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March 2009 Report No. AUD-09-005 Material Loss Review of The Columbian Bank and Trust Company, Topeka, Kansas AUDIT REPORT Report No. AUD-09-005 March 2009 Material Loss Review of The Columbian Bank and Trust Company, Topeka, Kansas Federal Deposit Insurance Corporation Audit Results Why We Did The Audit Columbian failed primarily due to bank management’s pursuit of rapid asset growth concentrated in high-risk CRE/ADC loans, without adequate loan underwriting and credit administration practices. As required by section 38(k) of the Federal Resulting losses due to asset quality deterioration and a downturn in the economy severely eroded Deposit Insurance Act, the Office of capital, and in turn, the availability of wholesale funding sources used by the bank to fund its growth. Inspector General (OIG) conducted a As a result, the bank was unable to satisfy liquidity requirements, leading to its failure. Specifically: material loss review of the failure of The Columbian Bank and Trust Company Management. Columbian’s BOD did not ensure that bank management identified, measured, (Columbian), Topeka, Kansas. On monitored, and controlled the risk of the institution’s activities or implemented timely corrective actions August 22, 2008, the State of Kansas, Office in response to examiner recommendations. In particular, ...

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March 2009 Report No. AUD-09-005

Material Loss Review of The Columbian Bank and Trust Company, Topeka, Kansas              

AUDIT REPORT

 

 

 

