Failed State Member Bank Reviews
Material Loss Reviews
Section 38(k) of the FDI Act requires that the IG of the appropriate federal banking agency complete a review of the agency's supervision of a failed institution and issue a report within six months of notification from the FDIC OIG when the projected loss to the DIF is material. Under section 38(k) of the FDI Act, a material loss to the DIF is defined as an estimated loss in excess of $150 million for the period January 1, 2012, through December 31, 2013.
The material loss review provisions of section 38(k) require that the IG do the following:
- review the institution's supervision, including the agency's implementation of prompt corrective action
- ascertain why the institution's problems resulted in a material loss to the DIF
- make recommendations for preventing any such loss in the future
We did not conduct any material loss reviews during this reporting period.
Nonmaterial Loss Reviews
The FDI Act, as amended by the Dodd-Frank Act, requires the IG of the appropriate federal banking agency to report, on a semiannual basis, certain information on financial institutions that incurred nonmaterial losses to the DIF and that failed during the respective six-month period.
When bank failures result in nonmaterial losses to the DIF, the IG is required to determine (1) the grounds identified by the federal banking agency or the state bank supervisor for appointing the FDIC as receiver and (2) whether the losses to the DIF present unusual circumstances that would warrant an in-depth review. Generally, the in-depth review process is the same as that for material loss reviews, but in-depth reviews are not subject to the six-month reporting deadline.
The IG must semiannually report the dates when each such review and report will be completed. If an in-depth review is not warranted, the IG is required to provide an explanation of this determination. In general, we consider a loss to the DIF to present unusual circumstances if the conditions associated with the bank's deterioration, ultimate closure, and supervision were not addressed in any of our prior bank failure reports or involved potentially fraudulent activity.
During this reporting period, we continued our in-depth review of the failure of Waccamaw Bank. In addition, one state member bank failed; the loss to the DIF associated with this failure was not material, and we determined that an in-depth review was not warranted.
In-Depth Review of the Failure of Waccamaw Bank
On June 8, 2012, the North Carolina Office of the Commissioner of Banks closed Waccamaw Bank and appointed the FDIC as receiver. According to the FDIC's press release, as of March 31, 2012, Waccamaw Bank had approximately $533.1 million in total assets and $472.7 million in total deposits. On June 8, 2012, the FDIC estimated that the cost to the DIF of Waccamaw Bank's closure will be $51.1 million, which did not meet the materiality threshold as defined under section 38(k) of the FDI Act. Based on the results of its failed bank review, the OIG determined that the failure of Waccamaw Bank was due to circumstances that have been covered in past OIG reports. However, the failed bank review also identified three unusual circumstances that warranted an in-depth review of Waccamaw Bank: (1) Waccamaw Bank appears to have misinformed regulators about key aspects of an asset swap transaction that significantly changed its risk profile and financial condition; (2) Waccamaw Bank initiated a series of appeals related to the examiners' recommended regulatory capital treatment of a transaction, which ultimately reached the highest level of appellate review by a Board Governor; and (3) there were unique circumstances surrounding the retirement of Waccamaw Bank's former president and chief executive officer. As a result, we initiated an in-depth review that focuses on these three unusual circumstances. We plan to issue our report during the next semiannual reporting period.
Nonmaterial Losses Not Warranting an In-Depth Review
During this semiannual period, there was one failed state member bank with losses to the DIF that did not meet the materiality threshold requiring an OIG review. We determined that the circumstances of this bank failure did not warrant an in-depth review.
Table 9: Nonmaterial State Member Bank Failure during the Reporting Period
| State member bank | Gold Canyon Bank |
|---|---|
| Location | Gold Canyon, AZ |
| Asset size (millions) | $45.2 |
| DIF projected loss (millions) | $11.2 |
| Closure date | 04/05/2013 |
| OIG summary of state's grounds for receivership | Unsafe and unsound condition |
| OIG determination | Circumstances did not warrant an in-depth review |
Follow-Up on Open Recommendations
We completed a follow-up review of the actions taken on open recommendations in our material loss and in-depth reviews from 2011 and 2012. Three reports contained a total of four open recommendations:
- Summary Analysis of Failed Bank Reviews (2011)—one open recommendation
- Review of the Failure of Pierce Commercial Bank (2011)—two open recommendations
- Material Loss Review of the Bank of the Commonwealth (2012)—one open recommendation
Based on our follow-up work, we determined that sufficient action had been taken to close one of the two recommendations from the Pierce Commercial Bank report. For this recommendation, we found that BS&R updated the Commercial Bank Examination Manual to cross-reference several components of guidance to assist examiners in identifying the risks associated with secondary-market asset sales. As a result, we closed recommendation 2 from this report.
BS&R has initiated actions to address the remaining three open recommendations from these reports. We plan to continue our review of follow-up actions during the next semiannual reporting period.
