New data shows insider loans spiked at Crescent Bank during credit crisis

The former Myrtle Beach-based Crescent Bank gave its officers and directors a record number of insider loans during a period when credit had dried up for most consumers and the bank was borrowing millions from the federal government to weather a nationwide financial crisis, according to data released by the Federal Reserve Bank.

Crescent Bank – which merged with Community FirstBank on July 29 to become CresCom Bank – borrowed as much as $66 million at one time from the Fed’s lending programs – mostly its discount window – during a 10-month period between Aug. 18, 2008, and June 18, 2009, according to a review of the federal data by The Sun News.

The Fed loans – which were separate from the agency’s Troubled Asset Relief Program, or TARP – were supposed to help banks deal with cash crunches, thereby freeing up money to make new loans to customers during a period when credit markets had dried up following the national real estate crash and in the wake of the Lehman Brothers Holdings Inc. bankruptcy.

“Such lending helped support the continued flow of credit to American families and businesses,” Fed Chairman Ben Bernanke said in a Dec. 6 letter to Congress.

Crescent Bank’s total loan portfolio, however, shrank as it was getting loans meant to help spur lending.

“Late 2008 through 2009 was a very volatile time in our industry, liquidity was tight and the [Federal Reserve Bank’s] discount window was utilized by many, many healthy banks in our country as a source of funding,” said David Morrow, chief executive officer at Crescent Bank and now CresCom Bank.

Morrow said Crescent Bank was never in any financial trouble – the bank exceeded regulators’ well-capitalized standards – but saw the Fed loans as “one of many funding sources for our bank.”

All of the insider lending met or exceeded the bank’s underwriting standards, Morrow said.

The bank’s loans and leases totaled $421.8 million in the first quarter it started borrowing from the Fed. That figure dropped each successive quarter – dipping to $387 million in the quarter that Crescent Bank’s final Fed loan matured.

The drop in the bank’s loan balance far outstripped the amount of charged-off loans the bank recorded during that period, showing Crescent Bank was both removing bad loans from its balance sheet and tightening up on credit to consumers.

At the same time, loans to the bank’s officers and directors increased by 65 percent, according to Crescent Bank’s quarterly financial statements – called “call reports” – filed with the Federal Financial Institutions Examination Council.

Four of the bank’s 11 board members and another five vice presidents received 10 loans totaling $3.4 million during the 11-month borrowing period, according to a review of real estate records in Horry and Georgetown counties.

Another director received a $417,000 loan eight days after Crescent Bank had taken its final loan – for $15 million – from the Fed.

The lending helped boost Crescent Bank’s insider loan total to an all-time high of $18.9 million – or 60 percent of the bank’s total equity capital – by March 30, 2009. The bank’s previous high was $14 million in insider loans during the final quarter of 2006, at the height of the real estate boom.

Loans to insiders are legal and often common at community banks such as Crescent Bank, which is privately held. However, regulators give insider loans added scrutiny because of the possibility of preferential treatment and Sheila Bair – the former FDIC chief who stepped down earlier this year to become an adviser at Pew Charitable Trusts – has said she is “deeply skeptical of any kind of insider lending.”

Others, however, say directors and executives are expected not only to bring business to the banks they oversee but to do their own business at those banks, as well.

During the credit crisis, insider lending accounted for 4.6 percent of Crescent Bank’s loan portfolio – a total more than 50 percent higher than the statewide average.

Morrow said the bank’s lending decisions are made independent of its funding decisions and that there is no relation between the amount of Fed loans it received and lending to insiders.

“There were no stipulations placed on any of the funds, although the bank has stood willing to lend to credit-worthy borrowers since our inception in 2001,” Morrow said. “Loan demand did weaken during 2008 and 2009, but we are still aggressively seeking high-quality loans and our budget for next year [2012] is projecting loan growth.”

Releasing the details

Crescent Bank was one of two Grand Strand-based banks to take part in the Fed’s loan programs during the credit crisis, according to data obtained by Bloomberg News following a two-year court battle with the Federal Reserve.

The former Beach First National Bank – which was shut down by the FDIC in April 2010 – took two loans in late 2008 with a maximum indebtedness of $12 million. Its insider loan total grew by 1.7 percent in the quarter it took the loans.

Loris-based Horry County State Bank was the only area bank to participate in the separate TARP bailout, borrowing $12.9 million on March 6, 2009. That bank’s insider loans increased by 2.5 percent in the quarter it took the bailout.

While the Fed previously has disclosed the aggregate amount of loans it provided to banks nationwide, it never specified which banks got the money and how much each bank received. The Fed argued that such disclosure would undermine the effectiveness of the lending programs and the confidence of individual bank investors and borrowers.

Bloomberg won an appeals court ruling forcing the Fed to disclose the information, and the U.S. Supreme Court declined to hear the case in March. The Federal Reserve, in response to the appeals court order, posted data on its website showing loans of up to $1.5 trillion at any one time to financial institutions nationwide and in 25 foreign countries during the credit crisis.

The Sun News used data from the Fed and Bloomberg to prepare its report on Crescent Bank’s transactions during the crisis.

