The former CEO of a Burlington bank faces prison time after he pleaded guilty to making a false report to regulators that concealed his bank's mounting loan losses.
Among other things, prosecutors charge that former Summit Bank CEO James E. Bishop and his son, former bank president James E. Bishop Jr., made overdrafts on borrowers' checking accounts - sometimes without the borrowers' knowledge - to cover payments on other loans. That made it appear that the loans were not in danger of default, and misled regulators about the seriousness of the bank's financial problems.
The elder Bishop, 70, of Mount Vernon, pleaded guilty in U.S. District Court in Seattle Wednesday, Aug. 21, to a felony charge of "making a false entry in a report of an insured bank" while he was CEO. State regulators shut down Summit in May 2011 and transferred its accounts to Columbia State Bank.
James E. Bishop Jr. is being prosecuted on a similar charge and is scheduled to enter a plea on Sept. 5, according to a press release from the office of U.S. Attorney Jenny Durkan.
According to the charging document filed by prosecutors, the elder Bishop was Summit CEO from 2005 until November 2010, when he resigned. His son served as president of Summit during roughly the same period, resigning about a month before regulators pulled the plug. Between them, father and son controlled more than 50 percent of the bank's stock, prosecutors said.
In some cases, the Bishops granted troubled borrowers new loan terms and larger loan balances near the end of a quarterly reporting period, so that the new money could be used to make it appear that the loan was current. The Bishops' financial maneuvers also concealed the bank's problems from its own directors, prosecutors charged.
In one report to regulators filed on June 30, 2010, Summit Bank reported past due loans of approximately $6 million. In reality, the bank had at least $13 million in troubled loans at that time, prosecutors charge.
All that is a problem for federal regulators, because banks like Summit make loans with depositors' money. The FDIC is ultimately on the hook to protect depositors, covering loan losses to prevent those depositors from losing any of their money. The FDIC gets its money from the insurance premiums paid by banks.
When state and federal regulators conclude that a bank's loan losses are mounting, and there is no likelihood the bank can raise enough new money to cover those losses, they step in to shut down the bank.
Under the terms of the plea agreement, the elder Bishop must be sentenced to a prison term between 12 and 41 months, or either side can withdraw from that agreement. Sentencing is scheduled before Chief U.S. District Judge Marsha J. Pechman on Nov. 15.
"Our economy depends on every bank following the rules," head federal prosecutor Durkan said in a press release. "Banking rules protect individual depositors as well as our financial system. These defendants - both experienced bankers - took a myriad of steps to hide the true financial condition of Summit Bank from federal and state regulators."
The FBI's Seattle office helped investigate the case.
As part of a civil enforcement agreement with the FDIC, Bishop will pay $300,000 to the FDIC and agree to a lifetime ban from the banking business.
An FDIC agent said his agency wants to send a message to bank insiders.
"We are committed to ensuring the integrity of the banking industry and are especially concerned when bank insiders abuse their positions of trust and attempt to deceive the regulators," said Wade Walters, special agent in charge of the Western Region FDIC Office of Inspector General. "It is fitting punishment that Mr. Bishop will be imprisoned, fined, and prohibited from participation in the affairs of any federally insured financial institution going forward."
Summit had only three branches, all in Skagit County. A glance at Whatcom County online real estate records indicates that Summit Bank made a number of real estate development loans here during the real estate boom but was not a major player.
In 2010, the city of Bellingham paid Summit $100,000 to acquire two lots on Lake Whatcom Boulevard, totaling 4.5 acres, as part of the city's ongoing effort to preserve land in the lake watershed from development. Property records indicate that Summit had acquired the property in a foreclosure after making a $250,000 loan on it to a Blaine couple.