Orion Bank - Management's master plan!

Orion Bank is based in South West Florida and specialized in commercial construction loans. If you know this area it already sounds bad; right? Well, it was! When management didn't want to own up it got ugly and resulted in one of the quickest "death spiral" bank failures of the year. Let's recap:

Orion bank was"adequately capitalized" (6% tier 1 leverage ratio) as of 6/30 with only $8M in losses over the 1st 2 quarters of the year.

When the 9/30 call report was released and indicated that the bank was "critically under capitalized" (0.47% tier 1 leverage ratio) and had lost $75M. (The loss is actually more like $136M because it was inclusive of $61M gain related to deferred tax assets that are not included in tier 1 capital)

It looks like the usually too friendly state bank regulators of Florida finally shut down the extend and pretend game being played by Orion.

But wait! Management had a plan! The following excerpts are taken from the 11/9/09 Prompt Corrective Action Order issued to Orion by The Federal Reserve:

Management goal - reduce classified assets:

In order to improve its management, the Bank must dismiss Jerry Williams (“Williams”), its current chief executive officer, president, and chairman of its board of directors, from office and as a member of the board of directors, based on the following:
(a)    Prior to June 2009, the Bank reached its legal lending limit under Florida law with respect to the aggregate loans outstanding to a borrower and his related interests. In June 2009, Williams permitted the Bank to make loans of an additional approximately $60 million to straw borrowers who were related interests of the borrower referred to above in continuing violation of the Florida legal lending limit statute (the “June 2009 loans”);
(b)    the June 2009 loans referred to above, which were made to enable the borrowers to purchase certain low quality assets from the Bank, were underwritten in an unsafe and unsound manner. The loans were made without adequate analysis of the borrowers’ creditworthiness, capacity for repayment, and valuation of collateral offered in support of the loans. Further, the loans were structured in a manner to make it appear that the Bank was reducing its level of classified assets;

 Management goal - raise equity capital:

the Bank needed additional capital as of June 30, 2009, to avoid being less than well-capitalized. Williams had knowledge that $15 million of loan proceeds from the June 2009 loans referred to above were to be used to purchase common and preferred stock issued by Orion Bancorp, Inc., Naples, Florida (“Bancorp”), the parent holding company for the Bank, and Williams took steps to ensure that the $15 million was promptly used to purchase the holding company stock;
(d)    in early July 2009, in response to inquiries from the Federal Reserve Bank of Atlanta (the “Reserve Bank”), Williams stated orally and in writing that the $15 million in capital referred to above was raised “without any financing” provided by the Bank. This statement was false because Williams had information available to him to demonstrate that the Bank intended that the loan proceeds be used as the source of the stock purchase;

Wow! What a plan! Make more "unsafe and unsound" loans to a borrower with a very large exposure to the institution so they can purchase classified assets from the bank and provide additional equity capital! This would improve the banks position on paper; but, obviously not in reality.  Sound like more extend and pretend to me! The summary from the PCA:

(e)    as a result of the actions set forth in (a) through (d), above, the Bank, with Williams’ active participation, filed materially inaccurate regulatory reports, made false statements to the Federal Reserve, has suffered additional loan losses, and has failed to comply with provisions of an outstanding Written Agreement designed to require that the Bank properly address its asset quality problems. These actions show that the management of the Bank would be improved without Williams’ service as a senior executive officer or director of the Bank.

Sounds like an understatement to me! I would think that (a) through (d), above, warrant not only termination but criminal prosecution!