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The Mortgage Graveyard
Failed, closed and a c q u i r e d mortgage-related entities.

1st Bank Failure of 2013

Recent financial institution failures

Jan. 14, 2013

By Mortgage Daily staff

This year's first bank failure wasn't a big financial institution, but losses exceeded 20 percent of its assets. Another first for this year was the first credit union failure.

New Covenant Missionary Baptist Church Credit Union was liquidated on Jan. 7 by the Wisconsin Office of Credit Unions, and the National Credit Union Administration was appointed liquidating agent of the Milwaukee-based financial institution.

The credit union had less than $1 million in assets and fewer than 300 members. It was originally chartered in 1982 to serve members of the New Covenant Missionary Baptist Church and related groups.

"The Wisconsin Office of Credit Unions made the decision to liquidate New Covenant after determining the credit union was in an unsafe and unsound condition to transact its business and had no prospect of restoring viable operations," an NCUA statement said.

New Covenant was the first credit union failure tracked in 2013 by Mortgage Daily.

On Friday, the Washington State Department of Financial Institutions closed down Westside Community Bank.

One major problem the bank had was that more than half of its $98 million in total assets were made up of commercial real estate loans. Another problem was its portfolio of construction-and-land-development loans.

"Westside Community Bank's capital has been depleted by large loan losses associated with land development and construction, as well as commercial real estate lending," DFI Director of Division of Banks Rick Riccobono said in a statement. "While the board of directors and management have worked diligently to address the bank's problems, they were unable to raise sufficient capital to remain viable."

Westside was established in March 1995. At the time of its failure, 16 people were employed by the bank.

The University Place, Wash., company's residential loan portfolio was $9 million as of Sept. 30, 2012, while its CRE portfolio stood at $47 million and its C&D portfolio was $4 million. Total deposits were $97 million.

Westside was the recipient of a Federal Deposit Insurance Corp. cease-and-desist order in September 2010.

The Washington bank regulator handed over Westside to the FDIC as receiver. Following a secret bidding process, Sunwest Bank was awarded the winning bid and picked up all of the failed bank's assets and deposits.

Despite its small size, the FDIC expects that Westside's failure will cost its Deposit Insurance Fund more than $20 million.

Westside was the first FDIC-insured bank to fail this year and the second mortgage-related closing tracked by Mortgage Daily.

The Securities and Exchange Commission said on Jan. 9 that it issued an order against KPMG auditors John J. Aesoph and Darren M. Bennett. Both are certified public accountants.

The SEC alleges that the pair of auditors failed to appropriately scrutinize management's estimates of TierOne Bank's allowance for loan and lease losses. TierOne was closed down by the Office of Thrift Supervision in June 2010.

"Aesoph and Bennett merely rubber-stamped TierOne's collateral value estimates and ignored the red flags surrounding the bank's troubled real estate loans," Director of SEC Division of Enforcement Robert Khuzami said in an announcement. "Auditors must adhere to professional auditing standards and exercise due diligence rather than merely relying on management's representations."

Three former senior TierOne executives -- Gilbert G. Lundstrom, James A. Laphen and Don A. Langford -- were sued in September by the SEC over their alleged roles in the bank's failure.

A report to Congress from the FDIC's Office of Inspector General said that more than 400 financial institutions failed during the financial crisis. The report was prepared in response to Public Law 112-88, which was signed into law on Jan. 3, 2012.

The OIG found that the markets drove imprudent behavior like bank expansion to keep up with rapid growth in construction and real estate development, rising mortgage demands and increased competition.

"Many of the banks that failed did so because management relaxed underwriting standards and did not implement adequate oversight and controls," the report said. "For their part, many borrowers who engaged in commercial or residential lending arrangements did not always have the capacity to repay loans and pursued many construction projects without properly considering the risks involved."

Regulators generally fulfilled their supervisory and resolution responsibilities as required by laws and regulations at the time, according to the OIG. In addition, regulators reacted to a rapidly changing economic and financial landscape by establishing and revising supervisory policies and procedures to address key risks facing the industry.

However, the report indicated that the Federal Reserve Board, the Office of the Comptroller of the Currency and the FDIC could have moved more quickly and comprehensively on troubled banks that failed.

A majority of community bank failures was attributed to "aggressive growth, asset concentrations, poor underwriting, and deficient credit administration coupled with declining real estate values."

Securities and Exchange Commission v. Gilbert G. Lundstrom, James A. Laphen and Trevor A. Lundstrom.
Case No. 12-cv-00343 (U.S. District Court for the District of Nebraska).

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