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FRB Richmond's formal enforcement action with Waccamaw, the written agreement in June 2010, did not explicitly require FRB Richmond to approve any material transactions. We did not identify any supervisory guidance that specifically requires a formal enforcement action to contain such a provision; nevertheless, we believe that such an approach would be a prudent practice that would eliminate the uncertainty we encountered on this point during our review. In this instance, interviewees were unsure whether the written agreement required Waccamaw to obtain prior formal approval for material transactions. This uncertainty appeared to contribute to FRB Richmond's passive approach to reviewing the proposed capital-raise transaction.
As a result of its failure to comply with a previously issued board resolution and the continued deterioration in the bank's financial condition, Waccamaw entered into a written agreement with FRB Richmond and the State on June 14, 2010. The written agreement directed management to develop a capital plan, perform a management assessment, avoid issuing or renewing brokered deposits, and strengthen credit risk management practices. Interviewees expressed uncertainty about whether the written agreement required prior approval for major transactions, such as the $110 million asset swap transaction completed in December 2010. We compared Waccamaw's written agreement to other formal enforcement actions issued by FRB Richmond and noted little variation between those actions. FRB Richmond appeared to use a standard format, similar language, and reporting requirements for each of the enforcement actions we reviewed.
Despite this apparent uncertainty, an interviewee noted that section 16(a) of Waccamaw's written agreement required the bank to submit a strategic plan and budget for the remainder of 2010. The strategic plan provision contained in the written agreement required the bank to address, among other things, (1) areas in which the board would seek to improve the bank's operating performance; (2) operating assumptions that supported projected income, expenses, and balance sheet components; and (3) a realistic and comprehensive budget for 2010 that included income statement and balance sheet projections. We determined that Waccamaw's strategic plan submitted on November 10, 2010, did not describe the asset swap transaction.
In September 2010, Waccamaw submitted a letter to FRB Richmond requesting approval of the asset swap transaction. The letter described the components of the transaction at a conceptual level: (1) Waccamaw will acquire selected HELOCs and will receive a credit enhancement associated with the HELOCs, (2) Waccamaw will sell selected nonperforming assets, (3) Waccamaw will supplement the balance of the transaction with cash, and (4) the seller of the HELOC portfolio will purchase $3 million of Waccamaw's noncumulative perpetual preferred stock.
Rather than seek additional details about the transaction or direct Waccamaw to include the transaction in its strategic plan, FRB Richmond officials issued a response in which the Reserve Bank approved the debt component of the transaction and stated, “We are not opining on the other transactions around the issuance of th[is] subordinated debt." We believe that this passive approach represented a missed opportunity by FRB Richmond to obtain the additional information it needed to approve or reject the transaction or to require Waccamaw to include the transaction in the strategic plan.
We recommend that the Director of the Division of Banking Supervision and Regulation
The Director of the Division of Banking Supervision and Regulation agreed with our recommendation. In his response to recommendation 3, the Director stated that Banking Supervision and Regulation staff will develop a standard provision, to include as part of future formal enforcement actions with institutions in troubled financial condition, that specifies the need for formal approval of material transactions.
The actions described by the Director of Banking Supervision and Regulation appear to be responsive to our recommendation. We plan to follow up on the Board's actions to ensure that the recommendation is fully addressed.