposals prompt and serious attention.
They are
sorely needed if we are to achieve our number one priority
at the FDIC:
the maintenance of a strong and stable fi
nancial system under private ownership.
Mr. Chairman, thank you again for providing this forum.
I will be pleased to respond to any questions you or other
members of your subcommittee may have.
*
-k
*
INFORMATION SUPPLEMENTAL TO
THE TESTIMONY OF
WILLIAM M. ISAAC
CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
MARCH 15, 1983
CONTENTS
HEADING
XJ
II.
III.
IV.
V.
VI.
VII.
Trends During TheButcher Era
Pages
1 - 8
The Last Examination
9-16
The Final Weekend
16 - 21
How It Happened
21 - 25
Payoff vs. Merger
25 - 26
Competitive Analysis
The Private Placement
26
27 - 28
Appendix (Transcript of FDIC Board Meeting)
RECENT REGULATORY HISTORY OF UNITED AMERICAN BANK
IN KNOXVILLE, KNOXVILLE, TENNESSEE
The following is a discussion of significant events occurring between the
time of the last change of control ownership of United American Bank in
Knoxville (UAB) and the date of the bank’s closing.
I.
Jake
Trends During the Butcher Era
F.
Butcher
acquired
approximately
known as Hamilton National
Hamilton Bancshares,
19,
1974,
Inc.,
to February 20,
51% of
Bank of Knoxville
Chattanooga),
1975.
during
At year-end
the
(no
shares
legal
of
UAB,
then
relationship
to
the period from December
1975,
the bank's
name was
changed to United American Bank, N.A., and on November 1, 1976,
the bank
converted to a state-chartered institution.
The bank that Mr.
Butcher acquired from Frederick Ingram, James Stradler,
and others, was not in satisfactory condition.
years had
been experiencing
problems in asset
The bank for a number of
quality,
manifested
by an
above-average level of adverse loan classifications and loan losses,
and
in earnings which were depressed somewhat by interest costs on deposits,
where growth had been almost exclusively confined to interest-bearing time
deposits.
2
The
following
are
earnings-related
figures
for
calendar
1974-1981
(000
omitted) :
Loan loss provision
Net income
Dividends
Sale of debt
Sale of capital
Net change
Return on Assets
Loan loss provision
Net income
Dividends
Sale of debt
Sale of capital
Net change
Return on Assets
1974
1975
1976
1977
3,414
101
450
6,000
1,919
2,507
875
1,075
2,414
1,125
1,655
2,802
1,220
6,137
.03%
1,677
.58%
1,480
.21%
1,582
.33%
1978
1979
1980
1981
2,856
1,104
990
1,800
1,810
990
2,330
3,047
1,026
2,372
3,522
1,080
114
.20%
1,500
2,333
.33%
2,025
4,046
.51%
2,442
.50%
The 1981 return on assets of
group average.
the bank was
liabilities
losses.
.50% was about one-half
the
relevant
peer
Clearly , during the period covered by the above schedule,
a poor earner.
($100,000
and
Its
over)
reliance
was
a
on costly
material
large denomination
factor ,
as
were
loan
Less a factor, but nonetheless relevant, were executive salaries,
other remuneration,
and credit life premiums.
Following
are
1977 through 1982 (000 omitted) for J. F. and C. H. Butcher:
figures for
- 3 -
J. F. Butcher
Salary, bonus
and fees
Expenses
Credit Life
1977
1978
198
28
241
—
—
—
C. H. Butcher, Jr.
Salary, bonus
and fees
Expenses
Credit life
The May 12,
1979
1980
1981
1982
86
27
26
197
12
73
178
6
176
8
175
15
54
4
36
66
10
—
25
9
—
—
—
—
—
1975, OCC examination found
1
—
the bank continuing to manifest
problems in about the same proportion as that of the earlier November 18,
1974, examination.
Adverse loan classifications as a percentage of equity
and
basically
reserves
were
classifications
would
usually
unchanged
be
at
83%.
considered
This
high,
level
but
not
of
adverse
particularly
critical.
The
April
26,
1976,
OCC
examination
showed
the
condition
of
the
bank
improved, with a reduction in adverse classifications to 50% of equity and
reserves,
The
an improvement in credit files,
letter
transmitting
the
report
of
and slightly improved earnings.
examination
to
the
bank’s board
criticized both executive remuneration and dividends and the bank’s credit
life practices.
Our files do not contain any enlightenment concerning the
outcome of the criticism.
On November 1, 1976, in conjunction with a simultaneous examination and/or
visitation program of
supervision
of
six
13
Butcher-related
separate
federal
banks
regulatory
in
two
states
offices,
FDIC
visited UAB to gather general information concerning the bank,
under
the
examiners
especially
4
as
related
to
insider
activities.
Regional Director wrote
to
the UAB
On
January
board
11,
and advised
policy concerning credit life commissions.
1977,
it
of
the
Memphis
the
FDIC s
He requested that the distri
bution of credit life commissions be considered and acted on by the board,
that the bank be reimbursed for its costs related to credit life, and that
the arrangements be disclosed to the stockholders.
the board approved
the distribution and Mr.
the bank for expenses.
ments on April 19,
On January 25, 1977,
Butcher agreed to reimburse
The stockholders approved the credit life arrange
1977.
This
practice
was
followed
thereafter
to
the
best of our knowledge.
The April 18,
1977, FDIC and State of Tennessee examination reflected a
continuation of
decreasing
the improving
further
to
30%
of
trend,
equity
with adverse
and
asset classifications
reserves.
Criticism
included
comments related to delinquent loans, a more or less chronic problem then
and thereafter owing to inconsistent and generally inferior loan servic
ing.
Also mentioned were "official family" borrowings which were equal to
72.6% of capital and reserves.
Adjusted equity and reserves stood at 5.5%
of adjusted assets, somewhat below peer levels.
On November 18, 1977, the Memphis Regional Director invited J. F. and
C. H. Butcher to the Regional Office to discuss the condition of UAB and
other controlled banks.
and
capital.
Credit
debt,
Two primary areas
life
and
commissions,
adverse
lending
classifications,
family
cussed.
The Butchers gave assurances that appropriate attention would be
out-of-area
asset
liquidity
official
addressed to these issues.
excessive
of discussion were
were
also
dis
5
The May 8, 1978, FDIC and State of Tennessee examination showed a slight
increase
in
adverse
Adjusted
equity
and
classifications
reserves
was
to
mostly
39%
of
equity
unchanged
at
and
5.2%
reserves.
of
adjusted
assets.
Criticism included comments concerning the high level of loan delinquen
cies; the "reasonably adequate" but declining equity and reserves relation
to
total
assets
which
were,
increasing level of directors,
at
that
officers,
time,
expanding
moderately;
and related-interest
debt,
an
then
equal to 142.9% of equity and reserves; and the bank’s decision to extend
its securities maturity distribution with new purchases since the previous
examination.
The examiner met with the board of directors and reviewed the findings of
the examination.
The examiner noted at the time that the bank had changed
to fairly aggressive lending practices, but had seemingly done so without
having employed the staff necessary to service a loan portfolio reflecting
such progressive policies.
On November 15-17,
1978, a visitation of UAB was
conducted,
and circum
stances appeared not to have changed since the May examination.
C. H. Butcher,
Jr., was again invited to the Regional Office
UAB and other Butcher banks.
At that time, Mr.
to discuss
Butcher suggested he and
his brother were entertaining the idea of shrinking their empire by sell
ing off a few banks.
6
UAB was next examined by the FDIC and
close of business January 15, 1979.
the State of Tennessee as of
the
Adverse loan classifications were up
fairly substantially to 90% of equity and reserves.
The adversely classi
fied total included debt of some individuals who,
although not official
family by strict definition,
of J. F. Butcher.
were family or known friends and associates
The examiner, citing a number of loans which were "sub
standard when made",
urged a tightening
clear indication that borrowers,
the disadvantage of the bank.
of lending policies.
in many cases,
There was
were dictating
terms
Earnings were described as weak, reflecting
all previously noted problems as well as
the additional negative
spread
securities.
created
by
long-term,
to
depreciated
Only
added to capital after a dividend payout of $990,000.
income
$113,600 was
A capital augmen
tation plan was agreed to, and $1.5 million in additional equity was sold
later in 1979.
