Strategic Capital Bank. Champaign, Illinois. Date of Charter: 11/1999. Date of Failure: 5/22/2009. Date of MLR: 12/4/2009. Federal Regulator: FDIC. Charter: State.
Bank failed due to aggressive growth and concentrations in risky assets after 2007. Above all, the bank’s investment portfolio, which constituted nearly 60% of assets in 2008, was made up of speculative MBS and Municipal securities. Earnings from the portfolio decreased sharply after the credit markets began to struggle. Additionally, after 2007, the bank increased its CRE portfolio tremendously through two methods. First, it bought out-of-area CRE participations from ANB National Association in Arkansas, a bank after which Strategic Capital modeled its business plan beginning in 2007. Secondly, it opened an LPO and began originating CRE loans en masse. Bank management acknowledged that other institutions were exiting the CRE arena in 2007, but believed that they could “cherry pick” the better CRE loans or projects. The bank funded its rapid growth through brokered deposits. Eventually, the bank was prohibited from acquiring new brokered deposits, which proved costly, as these were more or less the bank’s only source of funding. What is most interesting in this MLR is that Strategic Capital did not engage in risky behavior until late 2007. In almost every case, these reports have suggested that the practices which led to a bank’s demise originated much earlier than late 2007. Also interesting, the MLR reports excellent cooperation between the state and federal regulators, timely exams and identification of bank issues, and even timely enforcement action, which is rare. Additionally, both regulators’ offsite monitoring programs appropriately alerted them to the bank’s deteriorating financial condition, and allowed regulators to call for an accelerated exam cycle. Not much is said about what regulators could have done differently. The MLR is especially careful in highlighting the significance of Strategic Capital’s participations with affiliates, particularly ANB National Association and Citizens National Bank, in the bank’s failure.
Westsound Bank. Bremerton, Washington. Date of Charter: 3/12/1999. Date of Failure: 5/8/2009. Date of MLR: 12/2/2009. Federal Regulator: FDIC. Charter: State.
Bank failed due to management’s inadequate risk management with regard to asset growth and CRE/ADC concentrations. Management displayed weak loan underwriting and credit administration techniques. Additionally, Westsound had an ill-advised incentive compensation arrangement in place. With regard to funding, the bank used money market accounts with extremely high interest rates, which were eventually reclassified as non-core funding. Finally, the bank experienced a deposit run-off as a result of negative publicity associated with a shareholder lawsuit in October 2007. The MLR maintains that regulators identified asset concentrations and liquidity issues at an early state but should have conducted more forceful supervisory action in 2007. Specifically, the MLR claims that regulators should have downgraded management and asset quality in 2006. Also, the MLR points out that regulators placed too much reliance on management’s ability to raise capital, which it did in anticipation of an IPO, rather than focusing on the risk associated with the ADC concentrations. There is a new tone in this MLR, as the IG concedes that the regulators probably made the right decisions given the information they had at the time, and that these observations are made completely in hindsight.
American Southern Bank.Kennesaw, Ga. Date of Charter: 8/30/2009. Date of Failure: 4/24/2009. Date of MLR: 12/2/2009. Federal Regulator: FDIC. Charter: State.
Bank failed because BOD and management materially deviated from original business plan by pursuing a strategy of growth centered in ADC lending, while excessively relying on wholesale funding. However, the bank never demonstrated that it could survive under its original business plan because its deviation basically occurred right after it received its charter. As the Atlanta real estate market declined, loan losses affected capital and earnings, and liquidity became tight when the bank was restricted from acquiring brokered deposits. Both state and federal examiners identified key concerns at an early stage. However, more supervisory attention may have been warranted in light of the bank’s de novo status and deviation from its original business plan.
First Bank of Beverly Hills.Calabasas, California. Date of Charter: 12/1980 (OTS). Charter Conversion: 9/2005 (State). Date of Failure: 4/24/2009. Date of MLR: 11/5/2009. Federal Regulator: FDIC.
