Federal Reserve OIG Report on the Failure of Bank of Whitman

The Office of Inspector General ("OIG") conducted an in-depth review of the failure of Bank of Whitman ("Whitman") because the loss to the Deposit Insurance Fund presented unusual circumstances due to various questionable transactions and business practices involving senior management.

According to the report, Whitman failed because of the convergence of several factors, which the executive summary outlined as follows:

• The bank altered its traditional agricultural lending strategy and expanded into new market areas, which resulted in rapid growth and high commercial real estate concentrations as well as credit concentrations to individual borrowers.
• Whitman's corporate governance weaknesses allowed the bank's senior management to dominate the institution's affairs and undermine the effectiveness of key control functions.
• Whitman's credit concentrations and poor credit risk management practices, along with a decline in the local real estate market, resulted in asset quality deterioration, significant losses, and eroded capital.
• At that point, management engaged in a series of practices to mask the bank's true condition. The escalating losses depleted earnings and left the bank in a critically undercapitalized condition.

The report further details issues with respect to supervision. FRB San Francisco identified the bank's fundamental weaknesses during its first examination in 2005 but did not take decisive action to resolve those weaknesses until September 2009. FRB San Francisco, according to this OIG analysis, had multiple opportunities from 2005 to 2009 to take stronger supervisory action to address the bank's persistent deficiencies.

Click here to view report in full (links externally to federalreserve.gov).