Layton “Scooter” Stuart dropped by the Arkansas Business office to talk less than three months after regulators forced him out as chairman, president and CEO of Little Rock’s One Bank & Trust.
Most of the meandering conversation on that December afternoon in 2012 focused on him and the bank he owned but no longer controlled.
Among the first things out of his mouth, Stuart tossed out a topical tangent that had nothing to do with his regulatory woes.
“When are you all going to write about Allied Bank?” he asked.
Stuart wanted to know why Lex Golden and the way that he was running Allied weren’t receiving same the kind of critical treatment he was, either from the media or from regulators.
Golden dominated Allied Bank in the same way Stuart did at One Bank. The two executives were both in regulatory hot water at the time, though on different timetables toward financial reckoning.
Federal officials at the Office of the Comptroller of the Currency and other agencies exposed Stuart’s fiscal abuse of One Bank in the months that followed his forced exodus on Sept. 28, 2012, and his death on March 26, 2013. Golden’s turn in the federal spotlight finally came on March 22 with the public release of a 40-page report by the Office of Inspector General of the Federal Reserve System. The “Review of the Failure of Allied Bank” revealed that Golden and Stuart shared some bad habits in how they misspent bank funds.
The commonalities include directing the bank to pay family members for do-nothing jobs, cover personal air travel expenses, provide bank-owned vehicles for family members, allow family members to use bank-issued credit cards for personal expenses and pay personal bills of family members for monthly services like cable TV, internet and telephone.
The report put the company car count at 17, with Golden family members as the predominate beneficiaries.
Among lenders in central Arkansas, Allied Bank was considered the market leader for supplying vehicles for personal use by employees.
Unlike Stuart, whose bank had a national charter, Golden was allowed to stay aboard state-chartered Allied Bank until the bitter end, and no criminal charges have risen over the way the bank was run.
The OIG report refers to Lex Golden as “the SAO,” a reference to his title after 2012: special assets officer. His son, Alex, is referred to as “president.”
And it describes the two as “dominate management officials,” which is a term of art for bank examiners; dominant managers have been identified by the OIG as contributing factors in the failure of at least four other banks between 2009 and 2014.
The post-mortem report on Allied Bank notes that examiners from the Federal Reserve’s St. Louis bank wanted Lex and Alex Golden removed from the management picture. Their recommendations for removal, prohibition or money penalties were sent up to the Federal Reserve’s Legal Division and Division of Supervision & Regulation five years ago, 18 days before Scooter Stuart died.
After some back and forth, the recommendations languished because, the OIG concluded, the Legal Division’s eight-person enforcement staff lacked the resources to gather additional evidence. Nothing came of it, and supervisors at the St. Louis Fed “expressed frustration” when interviewed for the OIG’s report.
But even the St. Louis Fed did not recommend that the Federal Reserve report suspicious activity by the Goldens to law enforcement, a fact that the OIG noted. St. Louis officials explained that “they hoped the recommendation for removal, prohibition, or civil money penalties would remove the relevant management officials from Allied Bank.”
Candace Franks, State Bank Commissioner, said state law prohibited her from talking about what her agency did or didn’t do regarding suspicious activity or the removal of the Goldens from Allied Bank. The confidentiality law remains in force even though the bank has failed, she said.
The failure of a bank as small as Allied, which generated only an estimated $6.9 million loss to the federal Deposit Insurance Fund, wouldn’t normally trigger a full review by the OIG. The usual threshold is $50 million.
However, Allied’s failure 18 months ago “presented unusual circumstances that warranted an in-depth review for several reasons, including questionable business practices and alleged insider abuse.”
The narrative of the report is dominated by criticism of the Goldens, by title rather than name, and the bank board they held sway over.
♦ “Examiners stated that [Lex Golden] frequently extended loans to individuals with whom he had relationships or for self-dealing purposes. Examination reports state that [he] was responsible for managing and collecting classified assets, even though [he] was responsible for originating and approving many of these loans.”
♦ “During a May 2012 examination, Federal Reserve and state bank department examiners noted that [Lex Golden] appeared to omit facts or provide incomplete information to examiners. In addition, one Federal Reserve Bank St. Louis interviewee noted that [Lex and Alex Golden] were evasive and explained that [Lex Golden] often did not provide examiners with a straight answer in response to questions.”
♦ In 2012, Lex Golden’s title changed from chief lending officer to special assets officer; however, examiners noted that this position change appeared to be in title only, because Golden continued to control the lending function.
♦ During a May 2013 examination, examiners questioned his effectiveness in managing the lending function and attributed the bank’s financial condition — then classified as “extremely unsafe and unsound” — to his oversight.
Examiners also identified potential conflicts of interest related to Lex Golden’s relationships with specific bank customers. According to examiners, these relationships should have precluded him from serving as special assets officer.
Golden’s decision in 2010 to begin buying subprime auto loans appears to have been the trigger point for a rapid escalation in regulatory oversight at Allied. Auto loans went from near-zero to 80 percent of Allied’s total risk-based capital in the first quarter of that year.
