Review of the Failure of Bank of Whitman

Appendix C Management's Response

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
DIVISION OF BANKING SUPERVISION AND REGULATION

Date: March 11, 2013

To: Michael P. VanHuysen, Acting Associate Inspector General for Inspections and Evaluations and Senior OIG Manager

From: Michael S. Gibson, Director, Banking Supervision and Regulation /signed/

Subject: In-Depth Review of the Failure of Bank of Whitman

The staff of the Division of Banking Supervision and Regulation has reviewed the draft In-Depth Review of the Failure of Bank of Whitman (Whitman), Colfax, Washington, prepared by the Office of Inspector General. The report finds that Whitman failed, among other reasons, because of inadequate corporate governance and risk management over internal controls and expansion activities, as well as a buildup of concentrations of credit that were subsequently negatively impacted by declining market conditions. Whitman was supervised by the Federal Reserve Bank of San Francisco (FRB San Francisco) under delegated authority from the Board.

The report notes that FRB San Francisco complied with the Federal Reserve pre-membership requirements when Whitman converted to a state member bank in 2004 and examination frequency guidelines for the time frame we reviewed, 2005 through 2011, and that the Reserve Bank conducted regular offsite monitoring. Further, the reported noted that FRB San Francisco and the State conducted seven full scope examinations and three target examinations during the review period and executed three enforcement actions. However, the report concludes that FRB San Francisco missed some opportunities to take early and more decisive action to address the bank's weaknesses.

Banking Supervision and Regulation (BS&R) staff acknowledges the conclusions and lessons learned in the report. Whitman's failure illustrates the risks associated with aggressive growth and high concentrations of credit and the importance of establishing appropriate corporate governance, internal controls, and credit risk management practices. It further illustrates the need for scrutiny and forceful supervisory action where significant and unresolved weaknesses exist.

Because some of Whitman's weaknesses were identified at the first examination of the bank after it became a state member bank, BS&R staff will follow up on the report's recommendation to review the supervisory approach for pre-membership examinations and determine whether enhancements to the current approach outlined in SR Letter 11-2 are needed.