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Could have American Marine Bank been saved?

A former board director of American Marine Bank claims that its Jan. 29 closure was unnecessary, and AMB was a victim of the Federal Deposit Insurance Corporation’s recent trend to target small banks that are struggling because of the real estate market downturn.

The Bainbridge Island-based bank, which first opened its doors in 1948, had been on the FDIC’s hit list since it was examined by the Washington Department of Financial Institutions (DFI) in May 2008. The primary concern, according to DFI documents, was that the bank had “inadequate capital and severe loan losses.”

On Jan. 30, Columbia State Bank took over AMB after entering into a purchase and assumption agreement with the FDIC, which gave the Tacoma-based bank $40 million to protect it from AMB loan losses and about $23 million in net assets from its predecessor.

David Berry, an island resident and an AMB director for about 10 years until he resigned at the end of December 2008, acknowledged that the bank was experiencing a financial dilemma because of loans that had become non-performing (past due) during the current recession. (According to AMB records, as of July 31, 2009 the bank had about $29 million in non-performing loans, or a ratio of about 10.81 percent of its total loans.)

Brad Williamson, director of the state DFI, said Friday that AMB's closure was justified.

"The closure was fairly basic from the standpoint that the bank had significant loan problems and, by its own records and admission, had serious asset problems," Williamson said. "And the state of Washington doesn't allow banks that are critically undercapitalized to stay open."

A spokesperson for the FDIC would comment only about when pending actions against the AMB board members would be made public.

Barry said the FDIC policy has been less patient during the last two years in giving small banks such as AMB time to solve their problems.

“AMB had enough collateral to work through those loans over a normal period of three or four years,” Berry said. “But what we couldn’t do is take them off the books immediately as the FDIC mandated. That was impossible. They came in and said there was a market downturn so we needed to reappraise all of our properties. We did, so on paper at least, our portfolio was worth about $40 million less than before. That ruined us.”

That affected the Allowance Lease and Loan Loss (ALLL) reserve fund, which, when compared to a bank’s total loan numbers, is closely scrutinized by regulators because it is considered a harbinger of a potential bank failure if it is underfunded. A DFI and FDIC examination last June revealed that the bank’s ALLL was understated by $18 million.

The FDIC said the bank’s ALLL in May 2008 equaled only 1.38 percent of its total loans, which, Berry said, was acceptable in previous years.

“The FDIC dictated that our loan portfolio (worth about $350 million, he said) had to be written down artificially with a lot of capital written off, but it was only on paper – nothing had gone out the door,” said Berry, who is president of Caicos Corp., a marine construction firm based in Port Gamble.

Berry said the bank’s downfall had more to do with its emphasis on real estate loans than its performance.

“Because of the island’s demographics, the bank obviously was heavy into real estate, not business loans, and that’s going to take time to recover during a downturn for builders and developers like this one,” he said.

Berry said the board focused on the loss allowance and reworked the methodology three different times after DFI became involved. He said it was done “in transparency” so the regulators knew the bank board and employees were doing what they could to please them.

Regarding the ALLL situation following the FDIC’s mandate last year, the AMB board offered the following explanation, in part, during a question-and-answer session with shareholders last September:

“As it has been in most cases, the understatement of our ALLL was not related to flawed or erroneous methodology, but rather to inadequate collateral values resulting from the radical plunge in real estate values reflected in recent appraisals. ...The loss in our first quarter (2009) financials reflects the additional provision we had to take in order to correct the understatement the FDIC found in the ALLL ...This is an industry trend. According to the FDIC, almost two of every three banks have increased their provision this year and one out of every five took a loss in the first quarter of 2009.”

Berry said board members were hesitant to speak out after the closure because of an FDIC letter indicating they may face civil penalties.

“But most of the other board members will agree that we could have gotten through this if given the opportunity because we had sound banking practices with good paper and collateral,” he said. “The real shame is how destructive this has been to the community because of the loss of property values. I look at it as stealing from the island.”

It’s also estimated that about 450 shareholders lost some $33 million when the bank’s holding company AMB Financial Service Corp. went under with the bank.

A Feb. 22 letter from the corporation informed shareholders that “...it is unlikely that any funds will be available for distribution to the shareholders.” It concluded: “We deeply regret the closing of American Marine Bank. The Board of Directors did everything possible to prevent this from happening. We are saddened by this blow to our stockholders, our customers and our community.”

Berry and the seven sitting board members each received a letter from the FDIC’s San Francisco Regional office on Jan. 20 – nine days before the bank was closed – informing them that it was “considering recommending assessment of civil money penalty against you... based on the unsafe or unsound practices and violations of law” regarding five accusations:

– Failure to maintain an adequate ALLL;

– Failure to properly grade loans;

– Failure to charge-off loss in a timely manner;

– Unauthorized payment of dividends; and

– Filing of inaccurate reports of condition.

The letter concluded:

“Despite being advised of these practices at the May 2008 and June 2009 examinations of the bank, the directors failed to take action to ensure that these practices did not continue. The continuation led to a significant deterioration in the bank’s condition... and are part of a pattern of misconduct by the directors of the bank.”

Berry and each of the directors were also asked to complete a financial statement, including consent to release their individual financial information.

A public affairs representative contact this week in FDIC’s headquarters in Washington, D.C., said she couldn’t discuss details of AMB’s closure. She added, however, that the outcome of the federal agency’s review would be made public at the end of March.

Berry said he was told by a representative of the bank’s insurer, Travelers Insurance, that the “errors and omissions” accusations would not allow it to pay civil penalties imposed on board members, though its policy coverage would likely include legal defense to them.

Board President Alice Tawresey declined comment when requested, as have some other members of the board who were active at the time of the closure.

Berry said he resigned in December 2008, in part, because he felt the board should have made a legal challenge to the FDIC’s policy.

“In my estimation the board made some mistakes in dealing with the FDIC,” he said, “like standing pat and waiting for the regulators to come back. It was obvious what was going to happen. I thought we should have stood up to the FDIC... brought the battle to them legally.”

According to FDIC information, there were 140 FDIC-receivership bank failures in 2009 and 26 in 2010 through March 5. That compares to 25 in 2008 and 27 from January 2000 through December 2007.

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