Immediately after converting to a state charter in September 2005, FBBH began engaging in extremely risky practices. Initially a well diversified, geographically diverse S&L that specialized in CRE loans funded through core deposits, FBBH launched an ADC loan program in 2006, shortly after its conversion to a state charter, by originating and buying participations in ADC loans. Its ADC loan portfolio, along with its risky MBS portfolio became its primary source of revenue. Additionally, the once geographically diverse company began concentrating its business in the booming California and Nevada real estate markets and funding the vast majority of its business through brokered deposits and FHLB borrowings. The bank’s financial stability spiraled out of control after making poorly timed dividend payments in 2007, while the local real estate markets were crumbling. It eventually failed in April 2009. The MLR goes lengths in distinguishing the bank’s financial performance pre- and post- charter conversion, citing financial stability and consistent, balanced earnings during its time as an OTS regulated S&L, and a quick, risky departure from its original business plan that occurred after its conversion to a state charter. The MLR maintains that FDIC and state regulators identified many of the key issues regarding the bank’s financial stability, but both regulators were late and unassertive in taking enforcement action. The MBS portfolio was not addressed until November 2008, and the bank remained well-capitalized for PCA purposes until December 2008. Additionally, the MLR claims that the FDIC’s offsite monitoring tactics failed to identify supervisory concerns until June 2008.
Cape Fear Bank. Wilmington, NC. Date of Charter: 6/22/1998. Date of Failure: 4/10/2009. Date of MLR: 10/23/2009. Federal Regulator Involved: FDIC. Charter: State.
Bank failed due to high concentrations and rapid growth of CRE/ADC loans, brokered deposit dependency, failing NC real estate market, weak management, weak credit admin, and weak ALLL methodology. The MLR also points out that the bank’s parent company made public statements to the SEC about the bank’s viability, which caused rapid deposit outflow and a serious liquidity crisis. Cooperation was good between the regulators, and in addition to enacting 3 non-formal enforcement actions and one formal action between 2002 and 2008, the regulators accurately identified the majority of the bank’s issues and made recommendations to management. However, enforcement action was not strong enough, especially after the 2006 exam. The MLR specifically states that an MOU was necessary after the 2006 exam. Furthermore, the C&D came when failure was inevitable, and the institution remained at a level of adequately capitalized for PCA purposes through the failure, despite the fact that examiners labeled capital as being critically deficient in 10/2008. The MLR also cites inadequacies in FDIC off-site monitoring; however, off-site monitoring was not a huge issue because the FDIC also conducted adequate on-site exams and visitations.
New Frontier Bank. Greely, Colorado. Date of Charter: 12/1/1998. Date of Failure: 4/10/09. Date of MLR: 10/23/2009. Federal Regulator Involved: FDIC. Charter: State.
Bank failed due to high concentrations of CRE/ADC loans and agriculture loans, along with brokered deposit dependence, and a failing local real estate market. The MLR also cites a compensation structure based on loan production as one of the causes of failure. Over half of the adversely classified loans in NFB’s portfolio in 2008 were originated by the one senior official who benefited from the compensation policy. The bank did discontinue the policy after examiners cited it as an issue. Additionally, the bank experienced rapid deposit outflow after the public disclosure of its C&D on 1/30/2009. Regulation was largely a joint effort. Regulators increased the frequency of visitations, conducting 5 joint visitations between 2006 and 2009 in order to monitor the bank’s risk practices. And although regulators did identify the vast majority of the institution’s issues and made recommendations, the MLR is critical of regulators’ reliance on recommendations and not enforcement action. No enforcement action of any kind was taken until 2008, and the bank remained well-capitalized for PCA purposes until December 2008. Even then, the bank was not notified of its PCA categorization until March 2009.
FirstCity Bank. Stockbridge, Ga. Date of Charter: 5/20/1960. Date of Failure: 3/20/2009. Date of MLR: 10/5/2009. Federal Regulator Involved: FDIC. Charter: State.
