Wednesday, May 6, 2009

First Bank salvation came too late

Potential deals not enough to keep feds at bay

Express Staff Writer

The sign remains above the door on its branch on Main Street in Ketchum, but inside the First Bank of Idaho, the tellers wear U.S. Bank nametags after the latter bought the deposits of the former last week. Photo by Willy Cook

As the national economy and real estate bubble began to implode last year, First Bank of Idaho's balance sheet showed problems. The bank already had a high volume of loans compared to its capital base.

For the first six months of 2008, the last financial statement available on the First Bank of Idaho Web site, the bank had $445 million in outstanding loans and just under $390 million in deposits. Traditional banking procedures have been to keep loan amounts lower than deposits.

The bank's capital—which includes its stock and retained earnings—was 9.1 percent of loans, well below the 12 percent recommended by the Office of Thrift Supervision, an agency of the Department of the Treasury that regulates federal savings associations.

All those figures indicate that the bank had a lot of its money tied up in loans during a time when tumbling stock prices and home values meant borrowers would have a difficult time repaying them.

That was the conclusion in an OTS order for the Federal Deposit Insurance Corp. to take over the bank issued on Friday, April 24, the day the bank was closed.

Headquartered in Ketchum, the bank had two branches in Hailey and Bellevue, and those operating under the name First Bank of the Tetons in Victor and Driggs in eastern Idaho, and in Jackson, Wyo.

"[The bank's] asset quality and earnings declined steadily over the last year," the report states. "In the last six months of 2008, non-performing assets increased from 1.83 percent to 4.89 percent of total assets... [The bank's] declining asset quality materially affected its earnings. [The bank] reported a net loss total of $4.2 million for 2008, compared with $5.2 million net earnings in each of the prior two years."

Former First Bank of Idaho CEO Everett Covington said last week that while there were non-performing loans in all the bank's markets, Teton Valley's depressed real estate market contributed significantly to the problem.

The order to close the bank was preceded by a cease and desist order from the OTS on April 6 that gave the bank until June 30 to raise its capital up to 12 percent of loans. It was thought that this agreement would forestall a potential order by the government to force the bank to merge with another bank or close its doors.

The order also limited the bank's ability both to generate new loans or to borrow money to help its liquidity problem.

"Since April 9, 2009, [the bank] has experienced withdrawals averaging $2.7 million of net deposits per business day, with a high outflow of $5.5 million on April 20," the OTS closure order states. "Assuming continued deposit runoffs and no additional borrowing capacity, [the bank] projects that it will run out of cash on April 30."

First Bank of Idaho officials have said they were near completion of several deals that would have opened a $10 million line of credit from a hedge fund and removed $15 million in loans from the bank's books.

But OTS spokesman William Ruberry said the timing was too tight to allow the risk of the bank's being unable to close the deals. He said the agency needed to shut the bank down before it ran out of cash.

"In a liquidity bank failure, the timing is so important because the bank loses access to its normal borrowing capabilities," said Gavin Gee, director of the Idaho Department of Finance. "Once you fall below a certain capitalization level there are certain limitations placed on banks that make the situation even more challenging."

Gee noted that while some customers likely took money out of their accounts after the OTS publicly issued its cease and desist order, more cash was withdrawn as a result of the April 15 federal tax deadline.

"There are a lot of wealthy people [in the Wood River Valley] that owe a substantial amount of money to the IRS and it comes out of their checking accounts right around this time," Gee said.

According to the FDIC, First Bank of Idaho had just under 44 percent of the market share of all deposits in Blaine County. It was the fourth bank taken over by the FDIC on April 24 and the 29th bank nationwide that's failed this year.

Gee said he's not too concerned about the viability of other banks around the state, as "Idaho banks are performing better on average than their counterparts around the country."

Despite the significant market share held by First Bank of Idaho, Gee said that the relatively high number of banks in the valley will likely help assuage the situation.

"The good news is that there are lots of lenders and hopefully small businesses will be able to open new lines of credit or get new loans," Gee said. "It would be a different situation if the only bank in town fails, but clearly that's not the case in the Wood River Valley."

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