Paramount Bank, Farmington Hills, Michigan, Closed By Regulators

December 10, 2010 – Paramount Bank, Farmington Hills, Michigan, a four branch community bank, was closed by the Michigan Office of Financial and Insurance Regulation, which appointed the FDIC as receiver.  Level One Bank of Farmington Hills, Michigan, entered into a purchase and assumption agreement with the FDIC under which it will assume all deposits and purchase essentially all assets of failed Paramount Bank.

Paramount Bank’s web site describes itself as a locally owned small community bank.

When you bank with Paramount Bank, you’re not just choosing a bank – you’re choosing a local banking partner. The people who own the bank, who make decisions about your loan or mortgage, and who work in the branches, are all local people who live, go to school, worship and shop locally. They truly care about and understand your community and use that knowledge to offer more informed advice about your personal and business finances. It’s community banking at its best and its only from a real community bank – like Paramount Bank.

Paramount Bank had been under regulatory scrutiny due to its weak financial condition. In August 2010 the Federal Reserve issued a Prompt Corrective Action Directive, citing Paramount Bank as “significantly undercapitalized”. The enforcement action required Paramount to either sell itself to another institution or raise additional capital within 60 days.

It is not surprising that Paramount Bank was unable to find a buyer or raise additional capital.  Michigan’s economy has been under severe stress from the large loss of manufacturing jobs and the State’s unemployment rate is 12.8%, second only to Nevada at 14.2%.  In addition, Paramount’s loan portfolio was devastated by poor lending decisions.  The FDIC estimates that the loss on closing Paramount will amount to $90.2 million, which represents a staggering 35.7% of Paramount’s total assets.   Despite the economic troubles in Michigan, Paramount is only the fifth bank in the State to fail this year.  Florida leads the nation with 27 banking failures.

Depositors of Paramount Bank will have full  access to their funds over the weekend and will automatically become depositors of Level One Bank with no interruption in FDIC deposit insurance coverage.

At September 30, 2010, Paramount had total assets of $252.7 million and total deposits of $213.6 million.  Level One Bank did not pay the FDIC a premium for Paramount’s deposits.  Level One Bank will be protected from loss on the purchase of Paramount’s assets under a loss-share transaction with the FDIC that covers $233.1 million of the purchased assets.  The FDIC has used loss-share transactions as an incentive to facilitate the sale of failed banks.  The ultimate loss to the FDIC from loss-share agreements could easily exceed FDIC projections if property markets continue to falter (see Is the FDIC Understating the Cost of Bank Failures?)

Level One Bank, founded in 2007, has rapidly grown in size, as discussed in the Bank’s press release regarding Paramount Bank.

Level One Bank is locally owned and operated in Southeast Michigan and is governed by a Board of Directors that consists of active, engaged local businesspeople and professionals.   Founded in 2007, this is Level One Bank’s second acquisition in the past two years.  With this latest acquisition, the bank now operates 6 banking centers and has total assets which exceed $400 million.  “As a bank that was founded to contribute to the success of our local community, we welcome Paramount Bank customers to the Level One family,” said Patrick J. Fehring, President and CEO of Level One Bank.  “We have taken important steps to ensure that this will be a smooth and enjoyable experience for all of our new customers. We know that Paramount Bank customers will continue to enjoy the benefits of a relationship with a locally owned community bank.”

In April 2009, Level One Bank acquired failed Michigan Heritage Bank that had $184.6 million in total assets.  The quality of Michigan Heritage’s loan portfolio was so horrific that Level One purchased only $46.1 million of the assets.  The FDIC was forced to retain the remaining balance of $138.5 million in junk loans on which it took a loss of $71.3 million or a huge 51% of the portfolio.

Newly chartered and well capitalized banks such as Level One, run by shrewd bankers have become the fastest growing banks in the world, courtesy of FDIC assisted transactions.   If property markets eventually improve, the owners of banks such as Level One will become very wealthy (see story on phenomenal success of One West Bank).

Paramount Bank becomes the 150th banking failure this year and the fifth in Michigan.