Bank failed because of an aggressive growth pattern after the change in control in 2000. The bank had high concentrations in CRE/ADC loans (largest concentration in Georgia), a strong dependence on brokered deposits, and serious deficiencies in loan underwriting and credit administration. Additionally, First City sold loan participations to make larger loans, a tactic that contributed to its failure in the end. The MLR also cites a number of violations of Georgia state loan limits and appraisal methods. Regarding regulation, the MLR cites the inability of both state and federal regulators to adequately address asset quality and management’s ability to manage ADC risks. Specifically, asset quality was rated a 2 on a consistent basis until 2008 despite clear evidence of serious credit admin and loan underwriting deficiencies. The MLR states that the FDIC’s offsite monitoring program did not substantially alter the FDIC’s and DBF’s supervisory strategy until early 2008. More supervisory action was needed after the 2007 exam. This MLR is certainly more critical of the FDIC than the state, especially regarding exams that took place in the early 2000s, when the ADC concentrations began. After its 2002 exam, the state engaged in a BBR with the bank due to evidence of risky ADC concentrations. The BBR was lifted a year later after an FDIC exam reported that bank management had adequately addressed its issues. The FDIC’s exam also inspired an extension of the bank’s examination cycle from 12 to 18 months. The 18 month cycle was not revised until 2008. Later, in 2007, the FDIC determined that FirstCity was eligible for MERIT examination procedures, which did not require the same level of loan examination as a standard examination. Finally, the MLR is very critical of the FDIC’s failure to limit FirstCity’s use of brokered deposits, an issue that examiners recognized throughout the 2000s. Specifically, the MLR states that the FDIC’s tools for controlling the use of brokered deposits did not prevent FirstCity from obtaining such deposits in the third quarter 2008.
TeamBank, National Association.Paolo, Kansas. Date established: 1885. Name Changed: 6/1997. Date of Failure: 3/20/09. Date of MLR: 10/8/2009. Regulator and Charter: OCC.
Bank failed due to aggressive pursuit of CRE portfolio in failing real estate market and heavy dependence on brokered deposits. The bank also had a suspect compensation policy in place and an overly dominant CEO/President. The bank also had extremely weak credit admin and loan underwriting practices. The MLR is exceptionally critical of OCC’s failure to raise the bank’s significant issues to the level of “matters requiring attention” after the 2006 exam. Furthermore, the MLR claims that examiners did not identify until 2008 that TeamBank was being controlled by a President/CEO with too much responsibility. Additionally, the 2007 exam did not adequately address credit admin and loan supervision weaknesses. Finally, the MLR points out the after the January 2008 exam the EIC mistakenly believed that asset quality had improved and preliminarily rated the bank a composite 2, which was later revised to a 4. Essentially, the main criticism of the regulator as outlined in the MLR is the regulator’s reliance on “suggestions” instead of formal action.
Freedom Bank of Georgia.Commerce, GA. Date of Charter: 2/17/04. Date of Failure: 3/6/09. Date of MLR: 9/18/09. Federal Regulator involved: FDIC. Charter: state.
Bank failed because of CRE/ADC concentration and weak management oversight. The MLR cited untimely examinations as one of the biggest inadequacies in regulation. There was an 18 month lag between exams (2/07 FDIC exam- 6/08 State exam) during a time of heightened risk. The MLR does give the state credit for acknowledging the bank’s lack of an adequate CLP (contingency liquidity plan), while the FDIC claimed that the bank had an adequate CLP. Regulators noted the majority of the bank’s issues at an early state but did not take enough action.
Security Savings Bank. Henderson, Nevada. Date of Charter: 4/3/2000. Date of Failure: 2/27/2009. Date of MLR: 9/18/09. Federal Regulator Involved: FDIC. Charter: State.
State chartered ILC that failed because of high CRE/ADC concentrations, volatile non-core and high cost core funding, and a risky MBS portfolio. Bank management was also extremely uncooperative with examiners and exhibited adversarial behavior. All of the exams here were joint between the state and FDIC, and they actually did a good job of examining and addressing bank issues and made some meaningful moves in mitigating losses to the DIF. However, the regulators were late in addressing some mezzanine/high risk loans, the MBS portfolio, and did not review for formal pre-purchase analysis of long term repurchase agreements until July, 2008.
HeritageCommunity Bank. Glenwood, Illinois. Date of Charter: 11/28/1969. Date of Failure: 2/27/2009. Date of MLR: 9/18/2009. Federal Regulator Involved: FDIC. Charter: State.
