Short Summaries: 2010
1. United Security Bank. Sparta, GA. Date of Charter: 9/12/1932. Date of Failure: 11/6/2009. Date
of MLR: 5/26/2010. PFR: FDIC. Charter: State.
Bank failed because management could not control risks associated with an increasingly
complex business plan. Sparta fundamentally altered its business plan in 2002 by expanding into
the Atlanta metropolitan area and engaging in CRE/ADC activity funded through volatile funding,
a market in which it rarely participated in the past. In addition to originating CRE/ADC loans,
Sparta acquired a number of out of area loan participations for which it performed inadequate
analysis. Sparta’s operations were dominated at every level by one individual. Underwriting and
appraisals were poor. Sparta violated many laws and regulations related to BSA, appraisals, legal
lending limits, and ALLL. Eventually, the collapse of the Atlanta real estate market caused
significant earnings losses and capital erosion for Sparta, and the bank was closed. The MLR
points out the regulators identified a number of Sparta’s issues at an early stage and issued
enforcement action. However, Sparta’s expansion into the Atlanta area which brought a
fundamental change to its business plan, accompanied by the presence of the dominant official
and inadequate board and management should have elevated supervisory concerns as early as
2002. The MLR points out that enforcement action would have been prudent in 2007 and that
examiners should have been more skeptical of management’s ability to adequately address
deficiencies because prior to 2002, the bank had been operating in a vastly different market.
The MLR states that these circumstances warranted more forward looking supervision on the
part of the examiners.
2. Bank of Elmwood. Racine, Washington. Date of Charter: 12/1960 (SNMB), 8/1986 (SMB). Date
of Failure: 10/23/2009. Date of MLR: 5/12/2010. PFR: FRB. Charter: State.
Bank failed due to management’s inability to control risks associated with high growth strategy
that features new loan products and out-of-market lending. Elmwood developed a new strategy
in the early 2000s to increase earnings, which revolved around originating and holding
residential loans and also buying and selling out-of-area CRE loan participations, for which the
bank conducting improper due diligence. The new strategy was largely unsupportable because
of Elmwood’s weak earnings and inadequate capital. Elmwood funded its growth through
various sources of non-core funding. Additionally, the bank’s inexperienced management
implemented ineffective loan monitoring systems and incentive compensation packages that
encouraged loan production with lax underwriting. The MLR maintains that examiners
consistently alerted Elmwood to deficiencies in the bank’s structure and performance. However,
given the bank’s aggressive loan growth and insufficient capital and earnings levels and high
level of classified assets discovered around 2007, earlier supervisory action may have been
warranted.
3. American United Bank. Lawrenceville, Georgia. Date of Charter: 12/20/2004. Date of Failure:
10/23/2010. Date of MLR: 5/6/2010. PFR: FDIC. Charter: State.
Bank failed because of losses experienced on loan portfolio highly concentrated in CRE/ADC
funded through high priced time deposits and FHLB borrowings. The BOD and management
were very inexperienced and did not properly manage the risks associated with a rapidly
growing loan portfolio. The MLR also maintains that AUB deviated from its original business plan
and did not adhere to the details of the business plan that were the basis for the FDIC’s approval
of insurance. Additionally, the bank engaged in loan participations for which it did little to no
evaluation. AUB was also cited for a significant number of violations of laws and regulations
related to real estate lending standards, ALLL, Risk management for participations, and Reg O.
The MLR maintains that regulators identified the bank’s weaknesses at an early stage but did
not employ adequately forceful enforcement action. Supervisory action related to CRE/ADC
concentrations was not taken until 2/09 after the state made an interim downgrade.
Supervisory action related to credit risk management was not taken until 5/09. Despite variance
in AUB’s business plan at an early stage, examiners concluded that AUB was operating within
the parameters of its initial plan. The MLR also points out that management was rated a ‘2’ until
2/09 and suggests that examiners should have downgraded management at an earlier stage in
light of known management deficiencies, inexperience, and turnover rate. Finally, the MLR
notes that although offsite monitoring flagged AUB for review, offsite monitoring did not alter
examiners’ supervisory activities. Examiners should have increased activity based on offsite
findings during 2007-2009.
4. San Joaquin Bank. Bakersfield, California. Date of Charter: 12/1980 (SNM), 10/2006 (SM). Date
of Failure: 10/16/2009. Date of MLR: 5/12/2010. PFR: FRB. Charter: State.
Bank failed because of management’s slow response to the deteriorating California real estate
market and inability to manage risk associated with CRE/ADC concentrations funded through
brokered deposits and FHLB borrowings. SJB had a practice of renewing loans with no
evaluation of the borrower’s financial condition even when markets were deteriorating. The
MLR maintains that CRE concentrations and the management’s plan for loan growth despite the
failing economy warranted greater supervisory action in 2007. Additionally, the MLR points out
that the State’s 2008 exam highlighted significant issues within the bank which deserved
timelier enforcement action from state and FRB.
5. Warren Bank. Warren, Michigan. Date of Charter: 1998. Date of Failure: 10/2/2009. Date of
MLR: 4/29/2010. Federal Regulator: FRB. Charter: State.
Bank failed because management failed to manage risks associated with CRE loan portfolio,
which was heavily concentrated in CLD loans, during a significant economic downturn in the
Michigan economy. Management did not perform adequate appraisals of loans and used
interest reserves to mask losses. Additionally, management placed too much confidence in its
relationship with borrowers, renewing a number of loans without assessing the borrowers’
financial standing during the economic downturn. Eventually loan losses eliminated earnings
and depleted capital. The MLR maintains that regulators identified the vast majority of the
bank’s issues but that examiners did not issue an enforcement action compelling the bank to
rectify recurring regulatory concerns regarding loan grading, ALLL, and capital levels until
September 2008, which proved to be ill timed.
6. Georgian Bank. Atlanta, GA. Date of Charter: 11/2001. Date of Failure: 9/25/2009. Date of MLR:
4/10/2010. Federal Regulator: FDIC. Charter: State.
Bank failed because management failed to manage risk associated with high ADC concentrations
and a high number of loans to a few individuals. Additionally, Georgian’s primary funding
mechanism was through brokered deposits, but it also had a large amount of deposit money
from one individual, who eventually withdrew his money when Georgian demonstrated financial
deterioration, causing Georgian to experience a liquidity crunch. Georgian was dominated by
one senior official who pushed for rapid asset growth. Additionally, the bank’s ALLL
methodology was seriously flawed, and examiners cited the bank for a number of
contraventions of laws and regulations. The MLR maintains that examiners identified
concentration issues and brokered deposit dependency at an early stage; however, Georgian’s
supervisory profile remained satisfactory until 2008. According to the MLR, more supervisory
emphasis on risk management issues was warranted in 2008. Additionally, the MLR points out
that examiners did not identify the bank’s lack of a contingency liquidity plan early enough. Also
of interest in the report is the discussion of the bank’s quick departure from its original business
plan after its de novo period ended. FDIC used MERIT for the 2007 exam.
