On August 22, 2011, the FDIC filed a complaint in the U.S. District Court for the Northern District of Georgia against the former directors and executive officers of Silverton Bank, N.A. Silverton was declared insolvent and placed into FDIC receivership on May 1, 2009.
Silverton, formerly known as The Banker’s Bank, was not a traditional banking institution. It provided correspondent and clearinghouse services, among other financial services, to community banks only. Silverton was owned by investor banks, and its board was comprised entirely of experienced community bankers.
The FDIC’s account of Silverton’s failure contains many of the same hallmark allegations present in its prior D&O lawsuits:
- overly-aggressive growth goals;
- compensation that incentivized loan production regardless of asset quality;
- expansion of lending into unfamiliar geographic markets;
- heavy focus on risky CRE and ADC lending;
- significant weaknesses in loan underwriting and credit administration;
- ignored warnings from state and federal banking regulators; and
- complete disregard of deteriorating economic conditions.
As it has done in prior lawsuits, the FDIC has identified several failed credit transactions that it contends are examples of negligence, gross and a breach of fiduciary duty by the directors or officers who approved them. In total, the FDIC seeks damages in excess of $61 million for fifteen (15) specific credit transactions.
Although it contains some familiar allegations and case themes, the FDIC’s complaint against the Silverton D&Os is unique, both in substance and tone. For the first time in the current downturn, the FDIC seeks to hold directors liable for instances of what it describes as “corporate waste.” Specifically, the complaint recites several examples of Silverton’s “extravagant spending” while the economy was in decline, including: (i) the purchase of two corporate aircraft for the bank holding company; (ii) the construction of a new airplane hangar for the holding company on leased property; (iii) the construction of a “lavish” new office building, which Silverton occupied 20 months before the expiration of its then-current lease. The FDIC alleges that the directors who authorized these specific expenditures are liable for more than $10 million of “corporate waste.”
The tenor of the FDIC’s allegations against the Silverton D&Os is more strident than in its prior lawsuits. The FDIC is particularly critical of the Silverton board, which was comprised of CEOs or presidents of other community banks. That experience and specialized knowledge, the FDIC contends, imposed a heightened duty on the directors to discharge the duties owed to the bank.
One of Silverton Bank’s line of business was making loans to bank directors secured by stock in the borrower’s bank or bank holding company. Upon the failure of Silverton the directors were informed that the FDIC did not have a then current intent to sell those loans as it was doing with all of the other assets held by Silverton.
Recently the contractor hired by the FDIC to manage those loans has indicated that there has been a change in plans and plans are being put in place to sell the loans through a DebtX auction. Many directors have concluded that it would be in their best financial interest to try and negotiate a discount on the loan prior to its being sold to a third party. While this may make short term financial sense, there is an issue lurking in the shadows that many directors are not aware of.
A senior FDIC official recently informed a group of bankers that the supervisory side of the FDIC would look disapprovingly on any directors who discounted their director loan with Silverton on the basis that to do so caused the FDIC insurance fund to suffer a loss. While it is difficult to predict how firmly the position may be held by the FDIC, the longer term consequences may be significant if that director seeks to become involved with another bank in the future. Thus, any director, particularly management directors, should carefully weigh all of their options and seek capable legal advice before seeking to discount their loan.
There may be strategies to minimize risk to the director but those require a case by case analysis of the facts and circumstances surrounding the loan. Please contact Jerry Blanchard (404.572.6804) or your regular Bryan Cave contact if you would like to discuss these strategies.
Silverton Bank has prepared an Overview of the TARP Capital Purchase Program.
Silverton Capital Corporation, the investment banking subsidiary of Silverton Bank, can provide an analysis for your institution that addresses your cost of capital and the effect that participation in the TARP Capital program would have on your earnings per share and book value per share. For more information, contact Frank Brown at fbrown@silvertonbank.com or (770) 805-2152.
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