Bank failed due to CRE/ADC concentrations, weak management oversight, and ill-advised compensation policies. Additionally, the bank demonstrated weak controls over interest reserves and a consistently incomplete financial analysis effort. Bank did not rely on non-core funding. The MLR is very critical of the Regulators’ (state and federal) inability to identify the bank’s deteriorating financial condition until 2008. The MLR is especially critical of the FDIC’s decision to rely on off-site monitoring between 2006 and 2008, which was a very troubling period for the bank. Not being a de Novo institutions, regulators were not required to conduct frequent on-site examinations, although they should have because of the bank’s high CRE concentrations.
Silver Falls Bank. Silverton, Oregon. Date of Charter: 4/1/2000. Date of Failure: 2/20/2009. Date of MLR: 9/1/2009. Charter Affiliation: State. Federal Regulator Involved: FDIC.
Bank failed primarily due to its massive ADC loan concentration (4th largest in the country) and its failure to comprehend the nature of the failing Oregon Real Estate Market. The MLR gives both the FDIC and the State Regulator credit for identifying critical matters that eventually caused the failure as early as 2003 and making recommendations to management to address the issues. However, the bank management consistently expanded its ADC concentration limits in order to deal with compliance issues instead of altering its risk profile; the regulators were not forceful enough in addressing this issue. Additionally, regulators did not ensure that the bank addressed its risks before failure seemed unavoidable. Regulators also did not adequately address ALLL underfunding. Regulation for SFB was largely a joint effort, with some independent examination, but the MLR more or less refers to both regulators in most of its analysis.
Riverside Bank of the Gulf Coast.Cape Coral, Florida. Date of Charter: 10/27/1997. Date of Failure: 2/13/2009. Date of MLR: 9/9/2009. Federal Regulator: FRB. Charter: State.
Bank failed due to high concentrations of CRE and residential mortgage loans in failing Florida Real Estate market. Additionally, the bank relied on the secondary market to purchase its loans. The downturn in the secondary market hampered, and eventually eliminated the bank’s ability to sell mortgages. Riverside was also forced to significantly increase its ALLL after examiners identified a major number of classified assets that the bank had not accounted for. The provisions to the ALLL caused serious capital and earnings erosions. The MLR maintains that examiners identified the loan concentrations at an early stage. However, the MLR states that more action was needed after the 2007 exam. Despite the fact that examiners noted the failing real estate markets, the dramatic shift in the bank’s longstanding business model, and its reliance on the secondary market even before 2007, no action was taken until the FRB entered into a Written Agreement with the bank in 8/08. The MLR does not do much to distinguish between the two regulators, but it is worth noting that FRB Atlanta conducted 7 exams of some form between 2002 and 2008, while the State only conducted 2.
Cornbelt Bank and Trust.Pittsfield, Illinois. Date of Charter: 10/25/1946. Date of Failure: 2/13/2009. Date of MLR: 9/4/2009. Charter Affiliation: State. Federal Regulator Involved: FDIC
Bank failed due to its high risk appetite and loan concentrations to individuals that increased rapidly from 2003-2005. The bank’s loans had extremely high LTV ratios. Credit underwriting was weak. Risk management was weak. A high dependence on brokered deposits left the bank in a tight liquidity position. The majority of examinations were joint efforts. Of the 9 exams during the problem period, two were independent FDIC exams and the rest were joint. The MLR gives the regulators credit for identifying the vast majority of the bank’s serious issues and properly communicating them to management. However, management did not follow through with examiner recommendations. The MLR is specific in suggesting that examiners should have required the bank to submit a capital contingency plan in 2008. Also, the MLR suggests that examiners should have launched formal enforcement action after the 2007 exam instead of a second MOU.
Sherman County Bank. Loup City, Nebraska. Date of Charter: 6/27/32. Date of Failure: 2/13/09. Date of MLR: 9/4/09. Federal Regulator Involved: FDIC. Charter: State.
