On the eve of Friday May 28, 2010, the Office of the Comptroller of Currency shut down the Granite community bank, based out of Granite Bay CA. Under the purchase and assumption agreement, Granite Community bank was sold to Tri Counties Bank, of Chico CA, by the FDIC. This bank failure was number 77 of the year and number sixth for the state of California. The region of California was heavily impacted by the recent recession causing an outbreak of small bank failures within that region. Due to the severe real estate bust and ill-fated lending practices, the California banks have been heavily affected. According to the article “Loan Losses put Granite Bay bank at risk of failure, seizure”, by Charles Piller, “15 commercial banks based in the Sacramento area made money last year”. Therefore, the major contributor to Granite Community Bank failure is due to loan losses as a result of the economic condition in that particular area of California. It comes to no surprise the recent economic recession has lead to the Granite Community bank failure. Prior to 2007, the economy continued to boom and a frenzy of lending occurred. According to research done by Michael Zielinski, author of the article “Granite Community Bank Closed by Regulators”, Granite Community Bank had expanded rapidly during the period of 2002 to 2006 where the bank increased its assets from under $40 million to almost $160 million. This large increase in assets was due to increase in mortgage loans and other loans that proved to be too risky. When the real estate prices crashed, Granite Community bank was overwhelmed by the amount of under-performing loans and foreclosures. The chart below examines the rate of bad loans in the pacific region and how nearly 5% of small bank assets have gone bad. The rate of bad loans is three times what it was just after the recession of 2001-2002 (Piller). In 2008, Granite Community Bank entered a formal agreement with the U.S. Comptroller of Currency that required the bank to increase capital reserves to cover bad loans. But the impact of foreclosures proved it was too great for bank to handle. Granite Community bank would have had to raise around $6.5 million from investors to return its capital holding to levels demanded by regulators (Piller). For a small bank in this economic climate, this amount of capital is a major challenge to raise. In this situation, promote corrective action was needed in order for the bank to become adequately capitalized. Possible actions that Granite Community Bank could have taken included increasing equity through issuing new stock. Management could have enforced lenders to limit long-term loan obligations. Also the bank could have restricted the distribution of dividends to shareholders. Despite the efforts put forth by the bank management, the banks conditions continued to deteriorate as the following year approached. 2009 proved to be a troublesome year for Granite Community bank. The risk of failure was clearly apparent by year end. “The bank lost more than $5.5 million last year, including $3.5 million in the fourth quarter” (Piller). This damaging number is a clearly indicator that Granite bank was on the verge of failure unless they were able to come up with a plan to reduce its losses and gain more capital. According to Oakland-based foresight analytics, “Granite Community holds $14.2 million in loans that are in default or close to default” (Piller). This number is about four times the amount of the bank’s loan loss reserves. Therefore, the bank’s profits were severely impacted as the bank drew closer and closer to becoming insolvent. Based on 2009 financial statements, “Granite Bank had a very high troubled asset ratio of 284%” (Zielinski). Most banks that recently failed have had troubled asset ratios of over a 100%. Thus, Granite Community Bank’s troubled asset ratio was clearly over the benchmark for failing banks. As the year 2010 came about, the aftermath proved to leave a fall out of failed banks and things weren’t looking too bright for Granite Community Bank. Of the $6.5 million the bank needed to raise to meet regulators demands, Granite community bank only raised $2.2 million of it. Granite Community Bank’s conditions ranked among the worse out of all banks nationally. According to bankrate.com, Granite ranked had the second lowest rating of its size in California and is in worse shape than more than 98 percent of peers nationally (qtd, in Piller). The bank received zero out of five stars on Bauer.coms ratings (qtd. in Piller). At that point takeover by a larger more stable bank was drawing near.
The breaking point came on May 28th, 2010 when the bank was finally closed by the Office of the Controller of Currency and the FDIC accepted the receivership. The acquiring bank became Tri Counties Bank of TriCo Bancshares through purchase an assumption. Granite bank had total assets of $102.9 million and total deposits of $94.2 million as of March 31, 2010 (Zielinski). Tri Counties Bank did not pay a premium to the FDIC for Granite’s deposits, but instead has a loss-share agreement that covered $89.3 million (87%) of the purchased assets which limited the potential losses on the purchases of Granite Banks assets (fdic.com). According to the FDIC website, Tri Counties Bank will share in the losses on the asset pools covered under the loss-share agreement. The loss-share transaction is forecasted to limit the amount lost and maximize returns on the assets covered by keeping them in the private sector. The FDIC estimates the cost to the Deposit Insurance Fund (DIF) to be $17.3 million. This turned out to be a smooth transition because Tri Counties Bank’s acquisition of all the deposits made it the “least costly” resolution for the FDIC.
