School of Accounting, Finance & Economic

AF315 Banking Law

Tutorial Questions
Weeks 4

West Virginia’s First State Bank closes in 2nd

failure of 2020
Published April 6, 2020

Dan EnnisSenior Editor

Dive Brief:

 The West Virginia Division of Financial Institutions closed First State Bank in

Barboursville, West Virginia, on Friday, in the second U.S. bank failure of the year.
 All four of the bank’s branches opened Saturday under the MVB Bank banner. The
Fairmont, West Virginia-based lender assumed all $139.5 million of First State’s deposits
and $147.2 million of its assets — all but $5.2 million, which the Federal Deposit
Insurance Corp. will retain for later disposition.
 First State had been operating through “capital and asset quality issues” since 2015,
the FDIC said in a press release Friday. The regulator stated in a tweet Friday the closing
was not related to the coronavirus pandemic.
Dive Insight:

First State Bank’s “December 31, 2019 financial reports indicated capital levels were too
low to allow continued operations under federal and state law,” the FDIC said in its
press release. The bank lost about $3.7 million in 2019 and hadn’t turned a profit since
2013, American Banker reported.

The closing will cost the Deposit Insurance Fund (DIF) about $46.8 million, the steepest
such bill since the fund took a hit of more than $80 million in the 2017 failure of
Chicago’s Washington Federal Bank for Savings.

MVB bought the assets at a discount of about $28.2 million and acquired other real
estate owned for 47.5% of book value, the bank said in a filing Friday.

The FDIC emphasized new MVB customers should follow social distance guidelines set
forth during the coronavirus outbreak and, when possible, use online or electronic
banking tools. “In keeping with West Virginia Governor Jim Justice’s Stay-at-Home
Order, customers should visit a bank branch only if an in-person visit is essential and
only after making an appointment,” the regulator said.

The only other U.S. bank to fail this year is Nebraska’s Ericson State Bank, which a state
regulator shuttered in February. The FDIC and the Nebraska Department of Banking
and Finance issued consent orders last fall, with the federal regulator seeking more than
a dozen corrective actions, including that Ericson name a new CEO, devise a one-year
and a three-year strategic plan to return to solvency, and add at least two independent
board members. Two other Nebraska banks, Eagle State Bank and Tri Valley Bank,
announced a three-way merger with Ericson in November that never went through.

(Adapted: https://www.bankingdive.com/news/west-virginia-first-state-bank-closes-2020/575517/)

The First State Bank plus Barboursville, West Virginia

Date: November 24, 2020

Memorandum To: Doreen R. Eberley, Director, Division of Risk Management Supervision

From: Terry L. Gibson, /Signed/, Assistant Inspector General for Program Audits and Evaluations

Subject: Failed Bank Review Memorandum plus The First State Bank plus Barboursville, West Virginia
plus FBR-21-001

Background

On April 3, 2020, the West Virginia Division of Financial Institutions (WVDFI) closed the First State Bank
(FSB) and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. FSB was a locally
owned, state-chartered non-member bank located in Barboursville, West Virginia, that the FDIC first
insured on May 14, 1934. FSB was wholly owned by First Bancshares, Inc., a single bank holding
company. The bank President and Chief Executive Officer’s (CEO) family controlled 82 percent of
Bancshares’ common stock and Bancshares’ Employee Stock Ownership Plan (ESOP) owned the
remaining 18 percent of common stock.

According to the FDIC’s Division of Finance, the estimated loss to the Deposit Insurance Fund was $47
million or 30 percent of the bank’s $156 million in total assets. The WVDFI took possession and closed
FSB, because it had experienced longstanding capital and asset quality issues, was substantially impaired
(as of March 11, 2020),1 and had become insolvent.2

This Memorandum examines whether the subject bank failure warrants an In-Depth Review.3

Footnote: 1 The WVDFI Commissioner deemed FSB’s equity capital level substantially impaired on
March 11, 2020.

Footnote: 2 According to W. VA Code §31A-7-2(e), (f), a financial institution is insolvent when it is unable
to pay its debts to its depositors and other creditors in the ordinary and usual course of business or
when it is in a state of balance sheet insolvency (the assets of the financial institution are less than its
liabilities, exclusive of capital). W. VA Code §31A-7-4(a) mandates that the Commissioner appoint a
receiver whenever the Commissioner ascertains that a financial institution is insolvent.

Footnote: 3 When the DIF incurs a loss under $50 million, the Federal Deposit Insurance Act requires the
Inspector General of the appropriate federal banking agency to determine the grounds identified by the
state or federal banking agency for appointing the FDIC as receiver and whether any unusual
circumstances exist that might warrant an in-depth review of the loss. Section 38(k)(5) of the Federal
Deposit Insurance Act (FDI Act), 12 U.S.C. § 1831o(k)(5).

Required
1. Do you think the Board of Directors for the West Virginia First State Bank is liable for any
offense? Discuss.

Causes of Failure
Based on our review, we believe that the failure occurred because of a critically deficient
Board of Directors (Board) and poor management oversight. Management was unable to
correct deficiencies noted in prior FDIC and WVDFI examinations, resolve problem assets,
address the terms of an FDIC Consent Order in a timely manner, and obtain sufficient capital
to operate the bank as a going concern.4 The bank’s President and CEO was a dominant
policy-making official primarily responsible for strategic planning, regulatory responses, and
raising capital. He exerted considerable influence over family members who comprised a
large portion of the bank’s executive staff. Prior to FSB’s closing, the FDIC was considering
various actions against management, including a Prompt Corrective Action (PCA)5 dismissal
against the bank President and CEO.

The Board and management failed to adequately identify, manage, monitor and control risk
within the bank, and failed to address previously identified concerns regarding credit
underwriting and administration practices. During this same examination, the WVDFI also
 uncovered a potential loan fraud scheme perpetrated by a former Vice President and
Commercial Loan Officer. 

The bank’s high level of problem assets and management’s inability to resolve them
ultimately eroded earnings and depleted the bank’s capital.6 Financial institutions deemed
less than Well Capitalized are subject to certain restrictions, including the use of brokered
deposits under Section 29 of the FDI Act and Part 337.6 of the FDIC Rules and Regulations.
Consequently, as the bank’s earnings position eroded, its capital position became critically
deficient, directly impacting the viability of the bank. By December 31, 2019, FSB’s capital
levels became too low to allow for continued operations.

So, therefore, the above reason can validate the loss from the poor BOD, hence, Yes.

2. Identify and discuss the areas in which the Central Bank has failed.

Conclusion
FSB was the victim of an employee fraud scheme discovered in 2012 that impacted its financial
condition. However, as identified in multiple FDIC examinations conducted from 2012 through
2019, the Board’s oversight of the bank was also deficient and the bank’s risk management
practices were poor. FSB’s Board and management failed to execute actions and address
recommendations to improve FSB’s safety and soundness, its capital levels and liquidity
continued to decline, and the bank ultimately failed. We concluded that no unusual
circumstances exist that warrant an In-Depth Review of the loss.