Directors'
this
and
category
reserves,
officers'
of
debt.
including
about
borrowings
were
The
had
total
one-third
of
criticized
risen
that
to
amount
third parties against the equities of insiders'
due
to
149.7%
the
of
equity
which was
companies.
size
loaned
of
and
to
The salaries
of J. F. Butcher and other officers were criticized by the examiner who
found them, in his opinion, "excessive."
All the foregoing
findings and related
recommendations
were
outlined
the bank's board at a meeting following the close of the examination.
to
On
April 18, 1979, J. F. Butcher came to the Regional Office to discuss the
7
examination report.
There was some discussion of his salary,
more important matters were also discussed.
but other,
A commitment for the sale of
capital flowed from this meeting, and Mr. Butcher received a fuller under
standing concerning
the extent of
the FDIC’s dissatisfaction with UAB’s
lending practices, including insider lending.
The June 9, 1980, examination found adverse classifications in a "favor
able trend," dropping to 47% of equity and reserves.
down to 7%, which remained fairly excessive,
10%
figure
at
the
1979
examination.
Loan
Delinquencies were
but an improvement over the
account
servicing
was
again
criticized.
The examiner correctly observed that the bank was especially vulnerable to
adverse economic conditions because of the speculative nature of some of
the ventures on which
meeting,
at
which
the bank was lending.
time
he
forth his recommendations.
outlined
the
The examiner held a board
examination’s findings
The equity and
reserves
slightly to 4.9%, owing to the 1979 capital sale.
ratio
had
Director,
and
set
increased
officer and
related-interest debt was 139.0% of equity and reserves, but again was not
criticized as to quality.
On August 18, 1981, the State of Tennessee examined UAB.
The examination
report reflected adverse asset classifications equal to approximately 64%
of
equity
and
reserves.
There
were
no
other
areas
of
substantive
criticism except for comments relating to four state law violations.
8
The FDIC conducted its next examination on November 13,
all the improvements shown in 1980 had been reversed.
1981.
Virtually
Adversely classi
fied assets were up markedly to 84.3% of equity and reserves.
Adjusted
equity and reserves slipped slightly to 4.7%, despite a 1980 capital sale
of $2,025,000;
liquidity had fallen to the very low level of 13.6%;
and
the large liability dependence ratio (the extent to which large liabili
ties are necessary to fund the loan account) was situated at a very high
43%.
Official family debt,
however,
had
fallen
to 88.8%
of equity and
reserves.
The examiner met with the bank’s executive committee at the close of the
examination.
The committee agreed that
the bank would have a 6% equity
ratio by year-end 1982 and a liquidity plan would be formulated.
After
having
reviewed
the
report,
the
examiner into the Regional Office for
Regional
further
Director
discussions.
discussions flowed a decision to meet with the bank's board.
occurred
on
May
mounting
concerns
18,
1982.
about
the
The
Regional
bank,
improvements were evident by year-end,
program of rehabilitation.
Director
stating
outlined
that,
the FDIC would
unless
invited
From
the
those
The meeting
the
FDIC’s
significant
seek to enforce a
9
II.
The Last Examination
The FDIC was now alternating examinations with the State of Tennessee, and
the State Banking Department was scheduled to examine UAB next.
When no
examination had been conducted by September, the State was asked to either
join us or "stand aside" for a November 1 examination since the Regional
Director felt he could wait no longer.
The State could not join the FDIC,
but did agree to defer its own examination date to accommodate the FDIC’s
schedule.
The OCC and FRB were contacted with
program.
The
OCC arranged
to
regard
"visit"
to a coordinated
the bank in Lexington,
since it had recently examined the bank.
The FRB arranged
loan visitation of its bank in Nashville
simultaneously with
examination schedule.
had
in
the past
examination
Kentucky,
to conduct a
the FDIC’s
Since it was now fairly clear that Butcher banks
shifted
assets around
during
examinations,
the Memphis
Regional Director decided it would be well to examine at least the largest
Butcher banks at once.
allowing
examiners
to
That approach would also
look
debtors in different banks,
simultaneously
at
perhaps to develop
have
the advantage
borrowings
of
the
of
same
a better appreciation of
their real debt service requirements and the source of their loan repay
ment proceeds.
This, in the end, proved most helpful.
10
Six
Tennessee
November
1,
examinations
1982.
Regions who,
and
six
Examiners
from
along with support
-
Kentucky
the
examinations
Atlanta,
commenced
Columbus
and
staff in the various offices,
by
Memphis
numbering
approximately 150, were utilized in the effort.
There was a great deal of coordination before and during these examina
tions.
There were
banks:
one before the examination,
December
following
three meetings
loan
involving
discussions
purpose of these meetings was
examiners
from
one in mid-November,
with
the
various
and one in mid-
bank management.
The
general
to develop common strategy for combatting
loan shifting to avoid detection of problem credits, to share information,
and, finally, to arrive at uniform classifications of common credits.
The
examiners
at
UAB
were
able
to
detect
a
clear
indication
of
the
seriousness of the situation due to the high level of delinquent credits
discovered
accrued
in
initial
interest
tress, or both.
of approximately
was
loan
review.
uncovered,
Also,
signifying
widespread
lax
capitalizing
servicing,
borrower
of
dis
The loan review at UAB lasted for a very extended period
six weeks,
due partially to poor credit and collateral
files, but also due to a serious lack of management knowledge of credits.
Despite many promises by senior officers to obtain supporting information,
progress
in improving
slow and sparse.
gain
of
the
criticized
credits
was
very
Many loans were discussed several times in an effort to
management's
attention
discussions would flow.
the condition
to
them,
with
the hope
that
This basically did not result and,
some
fruitful
in fact, any
11
defense to adverse classifications of
During the loan discussions,
-
loans was practically nonexistent.
senior officers generally responded by stat
ing they would obtain necessary documentation and get back to the examiner
later.
On January
7, 1983,
Regional Directors Meadows
Sexton met with J. F. and C. H. Butcher,
and Waldrop and Director
Jr., who subsequently committed
in writing to a program with respect to all banks owned or controlled by
them.
The
program included halting
certain
restricting lending to any one borrower
loan purchase
transactions,
to 2% of equity capital without
prior board approval, restricting further extensions of credit to classi
fied
borrowers,
and
weekly
reporting
of
certain
loan
activity
to
the
appropriate Regional Office.
On January 11, 1983, a joint meeting was held at the FDIC with represen
tatives of the FDIC, OCC, FRB, and FHLBB to advise all involved agencies
of the preliminary findings of the coordinated examination efforts and the
perceived solvency problems at UAB.
Although there was no indication that
the January 7 informal agreement had been violated,
it was believed that
the condition of UAB was so imperiled that the agreement should be broad
ened and formalized
in Section 8(c)
orders to cease and desist).
actions
("temporary"
or
"emergency"
The 8(c) Orders, adopted by the FDIC Board
of of Directors on January 19, 1983, prohibited selling loans to other
institutions
without
full
written
disclosure;
required
approval
by
the
bank's board of any new loans made in excess of $250,000, with a weekly
list of such transactions to be provided the FDIC; prohibited the making
12
-
of
-
further out—of—area loans; prohibited. loans to insiders absent legally
binding
cash)
commitments; prohibited
and guarantees;
and
issuing
prohibited
letters
executing
of
credit
repurchase
(except
for
agreements
on
any loans sold.
On January 12, in an all-day meeting with FDIC examination staff,
J.
F.
Butcher
was
made
aware
of
each
major
loan
classification,
even
though, through other meetings and contacts, he was generally aware of the
seriousness of the problem well in advance of that time.
One such occa
sion was a December 17 meeting with the Memphis Regional Director when Mr.
