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Board Report: June 30, 2010
SolutionsBank (Solutions) was supervised by the Federal Reserve Bank of Kansas City (FRB Kansas City), under delegated authority from the Board, and by the Office of the State Bank Commissioner of Kansas (State). The State closed Solutions in December 2009, and the FDIC was named receiver. On January 4, 2010, the FDIC IG notified our office that Solutionsí failure would result in an estimated loss to the Deposit Insurance Fund of $119.0 million, or 23.3 percent of the bankís $510.1 million in total assets.
Solutions failed because its Board of Directors and management did not control the risks associated with an aggressive growth strategy, funded by non-core deposit sources, that expanded the scope of the bankís traditional activities. This strategy resulted in the bank developing significant commercial real estate (CRE) and commercial land development (CLD) lending concentrations that made the bank particularly vulnerable to real estate market declines. As real estate markets served by the bank weakened, asset quality deterioration strained earnings and depleted capital.
Our analysis of FRB Kansas Cityís supervision of Solutions revealed that examiners had opportunities in early 2008 for an earlier and more forceful supervisory action given the bankís aggressive growth strategy. In a January 2008 examination report, FRB Kansas City noted softening in the nationwide real estate market and that the bankís loan portfolio included a large concentration of CRE and CLD loans. Examiners also observed that the bankís already below peer capital levels had declined and that the bank increased its reliance on non-core funding sources. In our opinion, these findings presented an opportunity to question the advisability of management continuing its aggressive growth strategy, but FRB Kansas City only required the bank to develop a more robust capital plan and enhance CRE risk management processes. The case for a stronger supervisory response in the early 2008 timeframe is supported by a January 2009 examination report, which concluded that managementís decision to execute an aggressive growth strategy without the support of adequate capital resulted in the bankís unsatisfactory financial condition.
While we believe that FRB Kansas City had an opportunity for an earlier and more forceful supervisory action, it was not possible for us to predict the effectiveness or impact of any corrective measures. Therefore, we could not evaluate the degree to which an earlier or more forceful supervisory response might have affected Solutionsí financial deterioration or the failureís ultimate cost to the DIF.
We believe that Solutionsí failure offered lessons learned that can be applied to supervising banks with similar characteristics and circumstances. First, a community bank with large CRE and CLD loans relative to its total assets is particularly vulnerable to real estate market declines. Second, the failure underscored the risk of pursuing a new business strategy that features growth in high-risk lending outside of an institutionís traditional market area. Finally, we believe the failure demonstrated that examiners should assess capital needs based on an institutionís strategy and growth targets in addition to the quantitative regulatory capital levels established by Prompt Corrective Action.
The Director of the Boardís Division of Banking Supervision and Regulation concurred with our conclusion and lessons learned.