Bank failed due to BOD and management’s decision to increase and fund loan commitments without considering customer’s ability to repay. Loan commitments were made to 34 agricultural customers participating in a failing Commodity Marketing Program based on purchases and sales of commodity futures and options contracts. SCB had a questionable third-party arrangement which involved funding the program’s broker. SCB also compiled over 300 violations of Nebraska’s Legal Lending Limit. FDIC and state noted bank issues in early exams but did not adequately address the riskiness of the third party arrangement or the risks posed to the bank due to concentrations in Program loans. Additionally, the bank’s CAMELS rating was not downgraded until 2/2/09, 11 days before the failure. C&D and PCA notification not issued until about a week before failure.
County Bank. Merced, California. Date of Charter: 12/22/1977. Date of Failure: 2/6/2009. Date of MLR: 9/9/2009. Federal Regulator Involved: FRB. Charter: State.
Although the bank was historically well diversified, its loan portfolio depended heavily on the performance of the California economy, and the bank eventually failed due to plummeting value in its CLD loans, the biggest section of its CRE portfolio. The MLR also cites dependence on FHLB funding and a failing California Real Estate market as primary causes of demise. Furthermore, the BOD and management were unable to comprehend the nature of the real estate market decline. State regulators downgraded County’s asset quality after a 2007 exam. Management contested the asset rating and refused to operate as if its asset class was downgraded. Negative press coverage in 2008 also caused a rapid deposit outflow and liquidity crisis. Regulation was largely a joint effort between FRB and State. The MLR seems to infer that the real estate market collapse was too rapid for regulators to take meaningful action. However, it does state that regulators could have been more forceful in supervision after the state’s 2007 exam. The bank failed 18 months after the state’s 2007 exam cited first signs of asset deterioration.
FirstBank Financial Services.McDonough, Georgia. Date of Charter: 1/28/02. Date of Failure: 2/6/09. Date of MLR: 9/3/09. Federal Regulator Involved: FDIC. Charter: State.
Bank failed primarily due to its high concentration of CRE/ADC loans in a deteriorating Atlanta Real Estate Market. The bank relied heavily on non-core funding and adopted a business plan based on rapid asset growth. Earnings and capital eroded as a result of loan losses, and ALLL methodology was terribly inadequate. The State and FDIC conducted an adequate number of exams and identified key problems (namely ADC concentration) as early as 2002. However, no supervisory action was taken until 2008 when there were significant and quantifiable losses to the loan portfolio. The MLR is especially critical of the lag between the identification of a need for C&D (3/08) and its actual materialization (10/08).
Alliance Bank. Culver City, California. Date of Charter: 5/18/1980. Date of Failure: 2/6/2009. Date of MLR: 9/1/2009. Federal Regulator Involved: FDIC. State Chartered.
Bank failed due to high ADC/CRE concentrations in failing California Real Estate market. The bank relied heavily on wholesale funding. Additionally, the MLR cites weak credit admin, weak risk management, and lack of CLP as reasons for failure. The MLR gives the regulators credit for working together and identifying some of the main problems of the bank. The regulators conducted many exams during the problem period, and the MLR claims that DIF losses could have been much larger without regulator efforts. However, additional supervisory action was needed to address aggressive growth concentrated in ADC lending, reliance on wholesale funding, and weak risk management after the May 2007 exam. Regulators noticed the bank’s primary issues early on, yet they took no formal or corrective enforcement action until 2008.
Suburban Federal Savings Bank.Crofton, Maryland. Date of charter: 1995. Date of Failure: 1/30/09. Date of MLR: 9/11/09. Regulator and Charter: OTS.
Thrift failed due to ADC/CRE loan concentrations, weak internal controls, and a failing Maryland Real Estate Market. Management pursued rapid loan growth and a shift in concentration to ADC from residential beginning in 2003. Additionally, the thrift displayed chronic accounting deficiencies and incentive compensation policies based on loan production instead of loan quality. OTS regulators identified key problems in the thrift and suggested corrections but did not adequately monitor the thrift through field visits, making it difficult to ensure that corrections were made. The MLR suggests that OTS regulators should have employed concentration limits. The MLR makes no mention of funding issues.
