In January 2008, I had the opportunity to sit and chat with a manager at America West Bank in Layton. At that time the residential mortgage market was collapsing. Lending was tightening very rapidly. I asked him: "What do you do to keep your business going?". His response stunned me because it was counter to what I knew to be prudent. He says, "We are focused on expanding our commercial lending. It is the core of our business."
Real Estate Economic cycles happen in waves. Residential is first, commercial is second, and industrial is third. At that time with residential markets clearly in a downturn and commercial markets in queue to be next, I was flabbergasted that they would choose to put such a heavy emphasis on commercial lending. Economic indicators at that time suggested that the floor was about to drop out of the commercial real estate market. Clearly, management was not reading (or refused to believe) those indicators. Nobody is interested in hearing that their "core" business is about to end.
Well today's Standard Examiner reports the chickens came home to roost with an FDIC cease and desist order:
Without providing specifics, the FDIC order complains that the bank was “operating with inadequate capital” ,“inadequate loan valuation reserve” and “engaging in unsatisfactory lending practices.” The order also slams bank management and the bank’s board of directors for detrimental policies and inadequate oversight. FDIC data shows the bank had $299 million in total assets versus $286 million in total liabilities at year-end 2008.On paper it looks like America West Bank has a net worth of a mere $13 million. Yet, the report states that $40 million of commercial loans (assets) are non-performing. Non performing loans are typically valued at 50% of face value. So, lets subtract $20 million from the net worth. Uh-Oh! America West Bank is already underwater $7 Million! Yikes!
My conversation last year with America West Bank management ended on a sour note as I told him that making commercial loans was not where I would be focusing.
Now, the market is coming back into equilibrium. I anticipate more commercial loans to default so that $7 million negative worth is likely to get much larger for America West Bank. If the ship isn't righted, look for the FDIC to take custody of the bank and liquidate its assets.
Depositors beware.
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1 comment:
Looks like they committed the sin of "assuming infallibility" according to your conversation with the bank manager. I find many times upper management will surround themselves with "dimmer bulbs" so that they appear to shine brighter. Of course these dim bulbs will not step forward and rock the boat by pointing out an obviously failed (or failing) strategy. This is especially true when it's not THEIR MONEY at risk! Looks like the depositors will be the big losers in this one.
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