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FDIC Office of Inspector General, Office of Material Loss Reviews, Material Loss Review of MetroPacific Bank, Irvine, California, January 2010


FDIC OIG Executive Summary


Material Loss Review of MetroPacific Bank,
Irvine, California
  Report No. MLR-10-011
January 2010
Why We Did The Audit

On June 26, 2009, the California Department of Financial Institutions (CDFI) closed MetroPacific Bank, (MetroPacific) Irvine, California, and named the FDIC as receiver. On July 6, 2009, the FDIC notified the Office of Inspector General (OIG) that MetroPacificís total assets at closing were $75.2 million and the material loss to the Deposit Insurance Fund (DIF) was $29 million. As required by section 38(k) of the Federal Deposit Insurance (FDI) Act, the OIG conducted a material loss review of the failure of MetroPacific.

The audit objectives were to (1) determine the causes of MetroPacificís failure and the resulting material loss to the DIF and (2) evaluate the FDICís supervision of MetroPacific, including the FDICís implementation of the Prompt Corrective Action (PCA) provisions of section 38.

Background

MetroPacific was a state-chartered nonmember bank, established by the CDFI and insured by the FDIC effective February 7, 2005. MetroPacific, which was headquartered in Irvine, California, was a full-service community bank specializing in residential and commercial real estate loans (CRE), including residential acquisition, development, and construction (ADC) loans. MetroPacific provided traditional banking services within its marketplace and had no holding company, subsidiaries, or other affiliates.

Audit Results

Causes of Failure and Material Loss

MetroPacific, a de novo bank, failed primarily because it lacked stable and consistent management and oversight as a result of significant turnover in key management positions. The bankís Board of Directors and management were particularly ineffective in implementing risk management practices pertaining to adherence to the bankís business plan and rapid growth and concentrations in CRE and ADC loans. MetroPacificís operations suffered from inadequate loan underwriting and credit administration, loan policies, and allowance for loan and lease losses practices. The CRE and ADC concentrations and inadequate risk management controls, coupled with weak economic and real estate market conditions, (1) resulted in poor asset quality, a lack of earnings, and eroded capital and (2) left MetroPacific unprepared and unable to effectively manage the risks associated with its loan portfolio. An inadequate capital position finally led the CDFI to close the bank on June 26, 2009.

The FDICís Supervision of MetroPacific

The FDIC and CDFI provided oversight of MetroPacific by performing four on-site examinations and two visitations from 2005 to 2009. Throughout that period, the examinations and visitations included examiner concerns and recommendations related to the performance of MetroPacificís management, the bankís loan portfolio, loan underwriting and credit administration deficiencies, and weak risk management practices.

The FDIC pursued enforcement actions to correct problems as a result of the January 2006 and February 2008 examinations. However, timelier supervisory action could have been taken to address deviations from the business plan. In addition, as the institution developed a higher-risk profile due to CRE and ADC concentrations, supervisory






Executive Summary Material Loss Review of MetroPacific Bank,
Irvine, California
  Report No. MLR-10-011
January 2010

action more directly addressing loan policy deficiencies would have been prudentóparticularly at the time of the February 2007 examination.

With respect to PCA, we concluded that the FDIC had properly implemented applicable PCA provisions of section 38 based on the supervisory actions taken for MetroPacific. The effectiveness of PCA may have been impacted, however, by the fact that MetroPacific paid rates on certificates of deposit that exceeded the maximum permissible yield for Adequately Capitalized banks.

Management Response

After we issued our draft report, we met with management officials to further discuss our results. Management provided additional information for our consideration, and we revised our report to reflect this information, as appropriate. On December 22, 2009, the Director, Division of Supervision and Consumer Protection (DSC), provided a written response to the draft report. That response is provided in its entirety as Appendix 4 of this report.

DSC reiterated the OIGís conclusions regarding the causes of MetroPacificís failure. In addition, DSC stated that, as a result of significant operational deficiencies noted at the first full-scope examination, MetroPacific agreed to a corrective program with an informal enforcement action in June 2006. Due to significant turnover in key management positions, MetroPacific lacked management stability and was unable to establish a sustainable core business model. DSC officials also stated that the February 2008 joint FDIC/CDFI examination identified a sharp increase in adversely classified assets, an inadequate ALLL, loan underwriting and administration weaknesses, and a significant deviation from MetroPacificís business plan, resulting in a formal enforcement action by the FDIC and CDFI.

With regard to our assessment of the FDICís supervision, DSC stated that the supervisory program for de novo institutions was recently extended so that these institutions receive a full-scope examination every year for 7 years, as opposed to 3 years. Further, DSC stated that it is closely monitoring de novo business plans against actual performance throughout the 7-year period. DSCís August 2009 Financial Institution Letter, entitled, Enhanced Supervisory Procedures for Newly Insured FDIC-Supervised Depository Institutions, describes the program changes for de novo institutions and warns that changes to business plans undertaken without required prior notice may subject institutions or their insiders to civil money penalties.




















Contents

Page
Background 2
Causes of Failure and Material Loss 2
Bank Management Turnover 3
Adherence to the Business Plan 4
CRE and ADC Loan Concentrations 7
Loan Policy 9
Loan Underwriting and Credit Administration Practices 10
Allowance for Loan and Lease Losses 11
The FDICís Supervision of MetroPacific 12
Supervisory History 12
Supervisory Identification of, and Response to, MetroPacificís Risks 16
Implementation of PCA 20
Corporation Comments 21
Appendices  
1. Objectives, Scope, and Methodology 23
2. Glossary of Terms 25
3. Acronyms 26
4. Corporation Comments 27
Tables  
1. Financial Condition of MetroPacific 2
2. MetroPacificís Projected and Actual Levels for ADC Loans 5
3. MetroPacificís Business Plan Compared to Actual Actions 7
4. MetroPacificís Adverse Classifications and ALLL 12
5. MetroPacificís Examination and Visitation History 13
6. MetroPacificís Capital Ratios Relative to PCA Thresholds for Well-Capitalized Institutions 20
Figures  
1. MetroPacificís CRE Loans to Total Capital Compared to Peers 8
2. MetroPacificís ADC Loans to Total Capital Compared to Peers 8











FDIC, Federal Deposit Insurance Corporation, Office of Inspector General,  3501 Fairfax Drive, Arlington, VA 22226-3500
DATE: January 6, 2010
 
MEMORANDUM TO:Sandra L. Thompson, Director
Division of Supervision and Consumer Protection
 
FROM:Stephen M. Beard [Electronically produced version; original signed by Stephen M. Beard]
Assistant Inspector General for Material Loss Reviews
 
SUBJECT: Material Loss Review of MetroPacific Bank, Irvine,
California
(Report No. MLR-10-011)
 

As required by section 38(k) of the Federal Deposit Insurance (FDI) Act, the Office of Inspector General (OIG) conducted a material loss1 review of the failure of MetroPacific Bank, Irvine, California. On June 26, 2009, the California Department of Financial Institutions (CDFI) closed the bank and named the FDIC as receiver. On July 6, 2009, the FDIC notified the OIG that MetroPacificís total assets at closing were $75.2 million and the material loss to the Deposit Insurance Fund (DIF) was $29 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 agencyís supervision of the institution, including the agencyís implementation of FDI Act section 38, Prompt Corrective Action (PCA); ascertains why the institutionís problems resulted in a material loss to the DIF; and makes recommendations to prevent future losses.