7. Irwin Union Bank and Trust. Columbus, Indiana. Date of Charter: 13/31/1959. Date of Failure:
9/18/2009. Date of MLR: 4/29/2010. PFR: FRB. Charter: State.
IUBT was a community bank until 2002 when its holding company moved many of its non bank
subsidiaries under IUBT’s control, turning IUBT into a large, complex banking organization in a
short amount of time. IUBT’s transition to a LBO very poorly administered. IUBT’s management,
BOD, and holding company, failed miserably in implementing risk management tools that kept
pace with IUBT’s growth and complexity. After its conversion to an LBO, IUBT’s business,
primarily because of its subsidiaries, followed an “originate to distribute business model”
through its mortgage operations, which, but nature, implied an intense reliance on the
secondary markets. Additionally, IUBT developed significant concentrations in CRE loans. From
2000-2005, IUBT’s total assets triples, while net income decreased over the five year period.
IUBT’s liquidity position was always precarious, and management at no point possessed an
adequate contingency liquidity plan. IUBT not only demonstrated a reliance on the secondary
markets for liquidity (which became a huge issue because of the market freeze up), but the bank
also relied on brokered deposits and FHLB borrowings, which became strained when the bank
fell below regulatory capital requirements. Furthermore, the vast majority of IUBT’s investments
were pledged as collateral, so the bank had very little flexibility in that regard. On top of that, a
single commercial customer accounted for $300 million of IUBT’s deposits, and the bank also
held $500 million in Indiana public funds. IUBT’s liquidity position is the key reason for the
bank’s closure. The MLR also cites IUBT for a myriad of other issues. Above all, management
demonstrated reactionary policies toward risk rather than anticipatory policies. Management
failed to keep the BOD apprised of policy shifts on a regular basis, and generally disregarded the
performance of many of its non-bank subs when formulating business strategy, including Irwin
Home Equity Corporation, a branch of the company that completely failed to hedge market risk
associated with mortgage servicing rights and eventually caused enormous losses for IUBT.
When capital became strained, IUBT resorted to selling branches and subsidiaries to raise
money, which only worsened its liquidity position by causing deposit withdrawals. Other issues
for which the MLR cites IUBT include: high LTV lending, weak internal audit, countless violations
of consumer compliance requirements related to HMDA, TILA, RESPA, and others, failure to
implement an adequate model validation program, failure to address examiner
recommendations, among others. With regard to regulation, the MLR is extremely critical of
regulators’ failure to implement stronger supervisory action despite recognizing a large number
of threatening issues with IUBT. Among the early red flags that should have warranted stronger
action, according to the MLR, include corporate governance deficiencies, weak risk
management, systemic consumer compliance issues, and absence of adequate liquidity
planning, among others. The MLR maintains that regulators should not have waited until a
liquidity disruption before taking enforcement action regarding liquidity because there existed
blatant issues in IUBT’s liquidity position. And although regulators did implement a large number
of informal and formal enforcement actions, the MLR maintains that such enforcement actions
were weak and poorly implemented, in particular the Board Resolutions. Essentially, it was
quite clear that IUBT’s transition from a community bank to an LBO was terribly administered
and warranted greater supervisory action.
8. Venture Bank. Lacey, Washington. Date of Charter: 5/24/1979. Date of Failure: 9/11/2009. Date
of MLR: 4/9/2010. Federal Regulator: FDIC. Charter: State.
Venture failed because management failed to manage the risks associated with significant
CRE/ADC concentrations funded through brokered deposits, and a high level of risky
investments, namely GSE preferred stock, mezzanine tranche CDOs comprised of some
preferred debt from the defunct Indymac, and CMOs. Loan losses and investment losses eroded
capital and earnings, and liquidity became strained when funding sources were cut off. Venture
violated laws and regulations related to Reg O, Reg W, LTV limits, BOLI policies, BSA, appraisal
guidelines, and ALLL policies. The bank also did not file accurate Call Reports. Furthermore,
Venture refused to stipulate a C&D and formally contested examiners’ OTTI classification of its
CDOs, through an “Appeal of Material Supervisory Determination.” Eventually, the CDOs were
subject to an OTTI with a split classification between Doubtful and Loss. With regard to
supervision, examiners identified a large number of Venture’s issues at an early stage. However,
the MLR suggests that a management downgrade (not done until 2007), requiring a non-core
funding reduction plan, or requiring a CRE concentration reduction plan would have been
prudent at an earlier stage. Furthermore, the MLR claims that regulators should have forced the
bank to hold more capital and potentially downgrade asset quality in 2007. Examiners claimed
that the 2007 evaluation of asset quality was based on financial performance and not on
inherent risks. Furthermore, examiners did not consider the investment portfolio to be risky
until 2007 because the investments were considered to be investment grade. With regard to
offsite monitoring, the MLR claims that the program did not play a significant role in the
evaluation of the bank. The MLR does point out that SCOR did not flag Venture as a potential
candidate for a downgrade despite the obvious risks present. Additionally, the MLR maintains
that although PCA was implemented properly, capital was a lagging indicator of the bank’s
stability.
9. Mainstreet Bank. Forest Lake, Minnesota. Date of Charter: 3/15/1903. Date of Failure:
8/28/2009. Date of MLR: 3/25/2010. Federal Regulator: FDIC. Charter: State.
Bank failed because of capital erosion, earnings losses, and liquidity squeeze associated with
losses on highly concentrated CRE/ADC portfolio and a reliance on non-core funding.
Mainstreet’s ALLL methodology was inadequate, and the bank often used interest reserves to
mask loan losses. Additionally, Mainstreet acquired a number of loans through brokers.
Furthermore, despite the fact that management recognized the downturn in the real estate
market, it continued to originate loans and even created a new LPO in 2007. The MLR maintains
that the bank decided in 2001 to aggressively pursue a share of the ADC market. With regard to
the regulators, the MLR claims that the supervisory approach was consistent with prevailing
practices at the time but that in hindsight, heightened supervisory action was needed.
