To recap events; we had developed a very successful national small business lending operation that was doing business on Wall Street within a period of 3.5 years from startup working from a rural, historically underperforming state chartered bank in Podunk. We had successfully assisted our industry recover from political malfeasance in a manner that established the foundation for the SBA’s primary lending program to become self funding and sustaining, which is continuing today. We were making the owners of the bank far more money than ownership ever dreamed possible prior to our arrival. Our staff was competent and well compensated, prepared to take the next step as an industry leader as we had entered the Top Twenty in total annual loan volume with SBA’s programs along with expanding our conventional and USDA lines of business. We had developed a new, profitable spin on a SBA loan product that was being successfully pooled into CDOs. We had the support of regulators, government and a Big Three rating agency. Everybody in the industry knew our name and we had some competitors who had begun to copy our methodology for their own operations, which included my most recent former employer. That was the ultimate compliment.

We accomplished all of that without the city of our division headquarters knowing we existed beyond our annual business license renewal and despite the fact we had over 80 employees under roof in a prominent office building downtown with another 40 spread out around the country. Just the way I liked it, flying under the radar. We were developing an analytics based operating platform with our own programming staff that would be the envy of everybody in the industry that projected to be ready within a year. We had brought the owners an offer to purchase our division operations that would have freed them to expand the footprint of their bank statewide, which they said was their primary goal.

It was year end 2006 and we had turned the page to implement expanded operations and loan volume in 2007 at the insistence of the owners. The major shareholder personally told me to make as many loans as we could make. When I questioned him about capital and funding associated with same, he told me not to worry about that, he would make sure it was covered. Up to that point I had no reason to doubt it.

When I received the call a couple of months later to meet the owners and bring our SCO and NSM with me for an annual meeting to go over plans for 2007 and results of 2006, I thought nothing of it, just a routine occurrence.

The Meeting

To cut to the chase, it was a set up. A bull in the ring event and I was the bull.

The loan buyer we had recently committed to hire from Bear was there without my knowledge of his invitation. He had ingratiated himself to the owners over the period from when he first met them at his previous regional investment banking employer through my introduction. I was aware he was working with them on the investment side of the bank with the portfolio, but this was a whole different level now.

One of the ways he had increased his perceived value to ownership was by arranging for them to obtain additional Tier One capital through the issuance of what investment bankers call Trust Preferred securities. It is a quasi-capital investment used frequently during those days that was essential killed later in 2010 by Dodd-Frank. For those who want to know more about how the investment (scheme) worked please read the link.

https://www.investopedia.com/terms/t/trustpreferredsecurity.asp

The key part of the link…

“Phasing out or excluding trust preferred securities in the Tier 1 capital ratio increases funding requirements for banks and, in some cases, reducing the number of incentives for banks to issue trust preferred securities. The so-called “Collins Amendment” was proposed in the U.S. Senate to eliminate trust preferred securities as Tier 1 regulatory capital altogether.  

Finally, the costs are among the disadvantages for companies issuing trust preferred securities because the trusts sometimes have features like deferral of interest payments and early redemption of shares. These nuances make them less attractive to investors and, therefore, the rates on trust preferred securities are typically higher than those offered on other types of debt, simply investors demand a greater rate of return. The costs of investment banking fees for underwriting the securities can be hefty as well.”

That information gives a glimpse at why ownership choosing this method of adding capital was extremely risky. It was also a method used by many growing banks nationwide.

The bank’s subject $15 million dollar issuance in the name of its holding company was underway with buyers committed. It was being done with the deferred interest payments and early redemption of shares rights as described above. The plan being executed called for the majority of the net proceeds to be used to buy out the 30% owner who initially resisted our division being started, who also owned a competing, larger bank and other businesses. Not necessarily a bad purpose except the actual funds would never make it into operations. There would be minimal added benefit of bank liquidity to fund their geographic branch and our division’s loan growth with less than $1 M being made available to us. They planned to eventually add deposits to fund liquidity for our lending purposes through the branch expansion and brokered CD’s that the investment banker/loan buyer secured.

The owners attempted to hot box me on profitability of our division. The lines were clearly being drawn in the sand. The investment banker/loan buyer was the fox in the henhouse. I decided to just play along and agree with them except on the profitability assertion. My SCO and NSM were dumbfounded and totally blindsided. I did not expect it, but was not overly surprised. In my years in this and most industries, greed nearly always overcame sound business principles.

