A federal report blames senior County Bank executives for seeing too much blue sky while fiscal storm clouds gathered over their customer base.
County's former chairman disagrees with the report.
Federal Reserve regulators met in July 2007 with County Bank CEO Thomas Hawker and other managers to "stress the importance of 'getting ahead' of market conditions."
Armed with data showing the declining real estate market, they suggested that the bank brace for tough times. Ultimately, the examiners came away believing their warnings were dismissed.
"County's management did not respond to these early indicators because they expected the real estate market to recover and were continuing to focus on the bank's growth prospects," according to a federal report released in the fall that chronicles County Bank's failure.
The Office of Inspector General's "Material Loss Review of County Bank" concludes the bank collapsed because of a steep decline in the local real estate market and because the managers and board of directors failed to fully address the impact bad loans were having on its balance sheet.
The report also puts some blame on the Federal Reserve Bank of San Francisco, which should have been more aggressive in supervising the bank. It's unclear whether that approach would have been enough to keep County Bank afloat, according to the report.
Hawker said he doesn't recall regulators being quite so pessimistic in 2007 about the coming years. The bank had already scaled-back expansion plans and stopped offering loans for development.
He hadn't seen the report, adding that he didn't want to get into a he-said, she-said kind of argument. "It can be hashed and rehashed and no good will ever come," he said. "It's a terrible situation for everyone."
The review is mandatory for any bank failures that significantly affect the Federal Deposit Insurance Corp. County Bank's demise cost the FDIC an estimated $135 million. The bank's deposits and loans were handed over to Westamerica Bancorporation.
Board Chairman Jerry Callister disagreed Wednesday with the report's characterizations. The bank followed the 2007 order to update its land appraisals. He noted that the meeting with regulators came before real estate prices began their rapid decline, wrecking the economy. "There was no recession yet," he said. "It's not like they were creating a big alarm for us."
At the time of the meeting, the median home price had fallen, though it was still $310,000. In the following 12 months, it would plummet 50 percent.
In 2007, the bank maintained a solid overall rating, though regulators downgraded its loan quality and earnings ratings. Hawker disagreed with the changes, according to the report.
Still, the bank holding company's economists warned in their 2007 report that skyrocketing foreclosures, declining home prices and plunging real estate sales were a "major concern." They didn't call it a bust, opting to describe it as a "souffle with the air slowly leaking out."
While County Bank never issued any subprime mortgages, it was still sensitive to dramatic changes in the housing market. The report said County Bank's demise serves as a lesson for other community banks loaning to developers.
The bank's commercial real estate portfolio expanded during the housing bubble. Construction and land development loans nearly tripled, reaching $248 million.
When the market began its downward spiral, the bank was forced to set aside more money for bad loans and for good ones that could go bad.
"We took it very seriously," Callister recalled. "We went to work trying to get our hands around our loan portfolio."
Troubled loans increased to $275 million in May 2008 from $35 million in March 2006. Setting aside more and more money turned County Bank's profits into losses, which ate away at local confidence in the institution.
A Sun-Star story in March 2008 about the bank's first-ever yearly loss, $4 million, caused customers to yank $52 million out of its vaults. That autumn, when the bank reported a $2.7 million quarterly loss and its intention to seek federal assistance, another $72 million was withdrawn. Managers sold securities and borrowed money from the Federal Home Loan Bank to keep enough cash on hand.
The bank's rating fell in May 2008, reflecting that failure was a distinct possibility. By October, it was downgraded again, with failure becoming highly probable.
Efforts to raise $74 million in new capital or find a buyer fell short. The bank had hired a consultant and sent people to New York in search of investors. "There was no capital to be raised," Callister said.
Regulators visited the bank in January 2009 and considered its condition "critical." At the end of the month, the company announced it'd file a $96 million yearly loss. Another surge in withdrawals followed.
A week later, regulators seized the bank.
Reporter Scott Jason can be reached at (209) 385-2453 or sjason@mercedsun-star.com.
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