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Extensions enabled Sonoma Valley to postpone declaring $22 million loss

  • Glen Ellen branch of the Sonoma Valley Bank.

Sonoma Valley Bank continued to provide loan extensions to one of its largest borrowers and his business partners long after other lenders had begun to foreclose on his Sonoma County real estate projects.

By providing developer Bijan Madjlessi and his partners more time to repay, the community bank postponed foreclosing on the Sonoma County real estate used as collateral and avoided reporting any losses that would have resulted — a process that ultimately showed the deals had lost more than $22 million.

The extent of the bank's loan problems remained out of the public record until bank regulators, conducting a routine audit, forced executives in February 2010 to restate their earnings and recognize $26.6 million in troubled loans — a 300 percent increase over the $6.6 million the bank had originally reported.

Regulators shut down the bank six months later.

The federal government is estimated to have lost at least $20 million due to the closure. The bank's approximately 1,000 shareholders, whose stock was worth about $15 million the night before the bank publicly restated its loan losses, saw the value of their shares tumble 35 percent in one day. Today, their stock is worthless.

"Extend and pretend"

Beginning in 2008 and continuing until the final weeks before regulators closed Sonoma Valley Bank, Madjlessi and his business partners were given extensions to repay the millions of dollars their companies had borrowed despite defaulting on the loans, according to public records.

This practice of renewing loans that had defaulted was all-too common at troubled banks, according to one local banker, who said people in the industry called it "delay and pray." Another banker called it "extend and pretend." Both spoke on condition of anonymity, citing the ongoing investigation.

"It's not a prudent strategy. They are pushing the envelope forward," the banker said. "You may be buying time, but you've kind of dug yourself a deeper hole."

When a $9.2 million loan to Madjlessi for his condo project in Santa Rosa became due in April 2008, Sonoma Valley Bank provided him a short-term modification, according to court records.


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