That funding agreement with Zimmerman Motor Cars of Sherwood, first mentioned in Arkansas Business in January 2015, caused a spike in Allied loan activity that caught the eye of regulators.
Former Allied staffers identified Zimmerman, which goes unnamed in the OIG report.
“Zimmerman kept the fax machine humming with car loans,” said a former Allied employee. “We were overwhelmed.”
But the new business stream too often consisted of bad loans made to borrowers with bad credit legitimized by bad supporting paperwork, according to the former bank staffer.
When examiners from St. Louis came to Little Rock for an exam in October 2010, they were in no mood for complimentary coffee and doughnuts provided by Allied.
“That’s when they started looking at this closer,” the former Allied staffer said. By March 2011, Allied was under a memorandum of understanding with the St. Louis Fed that specifically required it limit its exposure to subprime auto loans.
It took five years of net losses and shrinking capital for Allied to bring its auto loan concentration more in line with its peer group, according to the OIG. But “certain loan relationships with automobile dealers remained problem assets until the bank’s failure in 2016.”
Falling Stars & Rising CAMELS: The Deterioration of Allied Bank
Lex Golden acquires controlling interest in the Bank of Mulberry, renamed Allied Bank in 2002. Golden purchased an 89.5 percent stake for about $2.3 million from North Little Rock’s First American Bancshares Inc., where he was chairman and CEO.
Alex Golden, son of Lex, joins Bank of Mulberry.
Lex Golden initiates the switch to the Federal Reserve Bank of St. Louis as the bank's primary federal regulator. The motivation was to replace the Federal Insurance Deposit Corp. with kinder, gentler oversight, according to a former Allied Bank staffer.
Alex Golden named CEO of Allied Bank.
After years as a 4-star bank on Bauer Financial’s 5-star scale, Allied’s rating is reduced to 3.5 stars.
★ ★ ★ ½
Arkansas State Bank Department commences a routine examination of Allied Bank that results in a composite “CAMELS” rating of 2, the second-best score for capital, assets, management, earnings, liquidity and sensitivity to market risk. “Financial institutions in this group are fundamentally sound,” according to the Federal Reserve System.
After briefly returning to 4-star status, Allied’s rating with Bauer Financial falls to 3 stars.
★ ★ ★
Shares in the Employee Stock Ownership Plan of Acme Holding Co., are valued at $37 per share at year-end. The valuation is the high-water mark for the plan. The ESOP holds a 41.1 percent stake in Acme, parent company of Allied Bank. Ownership is divided among 46 staffers and 23 former staffers. The biggest block is owned by the Golden family. Lex Golden, administrator of the ESOP, holds voting control of the shares represented by the plan.
Allied enters a new line of business: purchasing subprime auto loans from local dealers.
Allcorp Inc., controlled by Lex and Alex Golden, borrows $2.1 million from Heartland Bank of Little Rock to buy Community State Bancshares Inc., parent company of Community State Bank of Bradley (Lafayette County). The loan for the $3.1 million acquisition is secured by the bank’s 10,000 shares of outstanding stock.
September & December
Acme Holding Co., parent company of Allied Bank, borrows $4.5 million in two loans from Chambers Bank of Danville to recapitalize its struggling bank, and the loans are personally guaranteed by Lex Golden and his wife, Ellen. In addition to the Golden family’s interest in Allied Bank, the debt is secured by a $5 million life insurance policy on Lex Golden, which carried an annual premium of $63,645.
Examiners from ASBD and the Federal Reserve Bank at St. Louis begin a routine exam, which results in Allied’s composite CAMELS score being raised to 3, indicating “some degree of supervisory concern.” On the earnings component, Allied scores an ominous 4. Examiners note that Lex Golden, while not a member of the board of directors, “appeared to dominate major strategy and policy decisions.” Examiners are critical of oversight by Allied’s board of directors because the bank began buying subprime auto loans “without establishing adequate credit risk-management practices or policies.”
ASBD issues a cease-and-desist order that requires Allied to hire a consultant to assess the bank’s management and staffing needs.
St. Louis Fed issues a memorandum of understanding requiring Allied to revise its lending policy and procedures to limit exposure to subprime auto lending, among other provisions, because the board of directors and management had “demonstrated an inability to resolve” problems previously identified by examiners. “[C]ertain loan relationships with automobile dealers remained problem assets until the bank’s failure in 2016,” according to the final report by the Federal Reserve System’s Office of Inspector General.
As the target of regulatory action, Allied gets a special midyear exam by the St. Louis Fed and ASBD. It retains its CAMELS rating of 3, but earnings are still a 4.
A full exam raises Allied’s CAMELS rating to 4, with a 4 in every category except earnings, which is raised to 5. “Financial institutions in this group generally exhibit unsafe and unsound practices or conditions,” according to the OIG.
Bauer lowers Allied’s rating to 2 stars.
Lex Golden’s title changes from chief lending officer to special assets officer, a change that examiners say “appeared to be in title only” because he “continued to control the lending function.”
