Board Report: September 9, 2009
Riverside Bank of the Gulf Coast (Riverside-Gulf Coast) was supervised by the Federal Reserve Bank of Atlanta (FRB Atlanta), under delegated authority from the Board, and by the Florida Office of Financial Regulation (State). The State closed Riverside-Gulf Coast on February 13, 2009, and the FDIC was named receiver. On March 9, 2009, the FDIC OIG notified our office that the failure of Riverside-Gulf Coast would result in an estimated loss to the Deposit Insurance Fund (DIF) of $201.5 million, or 37.5 percent of the bank's $536.7 million in total assets.
Riverside-Gulf Coast failed because the bank did not adequately control the risks resulting from its (1) growth strategy to establish a residential real estate loan portfolio and (2) reliance on selling mortgages in the secondary market. The aggressive growth resulted in a commercial real estate concentration in the bank's local service area that included a sizable number of residential construction loans to speculative investors. By 2007, the economic downturn caused credit tightening in the secondary markets, thereby hampering, and eventually eliminating, Riverside-Gulf Coast's ability to sell mortgages. In addition, the unprecedented drop in southwest Florida's real estate market decreased the underlying collateral value of the bank's real estate loan portfolio. These factors required Riverside-Gulf Coast to increase its allowance for loan losses, which negatively affected earnings, resulting in insufficient capital to absorb losses, ultimately leading to the bank's insolvency.
With respect to Riverside-Gulf Coast's supervision, we believe that the circumstances FRB Atlanta encountered during a 2007 visitation signaled a sudden and total transformation of Riverside-Gulf Coast's longstanding business model. Specifically, FRB Atlanta noted a significant decline in the local residential housing market and observed that new appraisals indicated that the value of certain collateral, particularly developed lots ready for construction, declined by as much as 70 percent. In addition, examiners observed that Riverside-Gulf Coast could no longer sell mortgages in the secondary market and, therefore, would be required to hold and service these loans.
In our opinion, the magnitude and significance of changes observed during the 2007 visitation warranted more immediate supervisory attention, such as (1) conducting an asset quality target examination, (2) requiring the bank to prepare a new capital plan, or (3) further accelerating the full-scope examination that was conducted in March 2008. However, in light of the rapid deterioration in Riverside-Gulf Coast's local real estate market, it was not possible to determine the degree to which more immediate supervisory action would have affected the bank's subsequent decline or the failure's cost to the DIF.
We believe the lesson learned from Riverside-Gulf Coast's failure was that the secondary market may not always be a reliable option, especially for banks facing sharp deterioration in their local real estate market.
The Acting Director of the Division of Banking Supervision and Regulation agreed with our conclusion, concurred with the lesson learned, and noted that reliance on the secondary market to purchase mortgages “is not without its own risk.”