Mainstreet’s financial condition was considered satisfactory until 2008, mainly because
examiners claimed to have a good relationship with and confidence in management. A senior
MDC examiner claimed that MDC could have been more critical of the concentrations in 2006
and even as early as 2004. Both state and federal regulators failed to make adequate
recommendations regarding the bank’s internal loan policies until 2008. Furthermore,
examiners did not warn Mainstreet about the volatile nature of its liquidity sources in a timely
manner. The MLR also points out that FDIC examiners claimed that broker-originated loans did
not become a big issue for the bank until 2007 despite the fact that the bank was acquiring
brokered loans as early as 2003. Additionally, the MLR claims that the ‘1’ and ‘2’ asset ratings
Mainstreet received in 2005 and 2006 were not consistent with UFIRS definitions. The MLR
claims that the 12/08 C&D was not timely, and if regulators had issued earlier enforcement
action, much needed follow up scrutiny of asset quality would probably have taken place around
2006-2007.
10. Affinity Bank. Ventura, California. Date of Charter: 1982 (ILC), Conversion to SNMB (4/2004).
Date of Failure: 8/28/2009. Date of MLR: 3/25/2010. Federal Regulator: FDIC. Charter: State.
Affinity Bank failed because BOD and management mismanaged risk associated with CRE/ADC
concentrations and a reliance on non-core funding. Additionally, the bank had a significant CMO
portfolio, comprised of Z-tranche CMOs. The majority of Affinity’s loan growth occurred while it
was an ILC. It converted to a state non member bank in 2004 in order to diversify its business
and attempt to garner demand deposits. However, deposit competition and the secondary
market freeze prevented it from diversifying its business strategy as it had hoped. Additionally,
while Affinity decreased its loan volume after conversion, it increased its ADC concentrations.
Affinity failed to maintain adequate capital to support its loan portfolio, and it also experienced
a liquidity squeeze when its sources of funding were cut off. Both state and federal regulators
identified the majority of Affinity’s issues at an early stage and made recommendations to
management. However, timelier supervisory action was needed. Specifically, the 2/2008 BBR did
not address CRE/ADC concentrations, which was Affinity’s biggest issue.
11. CapitalSouth Bank. Birmingham, Alabama. Date of Charter: 10/16/1978. Date of Failure:
8/21/2009. Date of MLR: 3/15/2010. Federal Regulator: FRB. Charter: state.
CapSouth failed because of loan losses on its CRE/ADC portfolio, and the subsequent erosion of
capital and earnings that resulted. CapSouth traditionally suffered from low earnings because of
low loan yields and high cost of funds. In addition to taking on various sources of non-core
funding, the bank also offered high-rates on deposits to attract core funding in the locally
competitive markets. CapSouth consistently suffered from a struggling NIM and high overhead
expenses; the latter issue stemmed from its aggressive growth/branching/acquisition strategy.
CapSouth also engaged in aggressive loan growth. The MLR maintains that regulators generally
cited the majority of CapSouth’s issues as early as 2005 and consistently made
recommendations to the bank to improve its modest to poor earnings patterns. However, the
MLR does maintain that regulators could have been more forceful in addressing CapSouth’s
growth issues in 2005. Of particular interest in the report is the outline of the acquisition
process in which CapitalSouth acquired Monticello (an S&L) and its subsidiary Mortgage Lion.
Despite the fact that Monticello was rated a CAMELS 3 and under a C&D, FRB Atlanta approved
CapSouth’s acquisition of Monticello without conducting a pre-merger exam. This approval went
against FRB guidance which requires a pre-merger exam and thorough investigation of CAMELS
3 and worse institutions. It should also be noted that CapSouth misrepresented the extent to
which Mortgage Lion engaged in subprime and no-doc loan activity. The state conducted its own
pre-merger exam after the transaction was approved; the state’s exam found that Monticello
was in satisfactory condition, and the state approved the transaction. Although CapSouth would
have most likely failed without the acquisition of Monticello, the latter institution contributed to
the credit administration difficulties of CapSouth and most likely resulted in a greater loss to the
DIF. FRB Atlanta maintains that the Fed guidance detailing safety and soundness exam
requirements for institutions attempting to become or merge into a state member bank is
unclear. The MLR includes a formal recommendation that the FRB Director of Banking
Supervision and Regulation revise the current guidance.
12. First Coweta Bank. Newnan, GA. Date of Charter: 7/12/2004. Date of Failure: 8/21/2009. Date
of MLR: 3/10/2010. Federal Regulator: FDIC. Charter: State.
Bank failed because BOD and management failed to control risks associated with ADC
concentrations and failed to react to changing Atlanta real estate conditions. The bank funded
its rapid growth through brokered deposits and engaged in sloppy underwriting and credit
admin. The bank also did not adequately review loan participations that it acquired. The MLR
maintains that regulators identified the majority of the bank’s issues at an early stage but more
supervisory action may have been warranted in 2007 in light of the bank’s ADC concentrations.
Additionally, the MLR suggests that examiners may have been prudent to downgrade
management to a ‘3’ in 2007 because of the weak credit administration and numerous
violations of laws and regulations regarding ALLL, appraisals, and LTV limits. However, the MLR
also maintains that it would have been difficult to justify a management downgrade due to good
earnings and adequate capital. The MLR suggests that First Coweta’s deviation from its business
plan was not considered material at the time but would be considered a material deviation
today. Finally, the MLR compliments the FDIC’s use of offsite monitoring, which appropriately
flagged the bank for its deteriorating condition and initiated an accelerated exam.
13. Colonial Bank. Montgomery, Alabama. Date of Charter: 1934. Date of Failure: 8/14/2010. Date
of MLR: 4/23/2010. PFR: FDIC (1934-1997), FRB (1997-2003), OCC (2003-2008), FDIC (20082009).
Colonial failed because management failed to manage risks associated with CRE/ADC
concentrations, complex MBS, and struggling mortgage warehouse lending (MWL) operation.
The bank concentrated its business in rapidly growing real estate markets. Management did
little to nothing to alter its loan and investment strategies after those markets began to implode
in 2007. Colonial demonstrated a significant number of risk management deficiencies, including
weaknesses in credit admin, stress testing, ALLL methodology, and appraisal methods, among
others. Additionally, there were instances of fraud in Colonial’s MWL operation; the MWL
operation eventually contributed to significant losses for Colonial. One of the MWL operation’s
significant customers was Taylor, Bean, and Whittaker, which serviced MBS connected to $875
million in escrow deposits controlled by the bank. After TBW’s closure due to fraud allegations,
control of the escrow deposits was re-titled to GNMA, a loss that regulators believed would
have a devastating impact on liquidity and eventually led to the bank’s closure. Colonial
changed charters three times. Presumably, the final charter flip, from OCC to SNMB, in 2008 was
driven by Colonial’s desire to avoid a C&D that the OCC had drafted. Despite the fact that the
FDIC was not required to participate in the review or approval of the charter application, the
FDIC and the ASBD promptly met with the OCC to review the bank’s financial stability. As a
result of the meeting, FDIC and ASBD did not hesitate to take quick and forceful action regarding
Colonial. Shortly after the charter conversion, the FDIC and State enacted an MOU and a C&D
and downgraded Colonial. The MLR is complementary of the smooth supervisory transition from
the OCC to the FDIC and State. Although enforcement action was eventually taken, the MLR
maintains that earlier action related to Colonial’s ADC concentrations and investment portfolio
would have been prudent.
