Introduction to Problem Banks eBook

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Introduction to Problem Banks

February 25-27, 2025 Live Virtual

@ www.csbs.org ♦ @csbsnews

CONFERENCE OF STATE BANK SUPERVISORS 1300 I Street NW / Suite 700 / Washington, DC 20005 / (202) 296-2840

Introduction to Problem Banks Live Virtual February 25-27, 2025

Tuesday, February 25 1:00 pm – 1:30 pm

Welcome & Introductions

Defining Problem Banks and History Perspectives

1:30 pm – 2:00 pm

2:00 pm – 2:15 pm

Break

Red Flags

2:15 pm – 3:00 pm

Case Study: Pre-Exam Planning Memo

3:00 pm – 4:00 pm

Wednesday, February 26 1:00 pm – 1:30 pm

Case Study Discussion: Pre-Exam Planning Memo

Exam Plan and Process

1:30 pm – 2:00 pm

2:00 pm – 2:15 pm

Break

Exam Plan and Process

2:15 pm – 3:00 pm

Case Study: Exam Results Memo

3:00 pm – 4:00 pm

Thursday, February 27 1:00 pm – 1:30 pm

Case Study Discussion & Wrap-Up

Enforcement Actions

1:30 pm – 2:15 pm

2:15 pm – 2:30 pm

Break

Enforcement Actions

2:30 pm – 3:00 pm

Introduction to Bank Closures

3:00 pm – 3:30 pm

Q&A / Wrap-Up

3:30 pm – 4:00 pm

February 25-27, 2025 Introduction to Problem Banks Live Virtual

ATTENDEES Arkansas State Bank Department Thompson, Abigale

athompson@banking.state.ar.us cwilson@banking.state.ar.us

Wilson, Christopher

California Department of Financial Protection and Innovation Lo, Isabel

isabel.lo@dfpi.ca.gov logan.serface@dfpi.ca.gov

Serface, Logan

Colorado Department of Regulatory Agencies Division of Banking Thompson, Rachael

rachael.thompson@state.co.us

Winkel, Troy

troy.winkel@state.co.us

Hawaii Department of Commerce and Consumer Affairs - Financial Institutions Kobuke, Irene

imkobuke@dcca.hawaii.gov

Maine Bureau of Financial Institutions Getchell, Sean

sean.getchell@maine.gov lindsey.mattson@maine.gov andrea.mclaughlin@maine.gov

Mattson, LIndsey McLaughlin, Andrea

Massachusetts Division of Banks Bracchi, Russell

russell.bracchi@mass.gov

Mississippi Department of Banking and Consumer Finance Craig, James

james.craig@dbcf.ms.gov

New York State Department of Financial Services Khan, Tariq

tariq.khan@dfs.ny.gov daisy.le@dfs.ny.gov

Le, Daisy

Leganczuk, Jeremy McLeod, Nia Mehta, Deepali Steans, Jessica Weintraub, David

jeremy.leganczuk@dfs.ny.gov nia.mcleod@dfs.ny.gov deepali.mehta@dfs.ny.gov jessica.steans@dfs.ny.gov david.weintraub@dfs.ny.gov

Oklahoma Banking Department Duncan, Clint

clint.duncan@banking.ok.gov

Oregon Division of Financial Regulation Riggs, Kassia Utah Department of Financial Institutions Anderson, Ryan

kassia.riggs@dcbs.oregon.gov

ryananderson@utah.gov scottbarlow@utah.gov abateman@utah.gov marthahernandez@utah.gov

Barlow, Scott

Bateman, Amber Hernandez, Martha

Maeda, Tomo Nunez, Daniel

tjmaeda@utah.gov dnunez@utah.gov

INSTRUCTORS Arkansas State Bank Department Moseley, Baker

bmoseley@banking.state.ar.us

California Department of Financial Protection and Innovation Nahnsen-Robison, Catherine

catherine.nahnsen-robison@dfpi.ca.gov

Georgia Department of Banking and Finance Ensminger, Heather

hensminger@dbf.state.ga.us

Iowa Division of Banking Irlbeck, Zachery

zachery.irlbeck@idob.state.ia.us

CSBS STAFF Hoyle, Katie

khoyle@csbs.org

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Introduction to Problem Banks Training February 25-27, 2025

