A series of issues that contributed to the closure of DuPont-based Venture Bank last fall were highlighted in a report released Wednesday by federal regulators.
The 43-page report, known as a material loss review, was released by the Office of Inspector General of the Federal Deposit Insurance Corp. It outlines the reasons behind the bank’s failure and the role state and federal regulators played in supervising the financial institution.
The review was conducted by auditors KPMG LLP on behalf of the OIG. Material loss reviews are triggered by failed banks that tap FDIC funds, according to the report.
Neither a spokesperson for the inspector general nor an attorney for Venture Bank directors could be reached Wednesday. Venture Bank is one of many banks nationwide that bet big on commercial and residential real estate and got caught by the so-called mortgage crisis that began in September 2008.
The report largely focused on Venture’s commercial real estate and acquisition, development and construction loans – a risky investment strategy – and Venture management before the bank was closed Sept. 11 and sold to First Citizens Bank & Trust of North Carolina.
On the day it closed, Venture had $992 million in assets, and the estimated loss to the FDIC’s fund was $240.1 million. Venture Bank started as Lacey Bank in May 1979.
The report also noted the recent reviews of Venture Bank by the FDIC and the state Department of Financial Institutions from 2005 until the bank closed.
Among the report’s findings:
• Commercial real estate and acquisition, development and construction loans:
The bank’s concentration of commercial real estate loans were more than 600 percent of total capital from 2005 to 2007, compared with 357 percent to 405 percent for similar-sized banks in the same period. Acquisition, development and construction loans also totaled nearly 50 percent of total loans. By September 2008, “Venture’s ADC concentration exceeded all but 1.5 percent of the banks and thrifts nationally,” the report states.
• Investment strategy:
The bank’s total investments, which contained “very high-risk instruments,” rose to $295 million in June 2008 from $170 million in 2006. “Half of the (investment) portfolio consisted of trust preferred collateralized debt obligations, zero coupon bonds, derivative securities, corporate bonds and preferred stock. Another 18 percent of the portfolio consisted of collateralized mortgage obligations,” the report states. The report also noted the bank’s failed investment in preferred stock of Freddie Mac and Fannie Mae, investments essentially wiped out after the federal government took control of both companies. The bank also had invested in securities that included “the preferred debt of IndyMac Bank,” a California bank that closed in 2008. Its failure is considered the fourth-largest bank failure in U.S. history.
• Management and board oversight:
After a series of examinations by regulators, they noted that the “board was either unaware of or failed to grasp the potential threat to the bank’s viability of increasing risk without corresponding increases in capital.”
“The board members failed to place limits on management’s investment decisions and did not slow the steady increase in ADC loan concentrations,” the report states.
Regulators, however, could have done a better job in supervising Venture Bank.
“Stronger supervisory actions in 2007 could have influenced Venture’s board and management to limit the significant level of risks assumed,” the report states.
Rolf Boone: 360-754-5403