From the outside, Great Basin Bank of Nevada looked like an old-fashioned, small-town bank headquartered in a solid building on a corner in downtown Elko.
But the bank was anything but a small-town player. Nevada regulators say Great Basin Bank's executives were taking pieces of complex, out-of-state loan deals transactions that played a key role in the failure of the bank.
The state's Financial Institutions Division revoked the charter of Great Basin Bank and brought in the Federal Deposit Insurance Corp. as a receiver. The FDIC, in turn, sold Great Basin Bank to Nevada State Bank.
State regulators said they sounded alarms about the condition of Great Basin Bank in mid-2008 after an examination found the bank was involved in complex, volatile loan transactions without sufficient oversight or understanding of the risks that were involved.
"Loan administration practices remain critically deficient," said George Burns, commissioner of the Financial Institutions Division, in the order closing the bank 10 days ago.
Burns said earnings at the bank were so weak it lost $11.6 million in the fourth quarter of last year that Great Basin couldn't weather even a mild financial storm.
The bank's executives signed a memorandum of understanding with the state on July 31 in which they promised to clean up the institution.
They weren't able to resolve the problems, and state regulators issued a cease-and-desist order requiring better management about a week before they closed Great Basin Bank.
All those discussions between the banks and regulators were confidential to prevent a run on the bank.
In his order closing the institution, Burns said Great Basin was "critically undercapitalized" and didn't have any viable way of rebuilding its capital. Great Basin executives had talked with Nevada State Bank late last year about a possible acquisition of the Elko-based bank. Nevada State Bank took a close look, but decided to walk away, said Erich Bollinger, executive vice president and chief corporate banking officer for Nevada State Bank.
But that work helped Nevada State move quickly to acquire Great Basin when regulators put it on the block. Nevada State paid a $4.86 million premium to acquire the bank, which had $220 million in deposits and $238 million in assets including the loan portfolio when it was closed.
The FDIC is shouldering some of the risk as Nevada State Bank works out troubled loans including the participation by Great Basin Bank in highly specialized lending to out-of-state borrowers. The FDIC will pay 80 percent of the first $40 million in credit losses on the Great Basin portfolio and will pay 95 percent on any losses above $40 million.
And one of the first steps taken by Nevada State Bank will be much stronger discipline on loan underwriting and risk management, said Kevin Sullivan, northern Nevada administrator and executive vice president of Nevada State Bank.
"We will not be doing any more participations out of state," Sullivan said flatly.
While Nevada State Bank faces challenges in working out Great Basin's loan portfolio, Bollinger said the company saw the acquisition of the failed bank as a way to quickly build its presence in northeastern Nevada.
Great Basin operated branches in Elko, Spring Creek, Winnemucca and Fallon. With the exception of Elko, those are new markets for Nevada State Bank, which had 54 branches in the state before the acquisition.
Shareholders of publicly held Great Basin Financial Corp., the bank's parent, had run to the exits even before state regulators closed the bank.
The holding company's shares, which had traded for as much at $11 in mid-2006, were at 30 cents when the bank was closed. Even after the bank failed, the shares were trading around 4 cents a share on light volume.
The acquisition marks the second time in recent months that Nevada State Bank has stepped in to purchase a failed institution.
It acquired the insured deposits of Silver State Bank in southern Nevada last autumn.
The failure of Great Basin Bank is the second within 12 months in northern Nevada. Reno-based First National Bank of Nevada failed in late July. Mutual of Omaha Bank purchased the failed bank's deposits.
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