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Zoom Features

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Schedule • February 25: 1:00 PM – 4:00 PM ET

• February 26: 1:00 PM – 4:00 PM ET

• February 27: 1:00 PM – 4:00 PM ET

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Attendance Policy In order to receive a certificate of completion for a CSBS virtual training, an attendee may not miss more than 1 hour throughout the duration of the training. Attendees must also participate in all training activities including exercises, presentations, and assessments to receive the credit hours (CEHs) and certificate. If a certificate of completion is not important to you, you may continue in the training even if you no longer meet the attendance requirement.

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Instructor Contact Information

Business Analysis Director Georgia Department of Banking and Finance hensminger@dbf.state.ga.us Heather Ensminger

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Instructor Contact Information

Senior Bank Examiner Iowa Division of Banking zachery.irlbeck@idob.state.ia.us Zachery Irlbeck

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Instructor Contact Information

Assistant Deputy Commissioner Arkansas State Bank Department bmoseley@banking.state.ar.us Baker Moseley

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Instructor Contact Information

Regional Deputy Commissioner, Banking California Department of Financial Protection & Innovation catherine.nahnsen-robison@dfpi.ca.gov Cathy Nahnsen-Robison

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Pre-Course Questionnaire Discussion

www.menti.com Code: 9756 5267

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Introductions

NAME

AGENCY/STATE

HOW LONG HAVE YOU BEEN AN EXAMINER?

ANSWER ONE CASE STUDY QUESTION

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Prior Exam Case Study 1. Based on the current examination findings, what are the major areas you would like to focus on as EIC? • Name one of the major areas 2. You are conducting an off-site review of State Bank of Anytown, what ratios, numbers, and/or information would you review to determine if any material changes have occurred since the previous examination? Why? • Name one ratio, numbers, or information 3. What type of risk indicators would have to be present to start the exam sooner than scheduled? • Name one risk indicator

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Defining Problem Banks and History Perspectives When good banks go bad…

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January 16, 2025 Pulaski Savings Bank fails, Millennium Bank assumes deposits Pulaski Savings Bank, a $49.5 million asset Chicago-based community bank, was shut down Friday by the Illinois Department of Financial and Professional Regulation. The Federal Deposit Insurance Corp. was appointed as the receiver and all the banks' $42.7 million in deposits were assumed by nearby Millennium Bank of Des Plaines, Illinois. "Millennium Bank agreed to assume all deposits at the time of closing for a 4.61 percent premium. It will also purchase approximately $45.0 million of the failed bank's assets," an agency release noted. "The FDIC will retain the remaining assets for later disposition." "The FDIC preliminarily estimates that the failure will cost its Deposit Insurance Fund (DIF) about $28.5 million," the FDIC said in a release. "The estimate will change over time as assets are sold. Suspected fraud caused the higher estimated cost to the DIF."

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October 18, 2024 Oklahoma bank fails amid claims of 'false and deceptive bank records’ On Friday, Oct. 18, the First National Bank of Lindsay in south central Oklahoma, was reported closed by the Department of Treasury’s Office of Comptroller of the Currency over “false and deceptive” bank records. A member of the Federal Deposit Insurance Corp. (FDIC), First National was the first bank since April 26 to be shut down by federal regulators. Two days later, it reopened as First Bank and Trust Co., based in Duncan, Oklahoma. The agency projects that the failure will cost the DIF $43 million.

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October 18, 2024 Republic First becomes the first FDIC-insured bank failure of 2024 The news: Last Friday, Pennsylvania financial regulators seized and shut down Philadelphia-based Republic First Bank in the first FDIC-insured bank failure of 2024. • The deposit insurance fund is expected to pay out $667 million to cover the bank’s failure.

