WASHINGTON - Late Wednesday, state regulators abruptly shuttered $400 million-asset Connecticut Bank of Commerce, which has been troubled for much of the past decade. But questions as to how and why it failed were just beginning.
Despite its checkered past, the Stamford bank had seemed to be on the road to recovery. It booked a $1.3 million profit for the first quarter, after a dismal 2001.
But the Connecticut Department of Banking made a stunning revelation in its statement that it was closing the bank: that it had negative capital of nearly $7.5 million, a far cry from the $29 million of positive capital it reported at the end of March.
That was only one of the strange circumstances in the bank's collapse.
The fact that it was shut on a Wednesday - not a Friday, as is customary - was a sign that regulators felt they had to move quickly and had just learned of its capital position. A spokesman for the Federal Deposit Insurance Corp., the bank's federal regulator, referred questions on the timing to the Connecticut Banking Department, which declined to explain it.
Another indication that regulators were caught off guard: The FDIC has only just begun marketing the bank's deposit franchise, and will receive bids on it today, a spokesman for the agency said. Bank failures are rarely announced before a buyer has been found.
Outsiders said the rapid deflation of capital suggests that something besides simple reversal of fortune had caused the failure. Regulators would not say if fraud was involved.
David Tedeschi, the Banking Department spokesman, said he expected court documents about the bank to be available by early next week. He declined to say what they would show.
An FDIC spokesman also declined to say how much the failure could cost. There had been no time to value assets, he said, and "the extent of fraud is unknown."
The cost could be important to the industry at large because the Bank Insurance Fund's ratio of federal reserves to insured deposits, is already 1 basis point below the statutory minimum of 1.25%. If the fund is not recapitalized before November, when the agency meets to set premiums for next year, all banks will face assessments for the first time in six years. The Connecticut failure could conceivably be a decisive factor.
By law, regulators must shut a bank if it falls below 2% equity capital. Mr. Tedeschi said the state and the FDIC last examined Connecticut Bank of Commerce in April; he acknowledged that examiners did not then know it had negative capital, but he declined to say how regulators later learned it.
The bank was nearly shut in the mid-1990s. It was ultimately saved by its major shareholder at the time, Randolph Lenz, who unexpectedly recapitalized the bank.
Mr. Lenz, 55, has had his own share of problems with law enforcement authorities and regulators since then.
In a 1999 settlement he agreed to pay $58,000 to the Securities and Exchange Commission, which had accused him of failing to issue timely disclosures. He neither admitted nor denied guilt.
A year later two companies owned by Mr. Lenz pleaded guilty to criminal tax charges stemming from fraudulent deductions and were fined $350,000, according to published reports at the time. (Mr. Lenz did not return telephone calls from American Banker.)
Even executives of the bank had a hard time remaining optimistic about its chances. In 1997, Dennis Pollack, then its president and chief executive officer, said in an interview with this newspaper, "This bank has always been a loser."
But in 2000 it acquired MTB Bank of New York, more than tripling assets and deposits, and launched a new marketing program to promote itself.
Early this year, though, after four straight years of posting profits, it reported a 2001 loss, of $3.9 million.
In fact, by late last year the bank seemed to be on the brink of failure again. In November regulators put it under a cease-and-desist order that cited, among other things, poor supervision of lending, hazardous lending practices, poor asset quality, inadequate loan-loss reserves, and bad disclosures.
Early this year it seemed to be bouncing back. It posted a 1.31% return on assets for the quarter, up from minus 0.97% in the fourth quarter, and an 18% return on equity, up from minus 13%.
But Bert Ely, an independent consultant in Alexandria, said the numbers hid problems. "They weren't being honest in an accounting sense," Mr. Ely said. "There was clearly an underreporting of their problems, in terms of problem loans. There was an underreserving for future losses."
A Connecticut consultant said that, given the bank's and Mr. Lenz's "colorful" history, the failure was not surprising.
"The bank has always been viewed as a maverick institution in a state of conservative Yankee bankers," said John Carusone, the president of Bank Analysis Center Inc. in Hartford. It was known for "creative lending," he said.