I reminded them that our net income was three times theirs while still expanding operations to provide more in the future as we built our pipeline to cash in with loan sales. They conceded the point since they knew none of my team was under employment contract. They ended the probing with a “Well, you spoiled us with the previous year’s profit.” Yeah, OK. They wanted changes in our divisional executive compensation plans to incentivize more for profit than asset growth after having pushed for asset growth constantly (which continued) and approving the initial compensation plan. That demonstrated clearly they did not truly understand banking overall. In banking, increased profits follow asset growth if all things remain constant. Which they were not. The investment banker/loan buyer leaving a lucrative opportunity on Wall Street to join a community bank should have been their first major clue they were being used and unlikely to receive rapidly increasing profits.

It was also really easy to see at that point the division was perceived as mercenaries in their minds and when our contributions were deemed not enough or having met all objectives, we would be gone.

We agreed the compensation change could be arranged. They seemed happy that it could come to a successful resolution. Within a couple of weeks I submitted a plan for it and they accepted, which included strong bumps in salary to offset the reduced income upside and a potential reduction in executive incentive pay at present levels of profitability.

These things never end well when greed and hunger for power takes over. They had been willingly manipulated by the new guy who told them what they wanted to hear. However, he was regionally bred from west TN and went to the prominent private college there. He ran in the same Memphis area financial and social circles they did.

Over the course of the first half of 2007 he convinced them to sell off their bond investment portfolio to make room for more loans. He increased the amount of brokered CDs to fund liquidity. He did all of the classic things that a few in our divisional leadership team saw at Temecula that led that bank down the path toward destruction. He did not think I was on to him and I never shared with the other divisional leaders my conclusions. They did not need the distractions or the worry. There would be plenty of time for that later.

I had reached the point I was over it all. I remembered fondly the years after the equipment company disaster as our family unit rebuilt our lives and the blessings the Lord provided while I worked from home and directly helped small business owners. Working one on one with them was my first and deepest love working in the business. The employment politics, Wall Street, lobbying of politicians, dealing with regulators, etc. were draining my zest for life. I had nothing left to prove or accomplish in what the Lord had placed before me and now the fruits of our labors were beginning to show signs of spoilage.

Parallels

In that same year I was still hurting over the recent death of my father. Best Kid had graduated from HS and was enrolled in the local community college, chasing boys more than studying. My wonderful mother-in-law was in the middle of her ten year battle with dementia and Rock Star was on the road constantly tending to her personal needs and financial affairs, which included time spent as a volunteer working with the residents at the assisted living center where MIL resided. I was Pastor/Staff/Parish chair at our church and as such had been met immediately with the attempted suicide of our worship leader whose wife had gone lesbian. The same worship leader that a few weeks after he had been hired had presented a video of a homosexual Jesus and his merry disciples at a Wednesday night service while the senior pastor was out of town. The same senior pastor had not been informed it would be shown as part of the WL’s “message” to the congregation, but also who had not cared enough to inquire about what the WL planned to present.

There was also a mini-pedophile invasion into the congregation that year through a misguided decision to operate a Celebrate Recovery ministry without having sufficient trained volunteers from membership to staff and control. Our family had opposed having the ministry for that very reason. I was then having to act as an ear for rightfully concerned members. One of several CR participant pedos was later arrested that summer for being observed in a nearby Wendy’s performing the dirty on a wheelchair confined handicapped child in a restroom. It was the second time he had been sent to prison for the activities, where he still resides today. One family from the congregation then came forward and said the same guy had attempted to groom their teenage son. A large group in the congregation demanded an audience with the District Superintendent, who subsequently attempted to placate instead of respond appropriately to their valid concerns. All of them left the church permanently. The Senior Pastor was transferred out a few months later. When it was all said and done, a third of the active members were gone in weeks, which killed the church’s mission, finances, and perception in the community for years. Yet the CR ministry remained with a promise to do better from its leaders because we did not have enough member votes to terminate it. It finally died a natural death several years later as the congregation continued to dwindle in size.

Lesson learned: Do not attempt to do even well intentioned endeavors without clear revelation from the Lord while counting the cost and commitment required. I thought we were a congregation that would know to do what the Bible says to do. What made it worse is the conference UMC leadership had approved its implementation and provided no oversight at all through the years of its existence.