Full article: https://www.emarketer.com/content/republic-first-becomes-first fdic-insured-bank-failure-of-2024

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November 3, 2023 Iowa community bank becomes 5th to fail this year The $66 million-asset Citizens Bank of Sac City, Iowa, entered receivership of the FDIC on Friday and was then acquired by Iowa Trust & Savings. Citizens Bank of Sac City, Iowa, failed Friday after examiners “identified significant loan losses that had not previously been identified by the bank,” the Iowa Division of Banking announced.

Full article: https://www.bankingdive.com/news/citizens-sac-city-iowa community-bank-fifth-2023-failure/699034/

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July 28, 2023 ‘ Huge scam’ in rural Kansas town fells fourth U.S. bank in 2023 On Friday, July 28, 2023, Heartland Tri-State Bank was closed by the Kansas Office of the State Bank Commissioner. The Federal Deposit Insurance Corporation (FDIC) was subsequently named Receiver. No advance notice is given to the public when a financial institution is closed. Dream First Bank, National Association (N.A.), Syracuse, KS assumed all deposit accounts and substantially all the assets. All shares of stock were owned by the holding company, which was not involved in this transaction. "Heartland Tri-State Bank failed because of alleged fraudulent activity conducted by the bank's chief executive officer (CEO), who initiated a series of wire transfers totaling about $47.1 million Heartland's funds, among other suspicious activities, as part of an apparent cryptocurrency scheme referred to as 'pig butchering,’” the report said.

Full article: https://kansasreflector.com/2023/08/11/huge-scam-in-rural-kansas-town-fells-fourth-u-s-bank in-2023/

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March 10, 2023 Regulators shut down Silicon Valley Bank, capping abrupt 44-hour collapse The California Department of Financial Protection and Innovation took possession of the struggling bank, whose stock price tanked 60% the day before, and appointed the Federal Deposit Insurance Corp. as the bank's receiver. It cited inadequate liquidity and insolvency… The collapse of Silicon Valley Bank was the first bank failure in nearly two and a half years. The last FDIC-insured institution to fail was the $70 million asset Almena State Bank in Kansas on Oct 23, 2020, according to the FDIC website, its estimated cost to the DIF was $16.8 million.

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October 23, 2020 Kansas regulators close Almena State Bank in year’s 4th bank failure The FDIC blamed Almena’s closure on “longstanding capital and asset quality issues” unrelated to the coronavirus pandemic. The bank had lost more than $9.3 million since 2018 and had not turned an annual profit since 2017,American Banker reported. The FDIC estimates the bank failure will cost the Deposit Insurance Fund $18.3 million.

Full article: https://www.bankingdive.com/news/almena-state-bank-failure closure/587716/

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Additional Articles: 1. Collateral Damage: The Death of a Small Town Bank – Time 2. A bank failure shattered trust in this Kansas town. Only honest talk will heal it. – Kansas Reflector 3. Ex-Heartland Tri-State CEO charged with embezzling $47M in crypto – Banking Dive

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What is a problem bank? In the chat, type some characteristics of what makes a bank a problem bank.

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Definition:

A financial institution with a composite rating of 3, 4, or 5

A financial institution under an enforcement action

Not to be confused with “Troubled Bank”

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Two Scenarios

Known Problem Bank

Surprise/ Non-Known Problem Bank

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What’s the difference?

1. How would you prep for each scenario?

2. How would the examination change once you got there?

Type in chat or raise your hand to answer

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Today’s Landscape: In the chat, describe what you see as either present or looming risks?

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What we plan to cover in this course:

1. Red Flags 2. Examination Techniques 3. Enforcement Actions

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Brief History of Crisis and Response

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The Great Depression • The Banking Act of 1933 • The Security and Exchange Act of 1934 • The Banking Act of 1935

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• Depository Institutions Deregulation and Monetary Control Act of 1980 • Competitive Equality Banking Act of 1987 • Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) • Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991

The 1980s

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9/11/2001 USA PATRIOT ACT significantly increased regulators responsibilities to ensure that financial institutions implement systems to comply with The Bank Secrecy Act.

