Federal regulators issue cease and desist order to Grand Mountain Bank
Sky-Hi Daily News
Federal regulators issued a cease and desist order to Grand Mountain Bank on Nov. 9 that, among other things, prohibits the bank from making construction or land loans and paying dividends to investors until certain conditions are met.
“We feel like we’ve made the changes they want,” said bank President Frank DeLay, adding that “a lot of banks are going through this.” (See the accompanying story about Liberty Savings.)
“We don’t see it as the end of the world; in certain respects, it’s an opportunity for us to make sure everything’s OK,” DeLay said.
DeLay said business at the bank will be conducted as usual for most customers. In addition, he said deposits are safe and federally insured up to $250,000.
The bank and “its directors, officers, and employees shall cease and desist from any action … aiding and abetting the unsafe or unsound practices that resulted in deteriorating asset quality, ineffective risk management practices, and inadequate oversight and supervision of the lending function” at the bank, the Nov. 9 cease and desist order by the Office of Thrift Supervision (OTS) says.
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DeLay said a field inspection in June by OTS regulators was the apparent trigger for regulatory action.
“They just felt like we hadn’t done enough documentation-wise,” he said of the regulators.
“It is interesting that the order focuses on two areas of lending; construction and land loans,” a statement prepared by the bank says. “In fact, the bank has not had any foreclosures or losses with any of its construction loans and has foreclosed on only two land loans that resulted in losses of less than $50,000.
“Unfortunately,” the statement continues, “our regulators come from California, which has had tremendous loan losses in these areas, and they are concerned about how quickly Grand County’s economy will recover.”
The bank’s statement says the bank “has only had three foreclosures out of the hundreds in Grand County over the last two years. Given the state of the local economy we will likely have additional foreclosures. However, we believe our loan loss reserves are adequate to cover the potential losses on these loans.”
The OTS order demands that the bank prepare a report about how it will meet and maintain a minimum Tier 1 Core Capital ratio of at least 8 percent and a Total Risk-Based Capital ratio of at least 12 percent.
“The bank already exceeds these requirements by comfortable margins and forecasts capital levels to increase,” DeLay said in the prepared statement, which also says the current ratios are 9.8 percent and 13.8 percent respectively.
Among other things, the OTS order demands that the bank:
• Prepare a “written long-term Business Plan covering the remainder of 2009 through 2012 … The Business Plan shall be based upon a comprehensive review of the (bank’s) operations, including the risks and returns of each of its business lines, current and projected capital levels, available resources, and market conditions.”
• “… shall submit revised policies and procedures governing credit administration …”
• Hire an independent consultant to review the bank’s loan and lease losses.
• Submit a comprehensive liquidity plan “ensuring that the (bank) maintains adequate … liquidity to withstand any anticipated or extraordinary demand against its funding base.”
• Hire a third-party consultant to conduct an examination of the bank’s internal asset review program “to assess whether the (bank’s) IAR Policy is consistent with regulatory requirements …”
• Hire a third-party consultant to “assess the adequacy of the (bank’s) management resources and structure …”
The order also restricts the bank from making any “golden parachute” payments, making any changes in senior management or revising compensation for senior officers without consent of the OTS.
DeLay said the order arose from a combination of the sour economy and its impact on real estate values in particular, which has lowered the value of the bank’s assets. He also expressed puzzlement about the timing of the regulators.
In May, the bank received $3.1 million in Troubled Asset Relief Program (TARP) funds from the federal government.
“Generally, these funds are designated for healthy banks,” DeLay said, yet regulators decided about a month later that the bank wasn’t performing to regulatory expectations.
One of the areas in question is known as classified assets, which are loans considered to have “material weaknesses” even though they may still be performing.
DeLay said that can mean anything from a borrower receiving a bad mark on a credit report to ones who are making payments but the source of their income is not obvious.
He said 75 percent of the bank’s classified assets are still performing, meaning all payments are current. Nevertheless, regulators want the bank to cut off some of those loans.
“That makes no sense from a community bank standpoint,” he said. “We know the people we lend to … and we feel pretty good about that.”
He said the vast majority of the bank’s loans are in Grand County, so bank officials are familiar with borrowers’ properties. That is among the factors that allowed the bank to make a $50,000 profit in the third quarter ended in September, a trend he sees continuing, he said.
He also pointed out that bank has a track record of lending to local small businesses and that bank officials are eager to comply with regulators’ requests so the bank may resume construction lending.
As for customers who may be concerned about the OTS intervention, “I’m happy to sit down with anyone” to discuss it, DeLay said.
Grand Mountain Bank has offices in Fraser, Granby, Grand Lake, and Kremmling. It is the only financial institution based in Grand County, according to the bank’s prepared statement, and as of June had assets of $111 million, or about 40 percent of the deposits in the county.
DeLay said the sixth anniversary of the founding of the institution is Monday, Nov. 23.
– Drew can be reached at (970) 887-3334 ext. 19600 or at firstname.lastname@example.org