Ocala National Bank. Ocala, Florida. Date of Charter: 2/7/1986. Date of Failure: 1/30/2009. Date of MLR: 8/26/2009. Charter and Regulator: OCC.
Bank failed due to BOD and management’s aggressive pursuit of ADC loans, the largest portion of its CRE portfolio, funded primarily through brokered deposits and FHLB borrowings. Once the homes that were financed by loans through its ADC portfolio were completed, Ocala converted the loans into residential mortgage loans and sold them in the secondary market. This configuration presented serious issues when both the real estate and secondary markets collapsed. The MLR cites weak credit admin, weak risk management, and a failing real estate market as additional causes of failure. Also, the MLR identifies two suspect practices in which the bank was engaged that contributed to its demise. The first practice involved paying large quantities of dividends to the holding company, with which bank management (almost totally family run) had close ties. Secondly, banks made significant payments to repurchase loans from a company that was owned by management’s son. The MLR is fairly critical of the OCC’s failure to adequately address these two practices. Furthermore, the MLR notes that the OCC continued to rate the bank a CAMELS 2 throughout 2005-2006 despite noting serious issues in asset quality at an early stage. OCC regulators relied on regulator suggestions, which bank management largely disregarded, and little enforcement action. Formal action was not taken until 2008.
Magnet Bank. Salt Lake City, Utah. Date of Charter: 9/29/2005. Date of Failure: 1/30/2009. Date of MLR: 8/24/2009. Federal Regulator Involved: FDIC. Charter: State.
Bank failed due to high CRE concentrations, a business plan that revolved around excessive growth, reliance on brokered deposits, a dominant CEO, and compensation policies that encouraged loan production, not loan quality. Additionally, the MLR reports a large amount of suspicious activities in which the bank was engaged. The MLR does little to distinguish between the state and federal regulators, and it commends the regulators’ use of enforcement actions. Specifically, the regulators implemented two C&Ds in September and October of 2008. Additionally, PCA was issued in a very timely manner, in June, 2008. However, the MLR does assess that more supervisory action was needed after 2007, especially since the bank was a de novo institution and had extreme CRE/ADC concentrations and high non-core funding ratios. Furthermore, regulators continuously praised bank management despite obvious issues. And while PCA was timely, other enforcement actions were not as timely as necessary.
1st Centennial Bank. Redlands, California. Date of Charter: 8/1/1990. Date of Failure: 1/23/2009. Date of MLR: 8/11/2009. Federal Regulator Involved: FDIC. Charter: State.
Bank failed due to high concentrations of CRE/ADC and C&I loans without adequate underwriting and credit admin, and a high dependence on brokered deposits. Additionally, the bank concentrated its business in one geographic area, which proved costly when the California real estate market collapsed. State and Federal regulators are treated much in the same manner by the MLR. They conducted timely exams and identified the primary causes of the bank’s failure. However, enforcement action was ill-timed and not forceful enough, and 1st Centennial qualified for the FDIC’s MERIT examination procedures. Furthermore, bank management did not adhere to examiner suggestions and requirements. It failed to raise $30 million in additional capital by 8/1/2000 as required by the FDIC. It also did not fulfill a capital demand letter issued by state regulators in 11/08 (much too late anyway). Moreover, bank management refused to stipulate the April 2008 joint C&D order. Overall, regulators did not adequately address the effectiveness of bank management in monitoring the ADC concentrations.
National Bank of Commerce.Berkeley, Illinois. Date of Charter: 7/26/1966. Date of Failure: 1/16/2009. Date of MLR: 8/6/2009. Charter and Regulator: OCC.
Bank failed because of massive holdings of preferred GSE securities. Specifically, 74% of its investments were in Fannie and Freddie. Unfavorable economic conditions and the unprecedented decline in the value of GSE securities caused the bank’s investment portfolio to rapidly decline. The MLR does not place much blame on OCC regulators because of the suddenness of the deterioration. However, it does mention that OCC regulators need to be mindful of the notion that high concentrations in supposedly safe investments that are not explicitly backed by the full faith and credit of the US government do nevertheless pose a risk that must be managed.