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The Great Recession – December 2007

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The Pandemic Effect and Beyond

Liquidity

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Pulaski Savings Bank fails, Millennium Bank assumes deposits The Office of the Comptroller of the Currency closed the First National Bank of Lindsay due to what the regulator said were false and deceptive bank records suggesting fraud, which depleted the bank's capital reserves. "The FDIC preliminarily estimates that the failure will cost its Deposit Insurance Fund (DIF) about $28.5 million," the FDIC said in a release. "The estimate will change over time as assets are sold. Suspected fraud caused the higher estimated cost to the DIF.“

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What’s coming next?

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Questions

1/21/25, 10:46 AM

View Content - Meltwater

Pulaski Savings Bank fails, Millennium Bank assumes deposits

American Banker Online - Powered by Dow Jones | January 16, 2025

Pulaski Savings Bank, a $49.5 million asset Chicago-based community bank, was shut down Friday by the Illinois Department of Financial and Professional Regulation.

The Federal Deposit Insurance Corp. was appointed as the receiver and all the banks' $42.7 million in deposits were assumed by nearby Millennium Bank of Des Plaines, Illinois. "Millennium Bank agreed to assume all deposits at the time of closing for a 4.61 percent premium. It will also purchase approximately $45.0 million of the failed bank's assets," an agency release noted. "The FDIC will retain the remaining assets for later disposition."

Pulaski Savings Bank — which has one location — will reopen as a branch of Millennium Bank on Saturday during regular business hours.

Depositors of the failed bank will automatically become depositors of Millennium Bank and don't have to take any action to have access to their accounts, according to the FDIC.

The closure of Pulaski Savings Bank and the transfer of its deposits to Millennium Bank mark the first bank failure of 2025 .

Before Friday's failure, First National Bank of Lindsay, in Lindsay, Okla. in October 2024 was the last time the agency wound down an FDIC-insured bank.

The Office of the Comptroller of the Currency closed the First National Bank of Lindsay due to what the regulator said were false and deceptive bank records suggesting fraud, which depleted the bank's capital reserves.

While First National's failure was estimated to cost the DIF $43 million, the agency predicted Pulaski's failure will cost slightly less.

"The FDIC preliminarily estimates that the failure will cost its Deposit Insurance Fund (DIF) about $28.5 million," the FDIC said in a release. "The estimate will change over time as assets are sold. Suspected fraud caused the higher estimated cost to the DIF."

https://app.meltwater.com/shareddocumentviewer/v2/AMBO000020250118el1h00001?payload=eyJraWQiOiJmNzI0NTQ2Yy1iYTlhLTQwZTktYjQ1ZS0… 1/1

10/21/24, 8:55 AM

Oklahoma bank fails amid claims of 'false and deceptive bank records' | American Banker

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POLITICS AND POLICY

Oklahoma bank fails amid claims of 'false and deceptive bank records'

By Claire Williams

October 18, 2024, 8:26 p.m. EDT 2 Min Read

The Federal Deposit Insurance Corp. sold the insured deposits of a failed small bank in Oklahoma to another local community bank on Friday. Al Drago/Bloomberg

https://www.americanbanker.com/news/oklahoma-bank-fails-amid-claims-of-false-and-deceptive-bank-records?utm_campaign=NL_AB_Daily_Briefing… 1/8

10/21/24, 8:55 AM

Oklahoma bank fails amid claims of 'false and deceptive bank records' | American Banker

WASHINGTON — The First National Bank of Lindsay in Lindsay, Okla., was shuttered by the Office of the Comptroller of the Currency and taken over by the Federal Deposit Insurance Corp. on Friday.

First Bank & Trust Co. in Duncan, Okla., assumed the First National Bank of Lindsay's insured deposits. The only office of the First National Bank of Lindsay will resume normal business hours as a branch of First Bank & Trust Co. on Monday.

The OCC closed the bank "after identifying false and deceptive bank records and other information suggesting fraud that revealed depletion of the bank's capital," the agency said in a press release.

"The OCC also found that the bank was in an unsafe or unsound condition to transact business and that the bank's assets were less than its obligations to its creditors and others," the regulator said.