The audit objectives were to (1) determine the causes of the financial institutionís failure and resulting material loss to the DIF and (2) evaluate the FDICís supervision2 of the institution, including implementation of the PCA provisions of section 38 of the FDI Act. This report presents the FDIC OIGís analysis of MetroPacificís failure and the FDICís efforts to ensure MetroPacificís management operated the bank in a safe and sound manner. We are not making recommendations. Instead, as major causes, trends, and common characteristics of financial institution failures are identified in our reviews, we will communicate those to management for its consideration. As resources allow, we may also conduct more


1 As defined by section 38(k)(2)(B) of the FDI Act, a loss is material if it exceeds the greater of $25 million or 2 percent of an institutionís total assets at the time the FDIC was appointed receiver.
2 The FDICís supervision program promotes the safety and soundness of FDIC-supervised institutions, protects consumersí rights, and promotes community investment initiatives by FDIC-supervised insured depository institutions. The FDICís 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.








in-depth reviews of specific aspects of the FDICís supervision program and make recommendations, as warranted. Appendix 1 contains details on our objectives, scope, and methodology; Appendix 2 contains a glossary of terms; and Appendix 3 contains a list of acronyms used in the report. Appendix 4 contains the Corporationís comments on this report.

Background

MetroPacific was a state-chartered nonmember bank, established by the CDFI and insured by the FDIC effective February 7, 2005. MetroPacific, which was headquartered in Irvine, California, was a full-service community bank specializing in residential and commercial real estate (CRE) loans, including residential acquisition, development, and construction (ADC) loans. MetroPacific provided traditional banking services within its marketplace and had no holding company, subsidiaries, or other affiliates.

Table 1 provides a summary of selected financial information for MetroPacific as of March 2009, and for the 4 preceding calendar years.

Table 1: Financial Condition of MetroPacific
Financial Measure Mar-09 Dec-08 Dec-07 Dec-06 Dec-05
Total Assets ($000s) $75,316 $77,393 $63,402 $47,816 $40,026
Total Deposits ($000s) $70,078 $69,690 $49,031 $35,435 $27,469
Total Loans ($000s) $56,552 $59,551 $53,499 $34,650 $20,993
Net Income (Loss) ($000s) ($2,474) ($5,744) ($1,424) ($974) ($1,644)
Source: Uniform Bank Performance Reports (UBPR) and Reports of Examination (ROE) for MetroPacific.

Causes of Failure and Material Loss

MetroPacific, a de novo bank,3 failed primarily because it lacked stable and consistent management and oversight as a result of significant turnover in key management positions. The bankís Board of Directors (Board) and management were particularly ineffective in implementing risk management practices pertaining to adherence to the bankís business plan and rapid growth and concentrations in CRE and ADC loans. MetroPacificís operations suffered from inadequate loan underwriting and credit administration, loan policies, and allowance for loan and lease losses (ALLL) practices. The CRE and ADC concentrations and inadequate risk management controls, coupled with weak economic and real estate market conditions, (1) resulted in poor asset quality, a lack of earnings, and eroded capital and (2) left MetroPacific unprepared and unable to effectively manage the risks associated with its loan portfolio. An inadequate capital position finally led the CDFI to close the bank on June 26, 2009.






3De novo institutions are subject to additional supervisory oversight and regulatory controls, including the development and maintenance of a current business plan and increased examination frequency.





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Bank Management Turnover

MetroPacific experienced significant turnover rates in key management positions that resulted in unstable and inconsistent management oversight, which contributed to the bankís overall poor financial condition. From 2005 through the bankís failure in June 2009, the bank employed two Chief Executive Officers (CEOs), five Chief Credit Officers (CCOs), and three Chief Financial Officers (CFOs). This instability and inexperience in senior management and the bankís lack of consistent supervision over lending operations contributed to the development of the bankís concentrations, an excessive level of problem loans, and significant deficiencies in underwriting, loan policies, and ALLL practices.

In its business plan, MetroPacific acknowledged the significance of, and responsibilities associated with, these positions, which were critical to the safety and soundness and profitability of the bank. Those responsibilities are outlined below.

  • CEOóIn conjunction with the Board, the CEO was to (1) provide leadership, direction and guidance of the bankís activities to assure short and long-range profitability and planned growth of the bank in a safe and sound manner; and (2) keep the Board informed of financial results of operations, the status of loans, banking competition, and new business developments.
  • CCOóThe CCO was responsible for:
    • the safety and soundness of the bankís loan portfolio, management of the ALLL and insuring that all loan personnel were adhering to the general loan policy, rules, and regulations;
    • executing and administering day-to-day lending functions necessary through supervision of lending staff;
    • reviewing problematic loans with loan officers and taking necessary action to address those issues;
    • maintaining credit files, loan quality assurance and loan reports; and
    • ensuring that the bankís loan mix complied with the lending activities outlined in the bankís business plan.
  • CFOóThe CFO was responsible for the bankís system of internal controls, including developing basic objectives, policies, and operating plans.

Further, according to the DSC Risk Management Manual of Examination Policies (Examination Manual), the quality of management is probably the single most important element in the successful operation of a bank. The Examination Manual also states that it is important for bank management to be aware of and to discharge those responsibilities in a manner that will ensure the stability and soundness of the institution. While it is not







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necessary for the Board to be actively involved in day-to-day operations of the bank, it must provide clear guidance regarding acceptable risk exposure levels and ensure that appropriate policies, procedures, and practices are established.

According to the FDICís February 2008 examination report, MetroPacific exhibited a pattern of hiring or promoting individuals for the CEO and CCO positions who did not have prior lending background and/or experience critical for those positions. During that examination, examiners also concluded that the CCO was not considered qualified to manage the bankís loan portfolio and excessive level of problem assets. Examiners concluded that bank management was unsatisfactory due to significant turnover, an excessive level of problem assets and operating losses, inadequate risk management practices, and the absence of a qualified CCO.

Concerns regarding MetroPacificís inability to effectively manage the bankís operations were reported in the FDICís April 2008 problem bank memorandum,4 which noted that:

  • the bankís weaknesses appeared to have resulted from poor oversight of the lending function, the lack of a CCO who had the necessary experience to manage the loan portfolio, and excessive turnover of the bankís lending staff; and
  • bank management was considered unsatisfactory due to significant senior management turnover, the excessive level of problem assets and operating losses, inadequate risk management practices, and the absence of a qualified CCO.

The March 2009 examination determined that continuing weaknesses in management oversight were evident in all key areas, corrective action to address identified deficiencies continued to be hindered by turnover in key management positions, and major provisions of a June 2008 Cease & Desist Order (C&D)5 had not been met. Examiners reported that the lack of consistent supervision over the bankís lending activities resulted in an excessive level of problem loans and substantial deficiencies in loan underwriting, loan policies, and ALLL practices. After about 4 years of operation, the bankís condition, including management, was deemed to be critically deficient.

Adherence to the Business Plan

Soon after MetroPacific opened for operations, the bank deviated from its business plan by quickly exceeding financial projections in several areas and failing to follow certain basic risk management controls. Such a deviation was contrary to the FDICís Final Order for Deposit




4 A problem bank memorandum documents the FDICís concerns with an institution and the corrective action in place or to be implemented and is also used to effect interim rating changes on the FDICís systems. According to Section 32 of the FDI Act, financial institutions that are deemed to be in a troubled condition are required to notify the FDIC in writing at least 30 days prior to certain management changes, including the addition or replacement of a Board member, or the employment or change in responsibilities of anyone who was, would become, or who performed the duties of a senior executive officer.
5 As a result of weaknesses identified at the February 2008 examination, the FDIC and CDFI issued a joint C&D, which the Board stipulated to on June 17, 2008. Refer to the Supervisory History section of this report for additional information on the C&D.