14. Community Bank of Nevada. Date of Charter: 7/1/1995. Date of Failure: 8/14/2009. Date of
MLR: 3/15/2010. Federal Regulator: FRB. Charter Affiliation: State.
Bank failed because of management’s failure to acknowledge the rapidly deteriorating Nevada
real estate markets and the subsequent losses it experienced on the CLD portion of its highly
concentrated CRE portfolio. From its inception, CBN engaged in rapid asset expansion. According
to examiners, management had a “lethal sense of optimism.” When examiners claimed that the
bank’s ALLL methodology was seriously flawed, management refused to acknowledge the
observation and continued to inadequately account for possible loan losses. Additionally, CBN
increasingly relied on wholesale funding sources and improperly made use of interest reserves.
The MLR maintains that CBN’s business model depended on the continued growth of the
Nevada economy. The downturn in the real estate markets eventually helped slash CBN’s
earnings and erode capital. Examiners noted CRE concentrations as early as 2000. Additionally,
examiners cited CBN for having an inadequate liquidity risk management system. However,
supervisory action was not forceful or timely enough. With regard to offsite monitoring,
examiners made an offsite downgrade in 2008.
15. Community First Bank. Date of Charter: 1980. Date of Failure: 8/7/2009. Date of MLR:
3/15/2010. Federal Regulator: FRB. Charter: State.
Bank failed because of BOD and management’s passive response to rapidly deteriorating Oregon
real estate market, and the subsequent loan losses the bank experienced primarily on the CLD
portion of its CRE portfolio, which eroded earnings and capital. Community First also made use
of brokered deposits to support its rapid CLD growth, which did not take off until 2006 when
management decided to change the composition of the bank’s CRE portfolio. The MLR maintains
that it is unable to determine what earlier supervisory action would have done in light of the
rate of the downturn in the Oregon real estate market. However, the MLR does point out that
FRB and state examiners upgraded the bank to a 2 in 2006. Examiners justified the upgrade by
maintaining that management had installed adequate control procedures in regard to its
increasingly concentrated CLD portfolio. The MLR also points out that state examiners upgraded
asset quality to a 1 in 2007. With regard to offsite monitoring, the MLR points out that FRB and
the State performed a joint offsite downgrade 2008.
16. First State Bank. Sarasota, Florida. Date of charter: 10/27/1988. Date of Failure: 8/7/2009. Date
of MLR: 3/10/2009. Federal Regulator: FDIC. Charter: State.
Bank failed because BOD and management did not adequately control risks associated with
CRE/ADC and C&I loans. The bank’s loan portfolio eventually eroded capital and earnings when
the Florida real estate markets imploded. Although FSB had concentrations in these loan areas,
the concentrations were not as significant of a factor (nor were they that large in general) as
was the substandard nature of most of the loans the bank held. Despite warnings from bank
credit analysts, management and BOD approved numerous risky loans. Additionally, FSB used
interest reserves to mask loan performance, and made ill-timed dividend payouts to its holding
company. Additionally, two events significantly affected FSB’s capital position in the late stages
of its existence. Those two events were the reclassification of a large portion of a DTA on FSB’s
books because it was not realizable, and an early termination fee associated with a repurchase
agreement with Citigroup. The MLR maintains that regulators identified the majority of the
bank’s issues at an early stage. However, FSB received no supervisory attention during the most
critical time period. The 10/2006 exam, conducted through the MERIT procedure, noted various
issues in the bank’s condition and led to a downgrade in asset quality. However, the FSB was
rated composite ‘2’ and thus was not required to address the issues highlighted in the FDIC’s
transmittal letter. Then, because the bank was on the 18-month exam cycle, it received no
further supervisory attention until March, 2008. The MLR maintains that the FDIC missed a
chance in 2007 to conduct an off-site analysis or visitation of the institution.
17. Community First Bank. Prineville, Oregon. Date of Charter: 1980. Date of Failure: 8/7/2009.
Date of MLR: 3/12/2010. PFR: FRB. Charter: State.
Community First failed because its Board of Directors and management did not adequately
adjust the bank’s commercial real estate (CRE) portfolio to suit the rapidly deteriorating housing
market in the area. The bank had a high concentration in the construction and land
development (CLD) loans, which was funded by non-core funding, including brokered deposits.
CRE concentrations consistently exceeded 400 percent of capital from 2002 until the closing in
2009, with a significant increase in 2006—the year before housing prices in the area began to
rapidly depreciate. Community First was put on the FRB internal Watch List in 2008 when the
examiners noted deterioration in the Central Oregon economy and housing market and said that
the bulk of the bank’s problem loans were concentrated in the CLD component of the CRE
portfolio. This led to an off-site assessment and, eventually, a full-scope examination rather
than the planned target examination. The full-scope examiners found that management had
had a “passive” and “not appropriate” response to the changes in the local economy, and
consequently issued the bank a composite CAMELS score of 5 and a Written Agreement in April
2009, which gave the bank’s management and Board of Directors 60 days to address a variety of
problems before another target examination was conducted. At the time of the next
assessment, the examiners found that the bank would soon be insolvent, and the state closed
the bank. Though FDB San Francisco did comply with the frequency of safety and soundness
examinations prescribed, the MLR points out that the examinations leading up to the summer of
2008 offered an “early opportunity” to provide written notice to the Board of Directors
concerning the risks the bank’s portfolio faced, especially considering that the housing prices
had begun to depreciate two years before that time. The MLR states that, in the future, rapid
growth in the CLD portfolio should require heightened and immediate supervisory action.
18. Integrity Bank. Jupiter, Florida. Date of Charter: 7/12/2004. Date of Failure: 7/31/2009. Date of
MLR: 2/26/2010. Federal Regulator Involved: FDIC. Charter: State.
