Changes likely at Lynnwood-based City Bank

Published 7:27 pm Tuesday, March 31, 2009

LYNNWOOD — After revising its 2008 loss to $60.8 million, Lynnwood’s City Bank anticipates orders from federal regulators requiring it to adjust its lending and operating practices.

In a regulatory filing released Tuesday, City Bank reported its loss for last year increased by $25 million from an initial estimate on Feb. 3. Recent appraisals conducted of the bank’s real estate loans pushed City Bank’s loss to $60.8 million, or $3.86 per share, for 2008. With roughly 62 percent of its loans tied to residential construction and development, City Bank has been hit hard by the global recession and credit crunch.

After auditing the bank’s filings, an independent accounting firm issued a “going concern” warning about the bank’s ability to survive. The accountants expressed concern over the bank’s liquidity, or its ability to come up with cash, due to the significant amount of brokered deposits that mature with the bank this year.

Adding to City Bank’s troubles is pending action from the Federal Deposit Insurance Corp. The community bank expects to receive directives from the FDIC following a recent regulatory examination. City Bank will be required to seek federal approval, which it is unlikely to receive, to renew or accept new brokered deposits. That restricts City Bank’s ability to replace the deposits coming due.

The federal agency likely will require City Bank to take additional steps to improve the quality of its assets and to fix deficiencies found in the bank’s lending practices. The bank also will need federal approval to hire or alter its executive board or directors or to offer certain types of severance pay.

The independent accountants also reported inadequate internal control policies, including practices that would have helped City Bank identify bad loans sooner.

As required by law, City Bank is developing a plan to address the accountants’ and federal regulators’ concerns. The bank will significantly limit its lending activities, restricting loans to only “modest” amounts for low-risk customers.

In January, the bank began an aggressive campaign to sell off nonperforming assets to generate cash. Those efforts already are paying off, said Conrad Hanson, bank president and chief executive. Over the past three months, City Bank has sold 245 properties for a total of $65 million. It has pending sales of 175 properties, worth $54 million. City Bank even has added a “featured properties” link on its Web site.

“Most of these homes are in very desirable areas of King, Snohomish and Pierce counties in the price range of entry-level and second-time homebuyers,” Hanson said. “With interest rates at historic low levels, we expect traffic to increase as we move into the spring homebuying season.”

As of March 31, City Bank has cash and federal funds of approximately $180 million for liquidity purposes. Hanson emphasized that customer deposit accounts, including non-interest-bearing checking accounts and savings accounts, are protected by FDIC.

City Bank is not the first bank in Snohomish County to run into trouble. Last week, Everett’s Frontier Bank disclosed it had received a “cease and desist” order from the FDIC and the Washington Department of Financial Institutions to stop lending practices the government regulators considered “unsafe or unsound.”

City Bank shares declined 46 cents, or 12 percent, to close at $3.30 Tuesday. That’s down from a 52-week high of $24.59 a year ago today.