Butcher was advised that the preliminary loan classifications were massive
and
that new capital
in the
"tens
of millions"
range
was
going
to
be
needed.
Early in January, Mr. Butcher asked how long the examination would remain
open;
i.e. , how long did he have to improve
the classified loans before
the FDIC considered the examination final enough to act
on.
Due
to the
need to bring the matter to the UAB board's attention and get some correc
tive programs underway,
the Regional Director
set up a board meeting
on
January 25, which meant the report would have to be closed by that time.
During the week of January 17th, Mr.
Butcher apparently decided that his
efforts on credits were a tactical error and that he could better
his time raising new capital.
For the first time, it seemed, Mr. Butcher
appeared seriously concerned that UAB might be declared insolvent.
spend
13 -
It is worth noting that, between December 24 and January
loans which had
were
sold to
been criticized
another financial
extensively
during
institution.
As
determine that a repurchase agreement existed,
were not removed
from U AB’s adverse
unsuccessfully to get
having to repurchase the loans.
several occasions
by
our
the
three large
loan
discussion
examiners were able
to
the $13 million in loans
classifications.
the repurchase agreement
1,
Mr.
Butcher
cancelled.
UAB
tried
ended
up
This type of activity was encountered on
examiners
as management
attempted
to mitigate
adverse classifications by nonsubstantive and/or evasive means.
On January 25, 1983, the Memphis Regional Director and the examiner-in
charge of the UAB examination met with the bank’s board of directors.
that time,
full disclosure of
the bank's
condition was made.
At
The board
was advised that, based upon the level and severity of the adverse asset
classifications,
During
the bank’s capital needs would approximate
the board meeting,
adversely classified loans,
tain
questions
on
the
the directorate
despite
large
asked
$90 million.
no questions
concerning
the examiner's willingness
losses.
The
board
was
advised
to enter
that
the
Regional Director would recommend that action be instituted to remove the
bank’s deposit insurance due to its poor condition.
On January 28, 1983, despite information received at the board meeting on
January 25, UAB released financial information stating
only $2.3 million.
Reports
In addition,
of Condition and
Income
1982
losses were
the bank submitted to the FDIC year-end
reflecting
similar
figures.
Since
the
- 14 -
bank had placed what
the FDIC considered to be misleading and inaccurate
information in the public domain, a meeting was held on February 1, 1983,
in the Washington Office with representatives of the bank, at which time
immediate correction of the inaccurate disclosures was demanded.
As
the
bank’s response and proposed solution did not appear to adequately address
the problem in a timely fashion,
order under Section 8(c)
the FDIC Board on February 4 adopted an
prohibiting
the bank from issuing any false or
misleading information to the public or filing any false Reports of Condi
tion and Income;
issued
on
requiring correction of the misleading public
January
28;
and
requiring
the
filing
of
amended
statement
Reports
of
Income and Condition as of December 31, 1982.
On February 4,
Washington
1983,
J.
concerning
F.
his
Butcher,
plan
to
et al. , met with FDIC officials in
furnish
involved a $30 million injection of capital.
capital
for
UAB.
The
plan
Of this amount, $15 million
in preferred stock seemed obtainable since the proposed purchaser appeared
strong enough financially to handle the purchase.
preferred
stock involved
been able to perform.
sources of funding.
Another $5 million of
three individuals who might
On
these individuals,
we asked
or might
not have
to be advised
of
On the remaining $10 million, J. F. Butcher proposed
a merger of another of his banks into UAB, projecting the equity increase
at $10 million.
it
be
We were a little skeptical of the value, and asked that
documented
received.
more
fully
although
such
documentation
was
never
We advised Mr. Butcher that while we would be pleased to have
any new capital in UAB, the amount proposed was inadequate to convince us
that action under Section 8(a) (withdrawal of deposit insurance) would be
- 1-5 -
any
less appropriate.
Our calculations
showed
Butcher’s represented values with respect
bank would
remaining
to
that
the
even
capital
accepting
Mr.
injection,
the
still have a substantially negative adjusted capital,
terrific
overhang
of
adversely
classified
credits
for
with a
which
reserves would have to be supplied.
Mr.
Butcher
and
the
others
were
informed
situation was extremely critical.
by
the
FDIC
that
the
bank’s
Federal Reserve borrowings were mount
ing and a serious crisis of confidence on the part of depositors and other
funding sources was developing.
The FDIC urged the bank’s management and
directorate to come up with something immediately in the way of a solution
to the bank's problems.
was
living
day-to-day.
It was pointed out that the bank at that point
If something
dramatic were not done promptly,
a
depositor run could begin at any time.
On February 6, FDIC representatives from Washington and Memphis met with
Atlanta
Federal
Reserve
officials
Tennessee, W. C. Adams.
gency plans.
and
the
Commissioner
The purpose of the meeting was
of
Banking
in
to make contin
The State of Tennessee had entered the bank late in January
to make a determination as to whether the bank was viable and was
still
involved in that effort.
The president of the Atlanta FRB was concerned
that
collateral
the
$75
million
in
taken
(with
the
FDIC's advice
and
assistance) would not be sufficient to allow Commissioner Adams to finish
his examination at UAB.
The meeting ended on a strategy that Commissioner
Adams would finish up his work by Wednesday of the following week.
findings revealed insolvency,
he would convene
If his
the bank's board and ask
- 16 -
for the appropriate amount of capital and,
depending upon his assessment
of the board’s ability and inclination to meet
close
the
capital.
bank
or
would
give
the
bank's
the demand,
board
a
week
would either
to
raise
the
This being the program, the FRB president said he could envision
lending up to the area of $200 million to give the board, or alternatively
the FDIC, time to do what had to be done.
Of course, the FRB would take a
blanket asset lien to protect itself while doing this.
III.
The Final Weekend
The Commissioner did not finish his examination on Wednesday;
subsequently advised us that
the board meeting
Monday, the 14th.
the FDIC’s newest 8(c), relating to correc
Meanwhile,
tion of published information,
could
not
in fact, he
be held until
had become an important local news item.
Before the week of February 7 was over, borrowings at the FRB were in the
$85 million range because of a steady "run" of large creditors, signs had
gone up at some places of business announcing
that UAB checks
were
not
welcome, and a retail depositor "run" was experienced at the bank's' Foun
tain City branch.
11,
the FRB president called, expressing doubts that the situation could
be held together.
that
At a little after the bank's closing time on February
the
bidders'
The FDIC agreed that might well be the case and decided
meeting
had
to
be moved
very
substantially
forward.
Commissioner Adams was not prepared at this time to give the FDIC a letter
indicating that the bank was
tinuing through Saturday.
insolvent because his loan review was con
He ultimately was able to set up a board meet
ing at 4:00 p.m., Sunday the 13th.
At that meeting,
Commissioner Adams
- 17 -
demanded $30 to $40 million in additional capital by the following Friday
(the 18th).
Whereas
gave
the FDIC had planned
the
FDIC
a
letter
to call bidders
asking
the
FDIC
to
(assuming
prepare
the Commissioner
for
a
closing)
on
Tuesday the 15th, hold the meeting on Wednesday the 16th, and accept bids
on Friday the 18th, we had to forego that preferred "leisurely" pace and
call bidders the next morning, Saturday the 12th.
The meeting was set for
6:00 p.m., Sunday, in Atlanta.
The FDIC had 50 banking organizations on its bidders’ list.
Despite week
end communications problems, we were able to contact 46 of these, and 23
came to the bidders’ meeting.
This was FDIC's
first experience under
the interstate provisions
Garn-St
Act.
that
Germain
It
was
decided
qualified
in-state
of the
banking
organizations with assets of $1 billion and over would be invited, along
with all contiguous-state holding companies with assets
and over,
and in all other states,
billion and over.
of
$1.5
holding companies with assets
billion
of
$5
An equity ratio of 5% was required for all, as was a
composite CAMEL rating of 1 or 2.
The purpose of the size criteria was
simply to get a decent-sized universe of bidders capable of handling the
transaction.
