I am the president of American Bank and a banking veteran with more than 35 years of experience. American Bank is a nationally recognized high performing bank. We do what we do very well, emphasizing prudent real estate lending. While our largest market is Montana, we are very active in Hawaii, Idaho and North Carolina. We have recently financed successful developments in California, Texas, Colorado, Nevada and Wyoming. This is pretty amazing and fun work originating from a bank tucked away in Bozeman.

I have enjoyed a wonderful career at relatively high levels of the commercial banking industry in several locales. My experience has been woven through periods of both economic good and bad times. This background provides me with the perspective to offer comments on what is going on in the market now.

The local real estate picture is not very bright. Certain segments have over a five-year supply of product at current absorption rates. We are spiraling down and will continue downward until rational behavior returns. This means that lenders must quit throwing money at deals that historically have not made any sense. Consumers need to know that credit is not an entitlement and real estate values do not always increase in the short term. The key to success is for lenders to remain alert to solid opportunities when they present themselves.

I recently visited with a prospective customer, an aspiring developer. He has very impressive plans and is likely to find someone to loan him money on the terms he has requested. I shared these views on the market with him and he replied, “Boy, that sure is an upbeat assessment!” I then rhetorically asked, “If you are having headaches and go to the doctor who diagnoses you with a brain tumor, do you want him to tell you it is nothing—go home and take a couple of aspirin.” Wouldn’t you rather be told the truth and then plan accordingly?

Having seen the movie Casablanca before, watching it again, I wouldn’t expect Rick to get on the plane with Ilsa and live happily ever after. Likewise, I have seen this economic movie before—beginning in the mid 1980s. Consequently, I do not believe that I will wake-up tomorrow and find that the real estate market has painlessly righted itself.

Too many people (borrowers, bankers, investors and investment bankers) have done too many dumb things for this situation to be resolved without substantial pain disbursed over many folks. No optimistic happy talk will change the curing time; it’s likely measured in years.

In 1987 banks failed left and right. One such bank was United Bank of Alaska. In his June 30, 1987 financial report to the shareholders, the Chairman, John Shively, entered banking lore with straightforward remarks about the events at that time. Shively began his shareholder letter by saying, “The good news is that I am able to write my second letter to the Shareholders. The bad news is we lost $83.7 million in the first six months of this year. …

“Unfortunately, the boom came to a crashing halt,” he explained. “…Alaska banks were financing the building of condos, houses and shopping centers for the people who were building condos, houses and shopping centers. When the building stopped and other sectors of the economy began to disintegrate, people…began to leave and now we don't need all those condos, houses and shopping centers.”

While Alaska then and Bozeman now are not perfectly parallel, they are very close. Who is going to live in all of those newly constructed vacant houses in Bozeman and on the 4,000+ lots in the planning phases in Gallatin County? What is going to happen when the true impact of the construction downturn is fully realized?

We have been in an irrational market nationally and locally. We have been disproportionately rewarded, and now we face a reality check. Financially weak borrowers will seek bankruptcy. Financially weak contractors will go out of business. Imprudent lenders will suffer mightily. This will be painful in the short run but healthy long term—like a fire in a poorly managed forest. Over time a stronger local economy will result from this downturn.