Silverton’s rapid rise and fall

By 2008, Silverton Bank’s lavish annual soirees at the Ritz-Carlton’s Amelia Island resort were the place to be each summer for the Atlanta institution’s rapidly growing crowd of customers — hundreds of community bankers from across the nation.

Between trips to the Florida beaches and entertainment by Kool & the Gang, University of Louisville basketball coach Rick Pitino and others, the bankers heard hard-sell pitches on why they should become partners in Silverton’s rapid rise to become the nation’s largest so-called “banker’s bank.”

But it turned out that Atlanta-based Silverton was on an express trip that ended in oblivion. The fallout from its failure in May 2009 — Georgia’s largest bank failure ever — helped sink dozens of its customer banks as well.

A growing pile of lawsuits points to Silverton’s audacious growth plans and lavish spending — such as the $4 million it allegedly spent on the Amelia Island meetings over eight years — as key reasons why the bank crashed.

Silverton’s failure “presents a textbook example of officers and directors being asleep at the wheel and robotically voting” to approve risky loans and “expansive and extravagant spending” — even as the real estate and financial markets were rapidly deteriorating in 2007 and 2008, the Federal Deposit Insurance Corp. said in a lawsuit filed last week in U.S. District Court in Atlanta.

The agency estimates it will lose $386 million as a result of Silverton’s failure.

Silverton was not a typical bank. It didn’t do business with the public. Instead, it was a “correspondent bank” that handled both routine and complex services for its 1,400 member banks.

Behind its rise and fall, the FDIC said, was a team of executives and directors who wasted millions on the trinkets of a corporate empire, but failed to notice or act as that empire was crumbling.

As the economy and Silverton’s finances were wilting in 2007 and 2008, the agency alleges, the bank continued expanding, hiring employees and taking on hundreds of millions of dollars of risky real-estate loans.

During this period, it built a swank new $35 million headquarters in Buckhead and grew to 400 employees. It paid almost $4.9 million for two executive aircraft — one sold to Silverton by its CEO — bringing its fleet to three.

Then it spent $3.8 million more constructing a new aircraft hangar, and millions more on a staff of eight pilots and meetings with investors and customers at resorts at Sea Island, Ga., and Amelia Island, Fla.

The FDIC’s lawsuit alleges gross negligence and poor supervision by Silverton’s leaders. It seeks at least $71 million in damages from 17 of Silverton’s top executives and board directors, and two firms that insured their actions against such claims.

The lawsuit is the latest in a string of legal disputes, regulatory actions, bank failures and bankruptcies tied to the rise and fall of Silverton Bank.

In a lawsuit filed late last year, Silverton’s holding company, owned by its member banks, blamed Silverton’s former CEO and auditor for obscuring the bank’s financial condition. The holding company, now bankrupt, is seeking $65 million in damages.

Some of Silverton’s member banks are suing other members that helped put together large loan packages for development projects that later failed.

The FDIC and 60 of the banks, mostly in Georgia, are seeking nearly $90 million from an Atlanta developer for a 6,100-acre Arizona project that collapsed. Many other developers also are mired in lawsuits and bankruptcies.

Former Silverton executives and a lawyer representing the bank’s directors did not respond to a reporter’s calls or emails.

Former Silverton chief executive Tom Bryan, who is named in the FDIC lawsuit, requested emailed questions from a reporter, but no reply was received. During two telephone conversations, he declined to comment, but said he is representing himself in the various lawsuits.

However, one of Silverton’s defenders said the bank’s managers and directors weren’t negligent. Silverton was little different than many other banks and businesses that failed to anticipate how rapidly or deeply the economy and real estate markets across the nation would decline, said Walt Moeling, banking attorney with the law firm Bryan Cave.

“Silverton had been tremendously successful,” said Moeling, whose firm handled regulatory work related to Silverton’s expansion. The company’s directors based their decisions on the information that was available at the time, he said.

“I think you have to appreciate how rapidly conditions deteriorated,” Moeling said. “In retrospect, [Silverton’s spending] looks like too much.” But the jets were used to reach operations spread across the country, and its conferences at expensive resorts were its most effective method to drum up business among bankers, he said.

Ultimately, Moeling said, Silverton failed not because of its lending or spending, but because it is structured differently than most banks.

As a bank for banks, Silverton’s services included clearing checks, offering short-term investments for banks’ cash, financing new bank startups and divvying up and selling parts of loans — known as “participations” — that were too large for any single bank to handle.

To fund its operations, Moeling said, Silverton depended on member banks’ cash deposits in their check-clearing accounts and short-term investments. For each member, those accounts often totaled millions of dollars — well above the FDIC’s deposit guarantee of $250,000.

When rumors of Silverton’s troubles surfaced in early 2009, a modern-day run on the bank occurred. Member banks pulled out their money and turned to the Federal Reserve to clear their checks and hold their cash.

“Once the cracks began to appear, the member banks felt they couldn’t have uninsured deposits,” Moeling said. Silverton “went from very liquid to out of cash very, very fast.”

Silverton’s failure wiped out the once-lucrative shares of Silverton’s parent company that about 400 banks owned, damaging their finances. Likewise, many of Silverton’s 1,400 customer banks — many of them also Silverton shareholders — suffered heavy losses on loan participations that they had bought from Silverton.

“In retrospect, how many banks have failed because of [transactions with] Silverton? A lot,” Moeling said.

In its lawsuit, however, the FDIC alleged that Silverton suffered heavy losses and ultimately failed because of its slipshod lending methods and excessive real estate lending as it pushed for growth at any cost.

The bank grew from $1.7 billion in assets in 2005 to $4.2 billion by early 2009.

Much of this growth came from Silverton’s “participation” business. Acting like an investment banker, Silverton took on loans that were too large for its community bank members to handle alone, then divided them into smaller pieces that it sold to other members, usually keeping part for itself.

Often, when it came to verifying the loan properties’ values and the borrowers’ finances, Silverton dropped the ball, the FDIC said.

In 2006, for instance, Silverton put together a $9.3 million loan to three directors of Enterprise Banking Co. in McDonough, including a former Silverton director, for a 643-acre development in Henry County.

Such conflicts of interest should have stopped the loan from being made, the FDIC said. So should the borrowers’ weak finances. One borrower’s credit score was so low — 537 — that “it is unlikely [he] would have been approved for a credit card,” the FDIC said.

Silverton lost at least $2.3 million on the loan, according to the lawsuit.

Enterprise Banking Co., the lead bank for that participation, failed in January. Sixty-eight banks — the most in the nation — have failed in Georgia since mid-2008.

Meanwhile, the FDIC said, Silverton was taking on bigger and bigger loans as far away as California and Arizona, thousands of miles outside its traditional market in the Southeast.

Among the largest was a $100 million loan in late 2006 for Merrill Ranch. It was a massive residential, office and retail development that metro Atlanta businessman W. Harrison Merrill wanted to build on 6,100 acres of desert scrubland an hour’s drive from Phoenix.

It’s “a total land play,” objected Silverton director R. Rick Hart when the board of directors reviewed the planned loan, according to company records cited by the FDIC.

Despite his objections that the housing market was already depressed in Arizona and that the Merrill loan had other flaws, the board approved it.

The project never materialized and Silverton’s 60 member banks that participated in the loan suffered heavy losses. Silverton lost at least $7.5 million, the FDIC said. Peoples Bank of Winder, the lead bank in the deal, failed last September.