Spokane7
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October 4, 2011 in City
Impact of closed bank swirling
Some Bank of Whitman workers say they had to buy stock, now worthless, with loans from other banks
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.
Parishes giving $1.5 million toward settling sex cases 
polistra on October 04 at 3:51 a.m.
Wow! The scariest part is that the state regulator calmly considers this sort of criminality “fairly common.”
greyhound2 on October 04 at 4:11 a.m.
What a rip-off!
oneanddone on October 04 at 4:28 a.m.
This York guy seems to be a classic case of “a fool and his money are soon parted.” All of these people failed to see the handwriting on the wall, most likely willingly. It’s a good lesson for others however. When you’re asked to do something fishy - get it in writing. I certainly wouldn’t have any problem with the SEC throwing the board rooms of both banks in the clink though.
The_Seer on October 04 at 6:38 a.m.
This is how capitalism REALLY works. It would have toppled long ago without massive infusions of public wealth. As the curtain continues being lifted expect more and more of these types of activities to be discovered as the efficacy of a “free market” system is revealed for what it is: A house of cards led by predatory sharks.
IHike4Fun on October 04 at 7:24 a.m.
Seer,
Greece is a good example of how socialism REALLY works.
misjustice on October 04 at 7:30 a.m.
Another example of the greed and dealmaking that is far too common place; and NOW we are left holding the bag…
Liars, liars, pants on fire!
Or, in other words,
“Goldman Sachs rules the world!”
johnclarke on October 04 at 7:48 a.m.
“It’s not any kind of conspiracy. Banks lend to each other as a matter of routine,”
This is a complete conspiracy. These community bank CEO’s all know each other, and all pull the same scam. The lender gets “assets” in the form of the loan, the “selling” bank pumps up it’s stock price. Actually, they are not selling at all, they are simply tranferring their risk created by poor management and crappy loans to their employees. Duh. Those crappy loans are going to their buddies, because the CEO has lending authority, or he just gets his group of buddies known as “The Board” to vote how he wants.
James Tribbett should be in jail. Besides this story above he essentially raided his employee’s pension by transferring “ownership” of the bank to the ESOP. The kicker is he probably controlled the vote of the ESOP so the employees has no say in how the bank was run even though they supposedly owned it. He stole the employees retirement, plain and simple. Gee, I wonder what kind of money Tribbett walked away with? His assets should be frozen.
This is not the only bank that has done this. Do you work for a community bank? Retirement fund in an ESOP by any chance? I would be asking some hard questions at your next meeting, as in who is controlling your retirement. That person should be you.
Diana on October 04 at 8:54 a.m.
B-b-but, socialism!
MrNatural on October 04 at 9:40 a.m.
Obama’s fault…the government in collusion with the unions did this…liberal ponzi schemes by hippies and the ACLU took the money…now democrats want you to pay for this with tax cuts
Orphan on October 04 at 9:42 a.m.
Johnclark You really should do some research on ESOPs here is a good start. http://www.nceo.org/main/article.php/id/8/
There is no way you can transfer ownership via an ESOP by raiding the employees retirement accounts. The failed bank will now not pay the stock holders for the ESOP so the original stick holders will now lose all their miney as well including Mr. Tribbett. ESOPS are paid for over time not all at once. So the employees that were given ESOP stock are out what they were given.
As for Mr. York he is a banking profesional and should have known better. Mr. York was not a teller, he was management and most likely was planning on making some good cash on the deal.
I might remind you that the bank that did the lending lost their backside on the deal. No bank makes bad loans no matter who they are buddys with trhink about it would you loan money knowing you would lose it and it might cost you your home.
zelda on October 04 at 9:51 a.m.
>>It’s not any kind of conspiracy. Banks lend to each other as a matter of routine<<
OK, so maybe they do but is this a common or typical form of intra-bank loan?
I also have to wonder if this sort of activity used to be illegal but then became legal in the great Anything Goes wave of 1998 and beyond. When most of the banking laws were repealed or not enforced by ridiculously understaffed regulators the economy turned into a free-for-all. But the inconvenient facts are swept away with a shrug and the finance people say, “Well, it was all totally legal.” And the moral hazard keeps growing and festering.
thinkbig on October 04 at 9:54 a.m.
There are a few things to consider here. First Kyle York was a former Bank of Whitman MANAGER, and he did not understand the ramifications of this transaction. If this is true he is a complete idiot. He took out a loan to buy an asset and the asset decreased in value, now he is on the hook for the difference and has a problem with it? Hey, my house decreased in value but I still pay the mortgage.
