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Originally published April 16, 2013 at 4:27 PM | Page modified April 17, 2013 at 6:19 AM

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FDIC sues execs of failed bank

The Federal Deposit Insurance Corp. is suing two former top officers of failed City Bank in Lynnwood for at least $41 million, according to a lawsuit filed Monday in federal court.

Seattle Times business reporter

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The Federal Deposit Insurance Corp. is suing two former top officers of failed City Bank in Lynnwood for at least $41 million, according to a lawsuit filed Monday in federal court.

The federal agency alleges Conrad Hanson, the bank’s founder, former CEO and chairman; and Christopher Sheehan, former executive vice president of the bank’s construction loan department, were negligent and breached their fiduciary duties as bank officers in connection with 26 loans approved between May 2005 and October 2008.

City Bank, with about $964 million in assets, failed exactly three years ago Tuesday, on April 16, 2010, with eight branches in South Snohomish and North King counties. Under federal law, the statute of limitations for the FDIC to bring such lawsuits is three years from the bank’s failure.

“They came right down to the wire,” said attorney Kevin LaCroix, who publishes The D&O Diary, a blog on lawsuits against institutions’ directors and officers.

Regulators, who seized the state-chartered bank and sold it to Coupeville-based Whidbey Island Bank, initially estimated the failure would cost the deposit-insurance fund more than $320 million. But in December 2011, the FDIC revised its estimate to $194 million.

The lawsuit alleges Hanson and Sheehan defied repeated warnings from regulators to require appraisals and verify borrowers’ income and assets before making home-construction loans.

The lawsuit also alleges Hanson received “an exorbitantly high level of compensation for which there was no justification.”

The bank paid Hanson performance bonuses of $1.65 million and $2 million in 2006 and 2007, along with a salary of $544,416 and $600,000, according to the lawsuit.

Hanson, 70, of Clyde Hill, and Sheehan, 69, of Lake Forest Park, could not immediately be reached for comment.

From its founding in 1974, City Bank loaned money primarily for commercial real estate and construction. The bank generated above-average profits for shareholders during the housing bubble until the market turned and delinquencies on speculative construction loans skyrocketed. The bank’s total assets peaked at $1.37 billion in March 2009.

The suit alleges Hanson, as the bank’s CEO from 2006 to the end of 2009, defied regulators and loaded the bank up with too much exposure to the home-construction market even after it became clear the real-estate bubble had burst.

In December 2006, federal regulators told banks they could face significant risk if their total loans for land acquisition, development and construction exceeded 100 percent of the bank’s total capital.

By then, City Bank’s exposure was already at 329 percent of total capital, and by the end of 2009, a whopping 689 percent, the FDIC alleges. By comparison, the average for its peer group was 97 percent.

Hanson and Sheehan “relied upon informal and autocratic procedures to approve loans,” according to the suit. They told bank underwriters City Bank was “doing deals no one else would” and that they “knew the dirt” and didn’t need appraisals.

By late 2007, they knew the bank was foreclosing on three homebuilders and that originations of home mortgages were slowing, the FDIC alleges, but they failed to tighten the bank’s lending standards.

Moreover, the agency alleges, they approved loans to speculative builders who lacked any hard equity in their projects.

When the bank failed, Hanson owned more than 1.7 million shares, or about 11 percent of the bank’s stock, according to the lawsuit. Sheehan owned more than 211,000 shares, about 1.3 percent.

LaCroix, the attorney tracking FDIC lawsuits against bank directors and officers, said the agency in the past has generally sued a bank’s entire board and top management. So the City Bank lawsuit, which focuses on just two officers, deviates from the typical suit.

Many factors play into such decisions, LaCroix said, including “whose name and fingerprints are on the files the FDIC thinks caused the problem.”

Sanjay Bhatt: 206-464-3103 or sbhatt@seattletimes.com On Twitter @sbhatt

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