More details are emerging about the failure of Bank of Clark County. In an interesting development, it appears that the total dollar amount of uninsured accounts will be substantially less than the approximately $39 million that was widely report initially. Reported figures are now more in the $10 million range.
Most press accounts describe Bank of Clark County as a “community bank,” which is accurate enough, but it’s important to understand that this bank was essentially set up by and for real estate developers and builders. The bank’s web site disappeared Friday night, but thanks to the Google cache you can peruse the backgrounds of its board of directors.
News accounts tonight suggest the bank was heavily exposed to a collapsing construction and real estate sector, while at the same time it was reluctant to deal with problem properties. A substantial amount of money was withdrawn in the last four days of operation, according to published accounts.
The apparent explanation for the newer, smaller dollar figure for uninsured accounts is simple: word got out the bank was in trouble and large depositors went and got their money. In other words, a run.
From The Columbian:
By Friday morning, Umpqua had a tentative agreement to take over the Bank of Clark County – and the buzz of rumors continued to grow.
“I got a call on Friday morning” from someone in the know, a Vancouver homebuilder who had more than $250,000 in his account told The Columbian. He drew down his account to keep it within insured limits.
Between Jan. 13 and the close of business Friday, customers had withdrawn $28 million in deposits.
That’s one lucky house builder.
Problems at the bank escalated quickly, according to an article in The Portland Business Journal.
Last summer, when analysts were beginning to look askance at many banks, Bank of Clark County attracted attention because its level of delinquent loans to total loans was high. Analysts also wondered whether the bank had sufficient reserves to cover its delinquent loans.
At the end of September, 79 percent of the bank’s loans were in real estate. The decline in house prices has hit Clark County harder than Portland, largely because houses closer to city centers have been selling more quickly and for better prices than equivalent houses that are further from commercial centers.
One liquidity issue was the high percentage of brokered deposits that Bank of Clark County had.
Out of $366.5 million in total deposits, the bank had $117.8 million in brokered deposits, or deposits from “non-core” customers who don’t have other business with the bank, such as checking accounts or loans.
Banks normally don’t seek brokered deposits, which they attract by offering high interest rates, unless they lack sufficient deposits from “core” customers.
A quick search reveals a mid-2008 article from the San Fransisco Business Times discussing concerns about brokered deposits
“As a general rule, if an institution is relying on brokered deposits to fuel asset growth, it should raise a red flag with both investors and regulators,” said Steve Andrews, president and CEO of the Bank of Alameda. “Including brokered deposits in the funding mix is certainly acceptable. However, keeping the percentage under 10 percent or so is a prudent approach versus letting the percentage creep over 25 percent or more.”
Obviously, Bank of Clark County was well past that. So even as the construction and real estate sector crashed, they were propping things up by paying higher interest rates to garner capital.
The issue of delinquent loans also comes up in an Oregonian article.
“This bank was overly reluctant to take back properties,” said Troy Hershey, a prominent southwest Washington Realtor. “They’ve been a great community bank. They wanted to work with people and they didn’t want to take them down.”
Ray Davis, CEO of Umpqua Bank, which acquired Bank of Clark County’s deposits, voiced similar sentiments. “The bank, like a lot of others, just has not been aggressive enough dealing with the losses in their portfolios,” he said. “It caught up with them in the fourth quarter.”
The bank was ultimately purchased by Oregon-based Umpqua bank. Back to The Portland Business Journal:
Umpqua, which received a $214 million investment from the U.S. Treasury as part of its Troubled Asset Relief Program, is taking over about $185 million in insured deposits. The actual cash the bank receives from the FDIC will be net of the assets the bank gets along with Bank of Clark County’s two branches.
Process that now. Umpqua got TARP money.
But Umpqua didn’t want all of Bank of Clark County, just the tasty bits. Back to The Columbian:
A week before it was declared a failure, the Bank of Clark County went on the auction block. Umpqua Bank officials had an opportunity to buy, and ignored it.
With $32.5 million in past-due loans and mounting concern about liquidity, state regulators had decided that the Bank of Clark County could no longer stand on its own.
Those same concerns kept his bank away, said Ray Davis, president and chief executive officer of Umpqua. “We did not want to do a whole bank purchase.”
So Bank of Clark County had $32 million in past due loans, and (presumably larger) depositors yanked out $28 million in the bank’s last four days of operation. That’s fascinating.
The yucky, indigestible loan bits will be left to the feds to sort out. Back to The Oregonian:
Umpqua wants no part of Bank of Clark County’s loan portfolio. Other than about $6 million in loans backed by certificates of deposits, Umpqua doesn’t intend to buy any of Bank of Clark County’s $352 million in loans.
That means months of uncertainty for Bank of Clark County’s borrowers as the FDIC attempts to sell the bank’s loan portfolio to the highest bidder. It hopes to market the loans within 90 days, said FDIC spokeswoman Roberta Valdez.
Amazingly, there appear to be no losers at all here. Depositors who knew about the situation were able to withdraw substantial amounts at the last minute, another bank gets to buy up the good stuff (in effect using taxpayer money,) and the taxpayers take the bad stuff.
There’s just one thing I’m not clear about. If recipients of TARP money are going around buying other banks but not their loans, who’s solving the credit crunch?