Bank failed because of BOD and management’s inability to properly oversee ADC
concentrations. The lack of management oversight was primarily the result of Board disputes in
2007 that created significant employee turnovers and vacancies in the President and CEO
positions for extended periods of time. The bank also deviated from its original business plan by
buying a significant number of out of area loan participations from Integrity Bank- Alpharetta,
GA, which also failed later in August. Integrity- Jupiter did not perform adequate appraisals of
the participations it bought from Integrity-Alpharetta. Jupiter modeled its business plan after
Alpharetta; the latter had significant influence over Jupiter’s management despite
communication issues between the two. The MLR maintains that regulators adequately
addressed the bank’s ADC concentrations. However, while regulators identified issues within
management at an early stage, management remained at a supervisory rating of ‘2’ until July
2008.Furthermore, Jupiter’s material deviation from its business plan warranted supervisory
correction.
19. Mutual Bank. Harvey, Illinois. Date of Charter: 12/15/1962. Date of Failure: 7/31/2009. Date of
MLR: 2/26/2010. Federal Regulator Involved: FDIC. Charter: State.
Bank failed due to loan losses which caused significant capital erosion. Mutual’s loan portfolio,
which grew rapidly in the mid-2000s, comprised primarily ADC loans in the form of out of area
loan participations. Mutual acquired many of its loans through a loan broker. Most of these
loans were associated with high-risk industries, like hotels and gas stations. Mutual had a
terribly deficient appraisal method. Often, appraisals were made after loans were financed.
Additionally, Mutual engaged in inappropriate use of interest reserves, often using interest
reserves as a primary means of debt repayment. Also contributing to the bank’s failure was the
President’s considerable influence over the bank’s growth strategy, operations, and incentive
compensation plan, which encouraged high risk. Additionally, staffing did not keep pace with
the bank’s growth pattern. In November 2008, the FDIC informed Mutual that its TARP
application did not meet the required standards. The MLR generally credits regulators for
identifying and reporting the majority of Mutual’s issues. From 2004-2008, Mutual fell below
well capitalized, but in each case received a capital injection from the Board of Directors’
personal funds to boost the bank back into the well capitalized zone. The MLR does maintain
that examiners could have downgraded Management to a ‘3’ or issued an MOU in 2007.
20. Six Subsidiaries of Security Bank Corporation. Date of Failure: 7/24/2009. Federal Regulator:
FDIC. Charter: State. Date of MLR: 2/12/2010.
MLR outlines 6 bank failures under the same holding company, SBC. Banks failed because of
excessive ADC concentrations and growth supported by non-core funding. All six banks took
direction from SBC, and 5 of the six banks purchased a significant number of participations from
Security Real Estate Services, one of the parent bank’s subsidiaries. None of the banks properly
evaluated the participations it was acquiring from SRES, which itself had serious issues including
an incentive compensation arrangement based simply on loan production. The MLR also
maintains that SBC made an ill-timed entrance into the Atlanta area commercial real estate
market. The MLR also cites the banks for engaging in the improper use of interest reserves and
inappropriate appraisal methods. With regard to the regulators, the MLR maintains that the
FDIC and the state identified ADC concentrations early, but a more emphatic supervisory
response was warranted in 2007. Additionally, for two of the banks, the FDIC applied the MERIT
examination program in 2006.
21. Bank First. Sioux Falls, South Dakota. Date of Charter: 3/1997. Date of Failure: 7/17/2009. Date
of MLR: 2/19/2010. Federal Regulator: FRB. Charter: State.
Bank First Failed because of weak corporate governance, and terrible credit administration
associated with its CRE portfolio. Bank First was a limited purpose credit card bank until 2005
when it was acquired by Marshall Bancorp. In 2005, it significantly altered its business plan and
began originating and participating with affiliates in CRE loans. Its rapid CRE growth was inspired
by suspect compensation arrangements and facilitated by pitiful underwriting standards and
internal loan review mechanisms. Eventually, its earnings and capital were unsustainable as real
estate markets plummeted. Bank First demonstrated recurring corporate governance weakness
and odd employee structures, which allowed for sharing of employees between affiliates. Its
biggest weakness was its policy for reviewing loan participations that it acquired from affiliates.
Although the MLR does not do much in referencing state regulators, it is very critical of FRB
regulators for inadequately addressing Bank First’ s corporate governance deficiencies, its
significant shift in business strategy, and its weak internal credit controls. Furthermore, the MLR
cites 2005 and 2006 exams as “missed opportunities” to address Bank First’s issues at a critical
juncture. Also, the MLR claims that the FRB’s 2007 exam contradicted the findings of five
previous exams.
22. Temecula Valley Bank. Temecula, California. Date of charter: 12/96 (OCC), 6/05 (state). Date of
Failure: 7/17/2009. Date of MLR: 2/12/2010. Federal Regulator: FDIC. Charter: State
Bank failed due to management’s inability to control risk associated with CRE/ADC
concentrations. Temecula was consistently in a precarious liquidity position due to its reliance
on brokered deposits, SBA guarantees, and it lack of a CLP. It was one of the country’s largest
originators of SBA loans. Additionally, a dominant senior loan officer encouraged rapid growth
and suspect compensation policies, both of which contributed to the failure. Eventually the real
estate market collapse helped erode the bank’s earnings and capital. The MLR maintains that
Temecula converted to a state charter from a national charter in 2005 in order to take
advantage of higher legal lending limits and reduced examination fees. However, the MLR
maintains that both state and federal regulators provided consistent, adequate supervision of
the institution and issued adequate enforcement action. Earlier action in 2007 may have been
warranted in light of the bank’s high risk profile and ADC concentrations.
23. Bank of Wyoming. Thermopolis, WY. Date of Charter: 11/1/1978. Date of Failure: 7/10/2009.
Date of MLR: 1/21/2010. Federal Regulator: FDIC. Charter: State.
Bank failed because of liquidity issues associated with intense reliance on non-core funding and
because of capital erosion as a result of loan losses on ADC loans. Bank of Wyoming had
significant ADC loan concentrations that it acquired through a broker and through loan
participations. Brokered deposits played a role in the bank’s asset growth and liquidity crunch.
With regard to bank’s liquidity crisis, the MLR maintains that in 2009 examiners determined that
the bank’s liquidity level was deficient and continuing to decline because of its inability to obtain
brokered deposits as a result of its PCA categorization. With regard to the regulators, the MLR
reports good cooperation, proper detection and communication of the bank’s primary issues,
and timely enforcement action, including a 2007 MOU and a 2008 C&D. Additionally, CAMELS
downgrades were timely and appropriately administered. Offsite monitoring was also utilized
properly and enabled regulators to accelerate the exam cycle. The MLR does conclude,
however, that because of the bank’s concentrations and development of the real estate crisis,
examiners could have possibly acted earlier and more forcefully. Specifically, the MLR maintains
that examiners should have set parameters for non-core funding at an earlier stage.
