Lynnwood's City Bank gets tighter scrutiny

City Bank of Lynnwood, hurt by heavy lending to developers and homebuilders, on Thursday became the latest local bank to submit to tighter oversight from federal and state regulators.

It signed an agreement, called a cease-and-desist order, that requires City Bank to shrink the volume of nonperforming loans and foreclosed real estate it's carrying on its books; reduce its dependence on brokered deposits; increase its capital levels; and make other operational and organizational changes.

The move came on a day when six Illinois banks and one bank in Texas were shuttered, bringing the number of U.S. bank failures this year to 52.

Conrad Hanson, the chief executive of City Bank, said the bank already is doing most of what's in the order. It is selling off houses and lots at the rate of $30 million to $40 million a month, he said, and using the proceeds to repay brokered certificates of deposit as they mature.

He said City Bank hopes to sell an additional $200 million or so in real estate in the second half of 2009, if mortgage rates stay low and the recession bottoms out sooner rather than later.

"I think everybody's extremely pleased with the progress to date," he said in an interview.

Going forward, he said, City Bank likely will be a smaller, more diversified bank, with about $1 billion in assets.

City Bank is one of the worst hit among area banks that relied on builders and developers for big chunks of their lending business. That strategy paid off during the housing boom, but since local markets began deflating many of those borrowers have had trouble paying back their loans.

As of March 31, construction and land-development loans made up 59.9 percent of City Bank's more than $1 billion loan book, according to data reported to the Federal Deposit Insurance Corp. Nearly three-quarters of those loans are either more than 30 days past due or no longer accruing interest.

Nearly 44 percent of City Bank's $1.37 billion in assets consisted of repossessed real estate, loans past due more than 30 days, and "nonaccrual" loans -- those for which the bank is no longer counting on receiving all the interest payments due it. That was the highest level of such loans among 53 banks and thrifts analyzed by The Seattle Times using March 31 data.

City Bank also had the lowest coverage ratio -- money reserved against expected future loan losses as a percentage of problem loans -- of those 53 institutions.

About a dozen Washington banks are operating under tightened regulatory scrutiny, including HomeStreet Bank of Seattle, Horizon Bank of Bellingham, and Frontier Bank and Mountain Pacific Bank, both headquartered in Everett.

The bank announced the FDIC order late Thursday, after the close of the day's Nasdaq trading. City Bank shares fell 15 cents to close at $2.03.

The Associated Press contributed information on bank closures in Illinois and Texas.

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