Bank loan portfolios shrank in 2009

Local banks collectively trimmed more than $880 million from their loan portfolios in the past year, illustrating the decline in credit for Northern Colorado borrowers.

The 15 banks with charters based in Larimer and Weld counties decreased total loans by 14.5 percent to $5.2 billion at the end of 2009. Statewide, banks reduced their loans by $4.7 billion or just over 11 percent. Community banks typically serve as lenders for locals – small business, commercial real estate and the like – so the decline in credit speaks volumes about business activity.

If the health of Northern Colorado’s economy is reflected in the balance sheets of its local banks, it is definitely a dualistic situation. Industry-wide, financial institutions are struggling to keep on top of declining real estate values, higher regulatory expectations and declining creditworthiness of customers.

In Larimer and Weld counties, banks saw noncurrent loans – those delinquent at least 90 days or in nonaccrual status – jump from $162 million at the start of 2009 to $300.9 million at the end. Other real estate owned – foreclosed properties held by banks – increased 140 percent to $92.1 million.  While those increases are slightly higher than the state and national rates, not all local banks fall into the same category.

Large losses at big banks

Of the three Northern Colorado banks with more than $1 billion in assets, two reported large losses for 2009. Fort Collins-based First National Bank, with assets totaling $1.9 billion, had a net loss for the year of $37.6 million on charge-offs of $87.2 million and an increase in provisions for loan loss of $75 million compared to year-end 2008.

First National started off 2009 as a $2 billion-plus bank but saw a 34 percent decline in its loan portfolio throughout the year. A chunk of the $723.5 million drop was associated with the sale of its $143 million credit card portfolio to its holding company. Unlike many banks that shed the largest percentage of loans in commercial real estate, First National had a 55 percent drop in its commercial and industrial loan segment.

“Really what’s happening is that our customers are paying down their loans,´ said First National President Mark Driscoll. He attributed the $190.2 million decline in the commercial and industrial loans largely to a few sizable loans being paid off.

First National, which has been operating under an agreement with banking regulators since June, has tightened its credit standards. However, Driscoll points out that it doesn’t mean the bank isn’t lending.

“We’ve always been in the market for (commercial and industrial) loans,” he said. “We actively are looking to extend credit, with the exception of commercial real estate.”

Commercial real estate loans are a bit of a taboo for many banks right now, as regulators crack down on concentrations and real estate values continue to drop. Greeley-based Bank of Choice shed $111.1 million in construction and land development loans while boosting some other areas for a net portfolio decline of $87 million.

“It was a very difficult year,´ said Bank of Choice President and CEO Darrell McAllister. “Many customers have struggled and when customers struggle, we struggle.”

In an annual letter to shareholders, he described it as the most difficult in his long career in banking. Bank of Choice, with $1.22 billion in total assets, reported a net loss of $48.1 million – $25 million of which was a non-cash goodwill writedown.

For the year, the bank charged off $22.8 million worth of assets and pumped $38 million into loan loss reserve. Finding a bright side, McAllister pointed out that without those charges the bank would have netted $14 million for the year.

The bank is also seeing a bright side in the real estate industry. A Denver-area condo project, which accounts for about one-third of Bank of Choice’s $31.6 million in real estate owned, has seen a lot of interest lately. Of the 44 condo units the bank took into possession, 18 have recently gone under contract.

Some positive news

For some banks, the balance sheets have been peppered with positive news. Fort Collins-based Bank of Colorado, with $1.89 billion in assets, reported a net income of almost $22.5 million, up from $16.7 million in 2008.  Similarly, the FirstBank network throughout Colorado reported its best earnings growth in its 45-year history, with net income of $146 million compared to $127 million in 2008.

FirstBank of Northern Colorado reported a net income of $4.4 million, up from $3.2 million in 2008. Breaking from the general trend, the bank actually increased its loan portfolio.

“It’s all interconnected,” explained President Pat Brady. “Our profitability drives capital growth, and capital growth allows for additional loan growth.”

Brady is confident about the current market for loans because “the cat’s out of the bag.” He feels that the bubble has already burst, so there are fewer surprises when it comes to valuing collateral. FirstBank of Northern Colorado’s loans were up $54.1 million from the start of 2009. Most of the growth was in one-to-four family residential loans. Brady added that the bank is focused on working on owner-occupied properties and small, local businesses. Secondarily, it is looking to work with established local real estate investors.

Even with the positive growth, Brady is careful not to be overly optimistic. There are always unknowns and surprises, and regulatory uncertainty has the entire industry on edge.

“The question that we have, like anyone has, is what is the government going to do,´ said Home State Bank CFO Mark Bower.

Home State reported a net income of $1.4 million, down from $2.5 million in 2008. Bower pointed out that the bank would have been close to flat year-over-year if not for an extra $1 million expense incurred for deposit insurance. The Federal Deposit Insurance Corp. issued a couple of special assessments during the course of 2009 to boost up the Deposit Insurance Fund, which had been depleted and illiquid after the 185 bank failures since 2007.

Outside of the regulatory environment, Bower said there have been positive signs in the region. The bank is seeing activity, especially in the residential market.

“I think the good news, from our perspective, is that people are coming into the market to be buyers,” he said, adding that the bank has been in discussions with some national investors interested in Northern Colorado assets.

In all, the industry is still working through assets gone bad either because of the economy in general or real estate values in particular. While there seem to be signs that this year will be better than the last, most bankers agree that there is still several years of workout before they would deem the market healthy.

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