Banking & Finance  November 11, 2019

Robust local economy supports area banks

Colorado’s banking industry continues to be robust because of the strong economy and low unemployment rate. Historically low interest rates haven’t caused too much of a problem for banks because they have had years to adapt to that environment, but they are still a concern.

The Boulder Valley and Northern Colorado markets continue to be attractive to bankers because of the rapid growth along the Front Range. There are 43 banks that have a presence in Boulder, Broomfield, Larimer and Weld counties, 22 of which are headquartered in the state. According to the latest numbers from the Federal Deposit Insurance Corp., locally owned banks with a presence in the four-county area had earnings of $326.1 million in the first half of 2019, with FirstBank, Community Banks of Colorado, Bank of Colorado and Alpine Bank accounting for 77.5 percent of that total or $252.8 million.

Waller

“Capital levels are very high and the Tier 1 leverage ratio is 10.56 percent; 8 percent is considered well capitalized so there’s a substantial cushion,” said Jenifer Waller, chief operating officer for the Colorado Bankers Association. “You have the past due loans below 1 percent, and they have remained there for the last five quarters. Delinquencies are very low nationwide and that is tied to unemployment nationwide being low.”

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Low interest rates raise some concern among banks because a lowering rate environment compresses net interest margins, said Shawn Osthoff, president of Bank of Colorado in Fort Collins. “We are concerned about our profitability and concerned about where the economy is heading. It has been on such a good run the last 10 years eventually it seems likely it will slow down.”

Bank of Colorado’s net interest margin dropped from 3.59 percent in 2018 to 3.37 percent during the first half of 2019.

Net interest margin is the difference between the money a bank earns on loans vs. what it pays out on deposits. If the economy is strong and people and businesses are borrowing money, a bank’s net interest margin will grow, but if the economy slows down, people borrow less money and try to pay down their debt, which forces net interest margins to drop.

Nalezny

Gerard Nalezny, chairman and CEO of Verus Bank of Commerce in Fort Collins, said that bank net interest margins have been compressing over the past few years because of the flat or inverted yield curve that has plagued interest rates since the Great Recession.

“The real uplift for banks comes from a steep yield curve. A steepening yield curve is good for banks. Banks tend to fund themselves on the shorter end of the yield curve” through money market and checking accounts and short-term CDs.

“It’s a pretty good economy,” he said. “Nobody is losing money. If a business is doing bad in this economy — and these are the good times — they shouldn’t be in business.”

One of the exceptions to this is banks in agricultural parts of the country because the ag economy is suffering currently, he said.

“Interest rate risk could be an issue, not today but tomorrow. Banks are trying to hedge their bets,” he said. “Interest rate risk is one of those things that can be a big deal for banks. The goal is to be able to manage interest risk to a zero position.”

Nalezny said that every bank has its own models and nobody can manage that risk perfectly but they try.

Verus Bank of Commerce saw its net interest margin dip from 4.60 percent in 2018 to 4.31 percent in 2019.

Twenty-two of the 43 banks in the Boulder Valley and Northern Colorado saw their net interest margins rise in the past year, including Wells Fargo Bank, which went from 3.17 percent in 2018 to 3.21 percent in 2019; JPMorgan Chase Bank, which rose from 2.33 percent in 2018 to 2.85 percent in 2019; Independent Bank, which rose from 4.02 percent in 2018 to 4.57 percent in 2019; Compass Bank, which rose from 3.27 percent in 2018 to 3.30 percent in 2019; and Bank of America, which rose from 3.15 percent in 2018 to $3.23 percent in 2019. 

Waller said that banks are required to do interest rate risk analysis so they know where they would be vulnerable if the rates go high or low. “They have to shock their portfolio and test for that,” she said. “You hedge your bets. You have things in play. If equity securities move one way, you have something to protect and shield your portfolio from drastic shifts.”