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Insurance approving MetroPacificís deposit insurance.6 In addition, although MetroPacificís business plan (1) indicated that the bankís loan mix would include a substantial segment of Small Business Administration (SBA) loans and (2) stated that the bank would avoid concentrations of credit, both the lending practices that the bankís Board and management implemented and MetroPacificís significant management turnover in key positions ultimately resulted in (1) the bankís inability to adequately develop the SBA lending as planned and (2) concentrations in CRE and ADC loans. More specifically:

  • Although MetroPacificís business plan stated that the bankís proposed CCO and proposed President/CEO had considerable experience in establishing and administering SBA lending programs, problems associated with the bankís ability to achieve its intended level of SBA loans were noted at the bankís first full-scope examination conducted in January 2006.
  • At the January 2006 examination, examiners (1) identified underperformance and the lack of expertise to effectively develop and manage the SBA loan portfolio and (2) noted that CRE and construction loans (i.e. ADC loans), which at that time represented 85 percent and 66 percent of Tier 1 Capital, respectively, were the largest categories of loans in the bankís portfolio.

As shown in Table 2, MetroPacificís higher-risk ADC lending was substantially greater than the projected levels during the bankís first 3 years of operation.

Table 2: MetroPacificís Projected and Actual Levels for ADC Loans
Period Ended ADC Loans
Projected Actual
December 2005 12.3% 32.5%
December 2006 9.3% 34.7%
December 2007 8.4% 38.1%
Source: OIG analysis of MetroPacificís business plan and UBPRs.

According to the FDIC Statement of Policy on Applications for Deposit Insurance, and in compliance with sections 5 and 6 of the FDI Act, the FDIC must be assured that the proposed institution does not present an undue risk to the DIF. The FDIC expects proposed institutions to submit a business plan commensurate with the capabilities of the bankís management and the financial commitment of the incorporators. According to guidance in effect at the time the FDIC approved MetroPacificís application for deposit insurance, any significant deviation




6 The Final Order for Deposit Insurance included 11 conditions that the FDIC imposed on MetroPacific, and required the bank to comply with during its first 3 years of operation. The conditions were related, but not limited to: (1) operating within the parameters of the bankís business plan, with notification to the FDIC of major deviations from the plan within 60 days; (2) maintaining Tier 1 Capital at not less than 8 percent and an adequate ALLL; and (3) obtaining annual audits of the bankís financial statements by an independent auditor for at least the first 3 years of operation. On February 3, 2005, MetroPacific informed the FDIC that the bank had complied with or agreed to ensure future compliance with all 11 conditions included in the Order.





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from the business plan within the first 3 years of operationóthe de novo phaseówas to be reported by the insured depository institution to the primary federal regulator 60 days before consummation of the change. Further, business plans that rely on high-risk lending or a special-purpose market, or that otherwise diverge from conventional bank-related financial services, require specific documentation as to the suitability of the proposed activities for an insured institution.

According to DSC officials, in both the January 2006 and February 2007 examination reports, examiners concluded that (1) MetroPacificís inability to develop the SBA loan portfolio as the bank had intended and the resultant concentrations in CRE and ADC loans were temporary situations, (2) the bankís level of CRE and ADC loans was near that of its peer group, and (3) the total number of loans included in the bankís portfolio was minimal. Therefore, according to DSC officials, examiners concluded that the bank was operating within the parameters of its business plan. However, as indicated in Table 2, although the number of loans in the bankís loan portfolio may have been considered to be minimal, MetroPacific significantly exceeded the bankís projected level of growth in high-risk ADC loans outlined in the bankís business plan for each year of its de novo period based on year-end financial data.

Examiners first concluded and reported that MetroPacific was not complying with the bankís business plan at the February 2008 examination. In addition to reporting noncompliance at that examination, an April 18, 2008 FDIC problem bank memorandum stated that MetroPacificís:

  • lack of adherence to the originally submitted business plan and provisions in the Final Order for Deposit Insurance was troubling,
  • concentrations of speculative construction and land development loans were well beyond original projections, and
  • concentrations comprised the majority of the $28 million in adversely classified assets.

As indicated in Table 3, MetroPacificís noncompliance with its business plan was not limited to the type and extent of loans included in its portfolio, but also involved other controls included in the FDICís basis for its decision to approve deposit insurance for MetroPacific.







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Table 3: MetroPacificís Business Plan Compared to Actual Actions
Bank Business Plan Actual Bank Actions
The Board would monitor adherence to the business plan quarterly and revise the plan accordingly. The Board made no revisions to the original business plan during its de novo period.
Sound underwriting would be developed to keep the bankís loan loss exposure to a minimum. MetroPacificís Board and management failed to ensure that appropriate loan underwriting and administration risk management controls were implemented and followed, failed to maintain an adequate ALLL, and allowed adversely classified assets totaling more than $28 million to exceed 282 percent of Tier 1 Capital prior to failure.
The Board and executive management would pursue a carefully managed growth strategy. MetroPacific concentrated its loan portfolio in high-risk CRE and ADC loans, significantly increasing risk to the bank, while experiencing significant turnover rates in key management positions that resulted in unstable and inconsistent management oversight.
The intended geographical market was the bankís surrounding area/county. MetroPacific originated numerous out-of-area loans that totaled over $10 million as of May 2008.
The bank would not pay fees to brokers for any deposits.* MetroPacific purchased brokered deposits totaling $2.5 million during 2005 and more than $6.87 million during 2007.
Source: OIGís analysis of MetroPacificís business plan, ROEs, and examination workpapers.
* At the suggestion of an FDIC examiner, MetroPacific informed the FDIC in March 2007 of the Boardís decision to use brokered deposits, in addition to other sources of wholesale funding. As noted by examiners during the February 2008 examination, the bankís use of brokered deposits was contrary to the business plan, and the notification provided to the FDIC was not in compliance with the provisions of the FDICís Final Order for Deposit Insurance, which required the bank to provide a 60-day notification before materially deviating from the business plan.

CRE and ADC Loan Concentrations

MetroPacificís business practices resulted in the bank concentrating its loan portfolio in CRE and ADC loans. However, MetroPacific did not ensure that sound loan underwriting and credit administration practices were developed, the loan policy was adequate, and an adequate ALLL was maintained, all of which significantly increased the bankís risk profile.

At the January 2006 examination, examiners noted that CRE loans, at 97 percent of total loans, represented MetroPacificís largest category of loans. ADC loans represented 32.5 percent of total loans. The examiners noted in the February 2008 examination report that MetroPacificís business plan had projected that SBA loans would comprise 37 percent of total loans, versus the actual ratio of 16 percent at that time. According to DSC officials, MetroPacificís inability to develop the bankís SBA loan portfolio resulted in the bank continuing to generate CRE and ADC loans, ultimately developing a concentration in those higher-risk loans.

As indicated in Figure 1, the bankís concentration in CRE as a percent of Total Capital grew at a rate which more than doubled that of its peers by 2009.







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Figure 1: MetroPacificís CRE Loans to Total Capital Compared to Peers
[ D ]

Similarly, Figure 2 shows that the bankís concentrations in ADC loans, as a percent of the bankís Total Capital, consistently exceeded that of its peer group from 2005 through 2009, almost 200 percent more than that of its peer group in 2009.

Figure 2: MetroPacificís ADC Loans to Total Capital Compared to Peers
[ D ]







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Financial Institution Letter (FIL) 110-98, dated October 8, 1998, entitled, Internal and Regulatory Guidelines for Managing Risks Associated with Acquisition, Development, and Construction Lending, defines ADC lending as a highly specialized field with inherent risks that must be managed and controlled to ensure that the activity remains profitable. In addition, the FDIC issued FIL-104-2006, entitled, Concentrations in Commercial Real Estate, Sound Risk Management Practices, dated December 12, 2006, which states that such concentrations can pose substantial potential risks and inflict large losses on institutions. Although the guidance does not specifically limit a bankís CRE lending, the guidance provides the following supervisory criteria for identifying financial institutions that may have potentially significant CRE loan concentrations warranting greater supervisory scrutiny.