24. Millennium State Bank of Texas. Dallas, Texas. Date of Charter: 8/30/2003. Date of Failure:
7/2/2009. Date of MLR: 1/22/2010. Federal Regulator: FDIC. Charter: State.
Bank failed due to loan losses on CRE loans. Millennium had significant CRE concentrations, and
its earnings depended on the sale of the guaranteed portion of SBA CRE loans. Additionally, the
bank relied on extremely high rate CD (among the highest in the country) as a source of funding.
The MLR also cites excessive overhead costs and turmoil on the Board of directors as issues
contributing to the failure. Regulators identified the bank’s issues in a timely manner and were
particularly tough on management as outlined in the ROEs between 2005 and 2009. And while
cooperation was good between state and federal regulators, the MLR maintains that examiners
relied too heavily on recommendations and not forceful action. No enforcement action of any
kind was issued until 2007.
25. Community Bank of West Georgia. Villa Rica, GA. Date of Charter: 3/03 (SNMB), 3/04 (SMB).
Date of Failure: 6/26/2009. Date of MLR: 1/28/2010. Federal Regulator: FRB. Charter: State.
Bank failed due to bank management’s inability to control risk associated with significant ADC
loan concentrations. The rapidly deteriorating Atlanta real estate markets caused significant
earnings losses and capital erosion for West Georgia. Additionally, West Georgia demonstrated
a reliance on brokered deposits. While both state and federal examiners conducted timely
exams and identified the majority of the bank’s issues, more forceful supervisory action was
warranted in 2007. The MLR also claims that FRB Atlanta did not fully comply with the Board’s
supervisory guidance regarding examination frequency for de novo banks. However, the MLR
claims that FRB Atlanta’s failure to comply with de novo guidance did not have a material impact
on the bank. Additionally, discrete Federal Reserve guidance pertaining to de novos is contained
in two separate documents that are not cross-referenced, a notion that the MLR outlines in
explaining why FRB Atlanta might have overlooked the guidance. The MLR actually includes a
recommendation to the Director of the Division of Supervision and Regulation to revise the
Commercial Bank Examination Manual to include exam frequency requirements for de novos
and a cross-reference to Supervision and Regulation letter 91-17.
26. Neighborhood Community Bank. Newnan, GA. Date of Charter: 4/00 (SNMB), 4/01 (SMB). Date
of Failure: 6/26/2009. Date of MLR: 1/28/2010. Federal Regulator: FRB. Charter: state.
Bank failed due to bank management’s inability to control risk associated with significant ADC
loan concentrations. The rapidly deteriorating Atlanta real estate markets caused significant
earnings losses and capital erosion for NCB. The MLR maintains that regulators provided timely
supervision of the bank but that more aggressive supervisory action may have been warranted
in light of the bank’s significant turnover in employees and high concentrations in a failing
economy around 2007.
27. Mirae Bank. Los Angeles, CA. Date of Charter: 7/1/2002. Date of Failure: 6/26/2009. Date of
MLR: 1/21/2010. Federal Regulator: FDIC. Charter: State.
Bank failed because BOD and management did not properly manage risk associated with CRE
loans. The MLR maintains that Mirae did not possess dangerous concentrations in CRE loans.
However, the CRE loans that it possessed (car wash, hotel, gas station), were particularly
susceptible to economic downturns. Additionally, the vast majority of its loans were originated
by one employee, who was originally a broker to whom the bank was paying huge brokerage
fees. Eventually Mirae hired the broker as an employee. The MLR also points out the Mirae
offered better than market rates on deposits to attract funding and eventually developed a
reliance on brokered deposits and FHLB borrowings. The Southern California economic
downturn caused severe loan losses for Mirae which impacted earnings and capital. The report
also mentions that there was a constant struggle for power on the BOD throughout the bank’s
existence. Mirae also depended on the sale of SBA guaranteed loans for a large portion of its
earnings. The MLR maintains that regulators noted the majority of the bank’s issues at an early
stage, but greater supervisory action was warranted in 2007. Regulators did not adequately
address the bank’s poor underwriting principles or the origination levels by one employee until
2009. Of particular interest is the 2007 exam in which state and federal regulators disagreed
about the CAMELS rating. DSC examiners believed the bank deserved a CAMELS 3 rating while
state examiners believed the bank deserved a CAMELS 2 rating. They eventually agreed to issue
a CAMELS 2 rating. This was significant for two reasons: (1) the bank’s examination cycle was
extended from 12 to 18 months and (2) supervision of the bank was transferred from the
regional office to the field office and may have resulted in reduced supervisory attention to
Mirae during this period. There is also a large discussion of offsite monitoring in this MLR. While
the report maintains that the FDIC’s offsite monitoring functioned properly in flagging Mirae for
asset growth, the program was not handled properly by local examiners. For one thing, offsite
reviews were completed by the field offices in every case except the final review, despite the
fact that Mirae was rate CAMELS 3 in 2006 and thus offsite monitoring should have occurred at
the regional office. Furthermore, at one point, the same examiner who was conducting offsite
reviews was also commenting on and approving the reviews, which represented a fundamental
breakdown in the separation of duties associated with the offsite procedure.
28. Southern Community Bank. Fayetteville, GA. Date of Charter: 6/2/2000. Date of Failure:
6/19/2009. Date of MLR: 1/6/2010. PFR: FDIC. Charter: State.
Southern Community Bank failed because it had disproportionate ADC concentrations funded
through volatile sources plus poor risk oversight and management practices when the real
estate market faced the initial downturn in 2007. As a result of its high concentration in ADC
loans and the bank’s location in a rapidly developing and affluent area, Southern Community
experienced substantial growth between 2001 and 2006—more than 5 times the rate of banks
in its peer group. This encouraged the bank to continue to increase the ratio, which in turn
increased its risk profile. While Southern Community had intended to diversify its portfolio as
per previous suggestions of the FDIC and Georgia Department of Banking and Finance (GDBF),
the deterioration of assets resulting from the global downturn meant that the plans never went
through. The examination report found in 2009 that the management was so weak and the
asset ratios so lopsided that new management, ushered in during 2008 at the request of the
examiners, was unable to fix the existing difficulties. The MLR report focused only on FDIC and
GDBF examinations conducted after 2005, since economic conditions were stable and the bank
was generally considered a well-performing institution until that year. Examiners acknowledged
the need for the bank to diversify its portfolio and tighten its credit administration in each of the
assessments covered in the MLR report, but it was not until the end of 2007 that examiners
required SCB to take action. The MLR report highlights the fact that the examiners should have
more strongly emphasized the need to diversify in these interim years.
