Checkup for banks: How healthy are they, really?

In January, two Colorado banks, United Western Bank and FirsTier Bank, closed their doors within two weeks. But they were only two of the 23 banks that failed nationwide in the first two months of the current year.

How healthy banks are today can depend on how you look at it. Banks are failing at approximately the same rate as in 2010, when 22 banks failed in February and January. By the end of last year, 157 banks had failed. Still, the FDIC is taking an optimistic approach, predicting that the worst is behind us, according to David Barr, Federal Deposit Insurance Corp. spokesman.

“We expect 2010 to be the peak year,” Barr said. “What we have said is that we expect there to be fewer failures in 2011 and beyond.”

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Extrapolating failures for the entire year right now would be a mistake, he added. In 2008 there were four failures in the first half of the year but 21 in the second. In 2009, there were 140 failures.

“Prior to this current crisis, the last time we had more than 100 failures was in 1992 when 181 institutions closed,” Barr said.

Looking beyond bank failure numbers, there are some signs of health. Soon after FirsTier and United Western went under, Colorado Bankers Association President Don Childears pointed out that Colorado banks are holding 150 percent of the capital traditionally required by regulators, and that reserves to protect against loan losses have been bolstered to record levels.

Gerard Nalezny, president and CEO of newly merged Verus Bank of Commerce, characterized the matter of bank failures as a “shakeout where the strong community banks and national banks are getting stronger but the weaker are failing.”

Health is determined for Verus by how much easier it is than last year to find other banks interested in participating in quality loans. In Nalezny’s circles, at least, banks are becoming less nervous.

Prescriptions for health

But it will take more than the uncrippling of the credit market to get all banks back into shape. Bank of Choice, under new management, is looking into attracting outside equity and planning to downsize.

But here’s a bank where determining health can be tricky. While FDIC reports showed Bank of Choice’s assets increased from Sept. 20, 2009 to Sept. 30, 2010, they’ve also been under a consent order since April 2010.

According to CEO and President Joseph C. Bonner, at the helm of Bank of Choice only since the fourth quarter, taking asset numbers in isolation can create the wrong impression. The bank recognized a large loss, roughly $55 million in 2010, Bonner said. “Asset size doesn’t have bearing on the strength of a bank,” Bonner said, indicating that it has some bearing only if there is the market to support it. As for Bank of Choice’s health, it has already fulfilled all the requirements of the consent order except that of raising capital, and it’s poising itself for the future in a unique manner, Bonner said.

“We’ve changed the organization structure, we’ve changed management, we’ve hired consultants,” he explained. “I spent the first 90 days here getting all the pieces in place to take our case to investors. ”

Bonner said he is looking for investors who are interested in Bank of Choice and Northern Colorado as an area that will be stabilized by the growth of the oil industry. “We think that will bring jobs and demand for housing – a lot of things that help banks,” he said.

Bonner, most recently having served as a senior consultant at Credit Risk Management LLC, in Raleigh, N.C., is an industry expert and regular speaker on the development of strategies associated with the management and resolution of problem loans.

Two different outcomes

Paralleling the increasing number of bank failures are consent orders, the regulatory letters the FDIC uses to try to help banks correct problems such as undercapitalization before they become fatal. Sometimes it works, sometimes it doesn’t.

Currently seven banks in Colorado are operating under consent orders. FirsTier of Louisville was one. Undercapitalization was one of its issues, and while 245 potential bidders were contacted by the FDIC prior to its shutdown on Jan. 28, no buyer could be found. The FDIC’s Barr said that this happens in about “5 percent or so” of failed banks. FirsTier had $781 million in assets as of Sept. 30, but only $722.8 million in deposits.

The FDIC reopened FirsTier as the Deposit Insurance National Bank of Louisville for 30 days to give customers a chance to move their money. Feb. 28 is the absolute last day it will operate. All checks written on accounts that have not cleared by that date will be returned unpaid.

United Western Bank, also undercapitalized, had $2.05 billion in total assets and $1.65 billion in total deposits. The bank was closed Jan. 21, but its eight branches – including those in Fort Collins, Longmont and Loveland – reopened as First Citizens Bank and Trust Co. locations on Jan. 24.

Predicting more failures in Colorado is gloomy business, and most bankers won’t spectulate along those lines. What they will do is talk about the signs, why what’s happening can be good for some community banks, and let you draw your own conclusions.

“About half the banks in our community struggle with poor asset quality and substantial poor quality loans,´ said Leroy Leavitt, chairman of New West Bank in Greeley. “There are loan guidelines that restrict banks under consent orders. We aren’t restricted that way. We continue to get a stream of customers from banks under consent orders that are depositors. We are growing.”