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The Best Little Bank in America


Orange County is the unlikely home for the one firm untouched by the subprime-lending storm.

Sunwest Bank, a community bank in Orange County, California, looked very much like an outlier from 2005 to 2007.

Orange County was the epicenter of subprime mortgage lending -- half of the biggest 20 subprime lenders in the US were located there -- and Ground Zero for mortgage brokers hawking no-money-down adjustable-rate mortgages. All the extremes of the housing bubble could be found in Orange County.

Unlike its peers, Sunwest Bank neatly sidestepped the trouble. It never touched subprime lending. It warned of the dangers ahead. And it deliberately left other speculative lending, like commercial real estate, to those banks that were addicted to it, like kids on a sugar high. Few banks were wholly untouched by the carnage; even the biggest players, like Citigroup (C), Wells Fargo (WFC), JPMorgan (JPM), and Bank of America (BAC), hardly escaped unscathed.

As Sunwest had expected, most of its competition imploded, along with the whole subprime-lending industry there. The bank has survived, but more so, it's thriving, rummaging through the rubble for things to salvage. At the end of June, the Federal Deposit Insurance Corporation selected Sunwest to take over Irvine-based MetroPacific Bank, which failed on June 26.

Given its surroundings, it could be said that Sunwest is one of the most responsible small banks in America.

"We looked foolish to our competition," Glenn Gray, the CEO of Sunwest, told me recently. Stepping aside from speculative construction lending in 2006 -- a previously lucrative business -- Sunwest actually shrank. "We looked stagnant. People were poking fun at us. We decided to wait for another day."

Based in the inland town of Tustin, Sunwest Bank is in its fortieth year. As a community bank, its clients are small businesses and homeowners. Its conservative streak -- though that's what banks were until recently -- originated 10 years ago, Gray said, when Hovde Financial bought a controlling position in the bank. It assembled an active board, of which Eric Hovde, one of its founders, is the chairman.

Founded in 1987, Hovde Financial now has many arms: It's a full-service investment-banking, asset-management, and private-equity firm focused exclusively on the financial-services sector. Its expertise and research on the housing market helped steer Sunwest away from pitfalls.

Gray became the chief executive in November 2005, having spent the previous 10 years at Finova and 10 years at Wells Fargo before that. He saw the storm clouds. Being in Orange County meant the evidence was all around, but few were willing -- or able -- to see it.

"I expected exactly what happened," he acknowledged. "This is the third serious downside cycle I have been employed in as a lender. History repeats itself."

Meeting with the board, Gray recommended the bank immediately withdraw from speculative construction lending, as well as avoid such things as SBA loans and commercial real estate. The board was already there, and the bank had recently tightened standards.
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