Emerald City Bank: Tasks Undone As Deadline Nears

Emerald City Bank

-- Employees: 12

-- Headquarters: Seattle

-- Business: Community banking

-- Chairman of the board: Robert Coleman

-- Chief Executive Officer: Arlender Jones

-- Assets: $10.9 million

-- Loans: $3.2 million

-- Deposits: $9.4 million

-- Strategy: Secure long-term survival as a bank that serves the minority community.

Some businesses adopt strategies to gain market share or improve their profits. Others want to launch into new businesses.

But at Emerald City Bank, survival is the order of the day. The bank has been given until mid-December to raise $750,000 in new capital to avoid a possible voluntary liquidation.

So far, not a penny of that money has been raised. An audit is not complete. A stock-offering circular, which is legally necessary before stock can be sold or investments solicited, has not been written.

And the bank has yet to make a list of potential investors and amounts they could put up, said Robert Coleman, chairman of the state's only black-owned bank.

``It is in no way guaranteed that we will be able to succeed,'' Coleman said.

What the bank needs, Coleman and other directors say, is more time.

``There's no question that (the December deadline) is unrealistic,'' said Carl Smith, a business recruiter and consultant and an Emerald City director.

Emerald City, which was chartered in 1988 after federal regulators closed black-owned Liberty Bank of Seattle, was started with a mandate to serve Seattle's Central Area.

It was chartered with $3.2 million in federal money and $2 million in private capital - $600,000 from minority individuals and $1.4 million from 13 of Seattle's largest banks and corporations.

Last spring, after an investigation into business relationships between the bank and several of its directors, state Banking Supervisor Thomas Oldfield sought the resignations of Ray Merriwether, then Emerald City president and chairman, and another director, Symone Scales.

They refused, and Merriwether - the bank's largest shareholder, with 43 percent of the bank's common stock - proposed the bank be closed and voluntarily liquidated.

Community groups protested, saying a minority-owned bank is needed. Two months later, after the bank's entire board had resigned, corporate shareholders voted the liquidation motion down, elected a new board and told it to raise $750,000 to $1 million in new capital by selling 200,000 new shares of common stock.

The shareholders passed a resolution saying they would reconsider the liquidation motion in mid-December.

``If we can see some progress, that there is really something happening, I think we will give them more time to let them work it out,'' said Chuck Riley, vice chairman of U.S. Bank of Washington, one of the corporate shareholders.

Before it can solicit investors, the bank must publish an offering circular, which must include results of an audit by a certified public accountant. Coleman said George Stewart, a Seattle CPA, has been working on an audit for several weeks, but it is not complete.

A draft of the offering circular itself, which must contain summaries of the bank's history, financial performance and any litigation it is involved in, has not been written.

Coleman said he did not know who will write those parts or just how the bank's past will be presented. ``This is a touchy issue,'' he said. ``It has been discussed, but I am not at liberty to give you any more details.''

Even if Emerald City is given more time and gets its offering circular, marketing plan and advertising campaign going, raising capital won't be easy, Coleman said.

With the banking industry in a slump, bank stocks seriously depressed and the country facing a recession, the timing for a stock offering is less than ideal, he said.

Board members also see Emerald City's history as a potential obstacle to persuading investors to put up $750,000 to give the bank a new lease on life.

``There's no question in my mind that the deal can be done, but what we have is an image problem,'' Smith said.

In some ways, that problem stems from events before Emerald City was opened in June 1988.

Many people in the Central Area bought and held stock in Liberty Bank to support the idea of a minority bank. Many of those investments went back to 1968, when Liberty was founded.

When regulators closed Liberty, that stock became worthless, leaving feelings of bitterness that did not end with the opening of the new bank.

Emerald City inherited the staff, management, building and some directors from Liberty. It also inherited $8.4 million of loans that Liberty had made, many of them substandard and delinquent. Even today, 27 percent of Emerald City's loan portfolio is nonperforming. At most banks, problem loans total 2 percent or less.

Emerald City lost $194,000 in 1988, $209,000 in 1989 and $423,000 in the first three quarters this year.

Although the most recent two quarters have been profitable, the bank expects to show a loss for the full year, said Arlender Jones, chief executive officer.

