Federal regulators acted too late when they took over First Bank of Idaho in April 2009, an independent investigation has concluded.
The U.S. Treasury Department's Office of Inspector General conducted a review of the failed bank and found that the overseeing-agency, Office of Thrift Supervision, did not take "forceful and timely actions to address unsafe concentrations in high-risk lending."
The review said the Ketchum-based bank relied heavily on risky construction and land loans and didn't keep enough cash on hand to cover the dangerous concentration.
The Office of Thrift Supervision defines "concentration" as having similar kinds of loans, a dicey practice because a single negative event—the housing-market crash, in this case—can have a "highly detrimental impact" on the bank.
And First Bank of Idaho grew primarily by taking on these loans.
By the end of June 2005, the bank's land/construction loans were 12 times the limit recommended by the Office of Thrift Supervision for concentrated-sector lending.
"First Bank of Idaho continued making these higher-risk loans," the review stated.
When the housing market caved in during 2008, First Bank was dragged down by "nonperforming" construction/land loans, which means customers weren't making their payments. From December 2007 to December 2008, the amount of nonperforming construction/land loans increased from $2.2 million to $18.2 million.
By April 22, 2009, the bank had only $22.6 million in cash, including $9.5 million in borrowing capacity. The bank was projected to exhaust this liquidity in eight business days. On April 24, 2009, the Office of Thrift Supervision closed the bank, selling all deposits to US Bank and handing over loans to the Federal Deposit Insurance Corp., which is standard procedure.
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The review's key message is that the Office of Thrift Supervision's internal review had "identified" the bank's risky loan concentrations "early on," but did nothing to limit the growth. It actually did the contrary by giving the bank its highest risk rating in 2006 and allowing the bank to reduce its cash on hand.
The review said action was finally taken in 2008, after the loans became "problematic." The late takeover required $174 million to be paid by the Federal Deposit Insurance Corp., which insures bank deposits for up to $250,000.
That loss and other losses totaling $13 billion at seven other banks throughout the country since April 2008 prompted the Inspector General's review.
As a result, the Office of Thrift Supervision has been told it needs to change its practices in two ways: ensure that recommendations from its own internal reviews are put into action, and make certain that a bank's risk rating is taken into account before allowing it to have less cash on hand.
The Office of Thrift Supervision was also faulted for not discovering until March 2009 the bank's "improper use" of restructuring troubled loans by extending payback periods and granting separate lines of credit.
John Bowman, director of the Office of Thrift Supervision, wrote a letter to the Office of Inspector General saying the changes would be implemented by June 30.
But the changes come too late for First Bank's customers still reeling in the wake of its failure. One local example is Karen Day, co-owner of the Salmon River Lodge in Stanley. She may lose her business because the FDIC cut off her line of credit directly after the takeover, causing her to fall behind on payments.
The Express reported Day's story on March 26 and can be found on the paper's website by searching "Pain lingers in aftermath of First Bank closure."
Trevon Milliard: tmilliard@mtexpress.com
Ketchum’s former First Bank of Idaho was located at the corner of Main and First streets, as pictured here in April 2009, but is now US Bank. Photo by Mountain Express