The OCC is also referring the issue to the Department of Justice, "which has a wide variety of tools to hold individuals accountable for criminal acts and focuses on victims in all of its matters."

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The agency provided no further details.

https://www.americanbanker.com/news/oklahoma-bank-fails-amid-claims-of-false-and-deceptive-bank-records?utm_campaign=NL_AB_Daily_Briefing… 2/8

10/21/24, 8:55 AM

Oklahoma bank fails amid claims of 'false and deceptive bank records' | American Banker

"The OCC does not comment on bank closings beyond what is available on our website," Stephanie Collins, a spokesperson for the OCC, said in a statement.

The FDIC will make 50% of uninsured funds available to depositors on Monday, the FDIC said. That amount could increase as the FDIC sells the remaining assets of the bank.

The failure is an outsized hit, compared to the size of the bank, to the FDIC's Deposit Insurance Fund — the pot of money that banks pay into to resolve failed banks. The agency projects that the failure will cost the DIF $43 million, although that estimate could change over time as assets are sold, the FDIC said.

The First National Bank of Lindsay previously reported assets of $107.8 million. Deposits totaled $97.5 million, and around $7.1 million of those deposits exceeded FDIC insurance limits, the agency said.

That amount could change as the agency receives additional information from customers, the FDIC said.

First Bank & Trust Co. has assumed the failed bank's insured deposits for a 6.67% premium and will buy about $20 million of its assets.

The potential hit to the DIF comes at a sensitive time for the FDIC.

https://www.americanbanker.com/news/oklahoma-bank-fails-amid-claims-of-false-and-deceptive-bank-records?utm_campaign=NL_AB_Daily_Briefing… 3/8

10/21/24, 8:55 AM

Oklahoma bank fails amid claims of 'false and deceptive bank records' | American Banker

The DIF, which withstood the failure of Silicon Valley Bank and other large regional banks last year, recently stood at $129.2 billion, up $7.5 billion from the end of last year.

That put the pot ahead of schedule — before the most recent failure — to the legally required level of 1.35% by 2026. Some large banks had to make extra payments to cover the losses from the regional banking crisis in 2023.

This is the second bank failure of 2024. Republic First Bank — whose underwater bond troubles mirrored those at First Republic Bank and Silicon Valley Bank — was closed by its state regulator in April. Fulton Bank in Lancaster, Pennsylvania, assumed substantially all of Republic First's $6 billion of assets and $4 billion of deposits.

Claire Williams Reporter, American Banker

For reprint and licensing requests for this article, click here.

POLITICS AND POLICY

FAILURES

BANKING CRISIS 2023

https://www.americanbanker.com/news/oklahoma-bank-fails-amid-claims-of-false-and-deceptive-bank-records?utm_campaign=NL_AB_Daily_Briefing… 4/8

8/22/24, 12:30 PM

Sentencing of Kansas failed-bank CEO delayed

Sentencing of Kansas failed-bank CEO delayed American Banker Online - Powered by Dow Jones · Jim Dobbs US | August 12, 2024 · 12:00am Shan Hanes, the ex-CEO of failed Heartland Tri-State Bank who pleaded guilty earlier this year to stealing millions of dollars from the Elkhart, Kansas-based lender before it failed, will have to wait several more days for his sentence in U.S. District Court. Hanes, 52, admitted on May 23 to embezzling the funds from the $139 million-asset Heartland Tri State and its customers. He was charged in February. Facing up to 30 years in prison, he was originally scheduled for sentencing on Aug. 8. A judge postponed sentencing to Aug. 19, a spokeswoman for prosecutors with the U.S. attorney's office in Wichita, Kansas, told American Banker Monday. A reason for the delay was not immediately available. Prosecutors said that, from May to July 2023, Hanes initiated a series of 10 outgoing wire transfers totaling $47.1 million of Heartland's funds to a cryptocurrency wallet. The money was then transferred to multiple crypto accounts controlled by unidentified third parties. "Even as he was squandering away tens of millions of dollars in cryptocurrency, Hanes orchestrated schemes to cover his tracks concerning the losses at the bank," U.S. Attorney Kate Brubacher said in a statement. Hanes, who could not be reached for comment, admitted in court to embezzling bank funds, causing the bank to fail. Prosecutors said Hanes took money from multiple customer accounts, including one held by a local church.