Report No. AUD-09-005 March 2009   Material Loss Review of The Columbian Bank and Trust Com an , To eka, Kansas                      F   e   d    e   r   a   l       Deposit Insurance Cor   poration Audit Results   Why We Did The Audit   Columbian failed primarily due to bank management’s pursuit of rapid asset growth concentrated in   As required by section 38(k) of the Federal high-risk CRE/ADC loans, without adequate loan underwriting and credit administration practices. Deposit Insurance Act, the Office of downturn in the economy severely erodedResulting losses due to asset quality deterioration and a I spector General (OIG) conducted a capital, and in turn, the availability of wholesale funding sources used by the bank to fund its growth. m n atrial loss review of the failure of The   Specifically:As a result, the bank was unable to satisfy liquidity requirements, leading to its failure. e   Columbian Bank and Trust Company Management.not ensure that bank management identified, measured,Columbian’s BOD did (Columbian), Topeka, Kansas. On activities or implemented timely corrective actionsmonitored, and controlled the risk of the institution’s August 22, 2008, the State of Kansas, Office in response to examiner recommendations. In particular, Columbian did not adequately address of the State Bank Commissioner (OSBC), recommendations included in FDIC and OSBC Reports of Examination related to enhancing liquidity closed Columbian and named the FDIC as and reducing risk exposure in identified problem assets. the bank’s performance bonus program Further, receiver. On September 11, 2008, the FDIC growth and income without regard to loan quality.created a cultural climate that emphasized asset notified the OIG that Columbian’s total   assets at closing were $726 million, with a Asset Quality.Columbian’s loan portfolio consisted of a high concentration in CRE and ADC loans, material loss to the Deposit Insurance Fund many of which were brokered and/or out-of-territory. bank’s ADC loans as a percent of its loan The DI ated at $61.5 mi was significantly above peer group averages from 2003 through 2008.portfolio  did not Columbian ( Dec F e )  m e b st e i r  m 31, 2008, the esti ll m i a o t n e .  d    l A o s s   s o   f t   o follow sound loan underwriting and credit administration practices, including those pertaining to:   to million (1) loan file documentation, (2) credit monitoring, and (3) accounting for interest reserves. Also, . the DIF increased $232  a result, assetColumbian did not maintain a sufficient allowance for loan and lease losses (ALLL). As   The audit objectives were to (1)determine  quality declined, and losses, once recognized, reduced earnings and capital.   the causes of the financial institutio ’   n s Liquidity.Columbian became increasingly dependent on higher cost and more volatile sources of failure and resulting material loss to the DIF liquidity, such as brokered deposits, Internet certificates of deposits, and Federal Home Loan Bank and (2) evaluate the FDIC’s supervision of advances, to fund asset growth in  Liquidityexcess of the growth in core deposits. levels and funding t t h h e e    i P n r s o ti m tu p t t i   o C n o ,  r i r n e c c l i udi   n A g  c i ti m o p n l   e (P m C en A t ) a   tion of  strategies were deficient, and bank management did not implement the necessary controls for liquidity provisions of i t on v   e 38.  management, including an adequate contingency liquidity plan, until the bank had deteriorated to an sect overall unsatisfactory condition.     SupervisionOSBC conducted regular examinations of Columbian from 1996 until its FDIC and : The Background   closing in 2008. 2005, OSBC reported weaknesses in Columbian’s credit administration practices In   and noted the bank’s first use of brokered deposits as a wholesale funding source. In 2006, in addition to Columbian, originally a national bank that identifying some of the weaknesses reported in the 2005 examination, the FDIC reported concerns b h eca dq m u e a  i r n te s r u e r d e   d i   n o   n T   o O p c e t k o a b ,  er K   a 2, n   s 1 a 9 s 7 .  8   , T   h w e a   s  loan growth, and underfunding of the ALLL.regarding out-of-territory lending, rapid  a result of the As ea July 2007 examination, the OSBC, in consultation with the FDIC, downgraded Columbian’s composite FDIC became the primary federal regulator rating, and the FDIC expedited the 2008 examination. The FDIC did not issue a PCA Directive to of Columbian in December 1996. At  July 2008, the FDIC and OSBCColumbian because the bank had not become undercapitalized. In closing, the bank had seven branches in jointly issued a Cease and Desist Order (C&D) in an attempt to stop Columbian from operating in an Kansas and one in Missouri. Columbian unsafe and unsound manner.19 provisions, the C&D called for improvements in the bank’s the  Among was wholly owned by a two-bank holding liquidity and funds management, use of brokered deposits, concentrations of credit, use of interest company, which was wholly owned by an reserves, maintenance of a sufficient ALLL, and loan policy. individual serving as a Director and a Vice   President of Columbian. weaknesses in management, asset quality, andAlthough FDIC and OSBC examinations identified the liquidity that ultimately led to Columbian’s failure, supervisory action was not taken commensurate with   Columbian’s loan portfolio largely consisted  Columbian’s apparent strong earnings andthese weaknesses posed to the institution. Rather,the risks of commercial real estate l with factors as an understated ALLL and thelack of non-performing loans, which were attributable to such a significant concentration  o i a n  n l s a  ( n C d  RE),   mismanagement of interest reserves, overshadowed supervisory concerns with Columbian’s weaknesses until they became more pronounced based on changes in economic conditions. As a result, more timely l a o c a q n u s i   s ( it A io D n, C   ) d ,  ev m e a l n o y p  o m f e   n w t, h   i a c n h  d  w c e o r n e s   t b r r u o c k ti e o re n  d supervisory action directed at Columbian’s high-risk lending and weak credit underwriting and and/or out-of-territory. The federal financial administration practices should have been taken. In particular, the institution continued to pay regulatory agencies have recognized the substantially increased dividends, accept brokered deposits, and originate CRE loans while the 2007   examination report was being processed from July to November 2007. increased risk that CRE and ADC loans   g pr u e i s d e a n n t c  t e o  i   n fi   n D a e n c c e ia m l  b i e n r s   t 2 it 0 u 0 ti 6 o  o ns n  and i   s i k ssued  a series of summary reports on the material loss reviews it is conductingThe FDIC OIG plans to issue a r to the failure of Columbian and other FDIC-and will make appropriate recommendations related management framework that effectively supervised banks at that time. identifies, measures, and controls CRE   i c n o c n l c u e d n e t   r e a f t f i e o c n ti  r v i e s   k o .  v   e T r h si a g t  h f t r   a b m y  e b w an or k k    should  Management Response   management, including the board of The Division of Supervision and Consumer Protection (DSC) provided a written response to the draft s d o irec d to l r o s a  ( n B  u O nd D) e   r a w n r d i   t s i e n n g i ,  o c r r   e e d x i e t  cutives, and  report. DSC agreed with the OIG’s conclusions regarding the causes of Columbian’s failure and un resulting material loss and the supervisory activities related to Columbian. DSC also agreed that administration, and portfolio management increased supervisory action, commensurate with the risks these weaknesses posed to the institution, ractices.    should have been implemented sooner. To view the full report, go todfcigig.vo2/00r9www..atsorepsp