She added that the future continues to look strong but said that many people in the industry are expecting a market adjustment when it comes to real estate, especially in the Denver metro area, where properties are starting to sell for more realistic prices than in the past few years. “That’s starting to taper back to a normal level,” she said.

Even with the fear of the unknown, Colorado’s market is still very attractive to business, which, in turn, attracts many out-of-state banks to the market. “A lot of small banks are coming in and opening up one or two branches,” Waller said. These are relatively small institutions even in their home states.

“A lot of our colleagues in other states don’t have that same situation. Colorado is fortunate with that. It gives customers a lot more choice,” she said.

That said, a number of banks in the state have closed branches or announced upcoming bank closures, including BOK Financial, which closed branches in Boulder, Fort Collins and Louisville after its acquisition of CoBiz Bank in October 2018; Independent Bank, which closed four branches in Fort Collins, Greeley and Loveland after its acquisition of Guaranty Bank and Trust Co. was completed in January; U.S. Bank said in March it was closing five branches in the Boulder Valley and Northern Colorado; and FirstBank is closing its Boulder Table Mesa branch, which is located inside a King Sooper’s grocery store.

Zions Bancorporation, the Utah bank that operates Vectra Bank Colorado, announced it would be closing some of its branches and laying off 500 employees because of low net interest margins. It is not clear how many employees in Colorado will lose their jobs and whether any of the company’s 36 branches in Colorado are slated for closure. Vectra Bank operates four bank branches in Boulder, Broomfield and Longmont.

Greenwood Village-based National Bank Holdings Corp., which operates banks locally as Community Banks of Colorado, announced it would be closing two of its branches in Colorado, one in Fort Collins and one in Conifer. It also plans to relocate its Platteville branch.

Bank of Colorado continues to stay relevant in the markets where it has branch locations but, Osthoff said, he worries that “we are opening branches and other banks are closing branches. We are opening in markets we feel we have an opportunity to expand our presence.” That includes new locations in Denver, Boulder and Brighton.

The branch locations Bank of Colorado is building today are very different from what was being built 15 years ago, Osthoff said. They are smaller, more efficient and more geared toward customer service rather than just transactions. Bank of Colorado and other banks in the area have shifted many of their more traditional transactions online, like depositing checks and checking account balances.

The bank is also expanding its presence in the state via ATM live machines, or ATMs in which customers can interact with live tellers, making most of the same transactions they could make at a brick and mortar branch location.

“That technology has been terrific and allowed us to expand our footprint in our existing footprints,” he said. The ATM live machines stay open longer than traditional branch locations, including weekend hours. The company has rolled out 45 of these units. 

Bank of Colorado’s net income dropped from $37.8 million in the first half of 2018 to $32.1 million in the first half of 2019 but its total assets grew 16.67 percent from $3.67 billion on June 30, 2018, to $4.27 billion on June 30, 2019.

FirstBank, which has 20 branches in the four-county area, recorded net income of $150.8 million on assets of $19.2 billion in the first half of 2019.

Return on assets is another mark of profitability in the banking world. Anything over 1 percent ROA is considered healthy. In the first half of 2019, FirstBank’s return on assets was 1.59 percent and its return on equity was 18.39 percent. Bank of Colorado’s return on assets was 1.55 percent and its return on equity was 16.20 percent. Of the 22 locally owned banks in the area, five of them had a return on assets that was less than 1 percent, including Sunflower Financial Inc., First Western Financial; FBHC Holding Co. and Cache Bank and Trust.

Colorado’s banking industry continues to be robust because of the strong economy and low unemployment rate. Historically low interest rates haven’t caused too much of a problem for banks because they have had years to adapt to that environment, but they are still a concern.

The Boulder Valley and Northern Colorado markets continue to be attractive to bankers because of the rapid growth along the Front Range. There are 43 banks that have a presence in Boulder, Broomfield, Larimer and Weld counties, 22 of which are headquartered in the state. According to the latest numbers from the…

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