Banking Law

Those who complain of the slow pace of national bank regulators to deal with problem institutions they regulate have been slow to react to the FDIC's seizure of Ameribank, Inc. of Norfolk, West Virginia last Friday. Perhaps they were distracted by more important matters, like the announcement of Paulson's bailout plan. The federal thrift had a grand total of $112.62 million million in assets at the time it was seized, yet is expected to cause the FDIC a loss of $42 million. That appeared to me to be a pretty substantial loss as a percentage of assets (37%).

I was not alone in that view. Yesterday, Housing Wire's Paul Jackson was also asking questions.

You?ll want to do a double-take on that number: consider bank with slightly over $100 million in assets will cost the FDIC $42 million on its failure ? and that?s with all branches and deposits (along with the catch-all ?other assets?) being bought. It?s pretty clear how many of the bank?s ?assets? might have been something other than what their name would seem to suggest.

?The FDIC?s closure of West Virginia?s tiny Ameribank on Friday was not in and of itself terribly important,? said one source, who asked to remain anonymous. ?However, it does beg the larger question of what the regulators are waiting for with many of these institutions.?

The OTS' press release on the failure gives us some additional information, but even more concern.

Ameribank?s troubles stemmed from excessive growth in construction rehabilitation loans, which provided financing for the rehabilitation of distressed properties, predominantly in low- to moderate-income housing markets.

The quarter ending June 30, 2008, marked the fourth consecutive quarter of net losses and capital erosion for Ameribank.  The OTS determined that Ameribank was ?Critically Undercapitalized? and the institution was unable to develop a viable plan to restore capital to adequate levels.

In May 2007, OTS issued a Supervisory Directive enforcement letter and began a continuous on-site presence at the institution.  The enforcement letter restricted the bank?s rehabilitation lending activities and identified Ameribank as a troubled institution.  In October 2007, OTS issued a Cease and Desist Order, a formal enforcement action, because Ameribank was not in full compliance with the Supervisory Directive.

It took sixteen months after the OTS issued its first formal enforcement directive and started monitoring the thrift on-site, and nearly a year after it issued a Cease and Desist Order (because the institution was not complying with the directive), to stop the bleeding by shutting this institution down. Perhaps the thrift's owners had a third party that was exploring an acquisition or recapitalization of the thrift, and negotiations dragged on before they ultimately fell apart. When you're representing the thrift, you appreciate the forbearance in such circumstances. On the other hand, in a year when the entire financial system appears to in danger of a meltdown, and Treasury Secretary Paulson's proposal to terminate the OTS with extreme prejudice is part of his regulatory reorganization and modernization plan, I'm not certain that it's in the interests of the OTS (and certainly not of the FDIC) to let these basket cases linger for such a length of time. I wonder if there will be a "leak" to the press (as there was in the case of the recently seized Silver State in Nevada) that the FDIC was pressuring the OTS to pull the plug on Ameribank down much sooner than it did.

You have to hand it to the regulators, however. They picked a weekend when this type of news was certain to be buried on the back pages. With luck, the OTS may dodge this bullet completely.