The failure earlier this year of Community Bank & Trust sent shockwaves through the area. Although based in nearby Cornelia, CB&T had extensive branches in Jackson, Barrow and other Northeast Georgia communities.
CB&T continues to exist, the bank having been purchased by a South Carolina firm.
Still, the bank’s failure in January was a major blow not because it changed anything for most customers, but rather because it was thought to be one of the area’s largest and strongest financial institutions.
A FDIC postmortem report released last week that studied why the bank failed paints a disturbing picture that predates the economic downturn. While the collapse of the housing market bubble did impact the bank, there were other problems that magnified the housing bust and ultimately led to the bank’s collapse.
Why is this important now? Because there are lessons to be learned from this that go much further than banks. Every business and even local governments can learn from this high-profile failure.
So what went wrong? Essentially, CB&T’s demise was a failure of leadership according to the report.
As far back as 2004, examiners had identified “weaknesses” with CB&T’s loan underwriting. Those problems were also noted in 2006 and 2007 before the economic crash.
In the middle of that, the bank’s President/CEO Alton Wingate died in 2005. Wingate was a strong, some would say autocratic CEO who made a lot of decisions related to the bank’s loans.
The problems began to mount after his death. According to the report, Wingate’s death “left a leadership void.” There was no succession plan in place and the bank’s management leadership became a revolving door.
On top of that, the report said that the bank’s board of directors was weak and out of touch. There were lax internal controls and little oversight. Even after examiners issued the bank a scathing Cease & Desist Order in May 2009, the board failed to comply with many of its provisions.
Even before that in October 2008, examiners had issued some strong advice to the bank’s board and senior management about getting its structure in order. In that 2008 report, the bank’s management was described as “deficient.”
One of the key mistakes bank leaders made during this time, according to the report, was to decentralize loan decisions by allowing division presidents to make loans locally without board or senior management oversight.
The result was a mess. Some bank officials were making bad loans and not following the protocol for lending. Bank officials’ lending standards fell out of compliance with internal and external policies. One senior bank official was estimated to have made bad loans costing the bank over $10 million. Other bank lending officials also made “questionable” lending decisions, the report said.
In addition to those internal problems, examiner oversight was also weak. Although there were signs of problems, bank oversight wasn’t strong until after the 2008 exam and even then, it wasn’t strong enough. Only in 2009 did examiners get serious about holding the bank’s leadership accountable; but by then, it was too late.
So what’s the bottom line in all this?
Weak leadership by the bank’s board of directors, which had come to rely too much on their strong CEO. When the CEO died, the board failed to provide oversight and leadership to his successors. And there was no oversight of the bank’s extensive branch loan operations by senior bank managers. Local loan decisions became a mess of lax standards with everyone doing their own decision-making and failing to follow normal procedures.
Weak leadership + no oversight = Failure.
That’s a lesson all business and government officials should learn.
Mike Buffington is editor of The Jackson Herald. He can be reached at email@example.com.