Auditors, regulators see red flags at City Bank of Lynnwood

City Bank of Lynnwood has been told by its auditors that there is "substantial doubt as to the bank's ability to continue as a going concern," the company said in a regulatory filing Tuesday.

One reason for the warning: Set to mature this year at City Bank is $360 million in brokered deposits — large pools of money that investors move from bank to bank seeking the highest return. They're more than a third of City Bank's total deposits.

Brokered deposits can flow out as suddenly as they come in, so regulators don't like banks to rely on them too heavily. Restrictions imposed on City Bank by the Federal Deposit Insurance Corp. prevent the bank from renewing those deposits as they mature.

Another cause for concern cited by the auditors was City Bank's $601 million in nonperforming loans at the end of 2008.

The filing also says the FDIC told City Bank after a recent examination that "it will receive a formal administrative action ... expected to focus on steps necessary to correct deficiencies" found by the regulators, including "deficiencies in the bank's lending operations."

Regardless of what happens to City Bank, its depositors will be protected up to the FDIC limit of $250,000.

In part to generate enough cash to refund the brokered deposits, City Bank has eliminated dividends and is selling off properties attached to bad loans.

The bank, with eight branches in North King and Snohomish counties, also revised its 2008 loss Tuesday, which worsened from its first reported $35.8 million to $60.8 million largely because management decided to set aside more money for bad loans.

City Bank had said March 16 it expected a deeper loss but had not determined how much deeper.

The revised loss of $60.8 million, or $3.86 a share, includes a hefty $119.1 million provision for loan losses, up from its originally reported $91.1 million provision for 2008. In 2007, the loan-loss provision was $1.9 million.

The bank also reduced the value of foreclosed real estate from $114.9 million to $100 million and said it will claim the increased losses as tax deductions, giving it an income-tax benefit of $26 million.

"This has been a difficult process for us to go through," CEO Conrad Hanson said in a news release. "[B]ut we believe the new appraisals reflect the significant decline in the number of monthly home sales in King, Snohomish and Pierce counties since June 2008 levels."

The bank is quickly selling properties attached to troubled loans. Since January, it has sold more than 245 properties representing over $65 million and has more than 175 sales totaling $54 million pending. It created a link on its Web site at www.citybankwa.com where potential buyers can see homes for sale.

It said it's adequately capitalized under FDIC guidelines and has liquidity of about $180 million.

The bank did not apply for money from the government's Troubled Assets Relief Program (TARP).

Asked whether the bank is concerned regulators will take it over, independent board member Marty Heimbigner said, "We are concerned about the economy and where our borrowers are being impacted by the economy. We're confident that we have the capital necessary to execute on our plan, which involves aggressively selling nonperforming assets, reducing brokered deposits and reducing the overall size of the bank."

City Bank shares fell 46 cents to close at $3.30.

Melissa Allison: 206-464-3312 or mallison@seattletimes.com