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Allied Bank, the Mulberry bank that was closed by the state Bank Department in 2016, failed because of governance weaknesses and deficient credit risk-management practices, the federal Office of Inspector General said Thursday.

Formerly known as the Bank of Mulberry, Allied Bank had been in financial trouble since 2012 when it was first sanctioned by the Federal Reserve. About a month before it closed in September 2016, the Federal Reserve ordered Allied Bank to sell itself or raise capital because it was "critically undercapitalized."

When it closed, Allied Bank was sold to Today's Bank of Huntsville. It had $66 million in assets, down from $175 million four years earlier.

The Office of Inspector General released more than 40 pages Thursday covering its in-depth review of Allied Bank's failure, said John Manibusan, senior congressional and media liaison.

The report found that the Federal Reserve Bank of St. Louis generally took decisive supervisory action to address Allied Bank's weaknesses and deficiencies from 2009 to 2016. The Federal Reserve appropriately downgraded Allied's rating with its risk profile and increased the frequency of examinations, assigning more staff members to those exams.

[DOCUMENT: Read Office of Inspector General's full report on Allied Bank]

But the report also is critical of the Federal Reserve.

"Ineffective oversight by Allied Bank's board of directors allowed two management officials, the special assets officer and the president, to exert dominant influence over the bank's affairs, including its lending decisions, and allegedly engage in insider abuse," Manibusan said in an email.

The report indicates the Federal Reserve Bank of St. Louis should have taken stronger steps regarding the alleged insider abuse, said Garland Binns, a Little Rock banking attorney.

The 40-page report never names Alex Golden and his son Lex, referring to them only as the bank's president and special-assets officer.

In a 2012 examination, examiners identified several unsound banking practices that were the direct result of poor operating practices and the family's actions to prioritize its interests above the bank's, the report said. They included:

• A bank branch that was operated out of leased space in an antiques store owned by the special-assets officer's wife;

• payment of family members and their spouses who did not have clearly defined responsibilities at Allied Bank;

• providing advisory directors' fees to the special-assets officer's mother when there was no record of her serving as a director;

• allowing members of the controlling family to use bank-issued credit cards for personal expenses;

• paying the family's cable television, Internet and telephone bills, and paying fees to the family's grocery store to house an Allied ATM;

• compensating Allied employees for performing activities for family members on matters unrelated to bank business, such as residential construction work during business hours;

• holding board meetings in locations outside Arkansas, including Florida and New York, without a reasonable justification.

Examiners in the final review before the bank failed noted some of these practices and an attempt was made to remove the president and special-assets officer from their positions by submitting requests for enforcement actions against them to the Federal Reserve board's legal division. But the two remained in their positions until Allied failed.

What isn't addressed in the report is the recovery of $6.9 million that was lost to the Federal Deposit Insurance Corp. fund, Binns noted.

"It would be my expectation that the FDIC has and is continuing to look at the causes for the loss to the FDIC fund," Binns said. "At some point in time, it will seek restitution from the unjustly enriched directors [and officers] who engaged in reckless disregard of banking laws."

Business on 03/23/2018

Print Headline: Leadership flaws cited in bank failure

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