In early February, Spokane-based Washington Trust Bank had been looking for years to acquire a bank in the Portland, Ore., area with full branching rights, and had informed the Federal Deposit Insurance Corp. of that interest.

When the opportunity arose to acquire financially troubled Pinnacle Bank, of Beaverton Ore., Washington Trust had to be ready to buy it and take over its operations in the span of a few days.

"We submitted a bid on a Wednesday, heard back from the Federal Deposit Insurance Corp. on Thursday, and were there on Friday," says Jack Heath, president and chief operating officer of Washington Trust.

The Oregon Division of Finance and Corporate Securities seized state-chartered Pinnacle at the close of business on that Friday, Feb. 13, and appointed the FDIC as receiver.

"We had 12 people on site all weekend, which included Valentine's Day and President's Day," Heath says.

The Washington Trust people spent the weekend working with Pinnacle's vendors and connecting to Washington Trust's support systems so that Pinnacle's customers could continue writing checks, using automated tellers, and accessing their funds, he says.

They also made a link from Pinnacle's Web site to an introduction from Washington Trust and put up temporary signage inside and outside the bank to signify the changeover.

Also present were FDIC and Pinnacle representatives. The Pinnacle team's biggest priority was taking care of customers, and FDIC's focus was to minimize the loss to the deposit insurance fund it operates and to provide stability to the bank system.

The bank opened for "business as usual" on Feb. 17 under the Washington Trust Bank name.

"It was seamless for customers," Heath says. "There was no risk to deposits."

The FDIC was appointed as receiver for 25 failed banks last year, and Pinnacle was the 14th insured bank to fail this year and one of just three overall in the Northwest so far. The other two were Silver Falls Bank of Silverton, Ore., which was seized Feb. 20, and Bank of Clark County, of Vancouver, Wash., which was seized Jan. 16.

With Pinnacle, as with the others, much of the changeover process occurred in secrecy to avoid panicking customers and causing a run on the bank.

Until it nears a decision to seize a bank, the FDIC withholds the names of institutions that are on its secret "problem list" even from prospective buyers. It says on its Web site, though, that as of Dec. 31 that list had grown to 252 banks with total assets of $159 billion, up from 76 banks with total assets of $22 billion a year earlier.

Less than three weeks before the seizure of Pinnacle Bank, and shortly before the bank reported a fourth-quarter 2008 loss of $2.1 million, the FDIC invited Washington Trust to conduct a one-day review of Pinnacle's books.

"The market had softened on the real estate side," Heath says. "The bank had significant loan problems and had a difficult time raising capital."

That was also just days after WTB Financial Corp., the Spokane-based bank-holding company that owns Washington Trust Bank, received $110 million in Troubled Asset Relief Program (TARP) funds through a government purchase of the bank's preferred stock.

The FDIC informed Washington Trust at 2 p.m. Feb. 11—two days before Pinnacle was seized—that it had opened a secret online auction for the bank, which reported total assets of $71.9 million, as of Dec. 31.

As a single-branch bank located about 10 miles from downtown Portland, Pinnacle was just what Washington Trust was looking for to expand its banking activities in that market.

"That became the priority of the day," Heath says of the auction.

Heath says he doesn't know how many other banks bid on Pinnacle Bank.

"The bidding process is confidential," he says. "You don't know if you paid too much or if you won by $1."

Health declines to say how much Washington Trust paid for Pinnacle, but David Barr, an FDIC spokesman, says Washington Trust Bank agreed to buy Pinnacle's assets for $64.4 million, which is a $7.6 million discount from the bank's estimated asset value.

Washington Trust entered into a loss-share agreement transaction in which it and the FDIC will share responsibility for absorbing the losses on $66 million in loans covered under the agreement. The cost to the FDIC's insurance fund is estimated at $12.1 million, Barr says.

Heath says Washington Trust likely will realize a profit from the acquisition this year.

The acquisition gives Washington Trust immediate full branching rights in Oregon, something that takes years to acquire through organic growth, Heath says.

The state of Oregon protects the market by requiring out-of-state banks to operate loan offices at least three years before they are allowed to operate a new full-service bank branch, Heath says. "The way to get branching powers is to buy a bank."

While the Portland market was Washington Trust Bank's primary target in Oregon, the bank might look to expand to Eugene, where it also has clients. Eugene is about 100 miles south of Portland via Interstate 5.

"We're looking at opportunities and taking our time getting into that market," Heath says, adding that the bank has no other acquisitions in the works. If the FDIC should call again, though, he says, "It went well enough that we would consider doing another transaction like that."

The Pinnacle acquisition is a good use of capital provided through the federal TARP program, Heath says.

"Instead of allowing banks to fail, allowing other banks to take them over is much more efficient," he says.

Through TARP, the U.S. government provides capital to participating banks by buying preferred stock in them. Banks agree to pay a 5 percent dividend on that stock for the first five years and 9 percent after that. In most cases, the U.S. government receives warrants through which it can buy common stock in the banks at a price that's fixed for 10 years.

"TARP funds are going to healthy banks, and we're paying interest," Heath says. "The effective cost would be more than 6 percent."

He says banks that receive TARP money need to use it to generate revenue, rather than holding it just to bolster their capital reserves.

"That's expensive capital," Heath says. "Banks can't let it sit idle."

Meantime, he's anticipating that Washington Trust will see continued loan growth through 2009.

"A lot of business is being done, and a lot of companies are expanding," he says. "Our loan growth is good, although it's not as strong as it was a couple of years ago."

Washington Trust also plans to pursue loans for first-time home buyers who are eligible for new tax incentives under the federal economic stimulus plan, he says.

Washington Trust, a wholly owned subsidiary of WTB Financial Corp., has assets of more than $4 billion. The bank has 41 branches in Washington, Idaho, and Oregon, and loan-production offices in Utah and Arizona.

The FDIC was created in 1933 in response to widespread bank failures that occurred in the 1920s and early 1930s. It insures deposits at the nation's roughly 8,300 banks and thrifts and promotes the safety and soundness of those institutions by identifying, monitoring, and addressing risks to which they're exposed. It receives no federal tax dollars, but rather is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities.