Re-posted by Houston Lawyer - A recent complaint filed by the FDIC against former officers and directors of a failed bank followed what's become a fairly standard template. Although the Jacksonville (MO) JournalCourier calls the lawsuit a "fairly untypical maneuver," those of us who represent troubled banks and thrifts find the "maneuver" anything but "untypical."
In the case of Corn Belt Bank, which failed in 2009, the FDIC found five loans that caused losses to the bank ("Loss Loans"), alleged that the former directors and officers were negligent or grossly negligent in making the loans because they were improperly underwritten, and that the officers and directors breached their fiduciary duties to the bank. The former officers and directors failed to adequately inform themselves of the relevant risks and acted recklessly in approving them. In addition, the FDIC alleges undue loan concentration, out-of-area lending, high loan-to-value ratios, and overall weak loan administration. Finally, the FDIC alleges that regulatory examiners "repeatedly warned" the bank of these risks and the bank chose to ignore these warnings.
In another complaint filed by the FDIC against former officers and directors of Heritage Community Bank, which also failed in 2009 (and which we discussed a few months ago), the FDIC also alleged negligence, gross negligence and breach of fiduciary duty. In the Heritage Bank complaint, the bank, as is the case with many community banks that have failed and are expected to fail, grew rapidly by concentrating on commercial real estate loans, which went south when the economy crashed in 2008. According to the FDIC, the underwriting and loan administration and monitoring policies and procedures of the bank were deficient, which resulted in "Loss Loans" being made by the bank. The FDIC also alleges that instead of dealing conservatively with losses when they should have become evident by accurately classifying loans, increasing reserves, and preserving capital, the officers and directors "masked" the losses, continued to make deficient CRE loans, and, as a result, compounded the ultimate losses from those poorly underwritten loans. Again, the FDIC alleges that examiners warned the bank of these risks and that the warnings were ignored. In addition to losses on CRE loans, the FDIC is claiming losses on unjustified dividends and incentive payments made by the bank and claims specifically that the bank's former CFO was grossly negligent in failing to ensure that adequate reserves and capital were maintained, in advising that dividends and incentive compensation payments were proper, and in inaccurately advising the board of directors that interest on non-accrual loans "has only been deferred." Finally, the FDIC makes much of the bank's "undue concentration" on commercial real estate lending (responses to which we featured in our previous post linked above and in an earlier post from 2010).
None of these allegations is "untypical," based on what we've seen thus far. In fact, these types of allegations are standard stuff. As I've discussed in the past, many community banks focused on commercial real estate and today are bearing the bitter fruit of that concentration. The Monday morning quarterbacking will continue. The fun has only begun. [www.banklawyersblog.com]
In the case of Corn Belt Bank, which failed in 2009, the FDIC found five loans that caused losses to the bank ("Loss Loans"), alleged that the former directors and officers were negligent or grossly negligent in making the loans because they were improperly underwritten, and that the officers and directors breached their fiduciary duties to the bank. The former officers and directors failed to adequately inform themselves of the relevant risks and acted recklessly in approving them. In addition, the FDIC alleges undue loan concentration, out-of-area lending, high loan-to-value ratios, and overall weak loan administration. Finally, the FDIC alleges that regulatory examiners "repeatedly warned" the bank of these risks and the bank chose to ignore these warnings.
In another complaint filed by the FDIC against former officers and directors of Heritage Community Bank, which also failed in 2009 (and which we discussed a few months ago), the FDIC also alleged negligence, gross negligence and breach of fiduciary duty. In the Heritage Bank complaint, the bank, as is the case with many community banks that have failed and are expected to fail, grew rapidly by concentrating on commercial real estate loans, which went south when the economy crashed in 2008. According to the FDIC, the underwriting and loan administration and monitoring policies and procedures of the bank were deficient, which resulted in "Loss Loans" being made by the bank. The FDIC also alleges that instead of dealing conservatively with losses when they should have become evident by accurately classifying loans, increasing reserves, and preserving capital, the officers and directors "masked" the losses, continued to make deficient CRE loans, and, as a result, compounded the ultimate losses from those poorly underwritten loans. Again, the FDIC alleges that examiners warned the bank of these risks and that the warnings were ignored. In addition to losses on CRE loans, the FDIC is claiming losses on unjustified dividends and incentive payments made by the bank and claims specifically that the bank's former CFO was grossly negligent in failing to ensure that adequate reserves and capital were maintained, in advising that dividends and incentive compensation payments were proper, and in inaccurately advising the board of directors that interest on non-accrual loans "has only been deferred." Finally, the FDIC makes much of the bank's "undue concentration" on commercial real estate lending (responses to which we featured in our previous post linked above and in an earlier post from 2010).
None of these allegations is "untypical," based on what we've seen thus far. In fact, these types of allegations are standard stuff. As I've discussed in the past, many community banks focused on commercial real estate and today are bearing the bitter fruit of that concentration. The Monday morning quarterbacking will continue. The fun has only begun. [www.banklawyersblog.com]
Re-posted by Houston Lawyer
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