The reasons for the quality criteria are obvious.
Meanwhile on Sunday evening, UAB was moving closer to opening hour on Mon
day the 14th.
A number of responsible observers were predicting a massive
run and that the Commissioner, the FDIC, and the FRB, could easily be left
18
with the wreckage of a bank forced to be closed during the day.
Televi
sion cameras and newspaper
offices
speculating about
reporters were
the bank's condition and
camped around
the UAB
the possibility
of
a run on
Mo nday.
The Commissioner considered a joint FDIC/Commissioner press release stat
ing that the bank’s board was planning to raise $30 to $40 million in new
capital
by
the
following
Friday,
which would
restore
vency.
The FDIC declined to join in the proposed
the
press release
ground that even $40 million would not be nearly adequate
massive losses and leave the bank in viable condition.
was informed that even if the funds were injected,
necessary to commence a Section 8(a)
bank
to
sol
on
the
to cover
the
The Commissioner
the FDIC would find it
action to terminate deposit insur
ance.
In a last-ditch effort to avoid closing the bank on Monday,
the FDIC con
ducted individual merger negotiations throughout the night on Sunday with
three in-state banks,
First Tennessee, Union Planters and Third National.
Each was requested to make a proposal for an open-bank merger along
the
lines of the transaction ultimately entered into with First Tennessee.
Union Planters and Third National made offers between midnight and
1:00 a.m. which were rejected on the basis of price (cost to the FDIC).
First Tennessee worked throughout
offer,
the night and around 5:00 a.m. made an
which was generally acceptable.
Unfortunately,
time had run out.
It was simply not possible in the few hours remaining prior to the bank’s
opening hour to put together the merger.
19 -
At this point, the Commissioner and the Federal Reserve were faced with an
enormously difficult decision.
vent,
be
permitted
to
open
massive, televised run?
Should the bank, which was clearly insol
on
Monday
and
the
probability
of
a
What effect would that have on public confidence
in other banks in Tennessee and elsewhere?
close
face
Would it be less disruptive to
the bank on Monday and issue a press release announcing
FDIC would have the bank reopened at normal hours on Tuesday
that
the
under new
ownership and that no depositor would lose any money?
It was decided by the Commissioner and the Federal Reserve, a judgment in
which the FDIC concurred,
to open on Monday were
that the risks involved in permitting the bank
simply
too
great.
The
bank was
insolvent
large margin and no acceptable recapitalization plan was available.
by a
A run
seemed certain and the potential ramifications for other banks could not
be risked.
The Federal Reserve called its loan,
the Commissioner closed
the bank and the FDIC issued a press release promising to have the bank
reopened at normal hours on Tuesday.
The banks attending the bidders’ meeting on Sunday had been informed that
we did not know if or when the bank might close, but they should be pre
pared to bid on short notice.
First thing Monday morning they were called
and instructed to have their bids in by 5:00 p.m.
were received.
that day.
Eight bids
Because the best bid was from an out-of-state bank and two
other bids were within 15% (in terms
of net cost of the failure to the
FDIC), a second round of bids involving the top three bidders (C&S, First
Tennessee and First Union) was required by law.
20
First Tennessee was
informed prior
to receipt
of its first
bid
that we
would prefer that it bid on the same basis as the other banks rather than
submitting a bid structured along the lines negotiated the previous even
ing.
Despite this, First Tennessee submitted a nonconforming bid.
The three bidders were each given one hour to submit
proposals.
their second round
First Tennessee was clearly instructed that it must submit a
conforming bid on the second round in order to facilitate cost comparisons.
C&S, the highest bidder on the first round, raised its bid by $5 million.
First Tennessee raised its bid by $10 million,
but declined to submit a
conforming bid.
After a lengthy discussion,
because
it
had
conformed
the FDIC Board decided to accept the C&S bid
to
the
bidding
instructions
and
was
arguably
higher than the First Tennessee bid (a transcript of the Board meeting is
attached).
First Tennessee was informed it had lost.
The FDIC then dis
covered that C&S and the OCC were involved in a disagreement relating to
capital
and
the
booking
of
goodwill.
First
Tennessee
was
called
back
immediately and asked to stand by in case the problem with C&S could not
be resolved.
Apparently, the OCC had given C&S instructions about the capitalization of
the new bank in the event its bid were successful and C&S had failed to
conform to those instructions.
The FDIC urged the parties to resolve the
matter one way or the other without delay.
21
Time was becoming critically short.
the problem.
A deadline was set for resolution of
It missed by 10 minutes or so.
sought by C&S and it was granted.
the impasse was
still apparent,
switch to First Tennessee.
Another brief extension was
When the second deadline went by and
the FDIC
felt
The discussions
it had
no
option
between C&S and
lasted for more than an hour without any apparent progress.
but
to
the OCC had
If we did not
do something quickly, the bank would be closed a second day.
First Tennessee and the FDIC worked throughout the night Monday to draft
the agreements and get
were
opened
on
Tuesday
the bank opened.
morning
by
All offices of the
about
one-half
hour
later
former UAB
than
the
normal time.
IV.
How It Happened
The question of what happened to UAB has several facets.
as has been suggested previously,
the bank's officers were not in control
of the files, much less the borrowers.
were dictating terms to the bank.
that
inverted
relationship
associates
of
the
Because of
this,
is
that
More to the point,
the borrowers
In many cases, we feel the reason for
the
borrowers
person or persons making
as well as
To start with,
the
were
close
decisions
in
friends
the
or
bank.
the bank's own consciously-chosen expansive
operational philosophy, marginal credits were made in the normal course of
business.
Adverse
economic
conditions
deal
harshly
borrowers and banks, and this case was no exception.
with
marginal
22
There may be more to the fundamental story
than that.
As is our usual
practice, we have investigators in the bank whose job it is to search for
civil liability and to report any criminal irregularities uncovered.
As
those facts are found, we will take appropriate action.
Another
question is how
this
problem exploded
apparently much less serious
so
spontaneously
from an
situation at the last examination.
Of the
$377,201,000 in adversely classified loans at the November 1, 1982, exami
nation,
the
FDIC
analyzed
the
genesis
sizable group of smaller credits).
of
$358,519,000
except
a
Here is the result:
24.072.000
Adversely classified at last examination
Less:
(all
4,183,000
Reductions of various types
19.889.000
Net remaining classifications
Loans existing at the last examination,
178.274.000
but not classified
160.356.000
New loans since last exam
358,519,000
To
attempt
to
understand
largest
loans
which
were
variety
of circumstances.
the
$178,274,000
subject
figure,
to adverse
In some
cases,
we
analyzed
classification and
the
loans
the
found
simply worsened
25
a
as
economic conditions and high interest rates continued to weaken the posi
tion of marginal borrowers.
In others,
management
promises,
whether
or
23 -
not meant to mislead, did not materialize as represented.
substantial
Also,
the
loan
had
been
simultaneous
participated
examinations
upstream
helped
and
In one case, a
was
considerably
repurchased.
in
1982,
as
examiners were able to obtain a better picture of overall borrowings and
the source of debt-service payments by customers shared in common by UAB
and various other affiliated banks.
In some cases, adverse classifications were simply missed.
difficult
to
determine
from
this
vantage
point
but
The volume is
there
were
several
loans where weaknesses could have been found had management's explanations
been disregarded in favor of some deeper analytical work.
The examiners
at the current examination had the benefit of skepticism based on some of
the insights contained in the previous report.
Also worth mentioning is
that the files were in abominable condition at the 1982 examination.
management
had gotten unusually careless,
and
the FDIC examiners
Bank
had
a
great deal of tenacity.
Another aspect is that of insider dealing,
not in the usual definitional
sense, but in a broader context which is difficult to define.
We hope to
ultimately find out why so many friends, family and associates borrowed so
much and why they have been so reticent about payback.
insiders (officers,
its
total
equity
directors,
and
and their interests)
reserves.