  • Total CRE loans that represent 300 percent or more of the institutionís Total Capital, and the outstanding balance of the institutionís CRE loan portfolio has increased by 50 percent or more during the prior 36 months.
  • Total reported loans for construction, land development, and other land represent 100 percent or more of the institutionís Total Capital.

As shown in Figures 1 and 2, MetroPacificís levels of CRE and ADC concentrations began to exceed the 2006 supervisory criteria in 2008 and 2007, respectively. These concentration levels warranted strategies by MetroPacific to mitigate risk in the event of adverse market conditions. As discussed in subsequent sections of this report, the Board and management failed to effectively establish and implement such strategies.

Loan Policy

Throughout MetroPacificís de novo period, the Board and bank management failed to implement examinersí recommendations regarding deficiencies identified in the bankís loan policy. Those deficiencies related to issues such as, but not limited to, adequate controls to measure, monitor, and report CRE and ADC concentrations.

  • September 2004 Application Process, August 2005 FDIC Visitation Report, and January 2006 Examination Report. Deficiencies in MetroPacificís loan policy were noted during the 2004 application process, the 2005 visitation, and again in the 2006 examination report. The FDIC made the following specific recommendations to strengthen the bankís proposed loan policy:
    • establish specific portfolio mix targets related to concentrations of credit,
    • define concentrations of credit and aggregate reporting of loans exceeding Part 365 loan-to-value limits, and
    • expand the loan policies to include the requirement for concentration reporting and acceptable risk tolerance parameters.




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  • February 2007 Examination Report. This examination report noted that bank management had implemented the prior examination recommendations for the bank to expand the concentration analysis and establish loan policy requirements for concentration reporting and acceptable risk tolerance parameters. However, examiners made additional recommendations for MetroPacific to:
    • expand the construction loan report to track the number of sold and leased units,
    • enhance the construction policy to include a marketing plan on speculative real estate loans,
    • measure concentrations as a percentage of risk-based capital, and
    • perform stress testing on variable rate commercial and real estate loans.
  • February 2008 and March 2009 Examination Reports. Examiners continued to identify deficiencies in the bankís loan policy related to reporting and monitoring of concentrations as described above. Further, the February 2008 examination determined that, in some instances, management had failed to follow critical controls that were included in the loan policy, such as performing stress testing and/or sensitivity analysis on borrowers at loan origination. Accordingly, the FDIC addressed these deficiencies in a June 2008 C&D. However, at the following March 2009 examination, examiners also noted numerous deficiencies in the bankís loan policy, including deficiencies related to inadequate guidelines in the CRE concentration loan portfolio mix and monitoring of out-of-territory loans.

DSCís Examination Manual states that there are certain broad areas of consideration and concern that should be addressed in the lending policies of all banks regardless of size or location. According to the manual, a bankís lending policy should include guidelines, which, at a minimum, address the goals for portfolio mix and risk diversification and cover the bankís plan for monitoring and taking appropriate corrective action, if deemed necessary, on any concentrations that may exist. However, from its inception in 2005 until its failure in 2009, MetroPacificís Board and bank management failed to take timely and effective action to address deficiencies in the bankís loan policy related to CRE and ADC concentrations.

Loan Underwriting and Credit Administration Practices

Weaknesses in MetroPacificís loan underwriting and credit administration contributed to the bankís inability to effectively measure, monitor, and control the risks associated with the bankís loan portfolio. At the February 2008 examination, examiners noted inadequate loan underwriting and credit administration practices related to the following:

  • Failure to obtain current appraisals or perform adequate appraisal reviews, which significantly impacted the accuracy of the ALLL.






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  • Overstated analyses of borrowersí ability to repay.
  • Weak underwriting and credit approval process, including inadequate descriptions of borrowersí backgrounds, experiences, and credit histories.
  • Failure to perform global financial analyses on borrowers and/or guarantors.
  • Inappropriate use of interest reserves in which the bank shifted funds from a contingency reserve to replenish the interest reserve in an attempt to extend the carry period on construction projects.
  • Ineffective loan grading and risk monitoring system that resulted in examiners downgrading over $14 million in loans to substandard or worse.

MetroPacificís management did not take timely and effective action to correct its weak loan underwriting and credit administration practices, as evidenced by the results of the subsequent March 2009 examination. At that examination, DSC reviewed approximately 57 percent of MetroPacificís loan portfolio and identified numerous repeat loan underwriting and credit administration weaknesses, in addition to adverse classifications totaling about $28 million. In addition, examiners concluded that there were substantial deficiencies in key risk management controls including, but not limited to, credit underwriting, appraisal review, loan impairment analysis,7 and verification of a borrowerís financial status that resulted in uncontrolled deterioration in the bankís asset quality.

Allowance for Loan and Lease Losses

The February 2008 examination concluded that MetroPacificís Board and management had failed to comply with the FDICís Final Order for Deposit Insurance, which required the bank to maintain an adequately funded ALLL for the first 3 years of operation. In addition, MetroPacificís management did not consistently employ an ALLL methodology in compliance with the guidance entitled, Interagency Policy Statement on Allowance for Loan and Lease Losses, dated December 13, 2006. According to this policy, each financial institution must analyze the collectibility of its loans and maintain an ALLL at an appropriate level. An appropriate ALLL covers estimated loan losses on individually evaluated loans that are determined to be impaired as well as estimated loan losses inherent in the remainder of the loan and lease portfolio.




7 According to the Interagency Policy Statement on the Allowance for Loan and Lease Losses, dated December 13, 2006, under Financial Accounting Standards (FAS) 114, an individual loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.





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Examiners concluded at the February 2008 and March 2009 examinations that MetroPacificís ALLL was insufficient to protect against the level of potential loss in the bankís loan portfolio. In 2008, adverse classifications totaled more than $9 million, requiring additional provisions for the ALLL. By the March 2009 examination, adverse classifications had increased to $28 million, as shown in Table 4.

Table 4: MetroPacificís Adverse Classifications and ALLL
  ALLL Funding Level ALLL to Total Loans
and Leases
Examination
Dates
Adverse
Classifications
MetroPacificís
Funded Level
Examiner
Recommended
Increase
MetroPacific Peers
  (Dollars in Thousands) (Percentages)
01/17/2006 $0 $155 $0 1.20 1.20
02/05/2007 $0 $463 $0 1.34 1.23
02/25/2008 $9,100 $650 $660 2.34 1.28
03/09/2009 $28,000 $3,282 $3,200 7.36 1.57
Source: ROEs and UBPRs for MetroPacific.

Examiners noted in the February 2008 examination report that the bankís ALLL was significantly underfunded, and the methodology was flawed due to weaknesses in loan grading, inadequate support for estimated credit losses, and the absence of an independent ALLL review. Consequently, by March 2009, examiners concluded that deficiencies in MetroPacificís ALLL resulted primarily from the bankís failure to identify problem assets in a timely manner and the subsequent misapplication of FAS 114 impairment principles. As a result, examiners recommended that MetroPacific increase the ALLL by $3.2 million.

The FDICís Supervision of MetroPacific

The FDIC and CDFI provided oversight of MetroPacific by performing four on-site examinations and two visitations from 2005 to 2009. Throughout that period, the examinations and visitations included examiner concerns and recommendations related to the performance of MetroPacificís management, the bankís loan portfolio, loan underwriting and credit administration deficiencies, and weak risk management practices. The FDIC pursued enforcement actions to correct problems as a result of the January 2006 and February 2008 examinations. However, timelier supervisory action could have been taken to address deviations from the business plan. In addition, as the institution developed a higher-risk profile due to CRE and ADC concentrations, supervisory action more directly addressing loan policy deficiencies would have been prudentóparticularly at the time of the February 2007 examination.