Prosecutors said Hanes lied to the bank's board, investors and employees about the wire transfers. Federal authorities estimated that shareholders lost between $9.3 million and $13.4 million.

The Kansas Office of the State Bank Commissioner shuttered Heartland Tri-State and the Federal Deposit Insurance Corp. seized the bank on July 28 of last year. Dream First Bank of Syracuse, Kansas, assumed all of its deposits.

https://app.meltwater.com/newsletters/analytics/view/56f3dc447a8515021581002d/newsletter/601bc23d843b4f1e59274c56/distribution/66bb682789a0… 1/2

8/22/24, 12:30 PM

Sentencing of Kansas failed-bank CEO delayed

The FDIC said the agreement caused a $54.2 million hit to its Deposit Insurance Fund.

There were five failures overall last year, including three large regional banks that struggled under the weight of high interest rates and deposit runs. Those downfalls started with Silicon Valley Bank and Signature Bank in March, followed by First Republic Bank in May. Republic First Bank in April marked the lone failure so far this year. It was closed by its state regulator and taken over by the FDIC. The Philadelphia-based bank had struggled to maintain adequate capital and faced proxy challenges from investor groups.

Fulton Bank in Lancaster, Pennsylvania, assumed substantially all of Republic First's $6 billion of assets and $4 billion of deposits, according to the FDIC.

There were no bank failures in 2022 or the year before. But four banks failed in each of 2019 and 2020, according to FDIC data.

https://app.meltwater.com/newsletters/analytics/view/56f3dc447a8515021581002d/newsletter/601bc23d843b4f1e59274c56/distribution/66bb682789a0… 2/2

1/29/25, 2:00 PM

Regulators take over Silicon Valley Bank, citing poor 'liquidity and insolvency' | American Banker

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COMMERCIAL BANKING

Regulators shut down Silicon Valley Bank, capping abrupt 44-hour collapse

By Polo Rocha , Claire Williams

March 10, 2023, 12:12 p.m. EST 5 Min Read

https://www.americanbanker.com/news/regulators-take-over-silicon-valley-bank-citing-poor-liquidity-and-insolvency

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1/29/25, 2:00 PM

Regulators take over Silicon Valley Bank, citing poor 'liquidity and insolvency' | American Banker

Regulators shut down Silicon Valley Bank on Friday, capping a remarkable 44-hour fall for the tech heavy bank and sending shock waves through the nancial system.

The California Department of Financial Protection and Innovation took possession of the struggling bank, whose stock price tanked 60% the day before, and appointed the Federal Deposit Insurance Corp. as the bank's receiver. It cited inadequate liquidity and insolvency.

The FDIC said it has created the Deposit Insurance National Bank of Santa Clara and transferred all of SVB's insured deposits to that entity. The agency said all insured depositors "will have full access to their insured deposits no later than Monday morning."

The FDIC also said that it "will pay uninsured depositors an advance dividend within the next week." The bank's branches will reopen on Monday, the FDIC said.

Earlier on Friday morning, trading in SVB Financial, the bank's $212 billion-asset parent company, had been paused, and some media reports said the bank was in talks to pursue a sale. The Santa Clara, California-based bank, which on Wednesday announced $1.8 billion in bond-related losses and a plan to raise more capital, was among the 20 largest in the country by assets.

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AMERICAN BANKER

The FDIC insures depositors' accounts up to $250,000. But many of Silicon Valley Bank's deposits are above that threshold, according to a research note from RBC Capital Markets analyst Gerard Cassidy.

https://www.americanbanker.com/news/regulators-take-over-silicon-valley-bank-citing-poor-liquidity-and-insolvency

2/9

1/29/25, 2:00 PM

Regulators take over Silicon Valley Bank, citing poor 'liquidity and insolvency' | American Banker

As of the fourth quarter of 2022, deposits that were under $250,000 accounted for just 2.7% of the company's total deposits, Cassidy wrote.

