Material Loss Review of Community First Bank

Community First Bank (Community First) was supervised by the Federal Reserve Bank of San Francisco (FRB San Francisco), under delegated authority from the Board, and by the Oregon Division of Finance and Corporate Securities (State). The bank opened in 1980 and had as many as eight branches in central Oregon, including a lending office in Bend, Oregon. The State closed Community First on August 7, 2009, and the FDIC was named receiver. On September 15, 2009, the FDIC IG notified us that Community First's failure would result in an estimated loss to the Deposit Insurance Fund (DIF) of $44.4 million, or 22 percent of the bank's total assets of $199.8 million. 

Community First failed because its Board of Directors and management did not adequately control the risks associated with a high concentration in the construction and land development (CLD) loan component of the bank's commercial real estate (CRE) portfolio. The bank developed a high CLD concentration when the Bend, Oregon, real estate market was experiencing rapid growth and extraordinarily high price appreciation. A swift decline in the local real estate market, coupled with management's inadequate response to weakening market conditions, led to deteriorating asset quality and significant losses, particularly in the CLD portfolio. Mounting loan losses eliminated the bank's earnings, depleted capital, and eventually led to the bank's failure.

With respect to supervision, we believe that the magnitude of financial and market declines that FRB San Francisco examiners encountered leading up to and during the summer of 2008, when they conducted an off-site assessment and downgraded Community First's CAMELS composite rating to 3 (fair), offered an early opportunity to provide written notice urging the Board of Directors and management to begin raising capital to a level commensurate with the bank's deteriorating financial condition. Specifically, examiners noted the significant deterioration in the local real estate market and Community First's financial condition. Declining credit quality severely weakened earnings, and the bank reported a year-to-date loss in the second quarter of 2008. 

Examiners also reported that Community First's capital was considerably lower than its peer group and was not commensurate with the bank's risk profile. Finally, examiners found that bank management was not complying with its policy for obtaining appraisals when "obvious and material changes in market conditions are present or when real estate loans become past due, impaired, or otherwise internally classified." Examiners indicated that current appraisals were necessary to assess the soundness of loans that fit the criteria outlined in the bank's policy. However, in light of the rapid deterioration of the local real estate market, it was not possible to determine if an earlier or alternative supervisory action would have affected Community First's subsequent decline or the failure's cost to the DIF.

In our opinion, the failure of Community First offered a valuable lesson learned: rapid growth of the CLD portfolio in real estate markets experiencing extraordinarily high price appreciation is an extremely risky strategy that significantly increases a bank's vulnerability to any subsequent market downturn and requires (1) heightened supervisory attention, and (2) immediate supervisory action when signs of market deterioration or credit administration weaknesses first appear. 

The Director of the Division of Banking Supervision and Regulation agreed with our conclusions and lesson learned.