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Contents Page   BACKGROUND     RESULTS IN BRIEF   MANAGEMENT  Failure of Columbian’s Management to Address Examiner Concerns       Risk Management  Performance Bonus Program    Regulatory Supervision Related to Management             ASSET QUALITY    Examiner Concerns and Recommendations Regarding Asset Quality       Concentration in CRE and ADC Loans  Interest Reserves  Allowance for Loan and Lease Losses  Regulatory Supervision Related to Asset Quality  Concentrations of Credit   LIQUIDITY    Examiner Concerns and Recommendations Regarding Liquidity           Lack of an Adequate CLP           Brokered Deposit Restrictions  Regulatory Supervision Related to Liquidity   IMPLEMENTATION OF PCA   CORPORATION COMMENTS   APPENDICES  1. OBJECTIVES, SCOPE, AND METHODOLOGY  2. GLOSSARY OF TERMS  3. CORPORATION COMMENTS  4. ACRONYMS IN THE REPORT       TABLES  1. Financial Condition of Columbian  2. Examples of Examiner Comments and Recommendations Regarding Columbian’s BOD and Management Performance  3. Columbian’s Asset Classifications and ALLL  4. Examples of Examiner Comments and Recommendations Regarding Columbian’s Asset Quality  5. Columbian Net Income, ALLL, and Dividends

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   6. Examples of Examiner Comments and Recommendations Regarding Columbian’s Liquidity   FIGURES   1.   Columbian’s Key CAMELS Ratings 2.   ADC Loans as a Percent of Average Loans — Compared to Peer 3.   ADC Loans as a Percent of Total Capital — Compared to Peer 4.   as a Percent of Total Capital — Compared to PeerCRE Loans 5.   Net Non-Core Funding Dependence — Compared to Peer

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Office of Audits Office of Inesctor General

Federal Deposit Insurance Corporation 3501 Fairfax Drive, Arlington, VA 22226   DATE: 11, 2009 March   MEMORANDUM TO: Sandra L. Thompson, Director    Division of Supervision and Consumer Protection      /Signed/ FROM:Russell A. Rau  Assistant Inspector General for Audits   SUBJECT:Material Loss Review of The Columbian Bank and Trust Company, Topeka, Kansas(Report No. AUD-09-005)       As required by section 38(k) of the Federal Deposit Insurance Act (FDI Act), the Office of Inspector General (OIG) conducted a material loss 1 the failure of The Columbian Bankreview of and Trust Company (Columbian), Topeka, Kansas. On August 22, 2008, the Kansas Office of the State Bank Commissioner (OSBC) closed the institution and named the FDIC as receiver. On September 11, 2008, the FDIC notified the OIG that Columbian’s total assets at closing were $726 million, and the estimated loss to the Deposit Insurance Fund (DIF) was $61.5 million. As of December 31, 2008, the estimated loss to the DIF increased to $232 million.   When the DIF incurs a material loss with respect to an insured depository institution for which the FDIC is appointed receiver, the FDI Act states that the Inspector General of the appropriate federal banking agency shall make a written report to that agency which reviews the agency’s supervision of the institution, including the agency’s implementation of FDI Act section 38, Prompt Corrective Actionwhy the institution’s problems resulted in a material(PCA); ascertains loss to the DIF; and makes recommendations for preventing such loss in the future.   The audit objectives were to: (1) determine the causes of the financial institution’s failure and resulting material loss to the DIF and (2) evaluate the FDIC’s supervision 2 of the institution, including implementation of the PCA provisions of section 38. Appendix 1 contains details on our objectives, scope, and methodology, and Appendix 2 contains a glossary of terms. Acronyms used in the report are listed in Appendix 4.  

