Price of Colo. Bank Failure Marked Up to $200 Million

Losses from the July 1998 failure of BestBank of Boulder, Colo., just keep growing.

The bank's spectacular collapse is expected to cost the Bank Insurance Fund more than $200 million, making it the 26th most expensive bank failure ever.

A year ago the Federal Deposit Insurance Corp. estimated BestBank would cost just $28 million.

The culprit is a subprime credit card portfolio, the $314 million-asset bank's largest holding. Initially the FDIC tried to sell the $255 million portfolio, which was associated with a travel club offer, but investors were spooked by its high default rate and by allegations that the cards' servicer had manipulated accounts to make them appear current.

When an auction failed to locate a qualified buyer for the portfolio, the FDIC decided to liquidate it. The agency sent notices to about 350,000 cardholders, asking them to pay 50 cents on the dollar. The FDIC said that in exchange, it would tell credit bureaus the borrower was paid up.

About 48,000 cardholders accepted the deal, yielding $5 million in payments. The FDIC wrote off the balances of the remaining 302,000 accounts.

The FDIC had more luck with a second, far smaller subprime card portfolio not associated with the travel club offer. It sold the 13,500- card portfolio last month to Credit Store of Sioux Falls, S.D., for $4.7 million.

To recover the insurance fund's losses, the FDIC filed suit last fall. The complaint accused Fort Lauderdale, Fla.-based Century Financial Group of misleading bank regulators about the value of the subprime credit card portfolio it operated with BestBank and of engaging in a broad conspiracy with the bank's top two executives.

The FDIC also accused the executives of paying themselves bonuses totaling $9.5 million in early 1998 "despite the fact that the bank was on the verge of failing." Ironically, the bonuses were a reward for increasing the larger credit card portfolio. The suit is pending.

In February, meanwhile, an internal FDIC report found that though examiners had recommended a slew of enforcement actions against BestBank starting in 1992, many were abandoned, including a cease-and-desist order.

According to the report, BestBank was examined nine times between October 1992 and its closing. It earned Camels ratings of 3 or 4 each time until June 1998, when it received a 5, the worst score.

Nevertheless, FDIC Supervision Director James L. Sexton has not demoted, fired, or otherwise reprimanded a single employee, and no such moves are anticipated, an agency spokesman said.

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