29. Cooperative Bank. Wilmington, NC. Date of Charter: 1/1898 (mutual savings institution), 10/92
(state chartered savings bank), 12/02 (state commercial bank). Date of Failure: 6/19/2009. Date
of MLR. 1/6/2010. Federal Regulator: FDIC. Charter: State.
Bank failed because economic downturn in coastal region of the Carolinas adversely impacted
its highly speculative and highly concentrated ADC loan portfolio, which consisted primarily of
loans associated with vacation and rental properties. The bank also made a significant number
of interest-only loans, and its “Residential Lot Program,” which provided borrowers with funding
to purchase lots for the purpose of building on them in the near future proved to be an illconceived program. Cooperative also had significant holdings in FNMA securities, which
plummeted and an intense reliance on FHLB borrowings and brokered deposits. Cooperative
also had a weak internal audit system. The MLR claims that while regulators identified the
majority of the banks issues at an early stage, stronger supervisory action was needed in 2006.
Particularly, the MLR maintains that the FDIC’s 2006 exam, which identified rapid growth and
loan concentrations, weak underwriting, reliance on non-core funding, violations of regulations,
and a weak internal audit system, did not support the CAMELS 2 rating that Cooperative was
issued. The MLR also maintains that offsite monitoring did not identify any serious concerns in
the bank until July 2008.
30. Bank of Lincolnwood. Lincolnwood, Illinois. Date of Charter: 2/20/1954. Date of Failure:
6/5/2009. Date of MLR: 12/16/2009. PFR: FDIC. Charter: State.
Bank failed because of management’s inability to manage risk associated with high risk lending
strategy. Lincolnwood’s portfolio was highly concentrated in CRE/ADC and was supported
somewhat by volatile funding sources. The MLR also cites Lincolnwood for violations of laws and
regulations pertaining to lending limits and insider activities. The MLR maintains that regulators
identified the majority of Lincolnwood’s issues at an early stage, but more forceful supervisory
action was warranted, particularly in 2005 and 2008.
31. Silverton Bank, N.A. Atlanta, Ga. Date of Charter: 2/3/2986 (state); 8/17/1007 (OCC). Date of
Failure: 5/1/2009. Date of MLR: 1/22/2010. Federal Regulator: FRB (1986-2007), OCC (20072009).
Silverton failed because of inadequate risk management associated with its significant growth
and subsequent concentrations in CRE loans. Silverton had an insatiable appetite for buying CRE
loan participations from its affiliates. It funded its loans primarily through federal funds
purchased and brokered deposits. Eventually when the housing market plummeted, loan losses
decreased earnings and eroded capital, and the bank was closed. The MLR highlights two issues
with OCC supervision. Above all, the MLR claims that the OCC should not have approved
Silverton’s charter conversion, since an OCC pre-conversion exam highlighted serious
weaknesses with the bank. The report maintains that OCC gave too much weight to
management’s commitment to correct problems and conclusions reached by a December 2006
FRB Atlanta/GDBF exam. Additionally, the MLR highlights the supervisory lag immediately
following conversion. An EIC was not appointed for Silverton until 90 days after the charter
conversion, and the first full-scope OCC exam did not take place until 17 months after the last
joint FRB/GDBF full scope exam. A target exam did take place during that period. Aside from
those two points, the MLR maintains that “OCC could not have done anything significantly
different to prevent Silverton’s failure.” The MLR does point out, however, that even though
Silverton’s asset base was growing before conversion, growth increased substantially
immediately following charter conversion. The combined loss to the DIF and TAG program was
$1.26 billion.
32. America West Bank. Layton, Utah. Date of Charter: 5/18/2000. Date of Failure: 5/1/2009. Date
of MLR: 12/4/2009. Federal Regulator: FDIC. Charter: State.
Bank failed due to capital erosion, earnings losses, and a liquidity strain that resulted from losses
in a heavily concentrated CRE/ADC loan portfolio funded through brokered deposits. The MLR
also maintains that the bank deviated significantly from its original business plan, and
management ignored examiner recommendations and violated numerous laws and regulations
related to that deviation. Additionally, there was a good deal of insider activity present at the
bank. All exams were joint between the FDIC and the state, and although regulators identified
the banks issues at an early stage, the MLR claims that more supervisory action would have
been prudent in 2002 and 2003 in light of the bank’s de novo status and in 2007 in light of the
failing real estate market.
33. First Bank of Idaho. Ketchum, Idaho. Date of Charter: 3/1997 (SNMB), 7/1999 (SSB), 3/2001
(FSB). Date of Failure: 4/24/2009. Date of MLR: 2/16/2010. Federal Regulator: OTS. Charter
Affiliation: OTS.
Thrift failed because of loan losses on Construction Land and Development Loans, inadequate
capital, and a severe liquidity crisis. FBI grew steadily throughout its existence and made CLD
loans in risky/isolated markets, primarily to the surrounding Idaho resort towns, which
experienced a severe economic downturn. FBI had a significantly high cost of funds due to an
increasing reliance on brokered deposits and high cost core deposits. In an attempt to solve its
cost of funds issue, FBI management lowered rates on core deposits, which caused a deposit
runoff and serious liquidity crisis. The MLR maintains that FBI’s CLP was virtually non-existent.
Additionally, the MLR cites FBI for failing to implement adequate capital stress testing. With
regard to supervision, the MLR maintains that OTS regulators inadequately addressed the bank’s
key issues and did not take action in a timely fashion. OTS took enforcement action only after
CLD concentrations became problematic. Furthermore, OTS failed to properly identify FBI’s
improper use of interest reserves in covering loan losses. The MLR also cites two specific errors
by OTS examiners that were detrimental to the supervisory process. First, OTS did not take
exception to the thrift lowering its RBC ratio from 11% to 10.5% despite the fact that the thrift
already lacked adequate capital. Second, OTS upgraded the thrift to CAMELS 1 in 2006 despite
the presence of risk management deficiencies.
34. Michigan Heritage Bank. Farmington Hill, Illinois. Date of Charter: 3/10/1997. Date of Failure:
4/24/2009. Date of MLR: 12/18/2009. Federal Regulator: FRB. Charter Affiliation: State.
