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Board Report: 2015-SR-B-005 March 26, 2015

Review of the Failure of Waccamaw Bank

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Appendix C: Management's Response

March 10, 2015
Melissa Heist
Associate Inspector General
Michael S. Gibson /signed/
Director, Division of Banking Supervision and Regulation
Review of the Failure of Waccamaw Bank

The staff of the Division of Banking Supervision and Regulation has reviewed the draft Review of the Failure of Bank of Waccamaw Bank, (Waccamaw), Whiteville, North Carolina, prepared by the Office of Inspector General (OIG). The report finds that Waccamaw failed, among other reasons, because of inadequate controls over risk management associated with rapid growth, as well as a buildup of concentrations of credit that were subsequently negatively impacted by declining economic conditions. Waccamaw was supervised by the Federal Reserve Bank of Richmond (FRB Richmond) under delegated authority from the Board.

The report notes that FRB Richmond complied with the applicable Federal Reserve examination frequency guidelines. However, the report makes recommendations to address some unique issues that were found in the OIG’s review of Waccamaw’s supervision.

Banking Supervision and Regulation (BS&R) staff acknowledge the conclusions in the report. Waccamaw's failure illustrates the risks associated with aggressive growth and high concentrations of credit and the importance of establishing appropriate risk management practices. It further illustrates the need for stronger supervisory action where significant and unresolved weaknesses exist.

Regarding the recommendations made in the OIG’s report, BS&R staff agree that supervisory records must be retained in accordance with the Board Records Retention and Disposition Schedule (Records Schedule) and will continue to reinforce with Reserve Banks the importance of preserving departing examination staff members’ supervisory records in accordance with Board policy. Some of the work in response to these recommendations has already been completed. In 2013, each of the twelve Reserve Banks participated in a self-assessment to evaluate its management of Board records for supervision and regulation activities (self-assessment program). The objectives of the self-assessment program included (1) creating a standard methodology for Reserve Banks to evaluate their supervision and regulation records management program and (2) documenting the results.

FRB Richmond staff participated in the self-assessment program in February 2013. As a result, FRB Richmond staff noted several opportunities for improvements, which included developing new policies, implementing a new document management system, establishing organizational accountabilities for records management responsibilities, and increasing staff education and training. The Records Schedule requires retention of supervisory records; therefore, emails of staff that are determined to be supervisory records should be retained in accordance with the Records Schedule requirements. BS&R staff intend to work with other Board staff to ensure compliance with Board policy and to assess the extent to which the actions taken are responsive to the OIG’s finding.

Moreover, BS&R staff will develop a standard provision to include as part of future formal enforcement actions with institutions in troubled financial condition specifying the need for formal approval of material transactions.

Lastly, BS&R staff agree that the Board’s Guidelines for Appeals of Material Supervisory Determinations should be updated to address the elements listed in the OIG ’s draft report. Staff are developing revised guidance that will address the OIG’s recommended changes as well as make other enhancements to this process.