Dwindling capital imperils Loveland-based bank

LOVELAND – Capital levels at Advantage Bank have fallen below the threshold deemed acceptable by federal regulators, which could mean a closure or sale of the bank and making it one of the final victims of the recession.

As of the fourth quarter, the Loveland-based bank’s tier 1 leverage capital ratio, a key indicator of a bank’s health, plummeted to 2.64 percent from 4.1 percent in the third quarter. Regulators consider anything below 4 percent inadequate.

This capital ratio is the lowest it has been at Advantage since the bank was placed under a Federal Deposit Insurance Corp. directive to raise capital in October 2009.

Advantage has struggled for years to regain its footing, making efforts to raise capital and dispose of poorly performing loans. Advantage chief executive Tom Chinnock did not address the bank’s capital levels, but insisted that the bank is poised for stronger earnings in 2014. He points to the fact that Advantage has reduced its balance of non-performing loans by nearly half compared to a year ago and that it has increased its reserves. Indeed, the bank has reduced its balance of non-performing assets by 47 percent from $27.5 million to $14.5 million year-over-year in the fourth quarter.

Troubled banks often write off bad loans or sell them to other institutions for pennies on the dollar as they look for ways to raise more capital.

In 2012 Advantage sold its Boulder branch and conducted a stock offering, which temporarily boosted its capital, but in the two years since, capital levels have continued declining.

In its January 2012 stock offering, according to documents filed with the U.S. Securities and Exchange Commission, Advantage said it hoped to raise up to $8.1 million, but instead sold just $2.4 million worth of stock.

The offering followed an announcement at the end of 2011 that the bank would make a renewed push for capital, but no details about the offering were divulged at the time.
Thanks to the stock sale, by the second quarter of 2012, the bank’s capital ratio improved to 5.35 percent, placing it above the 5 percent threshold deemed “well-capitalized” by regulators, but the effects of the capital campaign were short-lived.

The bank’s capital ratios slid back below 5 percent in the next quarter, but the most recent drop to 2.64 percent has been the most dramatic.

What caused this latest decline isn’t clear.

Regulators track various kinds of capital, said Tim O’Brien, banking analyst at Sandler O’Neill and Partners, a New York-based investment firm. Capital levels are dictated by the amount of risk they are designed to offset. The riskier the loan, the more capital that must be set aside.
For example, cash kept in a simple savings account carries virtually no risk while loans carry much more financial uncertainty, O’Brien said. Tier 1 capital usually is composed of common stock and cash reserves, which also come with varying amounts of risk.

Once a bank drops below a 4 percent tier 1 ratio, O’Brien said, regulators are likely to step in to look for an outside buyer or to close the bank. However, a bank is likely to be acquired only if it still maintains good assets and talented employees.

The market for buying banks in Colorado is improving, according to Barbara Walker, executive director of the Independent Bankers of Colorado.

Improvements in loan and deposit levels, equity capital and general business confidence have led to upticks in mergers and acquisitions, a trend that is likely to continue, Walker said.
“There is increasing appetite on the buyer side,” she said. Twenty-two mergers and acquisitions have occurred in Colorado in the past five years, including the 2013 purchase of Greeley-based New West Bank by Fort Collins-based Bank of Colorado.

No Northern Colorado banks have been closed by regulators since July 2011, when Windsor-based Signature Bank and Greeley-based Bank of Choice were declared insolvent within weeks of each other and sold to Julesburg-based Points West Community Bank and Greenwood Village-based NBH Holdings Corp., respectively.

These banks, as well as Advantage and others, were victims of the recession, with many of the loans on their books going into default as companies failed and stopped making loan payments.

Most of the banks that were placed under federal orders to improve capital levels have been purchased, either outright or through an FDIC-brokered sale after the banks were declared insolvent.

The troubled banks list maintained by the FDIC has been steadily shrinking since the end of the recession, according to spokesman David Barr. The list is not broken down by state. Barr declined to comment on Advantage Bank’s status.

Nationwide, the number of troubled banks has dropped from 553 in the second quarter of 2013 to 515 in the third quarter. In the middle of 2011, the number of troubled banks hit 888.