Bank of Clark County. Vancouver, Washington. Date of Charter: 2/8/1999. Date of Failure: 1/16/2009. Date of MLR: 8/4/2009. Federal Regulator Involved: FDIC. Charter: State.
Bank failed due to CRE/ADC concentrations and failure to indentify the risk associated with such concentrations in the Portland, Oregon area. Additionally, the bank relied on volatile funding sources, had weak credit underwriting standards, and violated a number of laws and regulations. The MLR maintains that regulators noted the majority of the bank’s issues, but timing by both the federal and state regulators was poor. Specifically, the FDIC presented BCC with a C&D one day before its demise. The state threatened to revoke BCC’s charter because of capital issues one month before the bank failed. And generally, ADC concentrations cited in the 2007 exam warranted greater supervisory action.
Haven Trust Bank. Duluth, GA. Date established: 1/24/2000. Date of Failure: 12/12/2008. Date of MLR: 8/5/2009. Federal Regulator: FDIC. Charter: state.
Bank failed due to high concentration of CRE loans, brokered deposit dependency, and a failing Atlanta Real Estate Market. Bank management consistently ignored examiner recommendations and was non-compliant with laws and regulations. The MLR offers virtually no distinction between the state and federal regulator. The regulators alternated exams between 2000 and 2008. The MLR is very critical of the regulators’ inability to identify the bank’s inappropriate use of interest reserves, its questionable loan participation practices, its inadequate ALLL methodology, its deficient loan policy, and the obvious presence of insider transactions. The MLR points out that examiners knew about the majority of the bank’s issues between 2002-2006 but took no action until 2008. By that time, failure was inevitable.
First Georgia Community Bank. Jackson, GA. Date of Charter: 10/1/02. Date of Failure: 12/5/08. Date of MLR: 6/29/09. Charter: State. Federal Regulator involved: FRB.
The causes of the company failure are very similar to most of the other banks: ADC concentration, Brokered Deposit dependence, failing GA Real Estate Market, weak management. However, the regulator story is different than most. The MLR notes that FRB never gave First GA a CAMELS rating better than 3. First GA always had loan concentration issues, even before its ADC concentrations. In the early 2000s, First GA had concentrations in convenience store loans; those concentrations were addressed by regulators and seriously limited after the company went through a period of financial turmoil. Instead of taking on a strategy of diversification, the bank simply shifted its concentrations to the ADC market. Again, FRB always seemed informed about these concentration issues, and as a result, never gave First GA a better than 3 CAMELS rating. This was not the case with the state regulator. After a 9/05 exam, the state not only upgraded FGCB to a CAMELS 2 but also lifted an MOU that FRB put in place in 9/03. The state replaced the MOU with a Board Resolution. In 4/07, FRB downgraded FGCB to a CAMELS 3. In 4/07, the state once again upgraded FGCB to a CAMELS 2 and actually lifted the Board Resolution that was in place. The FRB publicly acknowledged after this CAMELS upgrade that it would not be treating FGCB as a CAMELS 2 institution because the bank still had liquidity issues, extreme ADC concentrations, and weak risk management. However, the FRB never issued a formal, separate CAMELS rating as it is supposed to in such a disagreement. In a 12/07 joint examination, FGCB was downgraded to a CAMELS 4 and an MOU was put in place. In 7/08, FRB downgraded the bank to a CAMELS 5 and put a Written Agreement in place. Then in 12/08, the bank failed. This is a pretty clear case in which the state regulator was seriously lagging behind the FRB. Cooperation was not good.
Alpha Bank and Trust. Alpharetta, GA. Date of Charter: 5/8/06. Date of Failure: 10/24/08. Date of MLR: 5/1/09. Charter: State. Federal Regulator involved: FDIC.
