On Friday, January 29, 2010, the Washington Department of Financial Institutions, and the Federal Deposit Insurance Corporation (FDIC) closed American Marine Bank of Bainbridge Island, WA. This was following December 2009 attempts by American Marine Bank to improve its lending and management policies, and failed hopes that an investor would rescue the 61-year-old Washington state institution.

American Marine Bank, much like other banks in the region, has experienced defaults in real estate and participation loans since the economy’s real estate-fueled downturn began. With homebuilders and developers unable to provide debt service, American Marine Bank began to buckle as FDIC insurance premiums and costs increased. From the close of Q3 2008 to Q3 2009, the bank’s loan losses ballooned ten-fold from $1.8 million to over $18 million.

The 11 branches of American Marine Bank are in the process of being transitioned to Columbia State Bank.

The Federal Deposit Insure Corporation and Columbia State Bank entered into a loss-share transaction on $255.1 million of American Marine Bank’s assets. Columbia State Bank will share in the losses on the asset pools covered under the loss-share agreement. The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be approximately $59 million. Columbia State Bank’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s DIF compared to all alternatives. American Marine Bank is now the15th FDIC-insured banking institution to fail during 2010.

From the latest (Q3 2009) call reports, BankProspector reports American Marine Bank with leverage ratio of 4%, nonaccrual real estate loans over $25 million, and OREO balances over $7 million. American Marine Bank fell mainly due to their Construction and Multifamily portfolio, 35% and 16% of which was noncurrent.

This is second in a series of five post mortems that I’m doing on failed banks this week. This one is Evergreen Bank, formerly a community bank based in Seattle WA. Like many other community and regional banks it had to compete where the big guys couldn’t, or wouldn’t. Stats as of last reporting are as follows:

• Total Assets: $488,516,000
• Total REO: $6,730,000
• Total Nonaccrual Real Estate Loans: $51,471,000
• Tier 1 Capital Adequacy: 4%

If you’ve been a regular reader you know that I’ve been saying that nonperforming construction loans are going to be a major problem for local and community banks. Well? Construction strikes again. Evergreen Bank’s construction portfolio was at about 50% nonaccrual on its last call report. With $40,945,000 in nonperforming construction loans the bank had only $4,306,000 in construction project OREO and net charge-off’s of 2.66%.

Denying construction loan problems is not a viable option for small banks. I understand that there are certain balance sheet and reporting constraints that every bank has to wrestle with and , well, balance. Inaction, however, merely delays the inevitable. Most of the debt put on condo projects and subdivisions and such is in trouble, that’s a fact. Banks with significant construction money on the street need to take real steps to address it. Simply waiting for the spring (or some other magical) market is not the answer and will very likely be a woefully disappointing strategy for most.

UMPQUA BANK of Roseburg Oregon took over the deposits and while they are a well capitalized bank they too have their share of OREO and nonaccrual loans, and yes they have bad construction loans. A well capitalized bank with an abundance of REO and non-performing loans is an opportunity.

Evergreen Bank Cause of Death: Construction Loans

If you offer solutions to construction loan problems for banks we want to hear from you here. Leave us a comment below or contact us participate in the Distressed Property Professional’s Podcast Series.

At the end of this week we are briefly reopening our free trial offer of BankProspector. If you’re looking for distressed loans and REO direct from banks you should apply.