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Board Report: 2013-IE-B-002 March 22, 2013

Review of the Failure of Bank of Whitman

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Bank of Whitman (Whitman) began operations in September 1977 in Colfax, Washington, as a state nonmember bank and converted to state member bank status in 2004. By 2011, Whitman operated 20 branches in eastern Washington. Whitman was wholly owned by Whitman Bancorporation, Inc., a single bank holding company. The bank's traditional business activities focused on agricultural lending. Prior to becoming a state member bank, Whitman expanded its strategic focus to include commercial real estate (CRE) lending. The bank was supervised by the Federal Reserve Bank of San Francisco (FRB San Francisco), under delegated authority from the Board of Governors of the Federal Reserve System (Federal Reserve Board), and by the Washington State Department of Financial Institutions (State).

On August 5, 2011, the State closed Whitman and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. The FDIC estimated that Whitman's failure would result in a $134.8 million loss to the Deposit Insurance Fund (DIF), or 24.6 percent of the bank's $548.6 million in total assets at closing. Section 38(k) of the Federal Deposit Insurance Act (FDI Act), as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), defines a material loss to the DIF as an estimated loss in excess of $200 million.1 The Dodd-Frank Act requires an in-depth review of any bank failure beneath the material loss threshold when the Inspector General of the appropriate federal banking agency determines that the loss exhibits "unusual circumstances." As a result of our initial review, we concluded that Whitman's failure presented unusual circumstances because of various questionable transactions and business practices involving senior management.

Objectives, Scope, and Methodology

When a loss to the DIF presents unusual circumstances, section 38(k) of the FDI Act requires that the Inspector General of the appropriate federal banking agency prepare a report in a manner that is consistent with the requirements of a material loss review. The material loss review provisions of section 38(k) require that the Inspector General of the appropriate federal banking agency undertake the following:

  •  review the agency's supervision of the failed institution, including the agency's implementation of prompt corrective action (PCA)
  • ascertain why the institution's problems resulted in a material loss to the DIF
  • make recommendations for preventing any such loss in the future2

To accomplish our objectives, we reviewed the Federal Reserve System's Commercial Bank Examination Manual (CBEM) and relevant supervisory guidance. We interviewed staff and collected relevant data from FRB San Francisco, the State, and the Federal Reserve Board. We also reviewed correspondence, surveillance reports, regulatory reports filed by Whitman, examination reports issued from 2005 through 2011, examination work papers prepared by FRB San Francisco, relevant FDIC documents, and reports prepared by external firms.

We conducted our fieldwork from October 2011 through November 2012 in accordance with the Quality Standards for Inspection and Evaluation issued by the Council of the Inspectors General on Integrity and Efficiency. Appendixes at the end of this report include a glossary of key banking and regulatory terms and a description of the CAMELS rating system.3

  • 1. Pursuant to the Dodd-Frank Act, this threshold applies if the loss occurred between January 1, 2010, and December 31, 2011.  Return to text
  • 2. This review fulfills a statutory mandate and does not serve any investigative purpose.   Return to text
  • 3. The CAMELS acronym represents six components: capital adequacy, asset quality, management practices, earnings performance, liquidity position, and sensitivity to market risk. For full-scope examinations, examiners assign a rating of 1 through 5 for each component and the overall composite score, with 1 indicating the least regulatory concern and 5 indicating the greatest concern.   Return to text