In an effort to recover more than $2.5 billion, the FDIC announced earlier this month that it had authorized lawsuits against more than 100 directors and officers of failed banks. It wasted no time in showing it was serious. On January 14, 2011, the FDIC filed lawsuits against certain directors and officers of failed Integrity Bank, of Alpharetta, Georgia, and 1st Centennial Bank, of Redlands, California. Both complaints read like dark novels describing alleged bank mis-management and the problems and forces (both internal and external) that have faced community banks over the past several years. In the Integrity complaint, the FDIC contends that the lending practices of Integrity were geared to “accommodate excessive growth, lacked appropriate checks and balances and rewarded irresponsible lending.” Specifically, the FDIC alleged:
- the Bank concentrated its lending in higher risk, speculative ADC loans mainly in the Atlanta metropolitan area to a small number of borrowers (in violation of Georgia banking law and the bank’s own policies);
- responsibility over lending was delegated to a few number of lower level lenders with little supervision by the Board or officers;
- loan officers were responsible for both the loan production and the quality control; and
- the Senior Loan Officer and other lenders were compensated based on the volume of loan originations and renewals (according to the FDIC, this also incentivized lenders to sell the loan rather than make a complete and objective review of the application or even make sure it was properly documented.).
Regardless of being repeatedly warned by federal and state regulators, the Bank apparently failed to address the problems until 2007, when 80% of the bank’s total loan portfolio was in ADC loans, and the Bank was seized by the FDIC. The lawsuits allegations underscore the importance of diligent and fervent oversight by the Board and its officers in loan origination/renewal, ensuring compliance with internal policy and government regulation, and insuring that the bank is internally structured with appropriate checks and balances.
Check back soon for an article discussing proactive measures bank officers and directors can take to better fulfill their duties and responsibilities.