Bank of American Fork's survivor's tale began with an unexpected phone call.
When residents in the rural town of American Fork, Utah, started losing their homes to foreclosure during the financial downturn, bank executives prepared for a "deep dip," says Richard Beard, then and now chief executive at the $1.1 billion-asset bank.
As the crisis intensified Beard received a call from his brother, a physician, who said he wanted to invest "a couple hundred grand" in real estate while prices were low. What happened next helped keep the bank profitable, and it is the subject of an academic paper that recently won a competition held by the Conference of State Bank Supervisors and will be presented at a Federal Reserve meeting this fall.
The call gave Beard an idea about how to manage the bank through the mortgage bust. "What we've got here is a mismatch in capital," Beard said to himself.
With the support of regulators, Beard established a separate investment fund to buy foreclosed property from the bank. The fund, structured as a limited liability corporation, provided regional investors an opportunity to speculate on real estate. It also allowed the bank to quickly shed low-value assets.
That story is the focus of a case study by a group of University of Utah students that won the CSBS competition, which pitted research papers from college students across the country against each other. It was part of a broader initiative by CSBS to promote academic research about, and job prospects in, the community banking sector .
"These banks are out there, doing unique things to provide access to financial services to customers," said Mike Stevens, an executive vice president at CSBS. "We needed a mechanism to extract those stories. And who better to do that than all of these universities and business schools?"
The Utah students looked at strategies that the Bank of American Fork used to stay healthy and pay dividends during the crisis, when more than 20% of banks throughout state disappeared. The students will present their study at a Fed conference on community banking in September in St. Louis, where Chair Janet Yellen is expected to give the keynote address.
Several other schools submitted papers, including the University of Arkansas, DePaul University and University of Missouri in Kansas City. A panel of academics, bankers and CSBS executives were involved in choosing the winner.
Each project matched up to five students with executives from a local community bank. The students produced a 25-page paper and 10-minute web video that analyzed a particular business strategy.
The University of Utah students also interviewed top executives from the Utah Department of Financial Institutions.
The competition gave the competitors a glimpse of what it means manage a business that has a community mission, said Jack Brittain, a professor at the University of Utah who advised the student project.
"To me that was inspiring, and I was surprised by that. Business schools tend to be so large and corporate in their orientation," Brittain said.
American Fork, which is located just south of Salt Lake City, is "a dinky little town" — the kind of place where the downtown strip includes the city hall, gas station and local diner, Brittain said.
The bank has been part of the community for over a century. When the crisis hit, it responded quickly to both customer feedback and regulatory warnings.
In addition to launching the foreclosed property fund, bank executives met every other week to review loan files and discuss workout strategies. It also launched a series of new products that paid more for deposits and offered investors loans to buy foreclosed homes and renovate them, according to the University of Utah report.
"There were multiple small things — none of it was huge," Brittain said.
One of the most gratifying parts of the competition for Beard was teaching students about business strategy at small banks.
"How do you deal with capital when prices have gone down more than 50%? How do you deal with somebody who last week you were good friends with, and this week you're going to have to foreclose on them?" Beard said, discussing some of the questions he raised with the students.
CSBS will begin accepting applications for next year's competition on Aug. 29.