When
loans
to
Strict-definition
owed UAB only 62% of
borrowers
who
are
not
insiders but who are considered friends, associates and family of insiders
are added,
reserves.
the figure becomes
$211,516,000,
or 506% of total equity and
24 -
Further
light
is
shed
by
the
following
categorization
of
245
of
the
largest classified loans (duplication between the groups makes the total a
meaningless figure):
1.
2.
3.
4.
5.
6.
7.
No.
AMT. (000)
5
5,008
Loans on which documentation and
management knowledge were seriously
absent
35
95,980
Loans for speculative real estate
investment and development
62
127,748
Loans to interests of the Butcher
family, friends, and associates
70
211,516
Loans to borrowers whose financial
positions were weak, questionable
or not supported
94
194,064
Loans to ventures related to the
World’s Fair
14
11,320
Loans to ventures and interests in
Florida
10
24,434
Loans to failed businesses remaining
on the bank's books
8.
Loans to coal mining interests
7
14,544
9.
Loans to borrowers whose weaknesses
appeared directly related to economic
recession
9
19,276
16
60,581
10.
Loans which were assumptions and
restructures of previously distressed
credits, or other real estate owned by
this bank
It is also a fact that the bank's five largest borrowers, including their
various corporate interests,
examination.
owed the bank
UAB was active in selling
$251 million
on the
loan participations
date
of
although
it
25
bought few.
At the 1982 examination, there was $125 million in participa
tions sold, compared to $106 million at the 1981 examination.
"Upstream"
participations account for $16 million and $34 million, respectively.
latter figures perhaps reflect the manner in which the
pondents had dried up during
the last year,
upstream
largely in reaction
The
corres
to
the
Penn Square episode.
V.
Payoff vs. Merger
The FDIC has a choice between a payoff and an assisted merger transaction
when handling a failed bank.
In this case,
the premium First Tennessee
paid to the FDIC reduced the FDIC's cost below that of a payoff of insured
depositors,
making the assisted merger
the
least
expensive action.
The
FDIC estimated that the ultimate loss on the collection of assets would be
in
the
$160,000,000
range
(including
securities
depreciation).
amount, uninsured creditors would have absorbed about $50 million,
the FDIC with a $110 million ultimate loss.
Of
that
leaving
The First Tennessee bid was
valued at $67.5 million, meaning that the FDIC’s loss was reduced to $92.5
million.
First Tennessee offered to accept $86,500,000 in total loan losses after
having received all assets of the former UAB and after having assumed all
its unsubordinated book liabilities.
After this threshold is reached,
the
FDIC commences to absorb losses and will continue to absorb all further
losses identified by the FDIC during the period extending two years from
26 -
the date of closing.
bility
of
follows:
First
Losses occurring beyond that date are the responsi
Tennessee.
The
$86,500,000
in
losses
are
absorbed
as
$42 million by UAB's equity accounts, $10 million by UAB's sub
ordinated creditors, and $34.5 million by First Tennessee.
First Tennessee's bid is priced at $67.5 million as follows:
Loan losses to be absorbed
Securities depreciation existing
in securities acquired
Value of the contract to FDIC
$34.5 million
18.0 million
15.0 million
Value of bid
$67.5 million
The value of the contract includes lower funding and collection costs and
the advantage of avoiding losses occurring
beyond
two years.
Moreover,
collections on charged-off assets are to be distributed to the FDIC, and
potential claims against directors, officers, accounting firms, etc., were
assigned to the FDIC as part of the agreement.
VI.
Competitive Analysis
In forming the competitive analysis associated with selecting bidders for
the UAB transaction,
any combination of
it was recognized that,
institutions
adverse competitive effects.
already
because of the size of UAB,
in Knox County would have
some
UAB had 18 offices in Knox County with total
IPC deposits of $438,177,000, which was equal to 31.6% of total commercial
bank deposits in Knox County and 21.1% of total commercial bank and thrift
27
institution deposits in Knox County.
The First Tennessee National Corpo
ration subsidiary, First Tennessee Bank,
Knoxville,
Tennessee,
had
seven
offices in Knox County with total IPC deposits of $138,975,000, which was
equal to 10% of commercial bank deposits and 6.7% of combined commercial
bank and
total
thrift
statewide
institution
commercial
deposits
bank
in Knox
deposits,
County.
and
First
UAB
had
Tennessee
2.6%
of
National
Corporation, through its 14 subsidiaries, had 11.1% of total statewide IPC
deposits.
Before inviting First Tennessee to bid for UAB,
analysis was performed.
a competitive
It was our judgment, that while there were other
ixistitutions whose entry into the market might have been more pro competi
tive, First Tennessee*s concentration in the Knoxville market —
attribut
able primarily to the institution it was seeking to acquire and not to the
institution it already owned in the market
problem was
created
did
not
rise
to
the
was acceptable.
level
that
would
Whatever
suggest
that
First Tennessee be denied the opportunity to bid on the UAB purchase and
assumption.
The Antitrust Division of the Justice Department was not con
tacted in this matter because it did not appear necessary.
VII.
The Private Placement
A remaining issue to be addressed concerns
the
final days
of
the bank's
existence.
the sale of capital
UAB
had
proposed
to
stock in
sell
$10
million in capital stock in a private placement to National Investors Life
Insurance Company, Little Rock,
Corporation, Cincinnati, Ohio.
Arkansas,
a subsidiary of Baldwin-United
The private placement was arranged through
Phoenix Investment Corporation, New Canaan, Connecticut.
In December,
$4
28 -
million in common was indeed sold.
sale
of
related
the
additional
statements
circular was
used
stock
were
was
available
since
the
At the time of the bank’s failure, the
pending.
to
the
transaction
No
offering
circulars
FDIC’s knowledge.
was
in
the
form
of
or
No
formal
a
private
placement relying on a "due diligence" review by the placement broker.
The FDIC has no guidelines or rules that would apply to a private place
ment
of
securities
by
a
state
nonmember
bank.
Private
exempt from the registration requirements under the
in response
to a
request
by
the
FDIC
are
securities laws and,
thus, the FDIC has no authority to regulate such issues.
stock was
placements
The sale of the
for UAB
to raise more
capital based upon the findings of the November 13, 1981, examination.
The
circumstances
interest
to
surrounding
the FDIC
this
investigations
transaction
unit.
For
are
currently
example,
of
special
on January
1983, UAB, for itself and as agent for five other affiliated banks,
12,
pur
chased $13 million in Baldwin-United Senior Term Debentures due in 1996.
The propriety of what appears to be a quid pro quo funding arrangement is
certainly open to serious question.
TRANSCRIPT
OF
A MEETING OF THE BOARD OF DIRECTORS
OF THE
FEDERAL DEPOSIT INSURANCE CORPORATION
BY CONFERENCE CALL
CLOSED TO PUBLIC OBSERVATION
FEBRUARY 14, 1983 - 8:00 P.M.
At 8:00 p.m. on February 14, 1983, the Board of Directors of
the Federal Deposit Insurance Corporation met by telephone conference
call to consider certain matters which it voted, pursuant to subsections
(c)(6), (c)(8), (c)(9)(A)(ii), and (c)(9)(B) of the "Government in the
Sunshine Act" (5 U.S.C. 552b(c)(6), (c)(8), (c)(9)(A)(ii), and
(c)(9)(B)) to consider in a meeting closed to public observation.
William M. Isaac, Chairman of the Board of Directors; Irvine
H. Sprague, Director (Appointive); H. Joe Selby, acting in the place and
stead of C. T. Conover, Director (Comptroller of the Currency); Jack E.
Edgington, Deputy to the Chairman - Administration; Margaret L.
Egginton, Deputy to the Chairman - Public Affairs; John R. Curtis,
Deputy to the Director (Appointive); Alan Herlands, Deputy to the
Director (Comptroller of the Currency); Laura L. McAuliffe, Special
Assistant to the Director (Comptroller of the Currency); Edward T. Lutz,
Assistant to the Deputy to the Chairman - Administration; Thomas A.
