Everett’s Mountain Pacific Bank pulled through the recession by getting into construction

EVERETT — Mountain Pacific Bank’s prospects looked so bleak during the recession that regulators figured the bank would close.

The Everett-based bank was heavily invested in real estate at a time when it was bad to be invested in real estate.

“When we eventually got out of the (cease-and-desist) order, they commented that we were in their top five of banks that would fail,” said Mark Duffy, Mountain Pacific’s CEO. “They assumed that we would fail.”

But that didn’t happen.

Instead, Mountain Pacific completed a remarkable turnaround, getting back into the good graces of the regulators. And more importantly, the bank started making a profit again.

Mountain Pacific went from losing $580,000 just three years ago to earning $780,000 in profit last year. And this year, the bank is on pace to earn $1 million in profit for the first time.

And all of that came about with a gamble.

At the height of the recession, Mountain Pacific found itself owning a lot of land, projects where contractors and developers had walked away. The bank could have sold the land for fraction of what it had invested. Instead, the bank went from financing projects to constructing them.

On one project, the bank built 24 homes on a lot in south Everett. The bank had an offer for $85,000 for each undeveloped lot on the project, but was able to make $100,000 a lot by going into the construction business.

That was about $360,000 at a key time for the bank.

“I tell people it helped save the bank,” Duffy said.

Duffy and Mountain Pacific made a smart move during a rough time for all banks, said John Collins, president and executive director of Community Bankers of Washington.

“That’s a good example of bankers using their initiative to keep the bank solvent and get through those tough times,” Collins said. “I have a great amount of respect for Mark.”

Mountain Pacific started 10 years ago and, in July 2006, opened its main branch at 3732 Broadway in Everett. The bank opened a second branch in Lynnwood in 2008. But just as the bank was getting going, the recession hit. At the time, there were 14 community banks headquartered in Snohomish County. Now there are seven and only two in Everett.

All of the failed banks had one common denominator: They loaned out too much money on construction projects. Mountain Pacific was no different. It had followed successful strategies employed by Snohomish County heavyweights Frontier Bank in Everett and City Bank in Lynnwood, which both collapsed during the recession.

“A lot of us followed their formula, which was the construction lending,” Duffy said. “Around here, everyone was going, ‘We’ve never had a real estate recession.’”

By 2009, the recession was in full force and Mountain Pacific, like other banks, started foreclosing on properties.

“We had an actuary, a plumber, painter — guys that were in different industries became developers,” Duffy said. “We realized when we ended up with property back that the professional developers, their projects definitely didn’t have as many issues as the guys who were in it as a second career.”

By March 2009, the Federal Deposit Insurance Corp. and the state Department of Financial Institutions put a cease-and-desist order on the bank.

“As I told my shareholders at the first bad meeting, which was in 2009 when everything was falling apart, I said, ‘I have my life’s savings in the bank, I put everything in when I started the bank,’” Duffy said. “I told them you don’t have a better CEO to turn this around, because I have my life’s savings here and my career is on the line.”

The first thing the bank did was stop making any loans except to existing customers. Then the bank raised some capital. To entice investors, the bank offered a warrant that allowed people to invest at $3 a share in 2009 and 2010 — much lower than the initial offering of $10 a share — and then buy shares again in 2014 for that same price. And the bank got creative.

With all of the land on the books, the bank decided to build homes. City Bank of Lynnwood was already doing the same thing. Mountain Pacific started with a couple of homes on an eight-lot development and found that it made some money.

At the time, the few builders who were constructing new homes were making the houses as cheap as possible. Mountain Pacific felt that it could spend a little bit more money yet still make a home for low cost.

“What I learned is you sell to the wife,” Duffy said. “That’s why we always put in a five-piece bathroom and granite tabletops and the hardwood floors.”

But the bank didn’t build too many homes before regulators put a stop to both City Bank and Mountain Pacific.

“The story we heard is it came out of Washington, D.C., they didn’t want to take the risk,” Duffy said. “If they had to come in and close the bank they didn’t want to have all of these building projects.”

City Bank went under soon after. Mountain Pacific tried a different tact: What if they just put up the land and the bank directors put up the cash to build the homes?

“We put up over a half a million dollars to front the construction of these homes,” said Rick Pedack, chairman of the Mountain Pacific board. “At the end of the day, if this didn’t work, we wouldn’t have gotten that money back.”

Pedack said he was confident in the Puget Sound area economy.

“Like I always like to say, Boeing is still building airplanes, Starbucks is still selling coffee and Microsoft is still making software,” Pedack said. “Those engines are huge for this area.”

Altogether, Mountain Pacific and its directors built 70 homes. The bank still owns some of the troubled land, property on Whidbey Island, and in Bothell and Entiat near Lake Chelan. But most of the foreclosed upon parcels have been sold and developed.

Pedack, who founded Seattle Speciality Insurance in Everett and continues with the company as chief marketing strategy officer after it was sold to National General Insurance, said that saving the bank by building homes was a rewarding experience.

“We were helping guys and gals who were pounding nails,” Pedack said. “All of those folks were earning wages and putting food on the table and providing for their families.”

While it helped the community, it also saved the bank.

“As people have told me over the past couple of years,” Duffy said, “I’m smiling a lot more than I was then.”