The data shows Crescent Bank obtained most of its loans from the Fed’s discount window – a last-resort lending program set up nearly 100 years ago to provide cash to banks if customers rushed to withdraw more than what was available in the bank’s vaults. The discount window has been available to banks for decades, and remains so, but the Fed typically charges above-market rates for such loans and banks normally have lower-interest lending sources available to them. During the credit crisis, however, the discount window was one of the few sources of short-term lending available to banks.

The discount window was one of about a dozen programs the Fed had during the credit crisis to provide liquidity to banks.

Crescent Bank started borrowing from the discount window during the third quarter of 2008, hitting its peak debt of $66 million on Dec. 3 of that year. The interest rate on those short-term loans ranged from 2.25 percent to 0.5 percent during Crescent Bank’s borrowing period, according to the Fed’s website.

Crescent Bank, like many banks nationwide, typically would borrow money from the discount window and then pay off the loan with interest before borrowing again in successive days.

Crescent Bank stopped borrowing from the discount window in June 2009, opting instead for a $15 million loan from the Fed’s Term Auction Facility, or TAF. The Fed set up that program in December 2007 because many banks did not want to take money from the discount window, afraid they would be branded as financially unstable. Crescent Bank paid a 0.25 percent interest rate for its TAF loan, which matured on Sept. 10, 2009.

All of Crescent Bank’s loans from the Fed’s programs were over-collateralized and repaid with interest.

The Fed’s loan programs provided banks with more than twice the amount of cash at any one time as the more publicized TARP bailout’s price tag of $700 billion.

But unlike the TARP recipients, the names of loan recipients – such as Crescent Bank – had been kept secret until the Fed was forced to disclose them.

Morrow said another difference between TARP and the Fed loans is that the Fed loans did not put any taxpayer dollars at risk.

“This is a significant difference between our collateralized borrowings … and TARP, which was funded through the Treasury Department as an equity investment into banks with taxpayer appropriations,” Morrow said. “We chose to not take TARP funds.”

Funds fuel loans

A review of thousands of pages of Fed documents by The Sun News shows Crescent Bank visited the Fed’s discount window 25 times during the credit crisis, taking out short-term loans ranging from $1 million to $15 million at a time.

The bank’s first loan – for $9 million – was on Aug. 18, 2008. Nine days later, the bank gave a loan of up to $300,000 to Scott Brandon, a member of Crescent Bank’s board of directors. Brandon’s loan later was reduced to a maximum of $200,000. About a week after Brandon’s loan, Crescent Bank gave a $1.1 million loan to Daniel Moore, another bank director.

Crescent Bank, like many banks nationwide, continued to borrow from the Fed’s loan programs for the next year – taking money, repaying the loan and then borrowing more funds. At points, the bank had several outstanding Fed loans at the same time. As the borrowing continued, more directors and executives were given loans as the overall amount of loans given to all consumers contracted.

The Fed data provides new insight into the actions banks took during a financial crisis that threatened to sink the nation into another Great Depression.

More than 2,000 borrowers – banks, financial institutions and businesses – borrowed up to $1.5 trillion at any one time from the Fed’s lending programs during the 2008-09 crisis, according to Bernanke’s letter. The nation’s largest financial institutions also were the largest borrowers, with Morgan Stanley leading the way at $107.3 billion in loans. Citigroup Inc. and Bank of America Corp. followed with $99.5 billion and $91.4 billion in loans, respectively.

Bernanke defended the loan programs, saying the Fed money helped spur 3 million automobile loans, 1 million student loans, nearly 900,000 loans to small businesses and millions of credit card loans. The Fed borrowers paid back their loans with interest that generated about $20 billion for the U.S. Treasury, the letter stated.

Bernanke’s letter also disputes reports that banks participating in the loan programs were financially troubled.

“During a financial panic, otherwise solvent banks and other financial institutions can be forced to sell assets at fire-sale prices in order to meet the demands of depositors and other sources of funding,” the letter states. “Central bank liquidity lending is designed to stem the panic by giving financial institutions a source of financing that permits them to refrain from selling assets during the panic.”

The letter also states that most loan recipients “generally suffered from temporary liquidity problems rather than being fundamentally insolvent.”

Banks previously have been criticized for insider transactions that occurred as they were borrowing from the Fed in times of tightening liquidity. For example, a labor group pushing for management changes at Bank of America questioned how the bank’s insider loans could have soared in 2008 “when at the time in question credit was extraordinarily difficult to obtain.”

Others, however, say federal regulations already are in place to keep insider lending in check. Banks are not allowed to make loans to insiders on better terms than those available to the general public, and insider loans must meet the bank’s underwriting guidelines.

For example, Morrow said most of Crescent Bank’s insider loans during the credit crisis were home mortgages written to secondary market standards and pre-sold to those markets or home equity loans “that had a floor rate of prime plus 1.75 percent and were part of our standard home equity program underwriting and pricing.”

If anything, some experts say, the credit crisis has put a sharper focus on how banks are lending money and to whom.

“When the auditor walks in the door, the first thing he’s going to say is, ‘I want every loan file on every officer and director,’ ” Richard Lovelace, a Conway lawyer who specializes in banking and real estate law, told The Sun News earlier this year. “Everyone knows that, so they aren’t going to do anything that would create any problems.”