UPDATE 4/29/2009: The following sources should now be willing to confirm the details of the story:
- Wilson McElhinny, Chair, First Bank of Idaho Board of Directors
- Nancy Shauer, Director, First Bank of Idaho Board of Directors
- Karl Bick, Director, First Bank of Idaho Board of Directors
- Author still prefers to remain anonymous.
By Save Community Banks
Monday, April 27, 2009
Small Banks … or Big Government?The Story of First Bank of Idaho The following information tells the story of how an excellent locally-owned community bank was intentionally destroyed by government agencies who – through inappropriate use of their powers – used technicalities to seize valuable bank assets and – in effect – give them to a large, TARP-funded bank. In 1997, a group of Sun Valley/Ketchum business leaders and bankers determined that the large regional and national banks operating in the community were not able to adequately respond to the challenging nature of the community’s unique mountain resort environment. As is typical of all resort communities, activity fluctuates significantly with the seasons. Approximately 90 shareholders invested $8 million, 10 staff members were hired, and First Bank of Idaho was opened. Within the first year, the bank had $20 million in assets. Since that first year, the bank has accomplished the following:
* Grew from one branch to three in the Sun Valley/Ketchum area;* Expanded into the Jackson Hole, Wyoming area with three branches in Jackson Hole, a branch in Driggs, Idaho, and a branch in Victor, Idaho;* Increased assets to $480 million;* Raised approximately an additional $30 million in capital;* Generated $8 million in net profits;* Became the market leader in the Sun Valley/Ketchum area (38% market share);* Created over 140 new jobs.As important, the bank became a vital community partner, donating over $500,000 to Sun Valley/Ketchum non-profit organizations, supporting local events with employee volunteers, and providing leadership to a number of organizations including Rotary, the Chamber of Commerce, and many non-profits. First Bank of Idaho represents the true essence of a “community bank” – one that is able to help community members achieve their dreams and become active participants in creating a vibrant economy. At no time did the bank participate in the sub-prime mortgage market or invest in risky real estate loans or securities. Unfortunately, due to the national economic downturn, which has affected the communities in which it operates, the bank experienced the same challenges as most American banks. At the time this document was drafted, First Bank of Idaho was threatened with being sold to another bank by the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS). This is the story of a board of directors that did not act quickly enough to raise capital during the precipitous downturn in the national and local economy, and of good loans that were made to responsible people based on the most accurate data available at the time. It is, however, also the story of big government agencies that claimed to be protecting bank customers and taxpayers, but who in fact have aggressively destroyed an organization that was only committed to protecting the interests of its customers, its shareholders and its communities. While it is undeniable that the bank was suffering from liquidity issues, the actions taken by the government agencies were not necessary to protect customers or taxpayers and purposely impeded the bank’s ability to recover its sound footing. The decline started last fall, when dropping real estate values affected the viability of a number of large loans. The bank aggressively identified these problem loans (unlike most large banks nationwide) and shared their concerns and their management plans for these loans with the OTS (also unlike most large banks nationwide). This proactive approach, in a good faith attempt to comply with mark to market accounting requirements and “subsequent transaction” rules established by the Financial Account Standards Board (FASB), resulted in the bank reporting a loss of $4.5 million in 2008. This was the first loss for the bank in nine years. As part of its efforts to bring its capital ratios back into balance, the bank set a goal to shrink its loan portfolio by $50 million. In general, a 10% capital ratio is required to maintain a bank’s rating as “well capitalized”. When (in early 2009) the loss for 2008 was accounted for, the bank’s ratio fell to 9.83% - hardly a draconian situation. At that time, the OTS presented a memo of understanding to the bank that offered the bank time - through June 30, 2009 - to raise an additional $10 million in capital to bring its capital ratio up to 12%. The OTS also informed the bank that it could qualify for a matching amount in TARP funds should it raise that equity. Had the bank been given until June 30, 2009, to raise this capital (as promised by the OTS), the new equity and TARP funds would have resulted in its having a capital ratio in the 14% range, well in excess of the OTS requirement. The additional capital also would have been sufficient to help the bank weather the remainder of the economic downturn. An