Local banks' struggles don't rattle most customers

Denise McKittrick-Little had been a loyal and happy customer of Rainier Pacific Bank for nine years when regulators last month shut it down and transferred its business to Oregon's Umpqua Bank.

"I was a little concerned when I heard," the Graham woman said recently outside one of the bank's Federal Way branches. "But then I talked with (bank staff) and I asked 'Are you happy with the change?' and they said they were happy and they weren't leaving, so I'm not either."

Brad Glaberson had been a loyal and happy customer of Evergreen Bank for 10 years when it, too, ran into trouble. But his experience was quite different: When the struggling bank pulled his company's credit line and customer service deteriorated, Glaberson took his business elsewhere — a few months before Evergreen's January closure.

"It was blatantly obvious to me that things were going bad with them," Glaberson said. "All of a sudden key people started leaving, and at one point it got really nasty on their end."

Across the country, the rolling bank crisis is testing relationships between banks and their customers.

That's especially true in Washington, where seven banks have been taken over by regulators since the start of 2008, several others are teetering and nearly a third of all state-based institutions are operating under stricter regulatory oversight.

Customers of troubled banks must choose whether to stick around; if their bank goes under, they have to judge whether to stay with an unfamiliar successor.

People with money to invest must decide whether to park it at distressed banks that often pay more on CDs and savings accounts to attract new deposits.

Reactions are divided. "You've got consumers who get very concerned if they see their bank in the paper and they'll pull their money out, but you've also got people who know they're protected up to $250,000 (by the Federal Deposit Insurance Corp.) and they'll move their money to capture the higher rates," said Joe Waites, a partner in Minerva Consulting, a Georgia-based firm that helps troubled banks.

The latest edition of The Seattle Times' quarterly report on the health of Washington banks shows they continue to sort themselves out into three broad groups: the well-capitalized, the warily watchful and the walking wounded.

See how your bank's financial health has changed over the past two years with our interactive database.

The charts on this page use three different gauges of a bank's financial health to rank the institutions facing the most stress: high levels of problem loans, low capital reserves, or both.

Although most banks don't consider a loan nonperforming until it's 90 days or more past due, we include all loans more than 30 days late in our analysis. That's based on a judgment that, especially in these tough economic times, a broader measure of problem debt can be a better warning sign of potential trouble ahead.

We looked at year-end data for 50 of the state's 90-plus banks, and for comparative purposes included the four banks that have failed so far this year. See full results, along with two additional measures for each bank.

Many of the state's community banks plunged into lending to developers and homebuilders during the real-estate bubble that peaked in 2007; after the housing market tanked, many of those borrowers couldn't repay their loans.

The result: Of the 95 banks based in Washington at the end of 2009, four have since failed and 27 others have had their operations restricted by regulators. Five state-based banks that received federal bailout money in 2008 and 2009 have missed at least one required dividend payment to the government.

Industry observers expect more Washington banks to fail this year, and several others are struggling to regain financial stability. This ongoing turmoil is forcing banks and their customers to reassess their relationships with each other.

One Federal Way customer of Rainier Pacific, who spoke on condition she not be identified, said she had been looking around for higher rates elsewhere but wasn't concerned about her money's safety.

"I knew Rainier Pacific Bank was in trouble, but I didn't know (the takeover) had happened until I came here and saw the sign on the door," she said. "If I'd had more money, I would have panicked and moved some money around, but since I was covered (by the FDIC's $250,000 insurance limit) I didn't worry."

That's a common assessment, bank experts say. Though customers generally are aware when their bank is struggling, they don't feel compelled to switch unless their own relationship with the bank is on the rocks.

The whole point of the deposit-insurance system is to remove fear of possible bank failures as a factor in people's decision-making, said Kenneth Daniels, a finance professor at Virginia Commonwealth University.

Bank customers, Daniels said, "know from experience that the FDIC will step in and clean things up and make them whole. After the event occurs, things are pretty much business as usual."

Even though the official limit on insured deposits is $250,000 per depositor per bank, he said, in practice "it's very rare that you'll find large depositors not being made whole."

Sometimes banks are the ones who disrupt the relationship. Banks operating under regulatory "cease and desist" orders often must get smaller, which usually means making fewer loans — especially in problematic areas such as real estate. That can send even healthy businesses scrambling for more credit.

Consider Glaberson, who owns Cucina Fresca, a Seattle maker of gourmet pastas. He'd had no issues with Evergreen Bank until, about a year ago, the bank told him it was canceling Cucina Fresca's $70,000 line of credit and turning the balance into a term loan at a higher rate.

"I told them, 'So I have to pay for your mistakes?' " Glaberson said. "But I got that it was a different world. I wasn't happy about it, but I understood it. At least I still had a loan, I still had a bank."

But a few months later, Glaberson got a new loan officer whom he describes as "a total shark," who was dismissive of his business and threatened to penalize him for being a day late in reporting his monthly financials.

"I'd never been treated by anyone that way before," he said. "After that first conversation, I decided to start looking for another bank."

Last November, Glaberson moved his Cucina Fresca accounts to Foundation Bank of Bellevue — in part, he said, because they took the time to get to know him and his business.

Alan Bainbridge, a banking consultant with customer-research firm Allegiance, said people generally are more loyal to community banks than to large national banks. Even when the smaller banks run into trouble, people are more willing to give them the benefit of the doubt, he said.

According to Allegiance's customer-survey data, people who say they're likely to switch banks typically cite bank staff's friendliness (or lack thereof) and willingness to help, not concern over the bank's future. But, he said, the combination of both can be a powerful incentive.

In some cases, Minerva's Waites added, a bank's troubles can spill over onto its business customers.

"If I'm with Bank A and it's in trouble and I can't get any more loans from them, and I go to Bank B for more credit they may think 'Well, Bank A got into trouble because of sloppy lending — maybe we're not too interested in you either,' " he said.

Waites said he's had to intervene on behalf of business customers of some of his bank clients, vouching for their creditworthiness to third-party banks.

"You're almost presumed guilty before you get a chance to make your case," he said. "The criteria are so much stronger now to get loans that people who were on the cusp before are over the ledge now."

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