                                                           1 As defined by section 38 of the FDI Act, a loss is material if it exceeds the greater of $25 million or 2 percent of an institution’s total assets at the time the FDIC was appointed receiver. 2 The FDIC’s supervision program promotes the safety and soundness of FDIC-supervised institutions, protects consumers’ rights, and promotes community investment initiatives by the institutions. The FDIC’s Division of Supervision and Consumer Protection (DSC) (1) performs examinations of FDIC-supervised institutions to assess their overall financial condition; management policies and practices, including internal control systems; and compliance with applicable laws and regulations; and (2) issues related guidance to institutions and examiners.     

 

This report presents the FDIC OIG’s analysis of Columbian’s failure and the FDIC’s efforts to require Columbian’s management to operate the bank in a safe and sound manner. A planned capping report will summarize our observations on the major causes, trends, and common characteristics of financial institution failures resulting in a material loss to the DIF. Recommendations in the capping report will address the FDIC’s supervision of the institutions, including implementation of the PCA provisions of section 38.     BACKGROUND   Columbian, formerly known as The Columbian Trust Company, was established and insured by the FDIC on October 2, 1978. The institution was renamed The Columbian Bank and Trust Company on December 1, 1996, and its primary federal regulator changed from the Office of the Comptroller of the Currency to the FDIC. Columbian, which was headquartered in Topeka, Kansas:   •   had seven branches in Kansas and one in Missouri; •   provided traditional banking activities within its marketplace and engaged in brokered and out-of-territory lending; and •   specialized in commercial lending, with a concentration in commercial real estate (CRE), including acquisition, development, and construction (ADC) loans.   Columbian was a wholly owned subsidiary of Columbian Financial Corporation, which was a two-bank holding company. Columbian’s local marketplace was the Greater Kansas City and Topeka, Kansas, metropolitan areas. The holding company was wholly owned by an individual who served as a Director and a Vice President of Columbian. In May 2006, Columbian merged with Keystone Bank (Keystone) of St. Louis, Missouri, to allow for the establishment of a branch office in Missouri. Additionally, in March 2007, the holding company purchased 100 percent of the common stock in The Bank, Weatherford, Texas (Affiliate). The Affiliate is a state nonmember institution that was established on June 11, 1987 and provides traditional banking services with a concentration in residential interim construction loans. The holding company purchased the Affiliate to provide a source of liquidity for loans originated by Columbian.   DSC’s Kansas City Field Office (KCFO) and the OSBC alternated safety and soundness examinations of Columbian, conducting a total of five examinations from October 2003 through July 2008. DSC also conducted a joint visitation with the OSBC during June 2008. At the January 2008 examination, Columbian’s CAMELS composite rating was downgraded to 4, 3   indicating unsafe and unsound practices or conditions and a distinct possibility of failure if such conditions and practices were not satisfactorily addressed and resolved. As a result of the June                                                            3 Financial institution regulators and examiners use the Uniform Financial Institutions Rating System (UFIRS) to evaluate a bank’s performance in six components represented by the CAMELS acronym:Capital adequacy,Asset quality, Management practices,Earnings performance,Liquidity position, andS Eachensitivity to market risk. component, and an overall composite score, is assigned a rating of 1 through 5, with 1 having the least regulatory concern and 5 having the greatest concern.

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2008 visitation, Columbian’s composite rating was downgraded to 5, indicating extremely unsafe and unsound practices or conditions; critically deficient performance, often with inadequate risk management practices; and great supervisory concern. Institutions in this category pose a significant risk to the DIF and have a high probability of failure.   Further, with respect to selected component ratings, as indicated in Figure 1 below, Columbian’s management, asset quality, and liquidity ratings were downgraded to 3 at the July 2007 examination and steadily decreased with each subsequent examination. At the following January 2008 examination, the same component ratings were downgraded to 4. As a result of the June 2008 visitation, examiners downgraded the component ratings to 5.