Back At The Ranch

The investment banker/loan buyer will be hereafter referred to as Judas. Not because I see myself as Jesus in this story – perish that thought immediately. His reference as Judas is because he did what Judas did. He sold his personal integrity for thirty pieces of silver to the worldly authorities for personal gain. That he would forever regret that decision later would be a lesson this Judas would learn in the ensuing economic collapse. I knew what he was doing, just as Jesus knew what the real Judas Iscariot was doing in secret. Observation of internal activities, comments from loyal coworkers, and the huge debt market bubble beginning to burst on the street told me. He claimed he could move all of our pipeline of loans at budgeted premiums. The truth was becoming apparent in my conversations with buyers and other market professionals that was unlikely. The owners may have bought his story, but I did not.

Have you ever been in a situation where you sensed it was not going to end the way you preferred, yet knew you had to follow it through to its conclusion? This was it for me.

At this point in my life I was totally burned out with the game playing by people in authority who thought they knew more than they actually did. It was always such a pathetic, fruitless exercise. Chasing after money and power at the cost of your integrity never satisfies and eventually leads to destruction. The drama of it all made me think of the following for years afterwards.

I knew I could take the core staff and leaders with me to another employer and do it all over again as there were many potential employers who would have jumped on it. I even had local options, one of which BIMD readers were informed of earlier in this series with a certain basketball coach’s (now ex) husband. However, it would mean going much slower with the economic meltdown on the horizon. I just did not feel the Lord leading me in that direction and I knew I was not much interested in it personally unless he did.

So after prayer and consideration I chose to play out the existing “opportunity” for all it was worth and head to the house when it inevitably collapsed. I would wait there for future assignments from the Lord, if any.

With our continuing business operations, Judas had to deliver buyers for our loan sales in his role. I cut off Bear Stearns as a buyer in early 2007 and not because we had hired Judas. It was because they low balled us on pricing the next $100 M loan pool sale. Big Dog called personally to push for the sale during which time he expressed concern for my personal mental health for not selling to them. Seriously. The guy confirmed everything I thought he may have been during my visit in his office. That he stooped that low to call hillbilly land for business told me how desperate they were becoming. However, when I informed the owners why we would not want to do business with Bear when they were offering half what we could get from others buyers, they doubted it was the right decision.

Geez. Still have trouble understanding how they ever owned a bank.

The buyers we primarily turned to during the period were insurance companies, Aegon Insurance in particular, and credit unions who needed earning assets. Meanwhile I asked the SCO to tighten credit parameters on the new 504 program loans and do less construction related requests despite the bank owners demanding more profit as well as more loan volume. It was time to slow the flow in that program as the reducing numbers of loan buyers were getting very picky and pricing lower.

In one meeting with Aegon on the activities in the national debt markets I found myself fully agreeing with the highly experienced and accomplished Aegon buyer to the dismay of Judas. The Aegon buyer still committed to purchase a small pool of $50 M due to the safety of our loan product, however, he said he was retreating from buying overall as he detected very rough economic seas ahead. We followed up that meeting with another with the CFO of Stanford Federal Credit Union (yeah – that Stanford), who flew in to see our operations. With their purchase commitment we had concluded our loan pool sales needs for the first half of 2007 on budget.

Conclusion

This is a good stopping point to absorb the progress of the story before we begin the last chapters. The theme will become increasing apparent, so I might as well leave you with a scriptural metaphor of sorts that leads to an analogy that is defined by an apparent paradox. Yeah, I know, too much information.

As Christians we are instructed to not become unequally yoked with non-Christians. This is Paul’s instruction to the Corinthian Church found in 2 Corinthians 6:14.

“Do not be mismatched with unbelievers; for what do righteousness and lawlessness share together, or what does light have in common with darkness?”

Yet, as Christians we are also instructed to remain salt and light in a world troubled by sin and evil per Jesus in Matt. 5:13-16

“You are the salt of the earth; but if the salt has become tasteless, how can it be made salty again? It is no longer good for anything, except to be thrown out and trampled underfoot by people. You are the light of the world. A city set on a hill cannot be hidden; nor do people light a lamp and put it under a basket, but on the lampstand, and it gives light to all who are in the house. Your light must shine before people in such a way that they may see your good works, and glorify your Father who is in heaven.”

How can we do both in the world today? We will pick up on this to start the next chapter. Blessings to all.