Brooks, General Counsel; James L. Sexton, Director, Division of Bank
Supervision; James A. Davis, Director, Division of Liquidation; Stanley
C. Silverberg, Director, Division of Research and Strategic Planning;
Robert V. Shumway, Director, Division of Accounting and Corporate
Services; Hoyle L. Robinson, Executive Secretary; and William H. Roelle,
Assistant Director, Division of Accounting and Corporate Services,
participated in the meeting.
Chairman Isaac presided at the meeting; Mr. Robinson acted as
Secretary of the meeting.
P R O C E E D I N G S
Chairman Isaac:
This is a meeting to consider the United American
Bank in Knoxville, Tennessee. I move that
Corporation business requires its consideration
of the matters to be considered in this meeting
on less than seven days* notice to the public;
that no earlier notice of the meeting was
practicable; that the public interest does not
require consideration of the matters in a meeting
open to public observation; and that the matters
may be considered in a closed meeting pursuant to
subsections (c)(6), (c)(8), (c)(9)(A)(ii), and
(c)(9)(B) of the "Government in the Sunshine Act"
(5 U.S.C. 552b(c)(6), (c)(8), (c)(9)(A)(ii), and
(c)(9)(B)).
Director Sprague:
I second.
Mr. Selby:
I concur.
Chairman Isaac:
We have probably one of the most complicated
situations at this point you ever want to deal
with. We had eight bids come in. And the eight
bids were First Union, $51,100,000 —
Mr. Selby:
I cannot hear you, Bill.
Chairman Isaac:
I am sorry, Joe. We had eight bids come in the
first time around on this interstate bidding
process. First Union bid $51,100,001.00; C&S,
$65 million; NCNB, $37,620 million; Union
Planters, $14.1 million; AmSouth, $22 million;
Wachovia, $15 million; and Third National, $10.5
million.
In addition, First Tennessee made a proposal,
which I will explain a little bit later. But it
was different than these. These were all done
according to bidding instructions, and these were
all premiums, no complications, easy to compare
them. First Tennessee’s was a deal that was
structured along the lines of what we were
negotiating with them last night when we were
trying to do a deal to keep the bank from
closing. Their deal was very difficult to price
because — and I*11 get into it later, but for
now, just accept the fact that it was difficult
to price, and we arrived at a conclusion that the
deal was worth approximately $57 million to us.
We calculated the cost of the bank failure, our
losses in the receivership, under the three best
proposals, and found that the C&S proposal would
cost us, after you deduct the cost of running the
failed bank and liquidating its assets, about $95
million. We calculated that the cost of the
First Tennessee proposal would be approximately
$103 million, and the cost of the First Union
proposal would be approximately $109 million.
We decided that the best bid was C&S. It was
out-of-state. The other two bids were within
fifteen percent of it. We determined we were
obliged to go into a rebidding process and allow
those three institutions to rebid.
I went back to First Tennessee myself, since I
had been having the major dealings with them
throughout the night last night, and I instructed
Ron Terry that the best bid was out-of-state, and
we were allowing those institutions that were
within fifteen percent of the best bid to rebid,
and that he was one of those who was being
permitted to rebid. I told him that the deal he
proposed to us was a nonconforming bid. It did
not conform to the bidding instructions. It was
very difficult to compare the cost of his
proposal in any precise way with the cost of the
others. And, therefore, I told him that he
should submit to us a conforming bid on the next
round. I said, "You may also submit your other
proposal as an alternative bid, giving us the
choice of taking whichever one we want, but you
must submit a conforming bid." He understood
that. There was no question about it. It was
clear.
We just got the next round of bids back in. We
gave the three bidders one hour. Ron Terry
called me and said that he had decided not to
submit a conforming bid. But he was going to
submit his other bid again, only he was upping
the price by $10.5 million. C&S submitted a new
bid, which conforms to the bidding instructions,
at a flat $70 million. They upped their bid by
$5 million. First Union kept its bid the same.
So it is clearly out of the running. That leaves
us with a choice between taking the C&S bid —
it's a premium of $70 million, which means that
this receivership, we would estimate, will cost
us about $90 million. We can take that bid or we
can take the First Tennessee bid.
All right, let me explain the First Tennessee
bid. They agree that they will take the first
$86.5 million in loan losses.
Director Sprague:
Bill, I can't hear you.
Chairman Isaac:
First Tennessee agrees that it will absorb the
first $86.5 million in loan losses. Anything
above that in loan losses the FDIC must absorb,
but our liability for loan losses only applies to
loans that are on the books today classified loss
within the next two years.
If we lay out any funds under this transaction —
if the FDIC is called upon to indemnify them for
loan losses above the $86.5 million — and there
are subsequent collections on any loans that have
previously been charged off, all collections go
first to the FDIC to repay It in full, and then
to First Tennessee. So that the FDIC is last in
and first out with loan losses, and we are only
responsible, as I said, for loans that we
classify loss within the next two years.
The way to calculate the value of this First
Tennessee bid is as follows. We can ignore $52
million of their bid because that represents the
capital and reserves of the bank and the
subordinated debenture.
Director Sprague:
That's $52 million.
Chairman Isaac:
That's $52 million. So you can just ignore that.
Take that off their $86.5 million in other words.
That leaves you with $34.5 million that they are
paying as a premium. In addition to that, you
have $18.2 million in depreciation in the bond
portfolio, which they are absorbing that C&S will
not be. Now let me explain that. They are
taking all the assets at book value. C&S,
according to our standard purchase and assumption
transaction, which is what they are doing, will
be taking the bond portfolio not at book value,
but at market. The market value is $18.2 million
less than book value. So, by doing the First
Tennessee deal, we are picking up $18.2 million
in depreciation in the bond portfolio that we do
not have to absorb. When we add those two
together, we get $52.7 million for their premium.
That is still short of $70 million.
But there are a number of advantages yet to be
gained from the First Tennessee proposal. One is
that last-in first-out arrangement, that we don’t
have to absorb any loan losses until they surpass
$86.5 million. And then when there are
collections on loans, we get the collections
first on all loans, on all the charged-off loans.
So that we will come in later and will get out
sooner than if we do the standard kind of deal.
Second, on the C&S arrangement, we will go in and
remove all of the classified assets or most all
the loans, basically. We are going to lay out
somewhere in the neighborhood of $500 million in
the transaction. That has a funding cost to it.
In the First Tennessee transaction, we will not
lay out any money for a period of time. I don’t
know for how long, but it will be a while before
we lay out anything. So we are going to save
some funding costs.
Next, in the C&S transaction we are taking over a
portfolio, I gather, of about $500 million worth
of loans that we are going to have to try to
collect. We have all of the associated
collection expenses, the personnel that it takes
to supervise it, the lawyers for lawsuits to
litigate the claims.
In the First Tennessee situation they are
responsible for the entire asset portfolio.
send no liquidators in other than to get an
We
inventory to begin with. We have no expenses
associated with it whatsoever.
Another advantage is that we only have to pick up
loans, which are classified loss during the next
two years, whereas, if we do the C&S transaction,
we will be acquiring all these loans in our own
name, and we will have to absorb the losses
whenever they occur at any time in the future.
Director Sprague:
Bill, was there any misunderstanding, is there
any possibility that —
Chairman Isaac:
Wait a minute, Irv, I am being talked to here.
Oh, yes, there is another one, and that is that
when we do the standard F&A transaction, we take
all the loans out. We allow the bank to come
back and acquire the loans from us, as it may
chose.
Director Sprague:
Right.
Chairman Isaac:
They will reject anything that has any credit
problems in it naturally. But they will also
either reject or require us to mark down to
market any loans that bear low interest rates,
whereas, in the First Tennessee situation, they
are taking all the assets at their book value,
and they are not being marked to market.
Now it is extremely difficult to put a pencil to
all this. I went around the room with our
management group, and I had three votes —
Edgington, Davis, and Shuraway — for going with
the C&S transaction on the ground that they
submitted the only conforming bid. I had four
votes — Brooks, Silverberg, Egginton and
Sexton — for going with the First Tennessee
transaction on the basis that it is clearly
superior financially, and it is our obligation to
take the best deal irrespective of whether it
conforms to the bidding instructions. The three
people who voted for the C&S deal, all three
acknowledge that the First Tennessee deal is
clearly superior financially. So that is our
pickle.