Figure 1: Columbian's Key CAMELS Ratings

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Composite Management Asset Quality Liquidity

Oct-03 Apr-05 May-06 July-07 Jan-08 June-08

    review of Reports of Examination (ROE) and Problem Bank Memoranda.Source: OIG     In April 2008, the FDIC notified Columbian that the Corporation considered the bank to be in “troubled condition” and identified the institution as a “problem bank.” To address examination concerns, including apparent violations of laws and regulations, inadequate risk management controls, and other safety and soundness issues, the FDIC and OSBC subsequently issued a Cease and Desist Order (C&D) effective July 15, 2008 (discussed later in this report).   Details on Columbian’s financial condition, as of June 2008, and for the 5 preceding calendar years follow in Table 1.                    

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Table 1: Financial Condition of Columbian 30-June-08 31-Dec-07 31-Dec-06 31-Dec-05 31-Dec-04 31-Dec-03    Total Assets ($000s) $735,071 $721,409 $528,816 $384,442 $269,048 $214,139 Total Deposits ($000) $620,354 $566,794 $368,312 $275,851 $191,787 $165,463 Total Loans ($000s) $638,504 $639,996 $479,638 $345,611 $244,865 $183,501 Net Loan Growth Rate15.93% 33.39% 38.39% 41.68% 33.38% 15.34% Net Income (Loss) ($000s) $3 $15,545 $15,814 $8,203 $5,081 $4,210 Loan Mix (% of Avg. Gross Loans):              All Loans Secured by Real Estate 76.60% 69.29% 68.39% 70.75% 75.24% 76.67%  Construction and Development 52.07% 43.67% 35.59% 30.14% 25.68% 19.75%  CRE - Nonfarm/ nonresidential 18.14% 17.85% 21.59% 24.82% 30.86% 37.68%  Multifamily Residential Real Estate 1.13% 0.93% 1.62% 1.62% 1.74% 1.70%  1-4 Family Residential – excluding 4.92% 6.47% 9.06% 13.35% 15.79% 16.13% Home Equity Lines of Credit  Home Equity Loans 0.22% 0.29% 0.46% 0.67% 1.00% 1.30% Construction and Industrial Loans 23.18% 30.36% 30.87% 28.29% 22.55% 19.85% Adverse Classifications Ratio  24% 7% 22% 22%197% 86% Source: Uniform Banking Performance Report (UBPR) and ROEs for Columbian.       RESULTS IN BRIEF   Columbian failed primarily due to bank management’s pursuit of rapid asset growth concentrated in high-risk CRE/ADC loans without adequate loan underwriting and credit administration practices. Resulting losses due to asset quality deterioration and a downturn in the economy severely eroded capital and, in turn, the availability of wholesale funding sources used by the bank to fund its growth. As a result, the bank was unable to satisfy liquidity requirements, leading to its failure. Specifically:   Management.Columbian’s board of directors (BOD) did not ensure that bank management identified, measured, monitored, and controlled the risk of the institution’s activities or implemented timely corrective actions in response to examiner recommendations. In particular, Columbian did not adequately address recommendations included in the FDIC’s ROEs related to enhancing liquidity and reducing risk exposure in identified problem assets. Further, the bank’s performance bonus program created a cultural climate that emphasized growth and income without regard to loan quality.   Asset Quality.Columbian’s loan portfolio consisted of a high concentration in CRE/ADC loans, many of which were brokered and/or out-of-territory. The bank’s ADC loans as a percent of its loan portfolio was significantly above peer group averages from 2003 through 2008. 4    Columbian did not follow sound loan underwriting and credit administration practices, including those pertaining to:                                                            4 In December 2003 through December 2004, Columbian’s peer group was composed of insured commercial banks   with assets between $100 million and $300 million in a metropolitan area and with three or more full-service banking offices. From December 2005 through June 2008, Columbian’s peer group was composed of insured commercial banks with assets between $300 million and $1 billion.

