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Miami Condos Sink Flagstaff Bank

The failed First State Bank of Flagstaff was participating in bundled real estate loans across the country, costing the FDIC $47 million in write-offs.

Sun Staff Reporter

Wednesday, September 09, 2009

First State Bank of Flagstaff didn't get into trouble making loans to people like Peter and Brent Schepper when they wanted to start Fratelli Pizza.

"We wouldn't have been able to get started without a loan," Brent Schepper said. "First State Bank was the only one willing to sit down with us."

Instead, it was investments like the million dollars sunk into a condo
project in Miami that got First State into trouble.

How much trouble? When regulators seized and closed First State on Friday, then sold it to Sunwest Bank of Tustin, Calif., they said the deal would cost the insurance fund $47 million -- nearly half the value of the First State loan portfolio.

So it was left to Glenn Gray, president and CEO of Sunwest Bank, to explain Tuesday during a visit to Flagstaff how the new owners would continue to serve loan customers like the Scheppers without losing more money.

"We don't make loans on spec businesses," Gray said, referring to speculative construction projects.

He said First State discontinued issuing those loans in December, but it was too late to prevent serious damage to the bank's fiscal well-being.

"Unfortunately, the changes had been made too late," Gray said.


In addition, Gray said Sunwest would not participate in packaged loans for projects like the $100 million Miami condos that went bust. First State was one of many community banks making bundled loans worth tens of millions of dollars to borrowers in other parts of the country.

But otherwise, Gray said Sunwest would continue to make loans -- as long as they were local.

"I don't think a bulk of the residents will be affected," Gray said. "The core of our business is in good shape."

Financial regulators closed all six branches of First State on Friday after it failed to meet an order to clean up its delinquent loan portfolio and raise $2 million in new capital.

Gray said First State's close ties to the real estate market have meant writing down more than $3 million worth of loans in the last two years

The Federal Deposit Insurance Corporation said on Friday that it expects to lose $47 million on the transaction. According the FDIC, the First State Bank had $105 million in assets and deposits totaling $95 million.

Sunwest Bank's acquisition of all the deposits was the "least costly" resolution for the FDIC's insurance fund compared to alternatives, according to the FDIC.

And Gray said the bank will still need to write down more loans in the future, but he did not offer specific details.


By contrast, Sunwest's balance sheet after 40 years in business is healthy. At the close of the most recent quarter, net income for the bank grew 20 percent year-over-year for the first half of 2009 while its assets grew by 29 percent during the same period.

The bank is a leader in homeowner association management banking and working with healthcare-related industries. The bank also has a home mortgage division, which it established after the subprime meltdown.

Former First State Bank President and CEO Kyle Curtis will serve as regional manager for Sunwest, overseeing the six branch locations in northern Arizona.

As for the 33 employees at First State Bank and its six locations, Gray said the bank will not be making any changes in the near future.

"We are not going to rush into any decisions on employees or locations," he said.


One of the only things left up in the air will be the name of the bank -- First State Bank or Sunwest Bank. Gray said Sunwest has not secured the legal rights to the name in Arizona and wasn't sure whether it would be able to get them.

"There are some legal questions, but for right now we don't have rights to the name," he said.

He noted that customers would still eventually need to order new checks because of new routing information, even if the name doesn't change.

As for Brent Schepper, he hopes the new owners will continue the lending practices that helped him start his business. He is on his third loan with the bank now, after paying off the first two.

"It is important for the community to have a local bank that is making local decisions," he said.

Joe Ferguson can be reached at