FRB St. Louis replaces the memorandum of understanding with a written agreement. Among the problems Allied is required to address are its concentration of assets in construction and land development loans, which represented more than 100 percent of total risk-based capital from 2009-12. The bank partially complies, according to the OIG, but never establishes real estate concentration limits.
In a letter to the Allied staff, Lex Golden says he disagrees strongly with many of the findings of the last two regulatory exams and believes the bank is well on its way toward a return to profitability after losing $1.6 million in 2011.
*As of June 30.
All dollars in thousands
Source: Federal Deposit Insurance Corp.
St. Louis Fed and ASBD raise Allied’s CAMELS rating to 5 in every category based on an exam that started May 21. “Institutions in this group pose a significant risk” to the Federal Deposit Insurance Corp.’s Deposit Insurance Fund “and failure is highly probable.” Examiners identify “several instances of alleged insider abuse,” like leasing space for a little-used branch inside an antique store owned by Ellen Golden, family use of bank-owned vehicles and credit cards for personal travel and expenses, advisory director fees paid to Lex Golden’s mother, and board meetings held in Florida and New York for no justifiable reason. Examiners also downgraded 30 loans totaling $8.5 million and identified 27 instances in which management failed to obtaining adequate or updated real estate appraisals.
ASBD revises its November 2010 cease-and-desist order to include additional provisions not specified in the OIG’s final report.
Amy Golden McCay
The consultant hired at the insistence of state bank regulators identifies corporate governance weaknesses similar to those identified by examiners, including “excessive compensation” to Lex Golden’s daughter, Amy Golden McCay, “who did not appear to perform bank-related services.” However, the consultant blames the board of directors and an ineffective organizational structure rather than the management, and the board makes no “significant changes to address weak oversight issues at the bank.”
The St. Louis Fed submits recommendations to the Federal Reserve’s Legal Division and its Division of Supervision & Regulation for removal, prohibition or civil money penalties against Lex and Alex Golden. While the recommendations “detailed various unsafe and unsound practices” and the Legal Division considered its options, no action is taken before the bank failed three and a half years later.
The report from a January target exam by the St. Louis Fed, ASBD and FDIC gives Allied straight 5s. Among other things, examiners note that “the board of directors often approved management initiatives that benefited members of the controlling family but were detrimental to Allied Bank,” its holding company and the holding company’s employee stock ownership plan. What’s more, “classified” assets — that is, problem loans — represent more than 234 percent of the bank’s tier 1 capital.
Allied gets a 1-star rating from Bauer Financial.
Yet another exam by the Fed St. Louis and ASBD is all 5s on the CAMELS scale. Examiners downgrade 12 loans totaling $9.4 million, underscoring the Goldens’ inability to properly recognize problem loans.
Bauer reduces Allied’s star rating to zero, where it will remain until Allied is shut down by regulators in September 2016.
Another exam results in 5s on all CAMELS ratings components.
Straight 5s from the St. Louis Fed, ASBD and FDIC.
The FDIC wins a judgment of almost $325,000 against Amy Golden McCay for a loan held by an Atlanta bank that failed. The loan was believed to be tied to the purchase of stock in Acme Holding Co.
A federal judge awards the FDIC $780,900 (plus $119,000 in attorneys’ fees) from Alex Golden for a loan held by the same Atlanta bank. Like his sister’s loan, this was believed to be tied to the purchase of Acme stock.
While its CAMELS rating remains 5, Allied gets a 4 for liquidity.
The St. Louis Fed and ASBD finish another exam begun at the end of November but don’t report CAMELS ratings.
St. Louis Fed, ASBD and FDIC commence the final examination of Allied Bank, during which they “downgrade several large loan relationships.” Reserving against those potential loan losses causes Allied’s capital level to drop from “well-capitalized” to “critically undercapitalized.” The report, which will be issued Aug. 9, notes that Lex and Alex Golden “continued to prevail over major strategy and policy decisions.”
Chambers Bank lands a $2 million summary judgment in Yell County Circuit Court against Lex and Ellen Golden in connection with the September 2010 loan to Acme Holding Co.
Allcorp, holding company for the Goldens’ bank at Bradley, files for Chapter 11 bankruptcy. In later filings, Allcorp claims assets of nearly $3 million, Allcorp’s valuation of Community State Bank, and liabilities of about $1.3 million, reflecting debt owed to Heartland.
The Federal Reserve issues a “prompt corrective action” directive, giving Allied 30 days to recapitalize or sell.
ASBD appoints the FDIC as receiver for Allied Bank, which has failed to meet the requirements of the Fed’s directive. Today’s Bank of Huntsville acquires Allied, with assets of $66.3 million and $64.7 million in deposits, for a negative bid of $6.14 million. The loss to the FDIC is estimated at $6.9 million.
Chambers Bank acquires the $5 million life insurance policy on Lex Golden from the bankruptcy estate of Acme Holding for $12,000 after paying more than $60,000 annually to keep the policy in force since Acme entered bankruptcy in April 2014.
Lex and Ellen Golden file for Chapter 7 bankruptcy protection.
Amy Golden McCay files for Chapter 7 bankrupty protection.
Trustee reports final assets of Acme ESOP: -$2.37 million.