Recent articles were published this week regarding the FDIC Prohibition Orders and Civil Money Penalties assessed to two of the key bankers in the failure of Sonoma Valley Bank. But these individuals didn't act in isolation. Loans to Bijian Madjlessi and his affiliates approached $40 million and represented one of the largest if not the largest borrower concentration within the bank. The Loan Committee and full board would certainly have been voting to approve these loans and workout plans as they began to deteriorate. Safe and Sound concentrations risk and credit risk management would require such.
The Loan Committee had voting members of Dale Downing committee Chairman, Robert Nicholas the bank Chairman, Mel Switzer a former regulator and long time banker, Suzanne Brangham a well accomplished commercial real estate developer and others. These people would have reviewed and approved applications and ongoing extentions, renewals and workout programs. Why are they not being referenced or fined? Why are they not being banned from ever serving on any future bank boards?
Finally, the FDIC and California Department of Financial Institutions regulated Sonoma Valley Bank and on average inspected operations on at least an annual basis. Standard examination procedure require examiners to review the largest borrowers in the bank. They typically ask for a report of the top 10 or top 25 borrowers by dollar exposure. They also ask for records of the central information files used to aggregate all affiliated borrowings. Bijian Madjlessi borrowed under a number of LLC real estate holding companies but it was well known to bank management that Madjlessi was the driving force behind the shell companies. Sonoma Valley Bank management were known to be "character lenders" developing a relationship of trust with borrowers in the local community, a common practice in community banking. Why then did the Board allow them to take Sonoma Valley funds out of area to a relatively unknown outsider like Madjlessi? Who vouched for him? Who brought him into this tight knit circle? Bank management did not possess the expertise and staff capable of analyzing complex financial statements like Madjlessi must have presented. If they did they would have seen several red flags on public records.
Regulators also ask for concentrations reports and analyze new lending patterns. Surely they should have noticed large loans to out of area borrowers (namely Madjlessi). The Self Storage unit in Santa Rosa, the Courtside Village (aka Park Lane Villas) west of Santa Rosa, and Petaluma Greenbriar apartments intended for condo conversion were all large and out of area and should have attracted attention. Any examiner should have asked..."why all of a sudden the large out of area lending...who is Bijian Madjlessi?" An exam team should have reviewed these loans and noted Bijian's name in common in all, deriving benefit. By virtue of Madjlessi deriving benefit from all these loans despite the fact he may not have signed directly or may not have been listed as an owner on the LLC, constitutes an unsafe and unsound concentration. This would have all but likely violated the California Legal Lending Limit. These practices certainly were not prudent from a concentrations risk management practice yet the Board voted to approve and regulators don't appear to have objected?
The California Legal Lending Limit to any one "relationship" is generally limited to 25% of Risk Based Capital for all real estate related loans which most all Madjlessi's loans were commercial real estate loans (except the 101 Houseco, LLC loan to Madjlessi's long time friend Jim House). Sonoma Valley Bank's capital did not exceed approximately $35 million at any time while Madjlessi dominated bank lending from approximately 2003 to 2010 when it failed. Had Regulators cited violations of legal lending limit laws they would have required diversiture to reduce exposure to the bank and if caught earlier on, before they defaulted, could have been participated or refinanced out of the bank. Regulators appear to have been complacent in identifying and addressing corrective actions which contributed significantly toward, and exacerbated loan losses and ultimately failure.
The FDIC, during much of the Madjlessi era, operated under what was commonly referred to as the "MERIT" program a special internal streamlined supervisory program that allowed scaled down supervision of historically well run and well capitalized banks. However, the large growth, out of area deals up on the 101 corridor, potential violations of legal lending limit, and conentrations of credit should have signaled concern to regulators and warranted more in depth scope of reviews and more traditional exams. Additionally the changing of management with Cutting moving from Senior Lender to President and other additions to credit staff suggest changing risk profiles and credit risk appetites. These observed patterns and practices should have disqualified Sonoma Valley Bank from this program and resulted in removal from these abbreviated MERIT supervision models. The FDIC appears negligent in conducting their affairs.
What liability does the FDIC and the DFI bear? Ironic they were the ones that missed excessive exposures and then failed the bank. Did they have a conflict of interest? Does the FDIC have motive to now cover their mistakes? Perhaps Charter Oak Bank in Napa would also be open now if the FDIC acted to curtail lending exposures to Madjlessi? (Charter Oak Bank held significant Madjlessi loan participations from Sonoma Valley Bank and resulted in significant losses and their ultimate demise as well just a few short months after Sonoma Valley Bank toppled).
Sonoma Valley deserves to know. Nearly 3,000 shareholders in a 9,000 person valley with even more people either customers or somehow connected to Sonoma Valley Bank, were impacted. It was a tragedy that reached beyond Sonoma.