investment banking firm was hired in January, 2009, to solicit capital. In late March, meetings were held with eight potential investors. However, during the time that the board was soliciting additional capital, the government agencies took two unexpected and unnecessary actions that severely restricted the bank’s liquidity: 1. The Federal Reserve reduced the bank’s line of credit from $140 million to $86 million, which was the amount the bank had outstanding at the time. In other words, this action effectively prevented the bank from making further loans of any kind. The bank’s advance rate also was reduced from 70% - 80% to 20% - 40%. This also impaired the amount of funds available to make loans and support operations.2. The OTS and FDIC downgraded the bank’s rating and eliminated its access to brokered CD markets including the Certificate of Deposit Account Registry (CDARS) program. This significantly limited the bank’s ability to borrow funds or to accept deposits for the program.These two actions by the government agencies put a severe strain on the bank’s liquidity as it no longer had access to traditional sources of money to fund the shortfall between deposits and loans. In an effort to provide insurance to as many of its clients as possible, the bank had moved approximately $13 million into the CDARS program. These funds comprised core deposits that had been held by the bank for years. In early/mid April, the bank was forced to send at least $9 million in its CDARS deposits that had matured to other lbanks because they were no longer insured by the FDIC. In addition, it had to turn away another $5 million which customers wanted to deposit. Just as the bank was expecting offers from potential investors, the FDIC/OTS placed the bank under a Cease and Desist order. This effectively meant that the bank could not increase or grow its loan portfolio. Simultaneously, local newspapers learned of the Cease and Desist order and announced it to the community (the bank did not release this information, which means that government agencies probably “leaked” the news of their own actions). The only possible result of leaking this information would be to prevent the bank from saving itself. In response to the local news articles, a number of bank clients have understandably pulled deposits, further affecting liquidity. On April 15, the bank received an offer from potential investors that would put it back into a “well capitalized” position in return for controlling interest. This, with FDIC approval, would allow the bank to once again participate in the brokered CD market and the CDARS program and effectively solve its liquidity issues. But instead of helping the bank, the OTS indicated that it would be unlikely that TARP funds would be provided. There was no explanation to the bank of why the OTS might renege on its earlier promise of $10 million in TARP matching funds if the bank found $10 million in additional investments. It then informed the bank that an OTS marketing team was being sent to Ketchum to prepare the bank for an assisted sale to another bank. OTS refused to identify the purchasing bank. Sources have indicated that this recommendation for the assisted sale was sitting on FDIC Chairman Sheila Baer’s desk as the bank was working to obtain the necessary capital, proving that the government never intended to allow the bank to save itself. The OTS indicated that an assisted sale would “protect” customers of the bank, even though those customers were largely already protected by FDIC insurance. The alarming alacrity with which the OTS moved toward the assisted sale virtually guaranteed the destruction of this once highly successful, and still potentially viable, community-based institution. Jobs will be lost, businesses that were supported by the bank during down times will suffer, and strong independent community spirit will be compromised. In addition, all 284 investors who believed in establishing a local community bank will lose almost all of their investments. So, while it is undeniable that the bank board might not have acted quickly enough to bring in capital, it also is clear that the OTS targeted this bank for sale to a larger bank and had no intention of allowing it to save itself, an action that would save taxpayers tens of millions of dollars. In effect, government agencies have used banking technicalities to take over an essentially viable community bank and effectively sell its assets to a large bank for far less than they are worth. Worse, these same government agencies have used their powers to prevent this community bank from saving itself through outside private investment that was willing and ready to come to the rescue. We believe that First Bank is not the only community bank suffering this fate. In fact, some community bankers are predicting that the regulatory agencies’ current actions will lead to the dissolution of hundreds – if not thousands – of community banks. It appears that the government agencies are targeting banks that have potential future strength, while others that have been under Cease and Desist Orders for months are being left alone. Examples of banks in that are perhaps in