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Tri-City banks among those under scrutiny

The recent forced sale of an Oregon community bank that had two Tri-City branches comes as federal state regulators also are keeping a close eye on at least two Washington chartered banks with branches in the Tri-Cities.

Columbia River Bank was closed Jan. 22 by the Oregon Department of Consumer and Business Services and the Federal Deposit Insurance Corp. because of inadequate capital and mounting residential loan losses, officials said. The bank's branches were taken over by Columbia State Bank of Washington, which has maintained operations.

Meanwhile, federal and state regulators have ordered Spokane-based AmericanWest Bank and Sterling Savings Bank to raise more capital and create a plan to reduce their delinquent real estate and construction loans and improve long-term profitability.

The Federal Deposit Insurance Corp. and Washington Department of Financial Institutions discovered problems at the two banks last year.

The capital to be raised by the banks, which is about $300 million in Sterling's case, would help the banks continue to operate and absorb potential losses, said Brian Adams, associate professor of finance at the University of Portland's Pamplin School of Business.

The money will be part of so-called Tier 1 capital that's raised through common stock and retained earnings, Adams said. It needs to be maintained like a rainy day fund, he said.

Sterling expects the capital-raising process to be completed in the first quarter of this year, said Cara Coon, vice president/communications manager, Sterling Financial Corp., the holding company for Sterling Savings Bank.

Sterling Finance Corp. will release its year-end 2009 earnings report Monday.

Like Sterling, AmericanWest Bank is working with an investment firm to raise capital. Patrick Rusnak, president and CEO of AmericanWest, said he's personally meeting with investors to share the bank's progress in reducing problem assets.

"Understandably, investors are nervous about the economy," he said.

Recently, Washington's Evergreen Bank and Horizon Bank were taken over by other banks because of capital deficiencies and losses from bad loans.

Volatile capital and credit markets, falling real estate prices, increased foreclosures and high unemployment have hurt returns on mortgage loans and resulted in significant write-downs of asset values by banks big and small, experts say.

Last year, 140 banks nationwide failed at a cost of about $37.7 billion to the Deposit Insurance Fund. And this year through Jan. 22, regulators have closed nine more banks at an estimated cost to DIF of $1.3 billion.

While the troubled banks are working to satisfy regulators' demands, customers have no need to worry, said LaJuan Williams-Young, FDIC spokeswoman.

That's because most deposits in the banks are protected by the FDIC up to $250,000 per account through Dec. 31, 2013.

Corrective actions the banks are taking also will help preserve the integrity of the state financial system, said Brad Williamson, director of the Division of Banks at the Washington Department of Financial Institutions.

"We're watching the steps they are taking. The (banks') management is taking serious action," Williamson said.

Community banks, regardless of their management, have been hit especially hard by an unusual combination of market forces over the past few years, said Adams of the University of Portland.

Real estate loans, which long have been community banks' bread and butter, soured with the collapse of the real estate market. That's left the banks with a large number of defaulted loans and foreclosed properties they couldn't sell, he said.

Even when banks have managed to sell the properties, they have taken a loss. That triggered more losses in the process, which soon spiraled out of control for many smaller banks, said Ed Allen, a longtime Tri-Cities banking professional.

Regional banks were not being careless when they financed local or regional commercial developments, which generally are ignored by big banks, Allen said.

"It's just the economy caught up with them. They were left holding the bag when the bottom fell out of the real estate market," he said.

Professor Adams said although most subprime lending was done outside the banking industry by lightly regulated finance companies, it's possible some regional banks invested in mortgaged-backed securities tied to subprime loans.

At AmericanWest Bank, total nonperforming assets, such as delinquent loans, were $156.4 million, or 8.87 percent of total assets as of Sept. 30, 2009. That compares with $107.5 million, or 5.74 percent, of total assets on Dec. 31, 2008, according to the latest quarterly report filed by the bank's parent company with the federal Securities and Exchange Commission.

Rusnak of AmericanWest Bank said his bank already had initiated some changes before regulators ordered it to do so. "We haven't made a land development loan since August 2007," he said.

The bank also has reduced its investments in more risky brokerage certificates of deposit, he said. Those deposits, which stood at $250 million at the end of June 2008, were at $2.5 million as of September, he said.

"The bank's liquidity is as good today as it has been in the last 18 months," Rusnak said. He said he expects AmericanWest to see improvement by first quarter of this year.

At Sterling, total nonperforming assets as of Sept. 30 were more than $818 million, up more than $227 million since Dec. 31, 2008, according to the company's latest quarterly report to the SEC.

The company's report to the SEC also said for the four quarters ending Sept. 30 last year, Sterling took a net loss of $878.7 million for common shareholders, or a loss of $16.92 per common share, largely to provide for credit losses. Additional credit losses are possible because the bank is exposed to higher-risk commercial real estate loans, the report says.

The lesson is that community banks need to diversify risk, said the state Division of Banks' Williamson. The banks also need a better capital holding plan and growth strategies, he said.

Williamson said the turnaround in the banking industry, both nationally and statewide, will be slow. "We might see additional failures and consolidation in the industry."

Both Sterling and AmericanWest face the threat of their stocks being delisted on the NASDAQ exchange.

But their immediate problem is satisfying regulators that they're making progress, said Adams. A bank that's under regulatory radar may be forced to sell off some of its better assets, he said, and a healthy bank needs more low-cost deposits from depositors such as savings and checking accounts, he said.

-- Pratik Joshi: 582-1541; pjoshi@tricityherald.com; Business Beat blog at www.tricityherald.com

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