- About Us
- Information Technology
- Contact Us
Report Fraud, Waste, or Abuse
Board Report: November 22, 2011
The Park Avenue Bank (Park Avenue) was founded in 1956 in Valdosta, Georgia. In 1982, the bank established a parent holding company, PAB Bankshares, Inc. Park Avenue became a state member bank in 2001 and was supervised by the Federal Reserve Bank of Atlanta (FRB Atlanta), under delegated authority from the Board, and by the State of Georgia Department of Banking and Finance (State). The State closed Park Avenue on April 29, 2011, and appointed the FDIC as receiver. The FDIC OIG notified our office that Park Avenue's failure would result in an estimated loss to the Deposit Insurance Fund (DIF) of $326.1 million, or 39 percent of the bank's $841.0 million in total assets at closing. The FDIC subsequently revised its estimated loss to the DIF to exclude $20.0 million in debt issued by the holding company under the FDIC's Temporary Liquidity Guarantee Program.
Park Avenue failed because its board of directors and management did not adequately control the risks associated with the bank's growth strategy. The bank's strategy involved higher-risk commercia real estate (CRE) lending and expansion into new markets, which resulted in a concentration in construction, land, and land development (CLD) loans that made the bank particularly vulnerable to real estate market declines. The board of directors' and management's failure to establish credit risk management practices commensurate with the risks of CRE lending, coupled with high concentrations and weakening real estate markets, led to rapid asset quality deterioration. Mounting losses depleted earnings and eroded capital, which prompted the State to close Park Avenue and appoint the FDIC as receiver.
With respect to supervision, FRB Atlanta complied with the examination frequency guidelines for the time frame we reviewed, 2001 through 2011, and conducted regular off-site monitoring. However, our analysis revealed that Reserve Bank staff had opportunities to engage in more aggressive supervisory activities when signs of credit risk management weaknesses persisted. In our opinion, the bank's failure to establish basic credit administration practices in earlier years should have served as a warning sign for examiners that the bank lacked credit administration practices commensurate with the high risk in its loan portfolio, especially as its CRE and CLD concentrations increased. Supervisory criticisms of credit risk management diminished as asset quality ratios and earnings performance improved in 2003, despite continued weaknesses and few signs that credit risk management had improved in proportion with the heightened risk in the loan portfolio.
Although Park Avenue did not appropriately identify, monitor, and limit the risk in its loan portfolio, examiners rated the bank satisfactory from 2003 through 2007 based, in part, on the bank's strong earnings and low level of classified assets. In our opinion, FRB Atlanta should have been more aggressive in its supervisory activities when signs of credit risk management weaknesses persisted, regardless of the bank's financial performance. Specifically, it should not have upgraded the bank's CAMELS composite rating in 2003 or terminated a 2003 board resolution before Park Avenue had clearly demonstrated that it had resolved its credit risk management deficiencies.
Further, we believe that FRB Atlanta should have held bank management accountable for not timely developing a CRE risk management program consistent with the guidance outlined in Supervision and Regulation Letter 07-01, Interagency Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices (SR Letter 07-01), especially given prior fundamental credit risk management weaknesses.
We believe that the lessons learned from Park Avenue's failure can be applied by those supervising banks with similar characteristics and circumstances. Park Avenue's failure illustrates (1) the risks associated with a strategic focus on high-risk loan products and expansion into new markets; (2) the importance of establishing appropriate credit risk management practices, including concentration limits and strong underwriting consistent with SR Letter 07-01 and the Commercial Bank Examination Manual, prior to pursuing higher-risk lending; and (3) the importance of scrutinizing any weaknesses in a function with previously noted deficiencies and implementing aggressive supervisory action to address those weaknesses.
The Director of BS&R concurred with our observations and lessons learned.