worse condition than First Bank of Idaho that are being left alone include Syringa Bank in Boise, West Sound Bank in Seattle, and America West in Spokane. We share this story not in an effort to save First Bank of Idaho; it is already too late for that. We share this story because we believe it is a much larger story and that the impact is severe for the future of our communities, and our country. This is, in reality, the story of big government pursuing the destruction of small institutions to benefit the larger institutions that contributed to the start of the economic decline. Is this what our new administration supports? Is this what President Obama meant is his State of the Union address when he said, “It’s not about helping banks – it’s about helping people. Because when credit is available again, that young family can finally buy a new home. And then some company will hire workers to build it. And then those workers will have money to spend, and if they can get a loan too, maybe they’ll finally buy that car, or open their own business. Investors will return to the market, and American families will see their retirement secured once more. Slowly, but surely, confidence will return, and our economy will recover.” Is sacrificing small banks for the benefit of larger, government-supported banks really in the best interests in our communities? Will the banks who wouldn’t, and couldn’t, help our community 12 years ago really supply the financial support necessary to help our unique communities thrive? While the regulators may not have technically done anything outside of their authority, the spirit of the power they are granted by law has unquestionably been violated in this situation.(postscript)This story does not have a happy ending.On Friday, April 24, the OTS sold off First Bank of Idaho to US Bank, even though the board and management had viable options to support the continued operations of the bank. The shareholders have lost millions of dollars of their investments, the community has lost an important advocate for its economy, and also lost a source of pride. Employees who gave their all to save the bank are devastated, and possibly unemployed. Potential investors who were working steadfastly to save the bank will direct their money elsewhere.The FDIC’s press release stated: “The FDIC estimates that the cost to the Deposit Insurance Fund will be $191.2 million.” (No one at First Bank of Idaho knows anything about a $191.2 million FDIC loss. Indeed, if the OTS had waited three or four more days to allow outside investors to bail out the bank, taxpayers would not have lost a dime! The OTS was well aware that such an investor was ready and willing to act.)According to the press release, “U.S. Bank's acquisition of the deposits of First Bank of Idaho was the ‘least costly’ resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Was it really the least costly resolution given that the bank was within days of regaining liquidity?A review of the FDIC’s Failed Bank List indicates that three other small community banks were closed on the 24th: First Bank of Beverly Hills in Calabasas, California; Heritage Bank in Farmington Hills, Michigan; and American Southern Bank in Kennesaw, Georgia.
QUESTIONS: The most obvious questions the public should have answered about their government’s actions in regard to First Bank of Idaho are the following:
1. Why did the FDIC and the OTS aggressively come after a small community bank that was experiencing far less dangerous problems than many other banks and dishonestly report to the public that they were taking over and selling the bank in order to save taxpayers money? After all, there were hundreds of banks around the country (and some in Idaho) that were in far worse shape. Is it because First Bank of Idaho had tens of millions of dollars in assets that could be virtually given to TARP-supported super banks that are controlled by the government?
2. Why did FDIC/OTS repeatedly assure First Bank of Idaho that it could get TARP funds if it could find $10 million in private investment and then renege on this assurance when the bank actually found the investors? Is it because FDIC/OTS had already targeted the bank’s assets on behalf of TARP-supported, government-controlled banks? If so, is the government literally stealing private assets from American citizens?
3. Why did FDIC/OTS refuse to allow First Bank of Idaho to receive some $17 million in private investment that would have completely solved the bank’s problems at no cost to the taxpayer and instead – upon learning that the investors were prepared to act – suddenly ignore the June 30, 2009, deadline it had given the bank and immediately fly 40 people into Sun Valley from around the country, take over the bank, sell its assets for an undisclosed price to US Bank, and put out a press release stating that the closure of this bank would cost taxpayers over $191 million? If FDIC/OTS knew (they did) that private investors were ready to act and that this action would both save the bank and save the taxpayers $191 million, why did they seize the bank?
Internet Link :
http://sunvalleyonline.com/information/linkexchange_view.asp?I=&LinkName=