As for the customers of Granite Community bank, the transition was smooth as well. All deposits and accounts have been transferred to Tri-Counties Bank, and were immediately available. Due to the bank being closed on Memorial Day weekend, the three branches of Granite Community Bank was reopened Tuesday June 1, 2010. All normal banking functions such as depositing checks, accessing ATM’s an online service remained available for the customers of Granite Community Bank making the impact to theses customers minimal. As for loan customers all normal payments and interest rated remained the same as usual. The biggest hit came to the stockholders since the equity in the bank was used to cover their losses. When banks fail, federal insurance protects depositors up to $250,000 but they do not cover shareholder investments. Although the bank put effort in towards raising equity to have a better core capital ratio, the end results proved was not beneficial for shareholders. In addition to stockholder, local businesses were closely affected by the bank’s failure. In this case, many small businesses in the granite bay area relied on relied on their community bank for credit. Starting up cost and day to day business operations need to be funded by bank loans in order to operate efficiently and without these banks being available small business suffers.
As for the clerks of the bank they either were laid off or were rehired by the acquiring bank. The senior officers of Granite Community bank will be paid some type of severance but as of now no information about their compensation packages has been released. According to the FDIC, any bank over $25 million in assets required the FDIC Inspector General to conduct his own independent investigation. This process takes six months to complete. Since Granite Community Bank failed at the end of May, the information will be available for the public at the end of the month or early December. To go more in depth about issues causing the meltdown of Granite Community Bank, the specific type of loans that were causing the most turmoil should be analyzed. Small banks in this region of California, such as Granite Community Bank, rely heavily on a combination of construction, industrial and commercial real estate loans as opposed to home mortgages. Initially small banks were able to cope with the economic recession but as foreclosure and mortgage meltdowns increase it lead to a snowball effect. Since residential mortgages became increasingly delinquent, construction lending followed down the same downward slope. The demand for new homes to be built crashed and construction loans were no longer sought after. In addition to the decline in construction lending, joblessness has caused a decrease in commercial and industrial loans. Both types of loans are sensitive to high unemployment and low consumer confidence. This becomes a major issue because small banks such as Granite Community bank have higher rates of commercial and industrial lending which have proven to go bad quickly in a recession. According to Foresight Analytics partner Matthew Anderson, “they are even riskier than real estate lending”. Therefore, Granite Community Banks high percentage of construction, commercial and industrial lending has put the bank in a vulnerable position. Another issue that contributed to Granite Community banks downfall is that they often delayed or even avoided designating loans as delinquent. Although this is legal, it gives off the wrong impression on the balance sheets by essentially delaying the bad news. With the information not being included in their financial statements, the bank wasn’t writing off enough of their bad loans causing the bank to look well-capitalized when in fact they were not. For example, according to Granite Community banks 2008 balance sheet, their leverage ratio was at 10.82% , Tier 1 capital ratio was 12.05% and their Total capital ratio was 13.31%. On paper theses ratio’s show that the bank is very well capitalized when in fact the bank was not at all. When looking at the 2010 financial statements prior to the closing of Granite community bank, it’s quickly noticeable that the numbers and ratios were far different than the ones noted in the 2008 financial statements. From the 2010 financial statements, the Leverage ratio was a 2.89%, the Tier 1 ratio was 3.46% and the Total capital ratio was only 4.75%. The return on assets for the bank was at a -1.31%. These key ratios put Granite Community bank in Zone 5 of the Prompt Corrective Action scale. The bank was critically undercapitalized in which at this point needed to appoint a receiver within 90 days, suspend payments of subordinated debt. In addition to these actions, the bank should continue to restrict pay to officers, restrict deposit interest rates and reinvest dividend payments. Below is a quick look at the financial facts of Granite Community Bank prior to its failure as well as the key ratios for capitalization analysis.
Balance Sheet Income Statement
(USD, in thousands) (USD, in thousands)
Total Assets 102,913 Total Interest Income 1,135
Total Liabilities 99,853 Total NonInterest Income (100)
Total Bank Equity Capital 3,060 Total Interest Expense 248
Total Deposits 94,252 Total NonInterest Expense 977
Net Loans & Leases 78,846 Net Income (345)
Loan Loss Allowance 3,096 Net Charge Offs 653

Key Ratios
Tier 1 Leverage Ratio 2.89
Tier 1 Risk-based Capital Ratio 3.46
Total Risk-based Capital Ratio 4.75
ROA -1.31
ROE -42.75

In conclusion, it is evident that the high percentage of delinquent loans has caused Granite Community bank to go under. The crash in the housing market due to the recession has caused a snowball effect that essentially turned mortgage, construction, commercial and industrial loans to valueless assets. Granite Community Banks troubled asset ratio proved to be one of the worst in the nation earning the bank zero out of five starts on a financial rating scale. The banks Tier1, leverage and total capital ratio introduced how critically undercapitalized the bank was after the fall out of the recession. Banks under these circumstances are bound to be shut down by the FDIC and taken over by a larger healthier bank. In this case Tri Counties Bank received the opportunity to overtake Granite Community banks remaining assets and deposits under a loss share agreement. The transition was rather smooth for customers but for shareholders and small businesses it wasn’t. The failure of Granite Community Bank seemed somewhat inevitable but hopefully other small banks prepare wisely for future recession to come