Silicon Valley Bank had received a glut of deposits during the pandemic-era tech boom, when interest rates were still low, and had invested much of that money in low-yielding securities. When interest rates rose sharply, the value of the securities fell, and the bank accumulated unrealized losses on them.

Back in January, SVB Financial CEO Greg Becker suggested that the bank had turned a corner.

"Last quarter, there was more uncertainty," he said during the company's fourth-quarter earnings call . "Even if we're in this prolonged period of time for longer or even a little bit deeper, we know we're going to weather that ne."

But late on Wednesday, the bank said that it had sold $21 billion in securities that were marked as "available for sale" at a $1.8 billion loss, and that it was making downward revisions to its outlook for deposits, net interest income, net interest margin and expenses.

Simultaneously, the bank said it was embarking on a $2.25 billion capital raise. Though it did announce a $500 million commitment from the investment fund General Atlantic, the bank had not secured the full $2.25 billion by the time of its announcement on Wednesday.

Casey Haire, an analyst at Jefferies who covers SVB Financial, said the company made "a colossal mistake" by not raising capital Wednesday.

"They should have raised equity right then and there Wednesday afternoon. They didn't. They had already sold the securities. They waited until the next day and, worse yet, waited until the market opened to have an underwriter call at 10 a.m.," Haire said.

"I'm shocked. This did not have to happen. Had they raised equity on Wednesday night, this never would have happened," he added.

https://www.americanbanker.com/news/regulators-take-over-silicon-valley-bank-citing-poor-liquidity-and-insolvency

3/9

1/29/25, 2:00 PM

Regulators take over Silicon Valley Bank, citing poor 'liquidity and insolvency' | American Banker

After the bank's announcement on Wednesday, the situation unraveled quickly. On Thursday there were reports that Founders Fund, the venture capital fund co-founded by Peter Thiel, was advising companies to withdraw their money from Silicon Valley Bank.

But between the end of 2021 and Feb. 28, 2023, Silicon Valley Bank's on-balance-sheet deposits had already fallen from around $210 billion to $160 billion, according to Gary Tenner, an analyst at D.A. Davidson.

The bank's decision to sell a large securities portfolio and raise capital put it in a dif cult position, Tenner said Friday.

"Obviously the market was not receptive to their capital raise, to put it lightly," Tenner said.

COMMERCIAL BANKING

SVB shares fall sharply after $1.8B in surprise bond losses

March 9, 2023 3:38 PM

The collapse of Silicon Valley Bank was the rst bank failure in nearly two and a half years. The last FDIC-insured institution to fail was the $70 million-asset Almena State Bank in Kansas on Oct. 23, 2020, according to the FDIC's website ; its estimated cost to the Deposit Insurance Fund was $16.8 million.

Jaret Seiberg, an analyst at TD Cowen, said that Silicon Valley Bank's abrupt collapse stemmed from its unusually large exposure to interest rate risk.

"Silicon Valley had a unique business model that was less dependent on retail deposits than a traditional bank," Seiberg wrote in a note to clients. "This left the bank more exposed to interest rate risk as its funding got more expensive, but its assets were not repricing higher."

The San Francisco Home Loan Bank, which lent $13.5 billion to Silicon Valley Bank in the third quarter of 2022 , is rst in line among creditors.

https://www.americanbanker.com/news/regulators-take-over-silicon-valley-bank-citing-poor-liquidity-and-insolvency

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1/29/25, 2:00 PM

Regulators take over Silicon Valley Bank, citing poor 'liquidity and insolvency' | American Banker

Seiberg said that it's possible that all depositors will be made whole, since the FDIC said that Silicon Valley Bank's assets exceeded its liabilities by nearly $35 billion on Dec. 31, 2022.

John Popeo, a principal at The Gallatin Group who worked for the FDIC leading bank failure deals during the nancial crisis, predicted that the status of Silicon Valley Bank's unusually high amount of uninsured deposits will now become a subject of contention.

The preferred method of an all-deposits transaction is now off the table, he said, which would have made the process for recovering those uninsured deposits signi cantly easier.

