Material Loss Review of Community Banks of Colorado

The FDIC estimated that the failure of Community Banks of Colorado would result in approximately a $225 million loss to the Deposit Insurance Fund (DIF), which exceeded the $200 million materiality threshold that applied at the time of notification by the FDIC OIG. Our review sought to determine why Community Banks of Colorado's failure resulted in a material loss to the DIF and assessed the Federal Reserve Bank of Kansas City's (FRB Kansas City's) supervision of Community Banks of Colorado during our period of review, 2007 through 2011.

Community Banks of Colorado failed because its board of directors and management did not adequately control the risks associated with the bank's growth strategy. The bank expanded within Colorado by merging with multiple banks and establishing new branch locations from 2003 to 2007. This strategy significantly increased the bank's commercial real estate (CRE) lending activities, particularly in construction, land, and land development loans. The board of directors' and management's failure to effectively manage Community Banks of Colorado's CRE credit risk, coupled with weakening real estate markets, led to asset quality deterioration. Mounting losses depleted earnings and eroded capital, which prompted the Federal Reserve Board to appoint the FDIC as receiver on October 21, 2011.

FRB Kansas City complied with the examination frequency guidelines and conducted regular off-site monitoring during the period we reviewed. Our analysis of FRB Kansas City's supervision of Community Banks of Colorado revealed that FRB Kansas City identified the bank's heightened credit risk and the potential threat to capital, but should have taken earlier supervisory action to address those issues. While we believe that FRB Kansas City had opportunities for earlier supervisory responses, we could not predict the effectiveness or outcome of any measures that might have been taken. Therefore, we could not evaluate the degree to which an earlier or alternative supervisory response would have affected Community Banks of Colorado's financial deterioration or the ultimate cost to the DIF.

We believe that Community Banks of Colorado's failure offers lessons learned that can be applied to those who supervise banks with similar characteristics and circumstances. Community Banks of Colorado's failure illustrates (1) a bank's vulnerability to changes in real estate markets when the bank's strategy features a high concentration in CRE loans, (2) the importance of a bank timely implementing a robust credit risk management program designed to facilitate the identification and management of concentrations, and (3) the importance of a forward-looking examination approach that assesses various risk factors that could affect a bank's condition. The Director of BS&R concurred with the conclusions and lessons learned in the report.