Supervisory History

Table 5 summarizes key information pertaining to the on-site risk management that the FDIC







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and CDFI conducted of MetroPacific, including the institutionís (1) supervisory ratings,8 examinations, and visitations and (2) supervisory and enforcement actions taken, including the MOU issued in 2006 and the C&D issued in 2008.

Table 5: MetroPacificís Examination and Visitation History
Examination
Start Date
Agency Supervisory
Ratings
(UFIRS)
Supervisory Action
08/08/2005
(Visitation)
FDIC Not applicable None
01/17/2006 FDIC/CDFI 223322/3 MOU (Effective June 9, 2006)*
09/12/2006
(Visitation)
FDIC Not applicable MOU continued
02/05/2007 FDIC/CDFI 222322/2 MOU terminated
02/25/2008 FDIC/CDFI 344422/4 C&D
(Effective June 17, 2008)
Problem Bank Memorandum
03/09/2009 FDIC/CDFI 555555/5 C&D continued
Problem Bank Memorandum
Source: ROEs for MetroPacific.
* In MetroPacificís response to the January 2006 examination, the bank included a Bank Board Resolution (BBR), dated March 16, 2006. The Board adopted the BBR in response to examinersí concerns as a result of the January 2006 safety and soundness and information technology examinations, and the bankís compliance visitation. Although MetroPacific adopted the BBR, the FDIC issued the MOU, effective June 9, 2006.

Examinations

January 2006. MetroPacific received a composite ď3Ē rating at the bankís first full-scope examination in the January 2006 examination, which revealed that the overall condition of the bank was considered less than satisfactory and the overall infrastructure of the bank was less than sound due to the significant number of internal control deficiencies. The examiners noted that the Board and bank management needed to improve internal controls and bank oversight, and concluded that risk management policies and procedures for asset and liability management and segregation of duties and dual controls were inadequate. As a result of this examination, the FDIC issued an MOU effective June 9, 2006. The MOU addressed operational and information technology deficiencies and required that the bank:

  • improve oversight by the Board and senior management and increase the Boardís participation in the affairs of the bank;



8 Financial institution regulators and examiners use the Uniform Financial Institutions Rating System (UFIRS) to evaluate a bankís performance in six components represented by the CAMELS acronym: Capital adequacy, Asset quality, Management practices, Earnings performance, Liquidity position, and Sensitivity to market risk. Each 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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  • retain management acceptable to the FDIC and the CDFI;
  • adopt and implement a policy to provide adequate internal routine and control policies consistent with safe and sound banking practices;
  • develop an internal audit program that establishes procedures to protect the integrity of the bankís operational and accounting systems;
  • revise, adopt, and implement a written liquidity and funds management policy; and
  • implement a policy establishing a formal information technology audit program that provided comprehensive and ongoing audit coverage.

In addition, examiners concluded that as of December 31, 2005, MetroPacificís earnings were less than satisfactory and the bank had sustained a net loss of $1.4 million, representing a loss that was $595,000 greater than projected in the bankís application for deposit insurance.

February 2007. Examiners determined that the bankís overall condition had improved, with adequate capital for the bankís risk profile and anticipated growth and satisfactory liquidity, and concluded that the bankís composite rating and all of the component ratings, except earnings, should be ď2sĒ. However, examiners concluded that (1) the bankís earnings were less than satisfactory, with expected profitability delayed until midyear 2007, (approximately 1 year later than originally anticipated) and (2) MetroPacific had substantially complied with the MOU provisions, and recommended that the FDIC terminate the MOU.

February 2008. The bankís overall condition had begun to show significant deterioration, resulting in a further downgrade of the composite rating to a ď4Ē, indicating unsafe and unsound practices or conditions. In addition, several of the bankís component ratings were also downgraded to either a ď3Ē or ď4Ē at this examination. Examiners concluded that after 3 years of operations, MetroPacificís earnings were deficient, unable to support the risk profile of the institution, and continued to erode the bankís capital, with an uncertain prospect for near-term profitability.

MetroPacificís Board stipulated to a C&D on June 17, 2008 that included provisions to address issues related to (1) improving Board and management oversight, (2) providing effective loan policy over the bankís lending function, (3) maintaining Tier 1 Leverage Capital at 10 percent of total assets until sustained profitability was achieved, (4) providing for an adequate ALLL, and (5) improving credit administration and underwriting practices.

March 2009. Examiners concluded that the bankís condition was ďextremely critically deficient,Ē citing unsafe and unsound practices and inadequate risk management practices relative to the institutionís size, complexity, and risk profile and warranted the greatest







14






level of supervisory concern. Accordingly, the bankís composite and all of the component ratings were downgraded to a ď5Ē.

2008 and 2009 Problem Bank Designation. During the February 2008 and March 2009 examinations, the FDIC designated MetroPacific as a ďproblem bank.Ē That designation was based on, but not limited to, the bankís:

  • deteriorated financial condition,
  • inadequate management and substantial turnover in critical management positions,
  • noncompliance with the business plan and the FDICís Final Order for Deposit Insurance,
  • increased adversely classified assets,
  • poor credit underwriting and administration,
  • inadequate loan and loan concentration review functions,
  • underfunded loan loss reserve,
  • apparent violations of laws and regulations,
  • inability to attain profitability, and
  • inadequate capital levels.

Visitations and Offsite Reviews

The FDIC and CDFI also conducted four on-site and two offsite reviews that provided continued monitoring of MetroPacific from the bankís inception in 2005 through its failure.

August 2005 Visitation. Given the bankís de novo status, the FDIC and CDFI conducted a limited scope visitation to verify compliance with the orders issued by the CDFI and the FDIC related to the granting of the bankís charter and deposit insurance. Examiners concluded that (1) asset quality was satisfactory, (2) loan underwriting was adequate, (3) the ALLL was adequately funded, and (4) managementís overall methodology and risk management was appropriate. However, DSC noted in the visitation report that the Board still had not addressed recommendations made during the application process to improve the bankís loan policy, such as establishing more specific portfolio mix targets, defining concentrations of credit, and aggregate reporting of loans exceeding loan-to-value limits.

September 2006 Visitation. This visitation was conducted to review the bankís progress in complying with the MOU issued in June 2006. The visitation report noted that, overall, the bank had made significant improvements in identifying weaknesses and complying with the provisions of the MOU, but bank management had not formalized its practices into Board-approved policies and programs. In addition, as follow-up to the MOU, the FDIC reviewed the quarterly progress reports that MetroPacific submitted to the FDIC and CDFI. Those reports outlined the actions that MetroPacific had taken or planned to take to address the provisions included in the MOU.







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December 2007 and March 2008 Offsite Reviews. These reviews noted that asset quality had deteriorated, adverse classifications represented 68 percent of Tier 1 Capital, the ALLL was underfunded with classifications centered in large dollar construction and land loans, and significant underwriting and credit administration weaknesses existed. The examiners also noted that the bank remained unprofitable after more than 3 years of operation.

November 2008 Offsite Review. The FDIC initiated this offsite review that focused on the bankís asset quality. Examiners reported that asset quality continued to show signs of deterioration, as evidenced by an increase in adversely classified loans to $16.9 million from $8.8 million during the February 2008 examination, and a continued and significant decrease in the bankís earnings, with the return on assets decreasing from (.82) percent at the February 2008 examination to (3.05) percent.

Supervisory Identification of, and Response to, MetroPacificís Risks

Although MetroPacific had exceeded the parameters of its business plan in ADC concentrations within 6 months of operation and lacked an adequate loan policy to monitor these concentrations, examiners noted but did not take exception to the noncompliance and concentrations until the 2008 examination. Early identification of those risks, coupled with supervisory guidance and studies issued during MetroPacificís existence, should have prompted timelier supervisory action during the bankís de novo phaseóparticularly at the time of the February 2007 examination.