On the other hand, Emerald City's equity capital was $1.07 million on Sept. 30, equal to 9.8 percent of its total assets. That is well above the federal capital requirements of 6 percent, but it is well below the $2 million Emerald City had when it opened.

Emerald's current fund-raising task was not made any easier when the Federal Deposit Insurance Corp. closed Freedom National Bank of New York, the nation's fourth-largest minority-owned bank, 10 days ago. The FDIC said Freedom had lost nearly $4 million over the past two years and was expected to lose another $2 million this year.

That bank had assets of $101.9 million, 22,000 depositors and 97 employees. Emerald City has assets of roughly $11 million, a dozen employees and an undisclosed number of depositors.

For most of the time since it was chartered, Emerald City has struggled to handle delinquent loans and deep divisions among its own directors and has operated without a marketing plan or loan officers, present and former employees say.

Last winter, the bank became embroiled in controversy over its financial condition, disclosure of loans made to its own directors and a King County Superior Court ruling that the bank and its law firm must pay a former customer about $540,000 in damages. (The lawsuit has since been settled for terms that neither side will disclose.)

Those troubles came to a head last March when Oldfield hired a Seattle law firm to investigate several issues:

-- A $300,000 loan the bank made to Ulysses Rowell, then a bank director.

-- Ties between the bank and a law firm in which Scales, then a director, is a principal.

-- Transactions involving rental space leased by Emerald City and sublet to an engineering company owned by the family of Ray Merriwether, then the bank's chairman and president.

After that investigation, Oldfield asked Merriwether and Scales to resign. They refused, and Merriwether proposed that the shareholders voluntarily liquidate the bank.

A few weeks later, all nine Emerald City directors resigned, and a temporary board was installed. In June, shareholders elected the present board and gave the order to raise new capital. Besides Coleman and Smith, the new board includes William Stone, a Central Area insurance agent; George Staggers, a personnel executive at Security Pacific Bank; and Dr. John Wilson, a physician at the University of Washington School of Public Health.

``Something has to happen by December - new money and a new board. It can't go on like this,'' U.S. Bank's Riley said at the time, referring to a long struggle for control of the bank between minority and corporate interests.

Corporations that own both common and preferred Emerald City stock are Weyerhaeuser, Boeing, Seafirst Bank, Security Pacific Bank, U.S. Bank of Washington, Washington Mutual, Puget Sound National Bank, First Interstate Bank and Key Bank of Puget Sound. Nordstrom, Safeco and Washington Natural Gas own preferred stock, and US West holds a bond issued by Emerald City.

Emerald City directors believe that if the bank raises the capital it needs and gains the support of investors, it must concentrate on banking basics.

``What the bank was chartered to do, and what we have to do, is to bring in deposits and make loans to serve the community,'' Smith said.

Coleman said Emerald City has adopted a marketing plan that calls for ``an open letter to the community'' to be sent via radio talk shows and local media asking people to become part of ``a grass-roots effort to make Emerald City Bank a first-rate community bank.'' He said the letter will go out by the end of November.

The board has also agreed on a strategy and a business plan that emphasizes small commercial loans, home-improvement loans and residential mortgages, Coleman said.

Smith said changes in the federal Community Reinvestment Act, which put more pressure on all financial institutions to serve diverse customers, could be a godsend for Emerald City. He said the bank could become ``a major conduit'' for larger banks to participate in loans with Emerald City in the Central Area.

``That is in everybody's best advantage,'' he said.

However, in order to make loans, the bank must attract deposits.

Emerald City's most recent financial statement, from Sept. 30, shows total deposits of $9.4 million.

But the majority of that money, averaging $5 million, is in transaction accounts of U.S. government agencies, mostly from the U.S. Customs Service. That money stays in the bank only a day or two on average and is not available for lending, Jones said.

Emerald City's core deposits, the checking and savings balances it can count on as a source of money for lending, have been declining. Those deposits, about $7 million two years ago, had dropped to $4.7 million by the end of 1989. The bank's Sept. 30, 1990, report showed core deposits of $3.01 million. That is 32 percent of the bank's total deposits, a much lower percentage than at most banks. At Seafirst Bank, for instance, core deposits make up 71 percent of the total.

Smith said the bank's advertising will tell the community, ``We want your business, we want your deposits and we want to raise capital.''