The Bank of Whitman’s failure has left other regional lenders stuck with piles of insider loans that could lead to millions in losses.
Recent court filings and public records disclose that RiverBank, of Spokane, for example, loaned large sums of money to employees of Bank of Whitman for stock purchases in the Colfax-based institution that federal and state regulators closed in early August. Many of those loans, which critics say were pre-arranged between the lending institutions, are now in default.
A top state regulator considers such practices fairly common among some lenders, but a lawyer defending the Bank of Whitman employees against collection efforts calls the loan program a failed “scheme” that was designed to add shine to bank balance sheets and asset portfolios.
Some Bank of Whitman employees were required as a condition of their employment to borrow money to buy shares of their own bank, said Spokane attorney Bob Dunn.
“We’re talking about employment blackmail here,” he said.
Federal investigators are looking into the bank’s failure, Dunn said. The collapse is expected to cost the federal government about $134.8 million, according to the Federal Deposit Insurance Corp.
According to the loan documents and other public records surrounding one case, here’s how it worked:
A Bank of Whitman manager, Kyle York, said he was ordered by top bank executives, including former CEO James Tribbett, in December 2006 to buy 3,500 shares of the holding company’s stock at a price of $101 per share.
To fund the purchase, York was presented blank loan documents from RiverBank to borrow $353,843.
Other documents described how the loan would be collateralized by the 3,500 shares of Bank of Whitman stock he was purchasing.
To repay the loan, York would be awarded sufficient bonuses and dividends to make the payments.
As Whitman’s financial condition eroded and its stock was rendered worthless, the bank stopped making the agreed-upon bonus payments to York. Those actions left York on the hook to repay a loan on a worthless asset.
York stopped making payments last December. RiverBank has since sued in Spokane County Superior Court, seeking repayment of the principal and accruing interest and late fees that add on another $18,866. The bank also seeks attorneys’ fees.
Last week, new RiverBank Chief Executive Officer Clyde “Chuck” Brooks declined to comment on such loan agreements. He replaced Duane Brandenburg, who helped start RiverBank in 2006.
RiverBank is now operating under a consent order issued by the FDIC and the Washington Department of Financial Institutions. The order makes no mention of specific loans, but requires the bank to undertake actions designed to ensure safe and sound banking practices.
Richard Riccobono, director of the DFI’s banking division, said loan agreements between banks – including having officers of one bank borrow money from another bank to buy company stock – are not illegal. Nor are they unusual.
“As for Bank of Whitman, I would say it’s not just RiverBank that made loans,” Riccobono said. “There are a number of financial institutions that made loans to the holding company.”
Small banks often lend to each other because they can’t access large new sums of cash by selling publicly traded stock or issuing unsecured corporate bonds.
“It’s not any kind of conspiracy. Banks lend to each other as a matter of routine,” Riccobono said, adding that he was talking in general terms about small banks rather than specifically addressing questions about RiverBank.
He added that community banks also lend to a competing bank’s officers so that they can buy stock.
“To the extent that one bank lends to the holding company of another bank, pretty much the collateral is that stock,” he said. “And if the bank is closed, well, you’re out of luck. The bank is going to take a loss.”
York has countersued RiverBank; attorneys for the bank did not return calls seeking an interview.
York, along with other former Bank of Whitman employees who are bracing for litigation after several rounds of demand letters and responses, allege that the whole employee loan apparatus was a scheme designed to mislead the public, investors, shareholders, employees and bank regulators. The countersuit by York includes accusations including breach of contract, fraud, conspiracy, breach of fiduciary duty, rescission and securities fraud.
Columbia Bank bought eight Bank of Whitman branches and assumed $515.7 million in deposits. Tacoma-based Columbia also bought $314.4 million worth of Whitman assets, including many of the best loans.
The FDIC inherited the rest and the DFI is attempting to find buyers for the 12 Bank of Whitman branches that were closed across Eastern Washington.