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Luckily, Silvergate Bank CEO Says He Saw Writing on the Wall Early

Silvergate Bank’s mortgage banking division had a golden opportunity a few years back to cash in when interest rates were at 50-year lows. But to bank President and Chief Executive Officer Dennis Frank, it wasn’t worth the risk.

“De novo banks were popping up like mushrooms,” Frank said about the banking climate three years ago. “Liquidity flooded the marketplace and a lot of lending was done under terms I thought were way too risky.”

So in 2005, Frank quietly shuttered the windows on La Jolla-based Silvergate’s mortgage banking operations while competitors such as Accredited Home Lending Corp. and New Century Inc. continued to reap rewards in the fertile mortgage marketplace.

“I got out of single-family (lending) because I saw the writing on the wall,” Frank said. “The competition was too fierce and underwriting was nonexistent. I got out while the getting was good.”

As of Dec. 31, Silvergate had $336.4 million in total assets compared with $460.4 million the previous year. In 2004, assets were at $491.2 million.

He said his exit from the market raised eyebrows with regulators. He said he told them, “I’m not going to make much money (in 2004).”

“I was going to continue my wholesale banking and conservative lending and, instead of continuing with my industrial bank charter, I would buy a bank,” he said. “Ideally one that had been too aggressive in lending.

“However, I was early and the dance went on longer than anybody anticipated, but I was also right.”

In 2007, both Accredited and New Century have suffered a string of shareholder suits filed against them in the face of rising interest rates, spiking defaults and falling share prices, including a class action suit filed May 3 against Accredited by shareholders.

“We’ve been anticipating a day of reckoning for the liquidity excesses,” he said.

Frank’s latest prediction is that the wave of foreclosures will impact commercial lending after moving through the subprime and prime mortgage markets.

He also sees the economy entering a period similar to the early ’90s.

“Job creation and gross domestic product fell (in 1990 and ’91). Then real estate values dropped and, as a result, banks were foreclosing on commercial real estate,” he said.

“You had the first Gulf War, a recession, and defense cutbacks; a perfect storm because it took a relatively benign national recession and hit California harder because of defense cutbacks.”

Similar to lending practices in the early ’90s, lenders’ margins have begun to narrow in fierce price competition. In some cases, Frank said, some of the price-cutting measures are shaving off points added to manage risk.

“Higher loan-to-value advances are being made and lower debt-to-service ratios are being tolerated,” adding up to high-risk loans at lower profitability, said Frank.

“(Lenders) become engorged with nonperforming assets and, eventually, your institution grinds to a halt.”


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