First quarter slightly less bad for banks

If down is the new up, then banks, both nationally and in Northern Colorado, were off to good start this year.

In general, not much has changed in the banking world. Loan losses and past dues continue to mount, putting a strain on capital levels and often resulting in net losses. Not all banks are following such trends, but the data show the vast majority still working through the sluggish economy.

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Nationally, year-over-year loan losses were up for the 13th consecutive quarter with a total of $52.4 billion in net charge-offs – up 38.4 percent from the first quarter of 2009. Most loan categories saw an increase in charge-offs, though the Federal Deposit Insurance Corp. pointed out in its quarterly banking review that the increases have been smaller the last few quarters. Charge-offs in the commercial and industrial loan segment actually declined for the first time in four years.

In line with the “less bad is better” philosophy, the FDIC also noted that while noncurrent loans were up for a 16th consecutive quarter, it was their smallest increase since the third quarter of 2007. Noncurrent loans include any loans past due 90 days or more or in nonaccrual status. Loans in nonaccrual status actually declined for the first time in four years.

In all, the nation continues to shed banks. During the first quarter, the number of reporting financial institutions dropped by 80 to 7,932, with 41 failures and 37 mergers, and the number on the “problem list” increased from 702 to 775, up from 305 at the end of the first quarter of 2009.

Results mirrored in region

First-quarter results were much the same for the 15 banks based in Northern Colorado. Noncurrent loans were up by 50 percent, year-over-year, to $271 million. However, that’s down from a third quarter high of $345.5 million. Other real estate owned, or OREO, has steadily risen during the past few quarters and at the end of the first quarter was up 60.9 percent from last year at $97 million.

Not all banks are saddled with past dues and OREO. Two of the larger banks in Northern Colorado – Fort Collins-based First National Bank and Greeley’s Bank of Choice – accounted for more than half the region’s total OREO, reporting $28.3 million and $32 million respectively.

Bank of Choice President Darrell McAllister said that the bank has been successful in moving some of the properties, selling between $5 million and $6 million in the first quarter, but the numbers have held steady as more go into foreclosure. Lots with structures built or started have been moving the quickest, but even some vacant land has sold.

However, McAllister worries that with the federal first-time buyer’s tax credit expired, housing inventory will stagnate and builders will once again retreat. The near future remains murky for many bankers.

“I can’t say this year will be a lot better,” McAllister said. “We are seeing fewer issues developing.”

McAllister added that he thinks things have hit bottom, but that he also wouldn’t have predicted that the bottom would have been so low. For the first quarter, Bank of Choice reported a net loss of $4.4 million – an improvement from last year’s first-quarter loss of $5.4 million – that came from $11.7 million in net charge-offs.

Following net charge-offs of $130.5 million for 2009 and another $50.4 million in the first quarter, loan portfolios at Northern Colorado banks have generally declined (see chart). Bank of Choice, like many other banks, is operating under an agreement with federal regulators, and has made it a mission to reduce its loans while raising its capital levels.

“It will still be a goal for this year,” McAllister said, adding that the bank will likely reduce its portfolio by a total of $100 million.

Despite the focus on shedding assets, Bank of Choice is making some loans in commercial and industrial or owner-occupied commercial real estate. The bank is sitting on plans to enter the agricultural lending market until it has sufficient capital for a full-fledged effort.

Earnings gains

Some regional banks are breaking from the industry norm of dismal results, and seven – about half – reported earnings gains. While many are still seeing slower loan demand, some are actually building their loan portfolios.

“We had a huge year in residential (loans),´ said Patrick Brady, president of FirstBank of Northern Colorado. “It was a record year.”

During 2009, FirstBank completed about 450 residential loan transactions. The next closest years were in the range of 250 to 275 transactions. From first quarter 2009 through first quarter 2010, the bank’s residential portfolio was up 34 percent to $199 million.

Brady explained that there were two components to the boom. First, borrowers are responding to historically low interest rates, in either a 30-year fixed mortgage or an adjustable. Second, the underwriting guidelines for residential loans through Fannie Mae, Freddie Mac and the Federal Housing Administration have become extremely tight. FirstBank is not subject to those standards since it holds most of its residential loans in its own portfolio, with the exception of 30-year fixed mortgages and certain jumbo loans.

FirstBank’s flexibility with qualified borrowers has been key to its growth. Brady gave the example of investment real estate, currently limited by Freddie and Fannie to four properties. FirstBank has no such limit and is seeing increased activity especially in Fort Collins and Greeley where rental homes near the universities are a popular investment.

FirstBank saw growth in most loan categories, and Brady anticipates growth in the commercial loan categories to continue at percentage rates similar to residential.

“Since we didn’t push commercial numbers in the late 1990s and 2000s, we’re not at the (lending) limits,” he said. “We’re taking on as many quality customers as we can.”