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(1) loan file documentation, (2) credit monitoring, and (3) accounting for interest reserves. Also, Columbian did not maintain a sufficient allowance for loan and lease losses (ALLL). As a result, asset quality declined and losses, once recognized, reduced earnings and depleted capital.   Liquidity.Columbian became increasingly dependent on higher-cost and more volatile sources of liquidity, such as brokered deposits, Internet certificates of deposits (CD), and Federal Home Loan Bank (FHLB) advances to fund asset growth in excess of the growth in core deposits. Liquidity levels and funding strategies were deficient, and bank management did not implement the necessary controls for liquidity management, including an adequate contingency liquidity plan (CLP), before the bank had deteriorated to an overall unsatisfactory condition.   Supervision.regular examinations of Columbian as of its The FDIC and OSBC conducted charter as a state-nonmember bank in 1996 until its closing in 2008. In 2005, OSBC reported weaknesses in Columbian’s credit administration practices and noted the bank’s first use of brokered deposits as a wholesale funding source. In 2006, in addition to identifying some of the weaknesses reported in the 2005 examination, the FDIC reported concerns regarding out-of- territory lending, rapid loan growth, and underfunding of the ALLL. As a result of the July 2007 examination, the OSBC, in consultation with the FDIC, downgraded Columbian’s composite rating to a 3, and the FDIC expedited the 2008 examination. The FDIC did not issue a PCA Directive to Columbian because the bank had not become undercapitalized. In July 2008, the FDIC and OSBC jointly issued a C&D in an attempt to stop Columbian from operating in an unsafe and unsound manner. Among the 19 provisions, the C&D called for improvements in the bank’s liquidity and funds management, use of brokered deposits, concentrations of credit, use of interest reserves, maintenance of a sufficient ALLL, and loan policy.   Although the FDIC and OSBC examinations identified the weaknesses in management, asset quality, and liquidity that ultimately led to Columbian’s failure, supervisory action was not taken commensurate with the risks these weaknesses posed to the institution. Rather, Columbian’s apparent strong earnings and lack of non-performing loans, which were attributable to such factors as an understated ALLL and the mismanagement of interest reserves, overshadowed supervisory concerns with Columbian’s weaknesses until they became more pronounced based on changes in economic conditions. As a result, more timely supervisory action directed at Columbian’s high-risk lending and weak credit underwriting and administration practices should have been taken. In particular, the institution continued to pay substantially increased dividends, accept brokered deposits, and originate CRE loans while the 2007 examination report was being processed from July to November 2007.     MANAGEMENT   Examinations from 2003 to 2006 resulted in a 2 (or satisfactory) rating for Columbian’s management. At subsequent examinations, the rating was progressively downgraded, i ndicating deficient BOD and management performance, inadequate risk management practices, and excessive risk exposure. Columbian’s management provided a performance bonus program that emphasized asset growth without regard to loan quality. By 2007, Columbian’s management rating indicated that the bank’s problems and significant risks may have been inadequately identified, measured, monitored, or controlled, and by 2008, the management rating indicated