Growth and concentrations that exceeded and were inconsistent with the business plan. MetroPacific quickly and consistently exceeded the growth parameters for ADC loans included in the business plan and implemented a business strategy that resulted in an ADC concentration that was not consistent with projected growth rates and the bankís stated intention to avoid concentrations of credit. As discussed earlier in this report, MetroPacificís concentration in ADC loans existed 6 months after the bank opened in 2005 and was, at that time, over 20 percent higher than the bankís projected levels.

At the January 2006 examination, which was based on September 2005 financial data, DSC officials stated that examiners determined that MetroPacificís loan portfolio was limited and had not yet resulted in a specific concentration or significant deviation from the business plan. Further, CRE loans represented only 85 percent of Total Capital, far below the concentration levels warranting greater supervisory scrutiny according to the December 2006 guidance, entitled, Concentrations in Commercial Real Estate, Sound Risk Management Practices. However, it was evident at the February 2007 examination that a concentration in ADC loans was developing, with the bankís ADC portfolio (1) representing 97 percent of Total Capital (only 3 percentage points less than the 2006 supervisory criteria), and (2) exceeding the bankís projections included in its business plan. As such, the risks associated with the bankís concentrations were also increasing in 2007. As indicated below, the number of loans







16






in the bankís portfolio had substantially increased by the February 2007 examination. More specifically:

  • At the January 2006 examination, which was based on September 2005 financial data, loans totaled $12.4 million.
  • At the following February 2007 examination, which was based on December 2006 financial data, loans totaled $34.7 million, representing an almost 200- percent increase in the number of loans.

Although the bankís loans had substantially increased by the February 2007 examination, examiners continued to conclude, as they had at the 2006 examination, that MetroPacific was in compliance with the bankís business plan and that there had not been a material or significant deviation from the plan. DSC officials stated that the examiners reached that conclusion because construction lending was an approved product line in the bankís original business plan approved by the FDIC.

The officials further explained that examiners:

  • noted the difference between the planned and actual loan mix but did not consider it alarming, given that the percentage of ADC and CRE loans was nearly the same as the bankís peer group and not considered high in relation to Tier 1 Capital, and
  • focused on internal control issues and operations, which were assessed as a more immediate risk to the safety and soundness of the institution.

Examinersí opinions regarding the bankís compliance with and material deviation from the business plan changed, however, at the February 2008 examination, when the bankís asset quality was deemed unsatisfactory due to an excessive volume of classified assets, and examiners noted numerous credit underwriting and administration issues and a flawed and underfunded ALLL. At that examination, examiners concluded that the bank was not in compliance with its business plan relative to (1) employing operating officers that were acceptable to the FDIC; (2) having CRE and ADC concentrations, including significant ADC-concentrated loans and out-of-territory lending; and (3) maintaining an adequate ALLL.

  • Operating officers. Examiners concluded that the bank had been operating without a CCO, and the individuals serving as CFO and CEO did not have prior experience in those positions and/or had no prior lending experience. Examiners concluded that an experienced CCO was needed to address the bankís excessive level of problem loans and the significant underwriting and credit administration weaknesses identified at the examination.
  • CRE and ADC concentrations. The February 2008 examination report stated that the business plan projected the ratio of construction loans to total loans at 8 percent at the end of the third year, versus the actual ratio of 41 percent, which examiners concluded was an excessive level. In contrast, SBA loans that had been projected to comprise 37 percent






17






    of total loans represented only 16 percent of total loans. In addition, examiners concluded that the bank managementís (1) underwriting and credit administration expertise and risk management processes were not commensurate with the volume of construction and land development loans in the portfolio and (2) financial analysis skills needed to be strengthened to properly identify risk when underwriting construction and land development loans.
  • Maintaining an ALLL. Examiners concluded that the bankís inability to maintain an adequate ALLL was directly related to the significant deterioration in the bankís asset quality, among other deficiencies.

It should be noted, however, that although examiners were required to address whether financial institutions were materially deviating from their business plans during an institutionís de novo period, prior to the 2009 examination for MetroPacific, DSC had not issued guidance to examiners that specifically defined what would constitute a ďmaterial deviationĒ from a business plan. Such guidance has subsequently been issued. In addition, DSC has since issued guidance to clarify its supervision of de novo banks. Specifically, on August 28, 2009, the FDIC issued FIL-50-2009, entitled Enhanced Supervisory Procedures for Newly Insured FDIC-Supervised Depository Institutions, which extended the de novo period to 7 years for examinations and capital and other requirements. In addition, material changes in business plans for newly insured institutions will require prior FDIC approval during the first 7 years of operation. Further, the guidance states that:

  • Going forward, deposit insurance orders for state nonmember institutions will require institutions to obtain prior approval from the FDIC on any proposed major change or deviation in their business plan.
  • The FDIC will evaluate proposed material changes to business plans to determine if the institution has sufficient capital, management expertise, and internal controls in place to adequately manage the risks.
  • In those instances when an institution has implemented a material change in its business plan without providing prior notice or obtaining the FDICís prior nonobjection, the assessment of civil money penalties or other enforcement action against the institution or other appropriate parties should be considered.

Repeat deficiencies in the bankís loan policy related to monitoring and reporting high-risk concentrations. As early as 2004, examiners identified issues associated with the bankís inadequate loan policy related to the monitoring and reporting of concentrations. However, bank management failed to take timely and effective actions to address deficiencies in MetroPacificís loan policy identified during the September 2004 application process, the August 2005 visitation, and the January 2006 examination report. These issues, coupled with the rapid growth in high-risk ADC loans, should have resulted in earlier and stronger supervisory action. Although examiners stated in the February 2007 examination report that bank management had taken action to improve MetroPacificís loan







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policy, examiners also identified additional deficiencies and other issues with the loan policy and continued to recommend that the bank take action to address these issues, as discussed earlier in this report. Examiners continued to report loan policy deficiencies during the February 2008 examination, noting that MetroPacific failed to take appropriate action to address its deficient loan policy. While supervisory action was taken to address the loan policy deficiencies in the June 2008 C&D, this action proved to be in vain, as concerns with the bankís loan policy were also noted at the subsequent January 2009 examination.

Supervisory Guidance and Studies Issued

2004 De novo Bank Study. In 2004, the DSC Atlanta Regional Office (ARO) led an interregional study of de novo financial institutions, and ďyoungĒ banks (banks in the 4th through 9th years of operation), in fulfillment of a DSC 2004 business line objective. The purpose of the study was to review the timing of, and susceptibility to, problems of de novo and young banks and to determine important factors related to the application process for deposit insurance, compliance with business plans, and high-risk factors for those institutions, including CRE concentrations. MetroPacific exhibited risk factors reported in the 2004 study including, but not limited to (1) weak oversight by the Board, (2) inexperienced management and high turnover in key management positions, (3) departure from the business plan by exceeding projected asset growth, and (4) rapid asset growth in CRE and ADC loans.

2003 CRE Review. The DSC ARO also conducted a CRE Review Project in 2003 that confirmed the need for bank management to develop and implement lending programs that incorporate certain key components. The CRE review concluded that a sound CRE lending program begins with Board and senior management direction and oversight; and that developing and adhering to a comprehensive loan policy that establishes clear and measurable standards for production, underwriting, diversification, risk review, reporting, and monitoring were critical. As a result, CRE Review results were made available to all DSC regional offices through Regional Directors Memorandum entitled, Commercial Real Estate Review Package (CRRP), dated December 22, 2003, which stated that while the use of the CRRP was not mandatory, DSC Regional Directors might use the CRRP at their discretion to help assess CRE lending in markets where economic fundamentals or bank lending trends suggest significant increases in risk. The guidance also stated that, generally, banks with CRE loans to Tier 1 Capital ratios of 300 percent or more might be included in a CRRP visitation program.