Second, banks lend to each other based on capital needs, this is not a new concept or a conspiracy. These smaller financial institutions are having a more difficult time during this recession because they can’t just go out and issue stock like Chase, or Wells Fargo. Banks have always lended to each other and community banks lend to other community banks.
This is not a conspiracy but a function of the prevailing economic conditions faced by our country right now. Interlending is up because liquidity and access to capital is down, wow shocker. Kyle York did not have to purchase this stock, he could have worked somewhere else but to make the assertions he is making once the deal went bad is ridiculous. This whole thing is bunk.
One last note, since the economy is in the can, people are grasping at whoever they can to paint them in a bad light and it is getting old. This is a community bank, not Bank of America, the CEO of Riverbank did not pull in $30+ million last year so everyone relax a bit. They have hit some bumps in the road, who hasn’t in the last 5 years? I am actually surprised people have not blamed Bush, Obama, or government employees yet.
thinkbig on October 04 at 9:57 a.m.
I stand corrected, MrNatural just blamed the government and Obama. Why do I always have to be right….
MrNatural on October 04 at 10:09 a.m.
We need more deregulation now before this happens again!
zelda on October 04 at 10:37 a.m.
>>This is a community bank, not Bank of America, the CEO of Riverbank did not pull in $30+ million last year so everyone relax a bit.<<
So it’s a matter of degree, right? Sort of like the difference between grand larceny and pilferage? The comparison to BoA lets every financier in Spokane off the hook by this logic.
johno on October 04 at 10:39 a.m.
American capitalism at work. Privatize the profits, socialize the costs. It’s all about being part of the “in” group. That way the government actually works for you and covers your losses while you walk away with riches and leave the public to pay for your mistakes.
johnclarke on October 04 at 11:03 a.m.
Mr. Orphan;
Thanks for the lecture, but oddly you are dead wrong. I happen to understand ESOP’s and this specific scenario quite well, thank you very much. Tell us super genius, exactly what form do you think the ESOP’s assets are in? BANK STOCK funded by people’s retirement funds, matched by bank assets. Who do you think was controlling the voting interest of both the holding company and the ESOP? I’m glad that you are in the know on the former CEO’s financial picture, but I can promise you he walked away well in advance with a ton of money. This is a pure manipulation, no different from the shell games on Wall Street. If you would like an example of privatizing funding sources such as Social Security, here you go.
Have you been inside the dealings of a bank? Been to the board meetings? Do you understand how a holding company really works? I’m going to guess that you and thinkbig up above have not. You guys quote “economic conditions” which is CRAP. Plenty of well run banks have survived just fine, when they don’t get greedy. Whitman was a well planned failure, most likely planned years in advance.
@thinkbig
“These smaller financial institutions are having a more difficult time during this recession because they can’t just go out and issue stock”
I’d say that is proof that you don’t understand the topic in the slightest. What do you think private bank stock is? Do you get the difference between public and private banks?
I hope you guys have your money in a community bank run by crooks. They would really appreciate it.
thinkbig on October 04 at 11:07 a.m.
>>So it’s a matter of degree, right? Sort of like the difference between grand larceny and pilferage? The comparison to BoA lets every financier in Spokane off the hook by this logic.<<
Not a matter of degree, I was pointing out the difference between the two. If you reread that paragraph I was making general references to the economic conditions of our country and pointing out the difference between a multinational bank and Spokane based and operated Riverbank. You can’t compare the two but in this article another financial institution is being villianized by the media, shocking right?
I am certian the bank made these loans in good faith using market interest rates for the loans to Kyle York. Why would they knowingly enter into a loan that would fail? As another reader pointed out, just because you are friends with someone you would not lend them money if you knew they would not pay you back. And if Kyle York entered into an agreement with any egregious provisions in the loan document he is an idiot, as a bank MANAGER he should know better.
I guess I am pointing out the obviousness of the conditions the bank is trying to operate in. The article is a giant waste of time under the guise of reporting on this “giant conspiracy” of interbank lending that is a common practice and has been around forever.
The_Seer on October 04 at 11:14 a.m.
thinkbig: This WAS a community bank.
zelda on October 04 at 11:59 a.m.
The reporter is not the one using the conspiracy word; it’s some of the parties involved.
I think the gist of the article is that it calls into question some apparently common banking practices which might be duplicitous. Interbank lending may be something that’s been around forever, but that doesn’t mean that someone can’t or won’t manipulate the practice to deceive investors.