Director Sprague:
Bill, was there any misunderstanding between you
and this fellow on what the ground rules were?
Is there any possible way he could have
misunderstood you when you said that —
Chairman Isaac:
Not the last time when I called him, he could not
have misunderstood me. We were all in the room
when I made the call, and it was very clear that
I told him that I had to have a bid that
conformed to the bidding instructions because I
just couldn’t make the cost comparisons
otherwise.
Mr. Selby:
Wouldn’t it be patently unfair then to C&S if you
said, "You have conformed to the bid," that,
"First Tennessee does not," if we were to accept
First Tennessee?
Chairman Isaac:
That’s the argument of those three people who
would take the C&S bid. They say it would be
unfair to C&S, that they obeyed the bidding
instructions and First Tennessee did not.
However, I would point out that we negotiated
the First Tennessee transaction — the way it is
structured is our idea, not theirs. We came up
with it last night.
Mr. Selby:
And that was on an open bank basis.
Chairman Isaac:
Right. We proposed it to them last night when we
were trying to do a deal in advance of the bank
closing. They got wedded to it, and they kept on
pursuing it all day long with our full knowledge
and blessing. It was not until later today that
I told First Tennessee that we simply could not
accept a nonconforming bid. Well, I did not say
that we could not accept it. I said "I have got
to have a conforming bid," and then, "If you want
to submit your nonconforming bid as an
alternative, then we can take our choice." But I
said, "We have got to have a conforming bid."
But that came late in the day. This entire
proposal started last night at our suggestion.
Director Sprague:
Well, that didn’t work though, Bill, that fell
apart. It seems to me what we are faced with is,
we have got one bid of 70 and one of 52.7 plus
all these advantages to us if we take it, which
you are telling me our staff people say will
probably add up to more than 70.
Chairman Isaac:
Substantially more.
Director Sprague:
I guess we better talk about it some more because
it strikes me that it would be indefensible not
to take the high bid. I don’t see how we could
explain —
Chairman Isaac:
Which is the high bid?
Director Sprague:
—
Chairman Isaac:
Which is the high bid? You say it would be
indefensible not to take the high bid. Our staff
believes that the high bid is First Tennessee.
Mr. Selby:
But you really don’t know that.
Chairman Isaac:
Yes, we know that. We cannot prove it to a
dollar amount. But we know it is.
Mr. Selby:
Well, what about — wouldn’t the same argument go
then to go back to C&S and say, ’’Submit a bid on
the same basis as First Tennessee”?
Chairman Isaac:
I don’t have the time unfortunately.
love to go back to C&S —
Dierctor Sprague:
The problem is you would open the bank tomorrow,
wouldn't you, Bill?
Chairman Isaac:
That’s the problem. The bank has got to be open
tomorrow morning, and I don't have time to go
explain this deal to C&S and ask them if they
want to make a bid on the same basis. It seems
to me we have got three choices. We take C&S,
we take First Tennessee, or we go back to them
both and give them one more shot at it and give
them twenty minutes to get a new bid in.
Director Sprague:
I thought we agreed this would be the last round.
Chairman Isaac:
We did.
52.7 plus —
I would
Director Sprague:
What do you think we ought to do?
Mr. Selby:
Who are you asking?
Director Sprague:
Bill.
Chairman Isaac:
Well, I am very torn. I want to go with the best
deal financially, and First Tennessee, I am
convinced, is the best deal financially. There
is another big factor. We have had a number of
bank failures, and the First Tennessee deal
doesn't require any personnel. We are going to
be criticized no matter what decision we make.
There are a lot of people who will criticize us
for going out-of-state unnecessarily. There are
people, if we take the First Tennessee offer, who
will criticize us for not taking the only offer
that conformed to the bidding procedures, and
what, on its face, in terms of hard, provable
dollars appears to be a better offer. We are
going to be criticized no matter what we do here,
I reckon.
Director Sprague:
Well, you know, we knew that going in.
Mr. Selby:
My only concern is the fairness of your bidding
package, and, you know, I understand what your
concern is, Bill, and the cost, too. But, you
know, if everybody plays by the same game, and we
set the game I thought, I find it is hard to
think you can go with someone that didn't play
that game. That's my own thought. And,
apparently, First Tennessee was told.
Director Sprague:
Bill, what insurmountable problems do you see if
we go with C&S?
Chairman Isaac:
There are no insurmountable problems if we go
with C&S that I am aware of unless First
Tennessee tries to sue us to enjoin us. But I
can't imagine they'd be doing that. They know —
Mr. Selby:
Unless they what, sue you?
Chairman Isaac:
Unless they tried to sue us to block us from
doing it. But I can't believe that they would do
that. They are much more responsible than that.
Director Sprague:
It seems to me that's a lot more defensible. I
would hate to have us on the first time we have
gone through this process not go with what
appears to be the best number, even though the
appearances may not be reality.
Mr. Selby:
They also make it very difficult in the future,
if you have to go through —
Director Sprague:
Well, that's what I am talking about.
Chairman Isaac:
I don't put much credence in that. I don't think
it is going to be much more difficult in the
future. I think this deal can be explained as
being thoroughly more attractive financially.
The only criticism anybody can have is First
Tennessee got away with submitting a
nonconforming bid. But I don't think that is all
that serious, and people are going to bid in the
future. The bidding in this situation has been
very aggressive, and it is not because they are
trying to do us a favor. It is because they want
to buy a bank in Tennessee across state lines.
But the reason why I wanted to call a meeting and
have this lengthy discussion is, I consider this
to be a terribly close call. I don't think it's
an obvious decision. I think any way we go we
are going to be criticized. Any way we go is
wrong. Any way we go is right. I haven't
expressed an opinion, because I wanted to hear
what you thought of it. I have tried to give
you, as best I can, all the sides of it. That’s
where we are, and I guess what I need are your
opinions. Joe?
Mr. Selby:
Well, I feel very uncomfortable about switching
out of the bidding stream and not going with C&S.
And I really don't — I don't quite understand
why C&S wants it, you understand. But they did
bid $70 million in the first bid package, and put
the dollars to it. That's what comes in the top.
Chairman Isaac:
Irv?
Director Sprague:
I agree with you that it is very, very close.
But I think, on balance, that we have to go with
C&S.
Chairman Isaac:
All right, I will make it unanimous. We will go
with C&S on the basis that their bid is the only
conforming bid we got, that First Tennessee
violated clear bidding instructions, and we just
have no choice. I so move.
Director Sprague:
I second.
Mr. Selby:
I concur.
Chairman Isaac:
The meeting is adjourned.
(Whereupon, at 8:30 p.m., the meeting was recessed.)
(The meeting was reconvened at 8:50 p.m.)
P R O C E E D I N G S
Chairman Isaac:
Board meeting — I don’t think I need a Sunshine
motion. I just wanted to inform you of what is
happening. I called Ron Terry and gave him the
bad news. There is media camped out all around
his bank, and he said, "What can I tell them, I
canft get out of the bank without them seeing
me?" I said, "I guess you are going to have to
tell them that you believe that C&S is going to
buy it, but we are just not going to confirm it
for a while."
So that settled that, and we called the Atlanta
people, and I asked them to bring John Poelker
from C&S in the room to talk to me, because I
wanted to encourage him to get the deal done
quickly and get the bank opened. They delayed in
bringing him in, and we found out that the delay
is because the Comptroller’s Office has some
concern about how the bid will be capitalized or
the goodwill amortized or something. So, I
immediately called Ron Terry back and,
fortunately, he had not said anything to anybody.
So we are on hold.
Mr. Selby:
Good.
Chairman Isaac:
Ron is sitting there. The Comptroller’s
Office may resolve this however they wish, and I
only hope that they will resolve it very quickly
because ve have got a deal to cut with one or the
other of these two parties. So, I just wanted to
inform you of where we are and to let you know
that the evening may not be over.