Bank shifted its business strategy in 2002 from equipment lease financing to commercial real
estate, namely CLD. The deteriorating Michigan economy led to significant losses in its CLD loan
portfolio. Loan losses eroded capital, and the bank was eventually closed because of its inability
to raise capital to support loan losses. The MLR maintains that regulators could have enacted
more enforcement action in late 2007 and early 2008, in light of the deteriorating economy and
four-fold increase in classified assets for MHB. Additionally, the MLR maintains that MHB’s
failure demonstrates that a bank making significant changes to its business strategy warrants
heightened supervisory attention, including an in depth assessment of management’s
experience and capability to manage the risks associated with any new line of business.
35. Great Basin Bank. Elko, Nevada. Date of Charter: 7/29/1993. Date of Failure: 4/17/2009. Date of
MLR: 12/4/2009. Federal Regulator Involved: FDIC. Charter Affiliation: State.
Bank failed due to management’s inability to properly manage risk associated with a rapidly
expanding loan portfolio comprising out-of- territory loan participations and CRE loans. The outof-territory loan participations built up between 2006 and 2008. Additionally, the bank had
significant holdings in preferred FNMA securities, which experienced a rapid decline in late
2008. This was a capital failure; the MLR does not report any funding issues, and the bank did
not make use of brokered deposits. The MLR maintains that while the regulators cooperated
and conducted timely exams, and even enacted enforcement action as early as 2003, the
enforcement action did not necessarily address some of the bank’s true issues. Aside from the
2002 BBR, which was terminated in 2005, enforcement action came well after asset quality
issues were identified. And the C&D became effective two days before the bank failed.
Furthermore the, 2008 MOU did not contain a provision for qualified management, which was
the biggest issue for the bank. The MLR also points out that the bank was denied TARP funds,
and the FDIC made an offsite downgrade.
36. Omni National Bank. Date of Charter: 3/7/2000. Date of Failure: 3/27/2009. Date of MLR:
12/9/2009. Federal Regulator/Charter: OCC.
Bank failed because of significant asset growth and concentrations in CRE beginning in 2003 and
the subsequent losses it experienced on its loan portfolio during the real estate crisis in the
Southeast. Its CRE portfolio consisted primarily of redevelopment loans. Omni relied heavily on
property appreciation and not on borrowers’ ability to pay back loans, which proved to be an illadvised policy when real estate markets imploded. Omni’s growth and concentrations were
substantial, exceeding even internal targets. The MLR also maintains that Omni had chronic
deficiencies in its Call Reports, consistently overvaluing OREO. The Call Report deficiencies did
not adequately reflect the bank’s true capitalization levels, and when management was forced
to correct the deficiencies, the bank’s capitalization levels dropped rapidly for PCA purposes.
Omni violated a variety of laws and regulations related to appraisals and BSA/AML risk
assessments. The MLR also cites the bank for having various other significant issues including
improper use of interest reserves, brokered deposit dependency, weak credit admin, escrow
misuse, and the use of straw borrowers. With regard to regulation, the MLR claims that OCC’s
regulation effort was inadequate and likely led to greater losses to the DIF. Until the new EIC
took over in late 2007, examiners failed to note key deficiencies in the bank, including lack of
management controls and oversight, uncontrolled asset growth, and high risk lending practices.
Omni also maintained a CAMELS 2 rating until the new EIC took over. After the new EIC took
over in late 2007, the bank was downgraded to a 5 and key issues were addressed. However,
OCC did not engage in enforcement action until nearly 9 months after the EIC determined that
action was necessary. Eventually the bank closed because of significant losses and inability to
raise capital. Omni was a participant of the FDIC’s TAG program.
37. Washington Mutual Bank. Seattle, Washington. Date of Charter: 1889. Date of Failure:
9/25/2008. Date of MLR: 4/16/2010. Federal Regulator and Charter: OTS.
WAMU failed because management failed to monitor risk associated with its high risk lending
operation. In 2005, WAMU shifted its business philosophy from one which revolved primarily
around traditional residential loans to a high risk loan operation centered on subprime lending
and the use of nontraditional mortgage products. Management’s justification for the shift in the
business philosophy was that WAMU needed to stay competitive with Countrywide. Some of
their mortgages were sold in the secondary market as well. The collapsing of the Florida and
California real estate markets, where WAMU conducted the majority of its business, helped
slash WAMU’s earnings. WAMU also underwent a significant liquidity crunch, in which negative
publicity and a failing stock price contributed to large deposit run-offs. WAMU’s issues were a
product of weak management, pitiful underwriting practices, inadequate appraisal methods,
and little oversight of the thousands of third party brokers who generated most of WAMU’s
business. The MLR is extremely critical of OTS’s supervision of WAMU. Above all, OTS did not
ensure that WAMU corrected issues associated with high risk lending, inadequate underwriting,
weak management, and weak internal controls early enough. Furthermore, OTS relied an
internal WAMU system for tracking the thrift’s progress in implementing corrective actions; this
proved to be a completely unreliable system. The MLR maintains that OTS did not downgrade
management, asset quality, or the overall composite rating of WAMU in a manner that was
consistent with findings. Additionally, the enforcement action issued by OTS in 2008 lacked
sufficient substance to compel WAMU management to take action. The MLR recommends that
OTS ensure that it will use its own internal procedure for tracking a company’s progress in
responding to criticism and not the company’s own process. Also highlighted in the MLR is the
FDIC’s role in the supervision of WAMU. The MLR claims that the risks identified by the FDIC
were not reflected in WAMU’s deposit insurance premiums. The reason for that is because FDIC
relies on OTS’s supervisory rating of WAMU in determining premiums. Those ratings were
satisfactory until 2008. The FDIC challenged the OTS’s “3” rating in 2008. OTS refused to agree
with the FDIC’s assessment until 7 days before the failure, when they downgraded the bank to a
“4.” The MLR maintains that coordination between the FDIC and OTS was very problematic for
WAMU’s fate. The FDIC reserves the right to issue enforcement action as a backup but did not in
because of significant procedural issues that is has to undergo to do so. According to the MLR,
the logic of the current interagency agreement that outlines the backup examination authority is
circular in that the FDIC must show a high level of risk to receive access to critical information,
but the FDIC needs that information to show that the institution poses a high risk to the DIF. The
MLR recommends that the FDIC revisit the interagency back up examination agreement and
explore modifying the agreement so that the FDIC can have access to exam information for
larger institutions. Additionally, the MLR suggests that the FDIC revisit deposit insurance
regulations and ensure that those regulations provide enough flexibility to allow the FDIC to
make its own independent determination of an institution’s risk level without having to rely on
the PFR’s supervisory ratings.