CDOs Helped Bring the End to a Washington CU That Converted to a Bank
One of the more than 30 credit unions that have converted to or merged with mutual banks became the 209th bank to fail since 2000 and the 22nd to fail this year.
Rainier Pacific Bank's life came to an end at the close of business on Feb. 26, when officials from the Washington Department of Financial Institutions closed the bank and, in an arrangement with the FDIC, acceded to a purchase and assumption agreement with the Umpqua Bank in Roseburg, Ore., according to a DFI statement.
"Rainier Pacific Bank's capital has been depleted by significant securities write-downs and loan losses," Brad Williamson, director of DFI's Division of Banks, explained when the DFI closed the institution. "Rainier's largest losses resulted from write-downs on collateralized debt obligations that lost tremendous value as the financial markets became illiquid and underlying asset values declined. Construction loan losses further eroded the bank's capital position."
"In these challenging economic times, we are always disappointed when a bank is unable to continue safe and sound financial operations," DFI Director Scott Jarvis added. "We are very pleased however to see the bank acquired as a whole bank purchase by a Northwest bank with a growing presence in our state."
Rainier Pacific started its life in 1932 as Tacoma Teachers Credit Union and went through several mergers to eventually become Rainier Pacific Credit Union, with a community charter in 1995. It converted to a state-chartered mutual bank in 2001 and then to a fully stock issuing bank in 2003.
Initially, the stock performed strongly for the bank's depositors, many of whom had been credit union members, and officers, who had an opportunity to buy into the bank's initial public offering at $10 per share. The stock closed its Oct. 21 opening day on the NASDAQ at $16.99 and hit its high point of $22.54 in mid-April 2007. The stock closed on Feb. 26 at 18 cents.
According to filings with the Securities and Exchange Commission and the FDIC, the bank lost almost $70 million in 2009 and agreed to a cease and desist order to implement a corrective action plan in October 2009.
The order required the bank to increase the bank's capital, maintain its allowance for loan and lease losses at a level proportionate with the risk in its loan portfolio, reduce its classified assets, discontinue the extension of loans to borrowers who had loans with the bank that were classified or charged off, and implement accurate and realistic models for determining impairment charges and the valuation of its trust preferred collateralized debt obligations portfolio, according to a press release at the time from the bank.
The bank reported losses of $35 million for third-quarter 2009 and attributed a significant portion of the loss to the performance of its portfolio of those securities, according to SEC filings.
Rainier Pacific's failure is a particular reversal for the hopes of its CEO, Jon Hall, who had been an executive and board member of the credit union as well. Hall led the institution through both conversions. In a January 2003 interview with Credit Union Times, Hall touted the charter change as a way a credit union could better serve the needs of its members and the broader community.
"I think we have successfully raised Rainier Pacific's profile," Hall said. "I think a broader segment of the community looks to us for help meeting their financial needs than when we were a credit union."
Hall could not be reached for comment on the bank's failure.
Reactions to the bank's failure varied. Jim Blaine, CEO of the State Employees' Credit Union, headquartered in Raleigh, N.C., acknowledged that he had not followed the institution closely since it became a bank but said that few of Rainier Pacific's members had been well-served by the conversion.
"I don't know how many of the depositors and officers were able to cash out their stock before the end," Blaine said, "but it's indisputable that the failure wasn't good for any of the credit union's members. If they were stockholders in the bank, they lost the value of their stock and if they were depositors, they lost their institution."
But Alan Theriault, founder/CEO of CU Financial Services, a consultancy for credit unions considering charter changes, saw the failure as a cautionary tale against the use of alternative forms of capital.
"Here was a healthy bank that went down this road and invested in some of the sorts of financial instruments they are considering allowing credit unions to issue to raise capital," he said. "And many of these instruments, which were debt issued by banks and insurance companies, ended up performing even worse than some of the private-label mortgage-backed securities out there."
Theriault said he doubted that there were other former credit union banks also close to failure, but he pointed to stock prices to indicate they were almost all suffering like other banks from the overall economic downturn. "With the exception of one or two, I don't think there are any with stock prices above their offering price," he said.