Mr. Selby:
Well, I cannot imagine why there was any
misunderstanding on C&S's part.
Chairman Isaac:
I don't know, Joe, and I am not trying to blame
anybody•
Mr. Selby:
No, I know.
limit?
Chairman Isaac:
I think we must have this resolved within a few
minutes, Joe, if you can.
Mr. Selby:
Well, I am prepared to go forward if they want to
give us a yes or no now.
Chairman Isaac:
Pardon?
Mr. Selby:
I think we ought to require a yes, they are going
to go forward with it or no.
Chairman Isaac:
I do not know what it is all about.
on those discussions.
Director Sprague:
Bill, do they have to put up some more money
tonight, is that the deal?
Chairman Isaac:
I do not know what the deal is. I do not
know what they are arguing about.
Mr. Selby:
I think I know what the deal is.
Director Sprague:
Well, tell us.
Mr. Selby:
I think what they were counting on, Bill, is that
the premium to the FDIC was all they had to put
up. They considered that the capitalization of
the bank.
Chairman Isaac:
They never felt that they had to put any new
capital in?
Mr. Selby:
The capital to capitalize the bank.
Should we be giving C&S a time
I am not in
Chairman Isaac:
Are you talking about at the holding company
level, Joe, that you wanted them to raise some
more capital or in the bank or what?
Mr. Selby:
At the bank level.
Chairman Isaac:
But we are furnishing —
Mr. Selby:
Well, I wonder if they understand that.
Chairman Isaac:
Well, who understands that?
Mr. Selby:
C&S.
Chairman Isaac:
Yes, they have asked for the FDIC to furnish what
we said we would, which is a $30 million,
ten-year loan, to their holding company, which
will be downstreamed as equity into the bank.
Mr. Selby:
I really do not know what their concern is then.
Chairman Isaac:
It is my understanding that it has something to
do with the amount of goodwill that is being
booked.
Mr. Selby:
Oh, it is not.
Chairman Isaac:
What?
Mr. Selby:
I just assumed that was it.
Chairman Isaac:
The amount of goodwill that is being booked, I am
told, is of concern to Herman. Who Herman is
talking with I do not know. Joe, I guess what I
would ask you is, can you somehow find out what
is happening and get it off the dime soon?
Mr. Selby:
I can certainly call, I certainly can.
Chairman Isaac:
And, as I say, however you want to work it out is
fine with me. I just need something done.
Mr. Selby:
You need something to go on. But the
understanding, Bill, is you will loan $30 million
to the holding company who will downstream it to
the bank in the form of capital?
Chairman Isaac:
Right.
Mr. Selby:
And the goodwill —
Chairman Isaac:
And our loan to the holding company is a ten-year
loan.
Mr. Selby:
A ten-year loan to the holding company.
don't know what the big deal is.
Director Sprague:
That was the deal offered everybody.
Chairman Isaac:
That is correct.
Mr. Selby:
Well, I will attempt to find out from Herman, and
you want me to get back to you?
Chairman Isaac:
Now you are going to be booking a heck of a lot
of goodwill. I don't know what, but —
Mr. Selby:
$70 million, I guess.
Chairman Isaac:
Well, yes, and I do not know what else. There
may be something else besides the $70 million
that gets booked.
Mr. Selby:
Yes.
Chairman Isaac:
And maybe it has to do with the charge-off of
goodwill. Maybe C&S had a misunderstanding about
the charge-off period.
Mr. Selby:
Well, all I know is we have always, we have
required a flat capital, and then allowed them to
book the goodwill over a period of years with a
write-off.
Chairman Isaac:
0. K.
Mr. Selby:
Yes.
Chairman Isaac:
Herman is in our Atlanta Regional Office —
Mr. Selby:
Yes.
Chairman Isaac:
— talking with C&S right now.
Regional Office's number is —
Well, I
Joe?
Our Atlanta
Mr. Selby:
0. K.
Chairman Isaac:
I want to give you that Atlanta number.
Mr. Selby:
We have got it.
Chairman Isaac:
Oh, you have it, Joe.
Mr. Selby:
Let me call him and talk to him.
Chairman Isaac:
Do you have it?
Mr. Selby:
Well, give it to me then.
Chairman Isaac:
All right.
Mr. Selby:
0. K.
Chairman Isaac:
There is an FTS number.
that.
Mr. Selby:
Yes.
Chairman Isaac:
242-6631.
Mr. Selby:
6631.
Chairman Isaac:
Right.
Mr. Selby:
0. K., I will call him right now and call you
back.
Chairman Isaac:
Thank you.
Mr. Selby:
0. K.
Chairman Isaac:
Bye-bye.
We have got it.
You are at the office?
I have it right here.
Area Code (404) 221-6631.
I don’t know if you use
(Whereupon, the meeting was recessed, and then reconvened at
9:40 p.m.)
Chairman Isaac:
We are continuing our Board meeting, Part III.
It is my understanding that the Comptroller's
Office and C&S have reached what appears to be an
impasse on the issue of the proper capitalization
of the bank and the handling of the goodwill in
connection with this transaction. I do not know
whether the Fed is satisfied or is still agreeing
with the Comptroller. Joe, you may have that
information.
Mr. Selby:
The Fed is satisfied with our decision.
Chairman Isaac:
The Fed is satisfied with your decision?
Mr. Selby:
Yes.
Chairman Isaac:
0. K. It appears there is an impasse. I do not
know whether it could be worked out if we
continued to let this go into the night, but we
simply do not have that option. We have to go
ahead and get a transaction done. I move that we
accept the First Tennessee bid because C&S does
not appear to be able to get regulatory approval
for its transaction.
Director Sprague:
I will second the motion. But before the vote,
can I ask Joe two questions? Joe, in simple
English, what is the problem is the first
question. The second one is, why the heck didn*t
you tell us before we voted for the deal instead
of after?
Mr. Selby:
Well, let me answer the second part, Irv.
Because you all would not let any of us
participate in the bid package in Atlanta. We
were excluded from any conversation. We did not
see C&S’s bid until 6:30. The Fed, however, was
allowed to see it much earlier than that. And
were the first to arrive at the condition for
capital. That is in answer to your second
question. O.K.? And I think that is something
that needs to be talked about in the future
because we were specifically excluded from it,
and we might have been able to point this out a
hell of a lot sooner if we had seen the bid.
Director Sprague:
But you did not even know about it when we were
talking at our Board meeting?
Mr. Selby:
No, sir, I did not.
Director Sprague:
All right.
Mr. Selby:
And I thought the C&S bid was coming into our
previous discussion.
Chairman Isaac:
Joe, I am astounded that you say that you were
not able to see the bid package. You were
invited to these meetings and I understand that
your people attended.
Mr. Selby:
Bill, sure, we saw the bid package, as it was
explained yesterday. And tonight, when the bids
were coming in, Bob Herman was asked to stay
outside the room. So we did not see C&S's bid.
Chairman Isaac:
Oh, you saw the bid package, but you did not see
C&S's bid because Herman was not in the room when
the bids came in.
Mr. Selby:
That is correct.
Chairman Isaac:
Oh, o.k. Well, that's fine. I think the normal
procedure is to have bids come in with only FDIC
personnel present.
Director Sprague:
Well, in the first place is what is the essence
of the dispute? They are trying to put too much
goodwill?
Mr. Selby:
Too much goodwill and not enough capital, right.
Director Sprague:
0. K.
Mr. Selby:
They are not coming up with anything is what they
are doing.
Director Sprague:
All right.
Mr. Selby:
I concur.
Chairman Isaac:
0. K. It is unanimous. I will inform Mr. Terry
that we are ready to proceed with his deal. And,
Jim, If you would inform whomever is on the
Atlanta line that we are switching to First
Tennessee.
Well, I second the motion.
f
Thank you.
The meeting is adjourned.
(Whereupon, at 9:50 p.m., the meeting was adjourned.)
@FedFRASER