Editor's note: This article originally ran on May 5, 2009.
In the last days of the First Bank of Idaho, bank officials thought the 12-year-old institution might be spared.
Officers said they were within days of pumping millions of dollars into the community bank to increase its capital, give it the cash needed to meet depositors' demands, and avert a possible shutdown by federal regulators. Give us time, they told the regulators. We'll save our bank.
But nervous depositors were taking their money elsewhere. Regulators weren't convinced investors would give First Bank a cash infusion quickly enough to keep it from running out of cash by the end of April.
So on April 24, the Office of Thrift Supervision, which oversees savings associations like First Bank, appointed the Federal Deposit Insurance Corp. as the bank's receiver. U.S. Bank took over First Bank's branches, deposits and some assets. First Bank of Idaho ceased to exist. It was the first Idaho bank seized by the federal government since 1988.
The FDIC will spend $191 million - the difference between what it cost to protect deposits and what the agency thinks it will get from the sale of assets U.S. Bank didn't take.
This collapse didn't need to happen, said Nancy Schauer, chairwoman of the holding company for First Bank of Idaho and a retired lawyer who lives outside Ketchum.
"This particular takeover should be undone, " she said. "I feel the bank still has life."
End of a dream
Putting First Bank of Idaho into receivership was an ignominious end for a dream that came true for Greg Lovell, an Idaho native. Lovell thought he saw a niche for home-town banks in resort communities, where there is strong support for local business and people have high net worths.
First Idaho started with a $250,000 investment from a friend and from money that Lovell, who left Bank of America 13 years ago, put in to run it for 90 days.
Within three years, First Idaho had claimed 38 percent of the market share in the Ketchum area. It would eventually compete against 10 banks, including some of the most well-known in the country, such as Bank of America.
"Sun Valley always had a history of supporting community banks, " said Lovell, now president and chief executive officer of another resort community bank, Idaho First Bank, which he started in McCall in 2005. He left the Ketchum bank in 2002.
First Bank of Idaho grew by adding branches in Hailey and Bellevue. It also started banks in Jackson, Wyo., and Driggs and Victor that operated under the name First Bank of The Tetons.
First Bank didn't make subprime loans. But its loan portfolio was heavy in residential construction and commercial development, mostly in resort communities, including Ketchum and Jackson.
Those loans were particularly vulnerable to the national housing slump and the recession's impact on business expansion.
When the Office of Thrift Supervision examined the bank in spring 2008, it gave First Bank a satisfactory rating for safety and soundness, according to Everett Covington, who was chief executive officer when First Bank went into receivership.
Covington came to First Bank in early 2008 from Colorado as a consultant specializing in helping banks turn around. The board asked him to become CEO in August as the bank's condition worsened.
But the Office of Thrift Supervision says it saw some problems emerging. The office doesn't disclose its ratings publicly.
Examiners saw deterioration in loan assets, including increasing delinquencies, said Timothy T. Ward, deputy director for examinations, supervision and consumer protection in Washington, D.C.
Real estate markets hammer bank
The drip of troubled loans become a torrent when the decline in the real estate market accelerated in the last few months of 2008.
"As the economic situation got worse, more and more of our real estate loans became nonperforming, " Covington said. "The real estate market started to implode, and more and more problems started to surface. People couldn't pay."
What happened to First Bank has been happening all over the country, said David Barr, spokesman for the FDIC: The bank made a lot of loans to developers, the developers did not repay those loans, and their defaults crippled the bank's ability to survive.
First Bank's troubled loans increased from 1.83 percent to 4.89 percent of total assets in the last half of 2008, according to the Office of Thrift Supervision. The declining loan quality hurt the bank's earnings. It lost $4.2 million in 2008.
In March 2009, the Federal Reserve and the Federal Home Loan Bank cut back on First Bank of Idaho's lines of credit. Those lines "effectively supported a portion of our lending activity, " said Karl Bick, a real estate broker who lives in Boise and has been a director of the bank almost since it opened.
The bank also went below the 10 percent ratio of capital to risk-weighted assets that federal regulators require as a minimum for a well-capitalized bank. First Bank's problems became public in early April, after the Office of Thrift Supervision told the bank to come up with $10 million more in capital and to stop making new construction loans.
The office also ordered bank officials to stop accepting any more brokered deposits, which are typically certificates of deposits brokers buy for clients seeking the highest interest rates. Brokered deposits are often volatile, and they can quickly flow out of a bank if higher interest rates are offered somewhere else, regulators say. About a third of First Bank's deposits were brokered.
People quickly started pulling their money out of the bank. First Bank of Idaho lost about $2.7 million a day in net deposits beginning April 9, with $5.5 million withdrawn on April 20, the Office of Thrift Supervision said.
"This net outflow of deposit has strained the ... bank's liquidity, " the agency said later. Translation: The bank was running out of money.
FDIC LOOKS FOR BIDDERSThe FDIC, which insures deposits up to $250,000, began looking for a bank that could take over First Bank's deposits. The agency contacted 180 potential bidders, without telling them the bank's name. Four banks made bids. Meanwhile, First Bank of Idaho officials worked frantically to stave off the takeover. They worked out a plan they say would have raised $15 million by selling loans. They hired a company to help them find investors. By mid-April, they thought they had an investor willing to put up $10 million, enough to acquire a controlling interest in the bank, Bick said.
Money from those deals could have started showing up in First Bank of Idaho last week, directors said.
But federal officials said they weren't sure that money would have been enough to solve the bank's liquidity crisis, and they questioned whether it would come soon enough.
Institutions often look for investors or other help "right up until the end, " said Ward, the Office of Thrift Supervision deputy director.
On April 24, as the agency closed the bank, it announced that First Bank was in an "unsafe and unsound condition as a result of its severe liquidity strain, deteriorating asset quality and negative operating earnings with no realistic prospects for raising capital quickly enough to ensure that it can repay all of its liabilities, including deposits."
U.S. Bank - the largest bank in the Treasure Valley based on deposits - won the bidding. It agreed to pay the FDIC a half percent on the $225 million it would receive in deposits plus $17.8 million for some assets.
The FDIC took control of the $112 million in brokered deposits, so it could pay off those deposits directly to brokers. As is customary, regulators announced the takeover after business hours on a Friday, and customers were transferred to U.S. Bank by Monday morning.
Acquiring First Bank of Idaho's deposits strengthens U.S. Bank in Idaho and Wyoming, spokesman Steve Dale said. "We look at this as a way of expanding our footprint in those two states, " he said.
Schauer, the holding company chairwoman, isn't ready to call it quits. She is investigating whether the takeover can be undone. She has e-mailed shareholders, friends and others saying FDIC could still be spared the $191 million.
"There is really an opportunity here to do something wonderful, " she said.
But neither Ward nor Covington, the former CEO, thinks that is possible.
Undoing the receivership is "like putting toothpaste back in the tube, " Covington said. "I don't see how in the world they can undo it."
Bill Roberts: 377-6408