Citing "pervasive and persistent" misconduct, regulators want top executives of failed BankFirst to personally pay $77 million.
Federal regulators are demanding that former executives and board members of BankFirst, a failed South Dakota bank with deep Twin Cities ties, personally pay $77.4 million for losses on bad loans it made during the real estate boom.
The move indicates regulators are toughening their stance on banker misconduct as they struggle to recover billions of dollars in losses on bank failures.
According to a March 26 letter obtained by the Star Tribune, the Federal Deposit Insurance Corp. accused nearly two dozen of BankFirst's top officers with failing to monitor the rapid growth of the bank while ignoring repeated regulatory warnings. As a result of what regulators described as "pervasive and persistent" misconduct, the former executives are now being held personally responsible for most of the estimated $90 million in losses the FDIC's insurance fund has incurred as part of BankFirst's failure last July.
The four-page letter came from the law firm of Leonard, O'Brien, Spencer, Gale & Sayre in Minneapolis, which is representing the FDIC as receiver for Sioux Falls, S.D.-based BankFirst. The firm declined to comment. Regulators shut down the bank this past July, and the letter indicates the FDIC's investigation is ongoing.
The FDIC's action could mark the start of a wave of lawsuits by federal regulators.
So far this year, 41 banks have failed, on top of 140 in 2009.
The FDIC's deposit insurance fund, which foots the bill for failed banks, dipped into negative territory last year for the first time since 1991. At the end of 2009, its balance was negative $20.9 billion, compared with $52.4 billion in the black in 2007.
In Minnesota, 11 banks have failed since the beginning of 2008, the bulk of them last year. Still 98 of Minnesota's state chartered banks -- nearly one-fourth -- are on a state watch list as regulators scrutinize them more closely for signs of problems.
Regulatory experts predict a rerun of the early 1990s when, in the aftermath of the savings and loan crisis, hundreds of board members were sued by regulators.
"The regulators want to send a clear message that, if you put depositor money at risk to earn a material gain for yourself, that's wrong and we'll come after you," said Tony Plath, a finance professor at the University of North Carolina at Charlotte. "Not everyone gets tarred and feathered and run out of town. Just the worst offenders."
In the BankFirst case, the so-called demand letters, which are normally kept confidential, were sent to 23 former directors, officers and employees of the bank or its affiliates, including at least four people who now work in prominent positions at other Twin Cities banks.
One of the recipients, Allan Doering, is now chief credit officer at Crown Bank in Edina. Doering didn't return phone calls Monday. None of the other former leaders of BankFirst, including John Kimball, a former president, could be reached for comment. Kimball is now chief executive of American Bank in St. Paul.
The letter accuses the group of 28 acts of misconduct, including failing to get adequate real estate appraisals and approving loans without ensuring that customers had a viable means of repaying them. Attached to the letter is a list of 33 loans BankFirst made for $142.7 million, on which the bank lost an estimated $77.4 million. The loans aren't dated or described except to note the losses on them.
The letter was also sent to the Cincinnati Insurance Co., the bank's insurer.
It's not clear how frequently the FDIC, a federal regulator, pursues directors and officers of failed banks personally for losses and demands repayment. The FDIC's professional liabilities section investigates every bank failure, but the agency doesn't publicly disclose the number of such demand letters it issues.
Frank Mayer III, a former senior FDIC attorney and partner at Pepper Hamilton in Philadelphia, estimates the agency demands payments from directors and officers in about one-quarter of the failed banks it handles. A current FDIC attorney, who asked not to be named, said he guessed that about half of failed banks receive such demand letters.
Given how long it takes to investigate failed banks, demand letters generated by growing torrent of bank failures are just starting to surface, Mayer said. "You're now starting to see the fruits of investigation."
In most cases, the bankers sued for misconduct avoid paying out-of-pocket damages because they have special insurance, known as director and officer liability policies. However, federal regulators occasionally seek more than is covered under these policies.
"It's a reasonable assumption that [BankFirst executives] won't have to pay a dime," said Bert Ely, a bank consultant from Arlington, Va. "But it's just an assumption."
The FDIC must prove gross negligence in order to prevail, one reason the government often chooses to not go after individuals.
"That's a very heavy burden of proof that the FDIC has to prove before the insurance company has to fork over anything," Mayer said.
BankFirst's rise and fall was particularly dramatic -- and costly. In just a few years, this once-tiny bank holding company booked more than $1 billion in syndicated loans across the country, then packaged those loans and sold them off to small banks peppered across the Midwest. Like the mortgage brokers that pushed subprime mortgages but never owned the loans, BankFirst made millions of dollars in fees for originating loans while taking on just a portion of the risk.
So far, two Minnesota banks have been buried by syndicated loans made by BankFirst. In February, regulators shut down 1st American State Bank of Hancock, Minn., a tiny bank about 160 miles northwest of the Twin Cities. The bank suffered losses on 22 BankFirst loans it had on its books, wiping out all of its capital.
And in January, Marshall Bank, an BankFirst affiliate in Hallock, Minn., was shut down by regulators.
Many of the bad loans listed in the demand letter likely were made during a frenetic, 21-month period, when BankFirst's loan portfolio rocketed more than tenfold, according to a report issued in February by the Federal Reserve's inspector general. The bank's loans shot from $36.6 million as of March 31, 2005 to $432 million by year-end 2006.
Many of BankFirst's loans were for commercial real estate projects far removed from its commercial lending arm in Bloomington. They included one for an upscale housing project called "Gold Mountain" near Phoenix that never went forward because it lacked a water source and a failed luxury condominium project at a marina in Portland, Ore.
The bank's compensation practices "rewarded risk taking and ignored loan quality," the inspector general report said. BankFirst rewarded its loan officers for the amount of fee income they generated, but did not encourage them to make safe loans, the report said.