Material Loss Review of First Community Bank

First Community Bank (First Community) was established in Taos, New Mexico, in 1922 and became a state member bank in 1938. First Community was supervised by the Federal Reserve Bank of Kansas City (FRB Kansas City), under delegated authority from the Federal Reserve Board, and by the State of New Mexico Financial Institutions Division (State). On January 28, 2011, the State closed First Community and appointed the FDIC as receiver. On February 24, 2011, the FDIC IG notified us that First Community's failure would result in an estimated loss to the Deposit Insurance Fund (DIF) of $260 million, or 10.6 percent of the bank's $2.46 billion in total assets at closing.

First Community failed because its Board of Directors and management did not adequately control the risks associated with the bank's aggressive growth strategy, which resulted in a Commercial Real Estate (CRE) loan concentration, particularly in construction, land, and land development (CLD) loans. The bank expanded into new markets by merging with multiple banks between 2001 and 2007. This strategy resulted in the bank developing significant concentrations in CRE and CLD loans that made First Community particularly vulnerable to real estate market declines. The Board of Directors' and management's failure to adequately manage the bank's CRE and CLD credit risk, coupled with weakening real estate markets, led to rapid asset quality deterioration. Mounting losses depleted the bank's earnings and eroded capital, which prompted the State to close First Community and appoint the FDIC as receiver.

With respect to supervision, FRB Kansas City complied with the examination frequency guidelines for the timeframe we reviewed, 2005 through 2011, and conducted regular off-site monitoring. Our analysis of FRB Kansas City's supervision of First Community revealed that examiners identified the bank's fundamental weaknesses, including having high concentrations in CRE and CLD loans and having a dominant Chief Executive Officer (CEO) and an "insider" Board of Directors (that is, it was comprised of senior bank officials). However, we believe that examiners should have held bank management accountable for failing to develop and implement appropriate CRE risk management practices in a timely manner and that First Community's high concentration in CRE and CLD loans warranted stronger criticism during an August 2007 examination, potentially including component rating downgrades. 

Also, in our opinion, the bank's insider board and dominant CEO operating model also warranted more supervisory criticism prior to an August 2009 examination. While we believe that FRB Kansas City had opportunities for earlier and more forceful supervisory action, it is not possible for us to predict the effectiveness or impact of any corrective measures that might have been taken by the bank. Therefore, we cannot evaluate the degree to which an earlier or alternative supervisory response would have affected First Community's financial deterioration or the ultimate cost to the DIF.

We believe that First Community's failure highlights several lessons learned thatcan be applied when supervising banks with similar characteristics. In our opinion, banks with a dominant CEO, an aggressive growth strategy, and high CRE and CLD loan concentrations require heightened supervisory attention. In particular, First Community's failure illustrates (1) the potential for a dominant CEO coupled with an insider board to be slow to react to recent regulatory guidance and dynamic market conditions; (2) the risks associated with the use of mergers to implement an aggressive growth strategy to expand into new markets; and (3) the importance of timely implementing a robust credit risk assessment program designed to identify and control CRE and CLD concentrations.

The Director of the Divison of Banking Supervision and Regulation concurred with our observations and lessons learned.