Sometimes in banking, you are your brother's keeper. But in the case of ICB Financial, it seems more like the keeper of a distant relative.
ICB said late last month that it paid the Federal Deposit Insurance Corp. $500,000 to resolve a claim that the Ontario, Calif., company was responsible for the cost of the 2009 failure of Progress Bank of Florida in Tampa. Known as the cross-guarantee provision, the FDIC can pin the cost of a failure onto any related banks.
ICB and Progress both had investments from Community Bank Investors of America LP, a Richmond, Va., private-equity firm. They also shared directors, but were not under the same holding company.
Lawyers say that the situation seems like a disturbing case of overreaching by regulators that could have damning ramifications for other banks and investors.
"I am surprised that they triggered [the cross-guarantee liability] in this case," said David Baris, a partner at BuckleySandler LLP and executive director of the American Association of Bank Directors.
"It is disappointing; I don't like bank having to pay for something that they are not legally obligated to pay for," Baris added. "This is a little scary for banks that happen to be owned by people who own shares in other banks."
The purpose of the cross guarantee is to reduce a failure's cost to the Deposit Insurance Fund. Congress gave the FDIC the power through the Financial Institutions, Reform, Recovery and Enforcement Act of 1989. The most notable example in the current cycle was when the FDIC seized all nine banks of FBOP Corp. in October 2009, though not all of the banks were in trouble.
Banking lawyers say the relationship between ICB's Inland Community Bank and Progress is not the type that would normally constitute such a liability.
The problem seems to involve the designation of Community Bank Investors' stake in ICB. The firm and its chairman, Laurence Fentriss, own a combined 9% of the $243 million-asset company, which the Federal Reserve deemed as controlling shares. Fentriss was the chairman of Progress and a director at Inland Community.
Due to the stake and perceived control, the FDIC asserted that Progress and Inland Community were commonly controlled depository institutions. Community Bank Investors and Inland executives say that, despite the designation, the firm has no control over ICB and that the company has larger shareholders.
For Fentriss, most of ICB's shareholders were unfairly held responsible. "90% of the shareholders had nothing to do with Progress Bank yet the FDIC is attempting to make them pay for the bank's failure," he said in an interview on Thursday.
According to a 2009 FDIC policy statement, the agency has the ability to hold other financial institutions accountable for a failure in instances where a private-equity firm owns at least 80% of the shares. Fentriss said he and his firm owned about 40% of Progress.
The FDIC determined that Progress' failure cost the Deposit Insurance Fund $25 million. According to ICB's 2010 annual report, the FDIC initially wanted the bank to pay $5.6 million, which would have delivered a major capital hit. After months of wrangling, ICB paid the FDIC $500,000 for waiving any further liability related to Progress' failure. The agreement also called for ICB to submit a plan to the Office of the Comptroller of the Currency to exit the Treasury Department's Troubled Asset Relief Program.
James Cooper, ICB's president and CEO, said the company decided it was in its best interest to settle the case rather than drag it out. The decision was made even though ICB felt that it was not liable for Progress and believed it would have prevailed in court.
"We were looking to raise capital, but with the cross guaranty issue at hand, no investors were willing to take on that additional risk," Cooper said. "My shares took a tumble, my investors were concerned and after ongoing discussions with the regulators, it was clear that they were not going to turn loose. We settled because we wanted to get this behind us."
The FDIC is also pursuing a similar claim against Gateway Bank, a thrift that serves San Francisco's Asian community and also counts Community Bank Investors among its shareholders. Jeff Cheung, Gateway's president and chief executive, declined to comment.
The FDIC and the Fed never comment on open institutions, but banking lawyers said that it would be interesting to hear their side of the story. "Maybe there was some other evidence of control or some other mechanism," Baris said.
Henry Fields, a partner at Morrison & Foerster LLP, said the settlement at the $500,000 level may suggest that "the FDIC did not have the strongest confidence that it would prevail if challenged." Fields added that the FDIC's assertion of a cross-guaranty liability at such a low level of ownership seemed to miss the mark of the provision's intention and could cause banks to think twice about taking minority investments from private-equity funds that invest in other banks.
"In the long run, asserting the cross-guaranty at such a low-level of ownership discourages capital formation," Fields said. "It raises a red flag for any bank seeking a minority investment from an entity that invests in other banks. Why would you risk it? What baggage is going to come along with it?"