Advantage Bank works to right fiscal ship, end fed’s scrutiny

LOVELAND — Advantage Bank’s chairman and acting chief executive, John Nigh, believes the troubled financial institution will get out from under federal scrutiny in the coming year as it continues to improve its capital levels.

The Loveland-based bank, with branches in Fort Collins and Greeley, has been under the Federal Deposit Insurance Corp.’s watchful eye since 2009 when the federal regulator of banks issued Advantage a cease-and-desist order to stop its risky banking practices.

At the time, the FDIC said Advantage Bank was operating with inadequate capital and an excessive level of adversely classified assets and delinquent loans, and was using inadequate lending and collection practices.

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Since then, the bank has been making slow progress toward complying with FDIC standards while going through an ownership change and restructuring its management team.

Jeff Demaske and Larry Buckendorf, co-owners of Greeley-based homebuilder Journey Homes, took ownership of the bank in July after Demaske, a shareholder and customer of the bank, called in a $2 million promissory note in March that the bank could not repay. When they took ownership, shareholders at the time were left with nothing.

“Right now they (Demaske and Buckendorf) are the bank’s only two shareholders,” Nigh said. Demaske pumped $5 million into the bank, and is poised to inject more if needed before the bank’s next exam, Nigh said. Demaske also paid off loans he had with Advantage when he decided to pursue ownership of the bank, to eliminate any perceived conflict of interest.

“Demaske’s actions resulted in the bank not being closed,” Nigh said.

Buckendorf, an attorney, has been added to the bank’s board of directors, where his legal expertise is being used. Neither Demaske nor Buckendorf were available for comment.

Larry Martin, chairman of Golden-based consulting firm Bank Strategies LLC, said having an investor in the wings ready to help is the best possible scenario for a bank trying to revive itself.

“There’s no normal length of time” that a bank stays under the FDIC’s watch, Martin said, but banks that are able to improve their loan underwriting and increase  core deposits “tend to stick around longer.” He said no two cease-and-desist orders, now called consent orders, are the same. They depend on what activities need to be stopped and reversed, he said.

The FDIC has issued 22 cease-and-desist orders to banks in Colorado since 2009, according to FDIC records, and 11 of those banks since have shut down or have been acquired by another bank.

In Northern Colorado and the Boulder Valley, FirstTier Bank in Louisville and New Frontier Bank in Greeley were closed, while Mile High Banks in Longmont, Bank of Choice and Signature Bank in Greeley were acquired by other banks. Valley Bank and Trust in Brighton worked its way out from under the FDIC’s watch.

That’s what Advantage Bank has been trying to do for the past five years.

Calling it a “long and difficult process,” Nigh, who has been the bank’s chairman since its inception in 2000, said the bank’s goal is to receive a clean bill of health from the FDIC by January of next year.

To achieve that goal, Nigh took over as acting CEO, replacing Tom Chinnock, who “left the bank to pursue other interests,” Nigh said. Chinook could not be reached for comment, and Nigh declined to discuss whether the FDIC, which can remove officers, had any influence on his departure.

Nigh also hired former bank examiner Tina Daniels as chief financial officer. Nigh said Daniels provides valuable insight about FDIC procedures.

Nigh recently hired David Besch to serve as the bank’s branch president in Fort Collins, where Nigh believes much of the bank’s growth can occur. Jason Jones recently was hired as the bank’s branch president in Greeley. Adam Bliven, who has been with the bank for about 10 years, is president of the bank’s Loveland branch.

Chief credit officer Michael Lombardelli and president Jeff Kincaid, both longtime Advantage executives, remain with the bank. Lombardelli is focusing on resolving problems surrounding troubled assets and leading changes to reduce risky lending. Kincaid is leading the bank’s sales efforts.

Nigh said he believes Advantage Bank can grow to $500 million in assets. The bank’s total assets as of Dec. 31 were $262 million, according to the most recent FDIC call report.

“We’ve got a good team in place.” Nigh said. “There has been a lot of pressure on the staff, and during a rehabilitation process like this you have turnover, but the core employees have been great as we move through this difficult time.

