FDIC OIG report: Longstanding earnings problems, ‘voluminous’ poor quality assets led to FL bank’s failure

A failed-bank review of fhe $136-million First City Bank of Florida, closed last October, shows that a growth strategy centered on commercial real estate, a lack of proper control risk mitigation, and poor credit underwriting practices contributed to the institution’s failure, the inspector general of the federal bank deposit insurer said in report released Monday.

The Office of Inspector General (OIG) of the Federal Deposit Insurance Corp. (FDIC), in its report, said that as of Nov. 30, 2020, the estimated loss to the Deposit Insurance Fund (DIF) from this bank failure was approximately $10 million, or 7% of the bank’s $136 million in total assets. In its review of the loss, the OIG said it found no “unusual circumstances” warranting an in-depth review of the loss.

The bank’s failure “occurred due to prolonged earnings problems and ‘voluminous poor quality assets’ that eroded the bank’s capital levels,” the report states. “The decline in FCB’s financial condition initially resulted from its growth strategy that began in 2002. This growth strategy focused on CRE and ADC [acquisition, development, and construction] lending without appropriate risk mitigation and credit underwriting practices. Over subsequent years, the bank continued to struggle financially and never recovered from the impact of the recession (2007-2009) on CRE markets. As a result, adversely classified assets remained high, and the bank was unprofitable for 12 years, from 2008 until its failure in 2020.”

The report states that the bank consistently received composite 5 ratings at every examination after 2009 due to continued problems related to asset quality and earnings, and it says that board and management failed to execute actions and address recommendations to improve FCB’s safety and soundness. By June 30, 2020, operating losses reduced capital ratios to a “critically undercapitalized” position for prompt corrective action (PCA) purposes, the report notes.