Case Study:

TWIN NATIONAL BANK:

A CASE STUDY After taking a Commercial Bank Management Course and graduating from Morgan State University, twins, Georgie and Georgetta (both 25, of course) decided to start a new bank with their grandfather, George, Sr. (65). Upon graduating from Wharton Business School, George had launched his career as a vault attendant at a small country bank, and ultimately became its Chairman. They were happy that Uncle Louie agreed to provide 100% of the bank’s capital, and become the bank’s first director. After all, his gambling casino has been rather successful since his release from prison five years ago on charges of extortion and loan sharking. After going through all the planning for the bank, G, G & G went out to look for a location. In Urban City, Upstate, they found an area where major roadways converged. On one corner were retiring seniors, on another corner, a middle class residential neighborhood with up and coming young executives, on another corner, two (2) shopping malls, and on the remaining corner, an impoverished, low-income community. All the areas had mixed ethnic populations. There, G, G & G opened Twin National Bank. The Bank decided to open two (2) new branches to serve its customers. But in which neighborhoods should it put the branches, since it received deposits (sometimes over $500,000 from a single depositor in the more affluent neighborhood!) from all of the areas? It had to sell all of its short-term and long-term securities to fund the growth. 

The bank soon found itself having to borrow frequently from the Federal Reserve to meet the withdrawal needs of its customers. One day, a customer had to be turned away because there was not enough cash for his $100,000 withdrawal. On another occasion, there was not enough to fund a $725,000 loan request. For the first three (3) years, the twins lived off of the large dividends from the young bank. Then the bank decided to raise more capital. Although the bank had plenty of Assets, they could only sell preferred stock that had a high rate of return. So, it decided to sell off its Operations Center building, at somewhat of a loss. In its fourth year, when interest rates began to rise again, causing a period of recession, and high unemployment, the bank was hit with large loan losses, exceeding its allowance for loan losses. The twins recognized they had loan problems, and asked their Chief Credit Officer, Cousin Louie, Jr., to examine the portfolio. It seemed that all of the business loans had either fixed rates or interest rate caps. The few corporate customers that had checking accounts at TNB, to satisfy their compensating balance requirements, all had NOW accounts, with interest rate floors. Cousin Louie found that some of the loan documents were missing. The only financial statements in the files were those collected at the time of the loan application, almost three (3) years ago. It was obvious that the loans were hastily made. It appeared that most of the companies had collateralized their five (5) year loans with office furniture, computers, and large out-of-state accounts receivables. The personal loans were also delinquent. The files showed that most customers had borrowed for bill consolidation, and to clean up their credit. One 17-year-old student, who had a job with Uncle Louie at the time, financed his junior prom through TNB. Most applicants referred by Uncle Louie, showed a lot of income, and most of them had a lot of real estate and high net worths. The twins couldn’t understand why they were not paying on time. Other than some obscure memo about “kneecaps”, the loans were unsecured. When Harry the Collector called them at 11:15 pm (“that’s when they seem to be home the most” he said), they grumbled, and promised to pay the bank back when their loan came through at the other bank in the neighboring city.

 Twin National Bank approached another bank with the idea of merging, but the idea didn’t receive serious consideration. The twins couldn’t understand why. Later on, MegaFirst Bank approached Twin National with the thought of acquiring them. Since you used to work for the FDIC as a bank examiner (and took the same Commercial Bank Management class), the twins have hired you as a consultant to review Twin National Bank, and offer your observations, concerns, and suggestions.