Granite Community Bank Failure Essay

2098 words - 9 pages

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 ...view middle of the document...

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, 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...

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