DSCís Examination Manual. The Examination Manual states that the examinerís evaluation of a bankís credit administration and loan policy and the quality of the loan portfolio are among the most important aspects of the examination process.

MetroPacificís noncompliance with the business plan and developing CRE and ADC concentrations may not have been evident at the August 2005 visitation and the January 2006 examination. However, by the time the February 2007 examination was conducted, DSC should have identified the bankís noncompliance with the business plan and the risks associated with the high growth concentrations, and taken action to address those risks. We







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recognize that the C&D issued in June 2008 addressed deficiencies at the bank; however, due to the significant concentrations and lack of appropriate controls, MetroPacificís loan-related losses had already resulted in significant deterioration in the bankís asset quality, depleted earnings, and eroded capital.

Implementation of PCA

The purpose of PCA is to resolve problems of insured depository institutions at the least possible long-term cost to the DIF. PCA establishes a system of restrictions and mandatory and discretionary supervisory actions that are to be triggered depending on an institutionís capital levels. Part 325 of the FDICís Rules and Regulations implements PCA requirements by establishing a framework for taking prompt corrective action against insured nonmember banks that are not adequately capitalized. Based on supervisory actions taken with respect to MetroPacific, the FDIC properly implemented applicable PCA provisions of the FDI Act, section 38. The effectiveness of PCA may have been impacted, however, by the fact that MetroPacific paid rates on certificates of deposit that exceeded the maximum permissible yield for Adequately Capitalized banks.

Table 6 illustrates the decline in MetroPacificís capital categories during the bankís history.

Table 6: MetroPacificís Capital Ratios Relative to PCA Thresholds for Well Capitalized Institutions
Period
Ending
Tier 1
Leverage
Capital
Tier 1 Risk-
Based
Capital
Total Risk-
Based
Capital
Capital Category
PCA
Threshold
5% or
more
6% or more 10% or
more
 
MetroPacificís Capital Ratios
Dec-05 58.45 81.63 82.62 Well Capitalized
Dec-06 25.79 29.54 30.67 Well Capitalized
Dec-07 18.89 20.30 21.56 Well Capitalized
Jun-08 NA NA NA Adequately Capitalized*
Dec-08 4.28 5.59 6.87 Under Capitalized
Mar-09 3.51 4.08 5.36 Under Capitalized
Source: UBPR and ROEs for MetroPacific.
* When MetroPacific entered into the June 2008 C&D, the bankís regulatory capital category was re-classified from Well Capitalized to Adequately Capitalized for PCA purposes as required by FDIC Rules and Regulation, Part 325, Subpart B.

As indicated above, MetroPacificís capital levels as of December 31, 2008 had dramatically declined from the bankís December 2007 capital levels, and continued falling through March 2009. In addition, during the March 2009 examination, examiners reported that although MetroPacific had not originated or renewed any brokered deposits since entering into the C&D, bank management had not adequately monitored deposit pricing restrictions to







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ensure compliance with regulatory restrictions.9 As a result, MetroPacific continued to solicit and retain deposits utilizing rates that significantly exceeded local market averages in apparent violation of Part 337.6 of the FDIC Rules and Regulations. Specifically, examinersí review of rates on $20 million in time deposits that were originated or renewed after the C&D was issued indicated that the rates that MetroPacific paid for essentially all of those time deposits significantly exceeded the average prevailing rates offered within the bankís normal market area. Examiners concluded that, on average, the rates exceeded local market averages by 148 basis points, with variances as high as 241 basis points on some accounts.

On April 21, 2009, the CDFI issued a capital demand letter to MetroPacificís Board giving the bank until June 15, 2009 to raise approximately $5.7 million in capital. The FDIC issued a PCA Notification Letter to MetroPacific dated May 6, 2009, notifying the bank that it was deemed to be Significantly Undercapitalized. In compliance with section 38, the notification required the bank to submit a capital restoration plan to the FDIC by June 15, 2009. On June 19, 2009, the FDIC rejected MetroPacificís capital plan dated June 13, 2009, citing the bankís plan to increase capital and become Adequately Capitalized as unrealistic. MetroPacific did not obtain the required capital, and the CDFI closed the bank on June 26, 2009.

Corporation Comments

After we issued our draft report, we met with management officials to further discuss our results. Management provided additional information for our consideration, and we revised our report to reflect this information, as appropriate. On December 22, 2009, the Director, DSC, provided a written response to the draft report. That response is provided in its entirety as Appendix 4 of this report.

DSC reiterated the OIGís conclusions regarding the causes of MetroPacificís failure. In addition, DSC stated that, as a result of significant operational deficiencies noted at the first full-scope examination, MetroPacific agreed to a corrective program with an informal enforcement action in June 2006. Due to significant turnover in key management positions, MetroPacific lacked management stability and was unable to establish a sustainable core business model. DSC officials also stated that the February 2008 joint FDIC/CDFI examination identified a sharp increase in adversely classified assets, an inadequate ALLL, loan underwriting and administration weaknesses, and a significant deviation from MetroPacificís business plan, resulting in a formal enforcement action by the FDIC and CDFI.




9 In addition to prohibiting the origination or renewal of any brokered deposit without a waiver, Part 337.6 of the FDIC Rules and Regulations restricts a bank that is not Well Capitalized from paying an effective yield on any deposit which exceeds by more than 75 basis points the effective yield paid on deposits of comparable size and maturity in the institution's normal market area.



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With regard to our assessment of the FDICís supervision, DSC stated that the supervisory program for de novo institutions was recently extended so that these institutions receive a full-scope examination every year for 7 years, as opposed to 3 years. Further, DSC stated that it is closely monitoring de novo business plans against actual performance throughout the 7-year period. DSCís Enhanced Supervisory Procedures for Newly Insured FDIC-Supervised Depository Institutions describes the program changes for de novo institutions and warns that changes to business plans undertaken without required prior notice may subject institutions or their insiders to civil money penalties.



























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Appendix 1

Objectives, Scope, and Methodology

Objectives

We performed this audit in accordance with section 38(k) of the FDI Act, which provides, in general, that if a deposit insurance fund incurs a material loss with respect to an insured depository institution, the Inspector General of the appropriate federal banking agency shall prepare a report to that agency reviewing the agencyís supervision of the institution. The FDI Act requires that the report be completed within 6 months after it becomes apparent that a material loss has been incurred.

Our audit objectives were to (1) determine the causes of the financial institutionís failure and resulting material loss to the DIF and (2) evaluate the FDICís supervision of the institution, including implementation of the PCA provisions of section 38.

We conducted this performance audit from August 3, 2009 to November 30, 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Scope and Methodology

The scope of this audit included an analysis of MetroPacificís operations from February 7, 2005 until its failure on June 26, 2009. Our review also entailed an evaluation of the regulatory supervision of the institution over the same period.

To achieve the objectives, we performed the following procedures and techniques:

  • Analyzed ROEs and visitation reports prepared by the FDIC and the CDFI examiners from 2005 to 2009.
  • Reviewed the following:
    • Documentation for offsite monitoring activities conducted by the FDIC.
    • Available work papers for FDIC examinations.
    • Correspondence maintained at DSCís San Francisco Regional Office and the Orange County Field Office.
    • Reports prepared by the Division of Resolutions and Receiverships (DRR) and DSC relating to the bankís closure.



