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Citizens Bank of Mukwonago on the rebound

CEO explains effect of recession on community bank compared to Wall Street

Dec. 7, 2010

After receiving an order to take measures to improve the strength of the bank earlier this year, Citizens Bank of Mukwonago appears poised to turn a profit in 2011.

Earlier this year, the Federal Deposit Insurance Corp. (FDIC) and the Wisconsin Department of Financial Institutions alleged that Citizens Bank used "unsafe or unsound banking practices" but the bank - which is projected to bounce back with a profit next year - is in no danger of shutting down, according to Chief Executive Officer Charles Miller. Miller also contends that the bank has complied with the orders issued by regulatory bodies.

"We've basically done everything that's in that order," he said. Regulators had asked Citizens Bank to reduce delinquent loans, maintain elevated levels of capital and take other measures to improve the bank.

Miller said it was important to remember that while the bank found itself in a precarious position over the past few years due to fallout from the recession, it did not get in trouble for the same reasons that larger banks or Wall Street did, nor did it take any bailout money from the federal government.

"Our issues have nothing to do with subprime loans, exotic derivatives or alternative lines of business," a letter from the bank read.

It also ranks near the top of its peer group of banks in terms of the amount of liquidity and capital it holds, the two factors that keep banks from closing during harsh economic periods, according to Miller.

"We always had a bunch of capital," he said. "As a matter of fact … I remember other bankers criticizing me and our bank, saying that (we) had way too much capital and that (we) weren't leveraging the bank properly to benefit our shareholders. Well, we felt that we liked that conservative nature. We wanted to keep that excess capital, and we're happy now that we did."

Miller said regulators were mostly concerned with the amount of commercial real estate loans that Citizens Bank doled out, but he was quick to point out that when the bank underwrote both those loans and home loans during Waukesha County's housing boom over the past 20 years, economic conditions were very different.

Additionally, the bank CEO indicated that regulators reviewed the same loans that the bank handed out during more prosperous times and never indicated any dissatisfaction with them, even though the same regulatory bodies now say that Citizens Bank should have never given those loans.

"It's not like we had lax underwriting standards," he said.

But after the economic freefall in 2008 that left the country in the grips of high unemployment rates, banks like Citizens Bank were forced to get new appraisals on the properties they already had underwritten with loans.

"So now we get it reappraised, well guess what? It doesn't take an Einstein to figure out that that the same appraiser that appraised it and showed 'X' value back at the time we underwrote the loan that showed us with plenty of collateral equity now is saying, 'well, now you're under water.' "

Many of the new appraisal values were priced well below their current loan levels, creating large losses early in 2010 for the bank.After a $3.4 million loss in the first quarter and a $150,000 loss in the second, the bank's finances stabilized, and it posted a $709,000 profit in the third quarter. Miller expects the bank to make somewhere between $800,000 and $900,000 in the final quarter of 2010.

"We're cleaning up everything we can, and then when we get into 2011, we're projecting profits between $3 million and $4 million," Miller explained.

"Now it's just a matter of working out of these loans and getting those loans that are struggling to either pay off or get them to come back to a current status and a proper status."

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