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that the bank’s problems required immediate action by the BOD and management to preserve the safety and soundness of the institution. Accordingly, examiners made a number of recommendations to improve loan quality and to address the increased risks inherent in the loan portfolio. However, Columbian’s management did not address these concerns in a timely manner, leading to the bank’s inability to meet liquidity requirements.     Failure of Columbian’s Management to Address Examiner Concerns   Examiner concerns with Columbian’s BOD and management were noted in the October 2003 examination, including issues related to aggressive loan growth, CRE/ADC high-risk lending, inadequate loan policies, and inadequate ALLL methodology. Issues in most of these areas continued to be identified in each examination until the bank was closed in 2008. In addition, beginning with the April 2005 examination, Columbian’s examinations showed a continuing pattern of inadequate loan procedures, understaffing of the lending function, inadequate risk assessment practices, growing severity regarding the lack of loan documentation, and inadequate credit administration resulting in an increasing risk profile for the institution. The credit administration deficiencies were repeated and compounded as noted in the 2006, 2007, and 2008 examinations.   Although Columbian’s annual loan growth exceeded 33 percent annually from 2004 through 2007, management did not adequately address examiner concerns to ensure sufficient staff to monitor and review existing loans. Each examination from 2005 to the bank’s failure in 2008 made reference to the inadequacy of Columbian’s loan review program, especially considering the increased risk of the loan portfolio, including brokered and/or out-of-territory ADC loans. From December 2004 to June 2008, the percentage of the loan portfolio committed to higher-risk ADC loans increased from 25.7 percent to 52.1 percent. Table 2 provides examples of examiner comments and recommendations related to Columbian’s BOD and management. The table also indicates that many of these conditions existed for several years prior to the bank’s closing.   Table 2: Examples of Examiner Comments and Recommendations Regarding Columbian’s BOD and Management Performance Examiner Comments Examination Dates Oct Apr May July Jan 2003 2005 2006 2007 2008 Overall conclusion on BOD and management performance   •   factory Stasi 9   9   9      •   Improvement needed and failure to adequately identify, measure 9 9 ,     monitor, and control risks Compliance with laws and regulations   •   Apparent violations related to insider, affiliate, or Bank Secrecy 9   9   9 9     Act activities •   Apparent violations related to loan underwriting and/or credit 9   9   administration  Growth of Columbian’s operations   •   aggressive, significant, or faster than anticipatedLoan growth was 9   9   9   9   9   •   Loan growth supported by wholesale liquidity sources 9 9   9   9       •   Loan portfolio was focused on CRE/ADC high-risk lending 9 9 9 9      •   Loan concentrations in brokered and/or out-of-territory loans 9 9 9 9     

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Examiner Comments

Examination Dates Oct Apr May July Jan 2003 2005 2006 2007 2008 Loan policy and procedures   Inadequate loan policies 9   9      9 9 9 •   Inadequate loan underwriting and/or credit administration 9   9   9   9   procedures  •   Inadequate methodology for determining ALLL 9   9   9   9   9   • Inadequate staffing of loan department and/or inadequate 9   9   9   9     management succession plan •   Inadequate loan review program  9 99 9      Risk management   •   internal audit program and/or related risk assessmentInadequate 9   9   9   9   9   process •   Inadequate attention to, and implementation of, examiner 9   9   9   recommendations  •   eduqIantsarta erofrep rob ecnamgpolrcp  gsituen/ o n d  maaarn 9   9   Examiner recommendations   •   policies and procedures to ensure compliance with lawsImprove 9 9   9         and regulations •   Improve loan policy and procedures to include appropriate internal 9 9 9 9 9 controls •   to the increasing risk associated withImprove oversight due 9 9 9     continued aggressive growth •   Improve the loan review program and/or related watch list 9   9   9   9   •   Improve the audit program and related risk management activities  9 99 9 9       •   Improve the ALLL methodology 9   9   9   9   9   •   Improve loan underwriting and/ or credit administration procedures  9 99 9        •   Take action to limit asset growth 9   •   Develop written management succession plan 9     Source: ROEs issued by the OSBC and the FDIC.     Risk Management   Columbian’s management did not ensure that adequate risk management controls were implemented and followed and did not act in a timely manner to address deficiencies identified by examiners related to the bank’s inadequate risk management controls for loan documentation, administration, and monitoring. Columbian’s management fostered a culture of high-risk tolerance and rapid growth financed with wholesale funding without apparent regard for the overall safety and soundness of the institution.   Financial institutions with high concentrations of CRE loans require strong concentration risk management practices. Beginning in 2003, Columbian began rapidly acquiring and originating CRE/ADC loans with a significant number of out-of-territory loans. By the January 2008 examination, 25 loans, totaling approximately $130 million, had been purchased through a loan brokerage firm and carried interest rates as high as prime plus 4 percent as well as high origination and brokers’ fees. In most instances, Columbian financed the fees and provided substantial interest reserves as part of the total loan commitment. In spite of its high-risk tolerance, Columbian management did not adequately staff the lending function, resulting in ongoing weaknesses in credit monitoring.

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