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Originally published Friday, February 26, 2010 at 6:06 PM

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Rainier Pacific Bank brought down by a big investment gone bad

Regulators closed Rainier Pacific Bank of Tacoma, and Umpqua Bank of Oregon took on most of its operations.

Seattle Times business reporter

Survival of the fittest

Rainier Pacific

Founded: 1933, as Tacoma Teachers Credit Union

Headquarters: Tacoma (Parent company is Rainier Pacific Financial Group)

Assets: $718 million

Branches: 14 — three in Federal Way, others in Pierce County

Umpqua Bank

Founded: 1953, as South Umpqua State Bank

Headquarters: Roseburg, Ore. (parent company, Umpqua Financial, is based in Portland)

Assets: $10.5 billion, including Rainier Pacific

Branches: 176 in Oregon, Northern California and Washington, including Rainier Pacific

Source: Company reports

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Oregon's Umpqua Bank scooped up its second troubled Washington bank in as many months Friday evening, buying the operations of Tacoma-based Rainier Pacific Bank.

By adding Rainier Pacific's 14 branches (three in Federal Way, the rest in Pierce County) and $446.2 million in deposits to the business it picked up last month with Seattle's Evergreen Bank, Umpqua becomes one of Washington's 20 biggest banks in terms of deposits.

The deal also marks the end of the line for a 77-year-old institution that began as Tacoma Teachers Credit Union, became a mutual-savings bank in 2001 and converted to stock ownership two years later.

Unlike most of the six other Washington banks that have failed in the past two years, loans to developers and homebuilders were not a major factor in Rainier Pacific's troubles, state banking director Brad Williamson said.

Rather, it was a large and spectacularly ill-timed investment in complex securities called trust preferred collateralized debt obligations — bundles of debt issued by banks and insurance companies, similar to the instruments at the root of the financial meltdown.

After the market for such securities evaporated, accounting rules forced Rainier Pacific to write down their value. The portfolio of CDOs, originally valued at $108.8 million, was worth just $17.1 million at year's end.

The repeated write-downs had the same effect as loan write-offs at other banks — sucking dry Rainier Pacific's capital reserves.

"Basically quarter after quarter they've been writing these things down," Williamson said. "If they hadn't gone so heavily into these CDOs, they would have made it."

The bank lost nearly $70 million last year, and in its fourth-quarter and year-end financial report acknowledged that it was "critically undercapitalized" and unlikely to be able to raise new capital.

Rainier Pacific was one of just two U.S. banks shut down Friday, the traditional day for bank closures. The other one was Carson River Community Bank of Reno, Nev.

The pace of closures has slowed lately: After 15 institutions around the country were shuttered in January, just seven banks failed this month.

In addition to assuming all of Rainier Pacific's deposits, Umpqua agreed to purchase approximately $670.1 million of the failed bank's assets. The Federal Deposit Insurance Corp. said it would retain the remaining $47.7 million in assets for later disposition.

The FDIC also agreed to absorb most of any losses on Rainier Pacific $564.1 million loan portfolio and certain other assets. Although details of the loan-sharing agreement weren't immediately made public, such agreements typically involve the FDIC covering 80 percent of losses up to a certain level and 95 percent beyond that.

The agency estimated that Rainier Pacific's failure will cost it $95.2 million.

Rainier Pacific's parent company, Rainier Pacific Financial Group, went public in October 2005 at $10 a share as part of the bank's demutualization. On Friday, those shares closed at 18.3 cents.

Last month, regulators seized three Washington banks: Evergreen Bank, Horizon Bank of Bellingham and American Marine Bank of Bainbridge Island.

The state's banking sector, which is heavily exposed to a wobbly housing market, soured development and construction loans and declining commercial real-estate values, is one of the weakest in the nation.

Twenty-seven of the remaining 91 banks and thrifts based in the state, or nearly 30 percent, are operating under varying degrees of enhanced regulatory scrutiny.

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com

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