“We still aren’t where we need to be, but we are making progress,” he said. “The last thing the FDIC wants to do is close a bank. As long as we are improving, the FDIC will work with us.”

As of Dec. 31, the bank had improved its capital level to $6 million, and had grown its loan portfolio to $195.2 million. About 9 percent of those loans are in the troubled range, Nigh said, much lower than six years ago. “The FDIC would rather see 5 percent or less in that range,” Nigh said. The bank had $235.4 million in deposits, according to the report.

Nigh predicted that the bank’s earnings will be more than $2 million by January, troubled assets will be at a minimal amount, and the bank will be “well capitalized.”

Advantage Bank’s Tier 1 leverage capital ratio, a key metric in determining the health of a bank, has been on a downhill roller coaster since 2009. That trajectory reversed in the final quarter of 2014. The ratio is calculated by dividing a bank’s core capital by its total assets. Bank regulators consider a 4 percent ratio “adequate,” and once a bank’s ratio falls below that threshold, the bank must improve its capital levels or face a potential shutdown.

“If a bank’s leverage capital ratio drops below 2.0, it’s usually toast,” Martin said.

Advantage’s Tier 1 leverage capital ratio began to decline in 2009 when it was at 8.38 percent, and hit its low mark at 2.44 in September of last year, according to FDIC records.

But the ratio improved dramatically in the fourth quarter, thanks to the cash infusion from the new owners and improved operating results. It stood at 4.61 percent as of Dec. 31, according to reports released by the Federal Financial Institutions Examination Council. The FDIC has not yet generated reports for the fourth quarter of 2014, according to an FDIC spokeswoman, who said the FDIC generates its reports by using FFIEC’s numbers.

Nigh said the bank’s troubles were caused by having a large percentage of its loans in real estate and construction companies as well as in land developers, two sectors hit hard by the Great Recession.

“We had a growing list of borrowers who had trouble making payments,” Nigh recalled. “It resulted in a reduction of capital.”

Nigh said the bank was forced to repossess property, but it took losses when the bank sold those properties.

“We couldn’t fill our contractual obligations, and the bank was in “real need of capital,” Nigh said.

As part of its effort to raise capital, Advantage Bank in June 2013 issued a promissory note worth $2 million to Demaske. The note was secured by 100 percent of the bank’s issued and outstanding shares of stock, according to a confidential memo to shareholders obtained by BizWest.

Even though the bank’s capital position was slowly improving, it couldn’t repay the $2 million, and Demaske subsequently foreclosed on the note in March 2014.

Demaske hired Denver-based St. Charles Capital LLC to market the bank stock to potential buyers, select a winning bidder and obtain regulatory approval for any transaction by late October. St. Charles Capital, in the meantime, was acquired by KPMG Corporate Finance. KPMG contacted 82 potential bidders. Twenty-two parties signed confidentiality agreements and reviewed confidential information about the bank including assets, liabilities and other pertinent data.

One party, Richmark Holding and its principals, led by Arlo Richardson, owner of Greeley-based Mineral Resources Inc., submitted a bid of $3.6 million, about $800,000 higher than Demaske’s bid of approximately $2.8 million.

Even though Richmark’s bid was higher, Demaske, as a secured creditor of the bank, raised concerns about Richmark’s qualifications to submit the bid but offered to sell the stock to Richmark in a private sale if Richmark were willing to agree to terms that included nine demands. Richardson did not agree to those terms and subsequently filed a lawsuit in Weld County District Court against Demaske over his concerns, saying in court documents that “it appears Demaske intends to unilaterally declare his low bid to be the winning bid of the public sale.” Richardson later withdrew the lawsuit, saying only that it “would have just destroyed the value of the bank.”

Nigh said that Richardson had not applied with regulators to become an accredited bidder, and likely would not have been able to do so in time to be declared the winning bidder.

Doug Storum can be reached at 303-630-1959, 970-416-7369 or dstorum@bizwestmedia.com.