This was the fastest failure of any bank between 1993 and 2008. Alpha failed for reasons similar to FCGA with a few differences. It also had serious ADC/CRE concentrations, a moderate dependence on non-core funding, a failing market, weak underwriting, and weak risk management. However, Alpha also had a compensation policy in place that rewarded loan production, with very little focus on loan quality. Furthermore, Alpha did not follow legal lending limits and loan-to-value limits. The MLR is critical of the FDIC’s failure to adequately address the vast majority of the bank’s issues, especially its ill-advised compensation policies. The MLR gives the state credit for identifying most of the issues and making recommendations to bank management about how to address the issues. The state regulator addressed issues regarding Alpha’s Tier 1 leverage Capital Ratio, its failure to operate within a regulator approved business plan which is required of a de novo institution, its establishment of a non-working Executive Management Committee, its dividends and incentives bonuses structure, its liquidity ratio, its brokered and interest deposit reports, and its income statements. The FDIC only addressed two of these issues, the Tier 1 leverage ratio and the business plan. In this MLR, the roles that the federal and state regulators played in the FGCB failure are largely reversed.
FNB Nevada. FNB Arizona. First Heritage Bank.Charters (FNB Nevada & Arizona): 1987. Charter (FHB): 2005. Date of failures: 7/25/08. Date of MLR: 2/27/2009. Charter & Regulator: OCC.
MLR tracks the failure of three different banks under the same holding company. FNB Arizona merged into FNB Nevada one month before the failure. The two FNB banks failed due to loan concentrations in CRE/ADC and residential mortgages, particularly non-traditional Alt-A loans, which caused serious earnings losses and capital erosion when the real estate markets began to collapse. FNB Arizona was also required to repurchase a number of its risky loans as a result of reworked contracts in 2006. Furthermore, the banks displayed suspect accounting practices, and bank management, which was dominated by the chairman of the board, was extremely ineffective and slow to respond to examiner recommendations. FHB’s failure was a direct result of the liquidity crisis it experienced when FNB was unable to repay $74.4 million in federal funds that it borrowed around the time of its failure. The three banks engaged in active participations with one another since FHB’s inception in 2005. FHB also had CRE concentrations and weak risk management. The MLR claims that OCC examiners identified the banks’ key issues as early as 2002, but regulatory action was not forceful enough at any point. The issues that were identified in 2002 repeated themselves throughout exams until the failures in 2008, and yet, enforcement action was not taken until the second quarter 2008. This was in large part due to the possibility of an equity injection from an outside investor, which never actually materialized. The MLR also claims that examination Workpapers generally lacked specificity and the basis for conclusions were not always clear.
IndyMac Bank. Pasadena, California. Date of Charter: 7/1/2000. Date of Failure: 7/11/2008. Date of MLR: 2/26/2009. Regulator and Charter: OTS.
Thrift failed due to aggressive loan growth policies and concentrations in residential mortgage and HCL loans. The thrift offered an array of non-traditional mortgage products, such as ARMs, 80/20 and subprime/ALT-A loans. Additionally, the thrift relied heavily on FHLB advances and brokered deposits, while also relying heavily on secondary mortgage markets to sell loans. The effects of the secondary market freeze up and real estate market collapse in both California and Florida, where the thrift concentrated its operations, were detrimental to its functioning. Furthermore, IndyMac experienced intense negative media coverage in late June 2008, which fostered extreme deposit outflow and a liquidity crisis. While the MLR cites the negative media attention as an issue, it makes clear that the failure of the thrift was inevitable even before the media attention. The MLR is extremely critical of regulatory efforts with regard to IndyMac. While regulators noted a few weaknesses, they did not identify or sufficiently address its core weaknesses, namely aggressive growth without control, poor loan underwriting, and reliance on non-core funding. And while examiners noted the prevalence of nontraditional mortgage products, they did very little to stop the proliferation of such products. Furthermore, regulators seriously overestimated management organization and risk management abilities. Additionally, OTS did not always report all problems found by examiners, as evidenced by the Workpapers. Regulators also chose to rely on suggestions instead of enforcement action despite IndyMac’s long history of not addressing examiner recommendations. The thrift remained a CAMELS 2 until 2008 despite obvious evidence of high risk activities. IndyMac did not even appear on the OTS problem list until early July. No enforcement action of any kind was taken until June 2008. Also, regulators failed to examine IndyMac’s Conduit Division until 2007. Finally, PCA was implemented far too late, on 7/1/2008, ten days before the thrift failure.