Caveat emptor is turning out to not be a good system upon which to run the nation’s finances. What you end up with is an unregulated casino.
johnclarke on October 04 at 12:25 p.m.
Cause and effect. Deregulation led to the banking crisis. The lack of governance, should it be from the FDIC or the bank’s Board results in the same thing. The hilarious concept of this failure being the fault of ….well other poorly run banks makes no sense. The explanation is pretty simple. Greed, at the expense of the regular joe. The people that caused all this crap don’t suffer. And btw, this is not really about interbank lending, that is a distraction.
MrNatural on October 04 at 2:59 p.m.
This is class warfare…I blame the poor for not having any money to save or invest…
I do hope the executives of this fine institution managed to give themselves a golden parachute to tide them over until they are needed again…
Orphan on October 04 at 3:18 p.m.
Johnclark I also understand ESOPs very well.
Exactly how do you know the ESOP was funded by employees retirement funds.
How do you know what the CEO walked away with, if you have an inside line please share we are waiting. I will stand by my statement that the ESOP will not be paid for now the original stock holders will get nothing.
You said he “raided his employee’s pension”, please tell us how that happens Mr ESOP expert.
As usual at best you ae telling half truths and holding them up as gospel.
greyhound2 on October 04 at 4:00 p.m.
Mr Natural, you are really good. And so are you johnclarke. It is nice to know that there are some people out there who have a grasp of reality (those are people who know the sky is really blue, and not green like they keep telling you). You can’t solve any problems until you recognize what the problem is. Keep up the good work!
(3 billion years ago, the sky and sea were green. It was plant life converting carbon dixoide into oxygen which turned it blue.)
MrNatural on October 04 at 4:07 p.m.
Cool 2U2 greyhound2…
…this bank failure was caused by global warming!
investing in glaciers and sea ice was profitable before the fed lowered the interest rate…
johnclarke on October 04 at 4:23 p.m.
Um, Orphan - you are aware the ESOP is also the 401k for the employees yes? So imagine that you have a 401k, and it was used to buy stock in a bank. Some of it was awarded, some of it you invested. (this is also called an ESOP stay with me pal) Where does that money go I wonder? What if say, it was loaned to a small group of people and they simply decided to not pay it back? Your stock, also known as the ESOP, also known as your 401k is gone. poof. Valueless. Not to mention you lost your job.
So, while I would normally be happy to take the time to explain all this over and over and over, you are clearly more educated than me on the matter. See, you would probably know by reading this
http://seekingalpha.com/author/christopher-menkin/instablog/3
and following the profit, you could imagine a CEO taking big bonuses year after year. Also, gee wonder if that guy is the same guy had huge lending authority and also controlled the votes of the ESOP because he managed it? Oh, and maybe he was the Chairman of the Board and the holding company. I’m sure you know all that. I’m sure you know that maybe the ESOP purchased stock owned by PEOPLE yes ? Do you think that possibly um, the CEO sold his stock to ESOP, after maybe it was awarded to him as compensation?
Seems far fetched, I know. Except for the fact it happened. If this were a public company, you can find the compensation numbers in the 10-k. Whitman was not public, therefore you could find it in the Board meeting minutes..now in hands of the FDIC.
http://www.federalreserve.gov/newsevents/press/enforcement/enf20100714a1.pdf
johnclarke on October 04 at 4:27 p.m.
One more fact, Whitman was founded in ‘77. ESOP stock purchase, 1999.
http://www.ftc.gov/acoas/64FR71457.pdf
Orphan on October 04 at 7:49 p.m.
Johnclark No dude I am not aware that the ESOP was also the 401K for the employees, the reason why is that they are 2 different things. Call me back when you have CPA after your name but by then you will know better, or not.
johnclarke on October 04 at 7:57 p.m.
Again, you clearly know more than me; except I know the lawyer that put the Whitman deal together. Would you like his contact information ?
WTFhappenedtologic on October 05 at 11:22 a.m.
Bank of Whitman was funded out of the profits as a result of managements decisions. No employee invested their own monies. It was also a subs s Corp which means that only individuals are allowed to purchase stock which limits access to capital considerably more than publicly held banks, or even private banks which are not taxed as s corps.
The executives of this bank lost more than anyone and the whole affair is tragic on all counts, we should all be thankful it didn’t happen to us!!!!!!
jdodgion on October 07 at 5:47 p.m.
Sounds like a crooked deal to me. Bank of Whitman is a bogus bank.