By Linda Whitmore
Silver Falls Bank is conducting “business as usual,” said Steve Way, president and chief executive officer. His assurance comes despite an order to “cease and desist” banking practices termed “unsafe or unsound,” by the Federal Deposit Insurance Corporation and Oregon Division of Finance and Corporate Securities.
The FDIC and DFCS took action Nov. 24, after, without admitting or denying allegations, bank officials waived the right to a hearing and agreed to the issuance of the cease and desist order.
“’Cease and desist’ is standard language,” Way said. “It sounds more draconian than it is.”
The terminology does not mean the Silverton-based financial institution must close its doors, rather it orders a cessation of practices – especially referencing loan procedures – that were “unsafe or unsound,” and requires the establishment of policies and systems to maintain a sound financial standing in the future.
While the order was issued in late November, the circumstances that brought it about had come to light in a routine review last spring.
“We’ve been dealing with this since last April,” Way said. “We have already fixed most of the problems and continue to serve the community.”
The order delineates several practices, especially those relating to commercial and construction loans that turned out to be risky, points out the need for better oversight by bank officials and requires a stronger capital base.
The bank revenue wobble was in large part due to outstanding construction loans. Way noted that the rapid decline of housing sales last year hit the building industry hard.
“Many of these builders were profitable and well-established,” he said. “They ran out of liquidity when the houses stopped selling” and fell behind in loan repayments.
Other commercial loans, such as to area merchants, generally have not been a problem, he said.
“If you could take our construction loans and magically move them off our books, we would have a very low delinquency ratio. It’s construction that’s giving us heartburn right now.”
To quickly rectify the problem, the FDIC/DFCS order mandates several changes the bank must make and sets timelines for their completion.
The first requirement, with a demand of immediate action, was the firing of “a certain employee that received incentive compensation based upon the volume of the new loans generated … without consideration of the risk involved. …,” the order reads.
This was done, Way said. Future rewards to lending officers “will include an evaluation of the quality and risk associated with the loans generated by that officer.”
The order also requires the bank’s board of directors and management take a more hands-on approach to assure that problems such as risky loans or borrowing based on unsubstantiated qualifications do not arise in the future.
The order stipulates that managers “have qualifications and experience commensurate with his or her duties and responsibilities at the bank” and new management employees must have expertise in “lending, collection and loan supervision.” To ensure this, during the life of the order the hiring of senior executives must be approved by the FDIC and DFCS.
The two agencies are watching over the bank at each step of its repositioning.
“Most of the items (listed in the order) are completed. We continue to work on problem loans and to raise capital,” Way said. “We feel like we can accomplish both of those.”
To increase its financial stability, Silver Falls Bank is opening stock offerings this month. Shares will be sold for $4, with a 1,000-share minimum. These funds will be held in an escrow account and not released to the bank until a $3.5 million minimum is reached.
“If we don’t raise the minimum, the money goes back to the people,” Way said. “We did the same when we started the bank.”
Silver Falls Bank began in 2000 as a community bank, with local investors and local supervision. Way said there is a strong connection between the bank and the community, with the bank sponsoring events in Mt. Angel and Silverton and residents in turn feeling a bond with the bank.
Way said many citizens have expressed interest in offering their support to the bank by buying stock, and he and board members, as well as several bank employees, also are showing their faith in the bank’s successful future by purchasing shares.
“We can’t ask others to invest if we’re not willing to do it ourselves,” he said.
In addition to raising capital through the sale of stock, the management is looking at ways to cut costs. “We’ve always had a low overhead ratio, but we are looking for other areas.” One recent move was to relocate the Salem office from a leased building to one the bank owns in the South Salem area. The bank has a tradition of being frugal, Way said, and joked that unlike AIG there are no Caribbean junkets. “The employees feel lucky to have a Christmas party – in Mulino.”
Though there was room for a little levity, Way is serious about the bank’s plans for a solid future.
“We hope toward the end of 2009 the orders will be released. The average takes about a year,” he said. “We expect our capital offering will be successful.”
In addition, single family home loans – to substantiated qualified borrowers – are doing well because rates are low. “You can get lower than 5 percent. It hasn’t been that low since the ’60s, I’m told.”
Way assures that the public is safe – general deposits are guaranteed by the FDIC to $250,000 and unlimited for business accounts – and the bank’s future is secure.
Under the watchful eye of the FDIC and DFCS, the bank is making “an internal review of costs and trimming where appropriate,” to lessen expenditures and to increase revenue,
“We’re still making loans and we’re still taking deposits. We plan to be here for the long haul,” he said.