Typically, he said, the kind of transaction that Silicon Valley Bank is undergoing is reserved for situations where there is no prospective acquirer.

"For the uninsured deposits, the depositors will still have the claim against the receiver," Popeo said. "They will have to le a proof of claim with the FDIC's receiver, and the status of what they'll be eligible for is unknown."

Popeo also noted that the timing of the bank's failure — during work hours on a Friday — was unusual.

"That's amazing," he said. "Banks are not supposed to fail until their scheduled closing time. So this speaks to the urgency of the situation."

Allissa Kline and Kevin Wack contributed to this story.

Polo Rocha Staff Writer, American Banker Claire Williams Reporter, American Banker

For reprint and licensing requests for this article, click here .

COMMERCIAL BANKING

BANKING CRISIS 2023

https://www.americanbanker.com/news/regulators-take-over-silicon-valley-bank-citing-poor-liquidity-and-insolvency

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Problem Bank Training Red Flags

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Objectives of this section:

Define Red Flags

Sources of information used in Red Flag identification

If seen, some questions to ask.

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Definition – Red Flags

• Indicators of actual or potential problems or heightened risk

• Can be indicators of root problems (leading indicators) or symptoms/results (lagging indicators).

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Where do we find red flags?

1. What sources can you use to find red flags?

2. How do you evaluate or decide which red flags to look at?

Type in chat or raise your hand to answer

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Leading or Lagging?

Increase in loan delinquencies

Increase in a particular market concentration Turnover in one or more of executive management

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Whistleblowers – who are they and why do they contact us?

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Former Management or Directors

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Objectives:  Definition  Sources of red flags

 Questions to ask

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Breakout Group Exercise Breakout group exercise (15 minutes) In your group: 1. Select a spokesperson 2. Discuss the red flag 3. Come up with questions (at least 3) you would ask management or areas you want to follow-up on. 4. Your group will present their questions to the larger group.

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Breakout Group Exercise

Groups 1 & 4 :

Groups 2 & 5: •Increase in the level of AOCI (negative) in the bank’s AFS securities.

Groups 3 & 6:

•Increase in borrowings

•Increase in

concentration of depositors in one market sector.

with the FHLB

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List of Red Flags

• Internal reporting delays, errors, omissions • Concentrations, of any kind • Delinquencies • Over 90 and accruing • Weak audit/examination finding remediation tracking • Rapid growth and/or new material product lines • Unfunded commitments • Inaccessible/unresponsive management and/or board • Uninsured deposit levels • Adjusting policy limits simply to avoid exceptions

• Increase in non-core funding

• Decrease in core deposits or no core deposits • Loan renewals without any paydowns

High Net Interest Margin

•

• Loan review scope influenced by management

No audit

•

• Inadequate CECL (ALLL back in the day) methodology • Not reporting policy exceptions to the board

Turnover

•

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In conclusion:

 Definitions  Sources for red flags  Questions to ask

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Questions?

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Examination Plan & Process

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Preparing for Exam

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Exam Scope

Exam scope should be highly detailed.

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Identify a Strategy

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Successful Resolution

ORDER CHAOS

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Organization

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Maintain Documentation

Documentation is key!

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What are some examples in a word or two that were a challenge for you being an EIC in more of a problem situation?

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Gather information

Organized, accurate & complete information.

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Document Management’s Promises

Generally speaking, avoid personal opinions.

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Federal Counterparts

Present a united front with federal counterparts.

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Key Points: • Workpaper procedures • No extra copies • Learn about the bank

• You aren’t alone • CBOs & RBOs

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Communication

Communication is critical to the exam process.

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Reporting

Reporting frequency depends on situation.

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Awareness

Consider regular meetings with examiners.

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Poll: What is your experience with joint exams?

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Communicate with Bank Management

Bank management should not be hearing about Issues for the first time at the exit meeting.

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Written Communication

E-mails should be protected through encryption.

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Confidential Meetings

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Documentation • Include only information about subject bank • Buddy up at meetings • Learn from others & self • Body language & words

• No ultimatums • Keep your cool

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