Traverse City Record-Eagle

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September 3, 2010

Plan to buy 25% of TCSB being reviewed

By Bill O'Brien bobrien@record-eagle.com

TRAVERSE CITY — Federal regulators are reviewing a $1 million investment in Traverse City State Bank by the owner of a local oil and gas exploration company, a move that could alter control of a local bank that struggled mightily in recent years.

The Federal Reserve Bank in Chicago this week issued a public notice on a proposal from the Thomas C. Pangborn Trust to potentially acquire more than 25 percent of the shares of TCSB Bancorp Inc., the parent company of Traverse City State Bank. Pangborn is founder and CEO of Savoy Exploration Inc., a Traverse city-based oil and gas exploration company. The trust includes Pangborn and his three daughters.

The local bank posted nearly $5 million in losses over the past two years, although Pangborn contends the region's economy is recovering and he expects to make money from his investment.

"I think it's a sound investment in the bank and the community," he said. "I looked at it as a business opportunity."

Bank officials said Pangborn purchased $1 million in subordinated debt in spring 2009 when the bank attempted to raise capital during mounting losses tied to bad commercial and housing loans and a drop in local real estate values. Pangborn was offered stock options at a fixed rate of $6 per share that expire at the end of 2013, and as part of the transaction will convert $500,000 of his sub debt to common stock to relieve the bank of monthly interest payments and expense payments on the debt.

If Pangborn converts all his subordinated debt to stock and exercises other stock options, he could potentially acquire more than 25 percent of the bank's shares, which triggers the Federal Reserve review. Federal regulations require a "Change in Control" application for large-volume share purchases that includes background checks on applicants.

Regulators will accept public comment on the application at least until Sept. 20, and can set a public hearing on the proposal. The agency generally makes a decision on the application within 60 days.

Ann Bollinger, the bank's vice president and chief financial officer, expects Pangborn will convert about half of his debt to stock by Sept. 30, giving him just under 7 percent of the bank's stock. That's about the same level as other major bank shareholders, Bollinger said.

The bank realized nearly $5 million in losses in 2008 and 2009 during the economic maelstrom that rattled the country's financial sector.

State and federal bank regulators issued a consent order this year that directed Traverse City State Bank to bolster its minimum total capital ratio to 12 percent by this fall, temporarily suspend dividend payments to shareholders and take other steps to shore up finances.

Bollinger said she's confident the bank will meet consent order requirements. The bank cut staff, renegotiated several lease and vendor contracts and reduced interest costs by $1 million. Those changes, plus some stabilization in the region's economy, helped the bank to a net income of $211,000 for the first half of 2010 and bank officials expect to post a profit this year. The bank is continuing its stock offering through Sept. 30.

"We feel like we've turned the corner," Bollinger said.

Pangborn is a Midland native who graduated from Michigan Technological University. He came to Traverse City in the mid-1970s and worked for Shell Oil Co. before starting his own oil and gas exploration companies. He launched his current company in 1995.

Pangborn said he first bought stock in the bank more than five years ago. He decided to bolster his investment to $1 million last year because he's confident in the bank's senior management team that includes Bollinger and president/CEO Connie Deneweth.

"I think the stock is definitely worth $6," he said.

Pangborn is not on the bank's 11-member board of directors, but officials expect he will be invited to join the board by year's end. Bank shareholders were notified of Pangborn's application in a letter sent out this week.

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