An unwieldy capital structure left SunSouth Bancshares Inc. with few alternatives but to file for Chapter 11 bankruptcy protection in February 2017. One year later with its debt structure reorganized and its banking subsidiary boasting improved capital ratios, the Dothan, Ala.-based company's president and CEO sees a range of possible longer-term outcomes.
Whether it remains an independent bank that "rewards the shareholders nicely" through dividends or becomes an acquirer or a seller, said Henry Monty Weigel in a recent interview, "We're building it for all three of those, and that's when you get your best value."
An industry veteran that has served in executive capacities at the likes of SunTrust Banks Inc., Florida Capital Group Inc. and NorthStar Banking Corp., Weigel joined SunSouth in 2014 and sought to stabilize an institution that had generated escalating net losses in the years that preceded his arrival.
SunSouth entered formal agreements in 2013 with all three of its regulators: the FDIC, Federal Reserve and the Alabama State Banking Department. At the time of its bankruptcy filing, SunSouth reported owing nearly $2.5 million under a secured business loan from a subsidiary of First National Bankers Bankshares Inc. in addition to upwards of $9.7 million in principal and accrued interest associated with two series of trust preferred securities.
Unlike a number of similarly situated companies that filed Chapter 11 petitions so as to facilitate the sale of their subsidiary banks pursuant to Section 363 of the U.S. Bankruptcy Code, including an ongoing process involving Colorado National Bank, SunSouth sought to reorganize its debt and raise new capital from potential new and existing investors. Bank holding companies that have sought to reorganize through a Chapter 11 filing, such as Alabama's Nexity Financial Corp. and Northwest Bancorp of Illinois Inc., have found mixed results.
Weigel said he would have preferred settling with the trust preferred creditors out of court given that the optics of a bank holding company seeking Chapter 11 protection "are terrible." But ultimately he felt like the company had little choice after more than two years of negotiations.
"They kept talking and talking, but when it got down to brass tacks nothing would happen," he recalled.
That the secured creditor had a first-priority lien on 100% of the bank's stock limited the options by the unsecured creditors to pursue an action like an involuntary bankruptcy filing, Weigel added. Then-outstanding litigation that "could have gone in a terrible direction for us" served to limit outside interest in a possible sale of the bank. SunSouth has since settled the litigation in a way that has "stopped the bleeding," he added.
The company's Chapter 11 plan contemplated the repayment of the secured borrowings over time. Trust preferred creditors were due to receive 5% of the new common stock in the reorganized debtor. The plan was confirmed in May 2017, and the bankruptcy case was closed in August 2017.
Weigel said that SunSouth was pleasantly surprised about its ability to retain customers throughout the bankruptcy process. The bank posted a modest amount of net income during the second half of 2017, after it ended a stretch of seven consecutive quarters of losses. Weigel said the bank was profitable in January 2018, and he anticipates it will make money for the full year, though not in an amount comparable to what a peer institution might expect to earn.
"We still have some healing to do," he said.
Achieving resolution of the written agreements with regulators represents a key part of that process. The FDIC consent order, for instance, requires the bank to maintain a leverage ratio of at least 9% and a total risk-based capital ratio of at least 12%.
Outside of the bank's leverage ratio of 5.19% as of Dec. 31, 2017, Weigel said, "We've pretty much complied with everything there. ... Our credit profile, our performance, our earnings, our reserves, our charge-offs, everything is within line now. I believe we'll get in a situation here very soon where they'll just allow us to earn our way up to that 9% level and add some additional capital here and there."
Eventually, Weigel did not rule out a sale of SunSouth to the extent "someone wants to pay us more than we can conceivably earn on a return on equity ... over time."
For the moment, however, he said that SunSouth is generating a return of between 15% and 20% on the $1.6 million of new capital it raised in 2017.
"So that's pretty darned good to begin with," Weigel said, "and as we now start to grow again, we expect that to step up."