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Appendix 1

Objectives, Scope, and Methodology

    • Audit Reports prepared by the bankís external auditor, Vavrinek, Trine, Day & Co., LLP, CPAs, Laguna Hills, California.
    • Pertinent DSC policies and procedures.
    • Interviewed the following FDIC officials:
      • DSC management in Washington, D.C., and San Francisco.
      • FDIC examiners from the DSC Orange County Field Office who participated in MetroPacific examinations and visitations.
    • Researched various banking laws and regulations.

    Internal Control, Reliance on Computer-processed Information, Performance Measurement, and Compliance with Laws and Regulations

    Consistent with the audit objectives, we did not assess DSCís overall internal control or management control structure. We relied on information in DSC systems, reports, ROEs, and interviews of examiners to understand MetroPacificís management controls pertaining to causes of failure and material loss as discussed in the body of this report.

    We obtained data from various FDIC systems but determined that information system controls were not significant to the audit objectives and, therefore, did not evaluate the effectiveness of information system controls. We relied on our analysis of information from various sources, including ROEs, correspondence files, and testimonial evidence to corroborate data obtained from systems that were used to support our audit conclusions.

    The Government Performance and Results Act of 1993 (the Results Act) directs Executive Branch agencies to develop a customer-focused strategic plan, align agency programs and activities with concrete missions and goals, and prepare and report on annual performance plans. For this material loss review, we did not assess the strengths and weaknesses of DSCís annual performance plan in meeting the requirements of the Results Act because such an assessment is not part of the audit objectives. DSCís compliance with the Results Act is reviewed in program audits of DSC operations.

    Regarding compliance with laws and regulations, we performed tests to determine whether the FDIC had complied with provisions of PCA and limited tests to determine compliance with certain aspects of the FDI Act. The results of our tests were discussed, where appropriate, in the report. Additionally, we assessed the risk of fraud and abuse related to our objectives in the course of evaluating audit evidence.







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Appendix 2

Glossary of Terms

Term Definition
Adversely Classified Assets Assets subject to criticism and/or comment in an examination report. Adversely classified assets are allocated on the basis of risk (lowest to highest) into three categories: Substandard, Doubtful, and Loss.
Allowance for Loan and Lease Losses (ALLL) Federally insured depository institutions must maintain an ALLL that is adequate to absorb the estimated loan losses associated with the loan and lease portfolio (including all binding commitments to lend). To the extent not provided for in a separate liability account, the ALLL should also be sufficient to absorb estimated loan losses associated with off-balance sheet loan instruments such as standby letters of credit.
Cease and Desist Order (C&D) A C&D is a formal enforcement action issued by a financial institution regulator to a bank or affiliated party to stop an unsafe or unsound practice or a violation of laws and regulations. A C&D may be terminated when the bankís condition has significantly improved and the action is no longer needed or the bank has materially complied with its terms.
Concentration A concentration is a significantly large volume of economically related assets that an institution has advanced or committed to a certain industry, person, entity, or affiliated group. These assets may, in the aggregate, present a substantial risk to the safety and soundness of the institution.
Memorandum of Understanding (MOU) An informal corrective administrative action for institutions considered to be of supervisory concern but which have not deteriorated to the point where they warrant formal administrative action. As a general rule, this action is to be considered for all institutions rated a composite ď3Ē.
Prompt Corrective Action (PCA) The purpose of PCA is to resolve the problems of insured depository institutions at the least possible long-term cost to the DIF. Part 325 of the FDIC Rules and Regulations, 12 Code of Federal Regulations, section 325.101, et. seq., implements section 38, Prompt Corrective Action, of the FDI Act, 12 United States Code section 1831o, by establishing a framework for taking prompt supervisory actions against insured nonmember banks that are less than adequately capitalized. The following terms are used to describe capital adequacy: (1) Well Capitalized, (2) Adequately Capitalized, (3) Undercapitalized, (4) Significantly Undercapitalized, and (5) Critically Undercapitalized.

A PCA Directive is a formal enforcement action seeking corrective action or compliance with the PCA statute with respect to an institution that falls within any of the three categories of undercapitalized institutions.
Uniform Bank Performance Report (UBPR) The UBPR is an individual analysis of financial institution financial data and ratios that includes extensive comparisons to peer group performance. The report is produced by the Federal Financial Institutions Examination Council for the use of banking supervisors, bankers, and the general public and is produced quarterly from Consolidated Reports of Condition and Income data submitted by banks.



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Appendix 3

Acronyms


ADC Acquisition, Development, and Construction
ALLL Allowance for Loan and Lease Losses
ARO Atlanta Regional Office
BBR Bank Board Resolution
C&D Cease and Desist Order
CAMELS Capital, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk
CCO Chief Credit Officer
CDFI California Department of Financial Institutions
CEO Chief Executive Officer
CFO Chief Financial Officer
CRE Commercial Real Estate
CRRP Commercial Real Estate Review Package
DIF Deposit Insurance Fund
DRR Division of Resolutions and Receiverships
DSC Division of Supervision and Consumer Protection
FAS Financial Accounting Standards
FDI Federal Deposit Insurance
FDIC Federal Deposit Insurance Corporation
FIL Financial Institution Letter
MOU Memorandum of Understanding
OIG Office of Inspector General
PCA Prompt Corrective Action
ROE Report of Examination
SBA Small Business Administration
UBPR Uniform Bank Performance Report
UFIRS Uniform Financial Institutions Rating System



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Appendix 4

Corporation Comments

December 22, 2009
MEMORANDUM TO:Stephen Beard
Assistant Inspector General for Material Loss Reviews
 
FROM:Sandra L. Thompson [Electronically produced version; original signed by Sandra L. Thompson]
Director
 
SUBJECT:Draft Audit Report Entitled, Material Loss Review of MetroPacific Bank, Irvine, California (Assignment No. 2009-052)
 

Pursuant to Section 38(k) of the Federal Deposit Insurance Act (FDI Act), the Federal Deposit Insurance Corporationís Office of Inspector General (OIG) conducted a material loss review of MetroPacific Bank (MPB) which failed on June 26, 2009. This memorandum is the response of the Division of Supervision and Consumer Protection (DSC) to the OIGís Draft Report (Report) received on December 14, 2009.

The Report concludes that MPBís failure was due to the Board and managementís inability to effectively manage regular operations due to excessive management turnover, and rapid growth in commercial real estate and acquisition, development and construction lending. MPB employed a total of two Chief Executive Officers, three Chief Financial Officers, and five Chief Credit Officers during its four year history, causing significant inconsistencies in loan underwriting, credit administration, and allowance for loan and lease loss (ALLL) practices. Due to expected initial losses and escalating loan losses in 2008 and 2009, the bank never reached profitability, resulting in declining capital reserves and eventually in MPBís failure.

From the time of MPBís opening in 2005 until it was closed, the FDIC and California Department of Financial Institutions (CDFI) performed annual examinations and two interim on-site visitations. As a result of significant operational deficiencies noted at the first full scope examination, MPB agreed to a corrective program with an informal enforcement action in June 2006. Due to significant turnover in key management positions, MPB lacked management stability and was unable to establish a sustainable core business model. The February 2008 Joint FDIC/CDFI examination identified a sharp increase in adversely classified assets, an inadequate ALLL, loan underwriting and administration weaknesses, and a significant deviation from MPBís business plan, resulting in a formal enforcement action by the FDIC and CDFI.

In recognition that elevated supervisory attention is necessary for de novo institutions, DSC recently extended its supervisory program so that these institutions receive a full scope examination every year for seven years, as opposed to three years. De novo business plans are being closely monitored against actual performance throughout the seven year period. The Financial Institution Letter issued in August 2009, describes the program changes for de novo institutions and warns that changes to business plans undertaken without required prior notice may subject institutions or their insiders to civil money penalties.

Thank you for the opportunity to review and comment on the Report.











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Last updated 3/3/2009