Colorado banks in distress: warning signs
When a big bank fails – think Wachovia or Washington Mutual – it’s akin to how we think a giant tree falls – the cracking noises and swaying gives warning that it’s about to come tumbling down. There’s plenty of public discourse about how troubled the institution is.
Not so much with smaller, local banks. I’m sure there were plenty of customers of Colorado National Bank in Colorado Springs caught off guard when regulators seized it March 20. While two other Colorado institutions have struck deals to be sold at the behest of regulators, Colorado National Bank was the state’s first full-fledged failure in this crisis.
There are, however, warning signs that a bank is gradually slipping into trouble. The information is found on federal regulators’ Web sites, but it’s tough for a typical bank customer to find and then figure out.
I have done the work for you. But before we go any further, let me stress that this is NOT a list of Colorado banks that are about to fail. I can’t even say they’re at significant risk of failure. So please do not run to these banks and pull out deposits that are already covered by federal deposit insurance (up to $250,000 per person, and even more in some cases). That will only make their issues worse.
This is what I can say, however: The banks’ own reports to federal regulators show that at the end of 2008, they had high levels of problem loans – enough icky assets to merit special attention from bank regulators.
Now, let me take another moment to talk about how I generated this list.
I looked at a wide range of assets in totaling up what I call “problem loans.” I took all the loans that were 30 days late or more; all loans that have truly gone bad and listed as “nonaccrual,” which means the bank has given up charging interest; and the real estate a bank owns after having foreclosed on its bad loans.
This measure is hard on banks: Regulators are more worried about loans that are past due 90 days or more than those that are still 30 to 89 days late. However, loans in the latter category have the tendency to creep into the former.
I then compared these problem loans to the bank’s “Tier One capital,” so called because it’s the highest-quality capital a bank has. Capital, to oversimplify, is the bank’s assets minus its liabilities, or what would be left over for shareholders if the bank decided to sell off those assets, pay off its debts, and hand over the remainder.
I also gave the banks credit for their “loan loss allowances,” special reserves set aside specifically for bad loans.
So, my question became this: Which Colorado banks had problem loans that equaled 50 percent or more of capital plus the loan loss reserve? At that level, regulators are sure to pay closer attention to a bank’s efforts to get its customers to pay.
The Federal Deposit Insurance Corp. lists 153 Colorado banks in its database, and 23 of them – roughly 15 percent – have hit that problematic level of problem loans.
The top four are, not coincidentally, banks that have run into regulatory action in the last year. Colorado National Bank’s problem loans are 191.7 percent of its capital and loan loss allowance (which I’ll just call “capital” from now on to simplify).
Greeley-based New Frontier Bank, which signed consent orders with regulators late last year and is trying to sell itself to get more capital, checks in with problem loans at 156.8 percent of capital.
Colorado Federal Savings Bank, a Greenwood Village savings-and-loan that operated more like a subprime mortgage company, reported problem loans at 122.9 percent of capital. It was sold to an investment group last year at regulators’ behest.
Pueblo-based Southern Colorado National Bank, which entered into a “consent order” with national regulators Jan. 27, reported problem loans equal to 105.6 percent of capital at Dec. 31. That was actually an improvement from the third quarter, when its problem loans equaled 120.7 percent of capital. President Keith Varner told the Pueblo Chieftain earlier this month “we had adequate capital but, given our concentration in commercial real estate, the federal regulators said we should increase our capital, which we’re doing.”
The next names on the list are the ones that bear watching. The banks will need to work out deals with its borrowers, raise more capital, and likely takes some nasty losses to deal with their problems.
The Pueblo Bank and Trust Co. reported problem loans at 89.2 percent of capital – also down from the third quarter, when the measure came in at 97.6 percent.
In a letter to customers posted on the bank’s Web site, Pueblo Bank and Trust CEO Bill Tandy told customers “we’re good.”
“Do we have problem loans? We sure do. And by the way, that can be said for nearly every bank in Colorado and most of the banks in the country. Are our problems more than we normally deal with? They sure are. Have we taken losses as a result? We sure have. Not only that, there is a reasonable chance we’ll lose money in 2008 as a result.”
In fact, the bank lost $9.8 million in 2008, thanks to the expense of putting $18.2 million into its loan-loss reserve. That wiped out nearly all the bank’s margin on loans, without even considering the costs of running the bank.
Barbara Walker, executive director of trade group Independent Bankers of Colorado, says part of the problem is that regulators are too aggressive in forcing banks to classify their loans as troubled.
“Community banks are ready and willing to help in the economic recovery by lending to small businesses and consumers in their communities. However, the current bank regulatory climate is causing many community banks to restrict unnecessarily their lending activities. … Overzealous field examination practices are undermining government efforts to increase lending to halt the economic recession.”
“The agencies should adopt a more flexible and reasonable examination policy, particularly with regard to real estate lending, and provide more transparency in the criteria that the examiners use to evaluate loans in the examination process,” she said. “There should be more dialogue between bankers and bank examiners to reduce the intimidation factor many bankers may feel.”
COLORADO BANKS AS OF DEC. 31
| Problem loans to capital, | ||
| loan-loss reserve | Bank | City |
| 191.7% | Colorado National Bank | Colorado Springs |
| 156.8% | New Frontier Bank | Greeley |
| 122.9% | Colorado Federal Savings Bank | Greenwood Village |
| 105.6% | Southern Colorado National Bank | Pueblo |
| 89.2% | The Pueblo Bank and Trust Co. | Pueblo |
| 80.1% | Valley Bank and Trust | Brighton |
| 73.5% | Summit Bank & Trust | Broomfield |
| 71.5% | Park State Bank & Trust | Woodland Park |
| 68.0% | *Citizens Bank | Pagosa Springs |
| 65.6% | Rocky Mountain Bank & Trust | Florence |
| 65.1% | *Native American Bank | Denver |
| 63.6% | Citywide Banks | Aurora |
| 57.9% | *Pikes Peak National Bank | Colorado Springs |
| 57.4% | Premier Bank | Denver |
| 56.2% | *Community Banks of Colorado | Greenwood Village |
| 55.8% | Champion Bank | Parker |
| 55.3% | Advantage Bank | Loveland |
| 54.1% | *Bank of Choice | Greeley |
| 54.0% | *North Valley Bank | Thornton |
| 52.4% | Colorado Mountain Bank | Westcliffe |
| 51.9% | *Peoples National Bank | Colorado Springs |
| 51.6% | *First National Bank | Fort Collins |
| 51.5% | *Colorado East Bank & Trust | Lamar |
* Bank would drop off the list if loans fewer than 90 days late are excluded
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Okay, I just signed up for a one year subscription.
1. Could you do the same analysis for credit unions?
2. Could you publish the bottom 20-25 banks on the list?
Thank you
This is why I will be signing up for your subscription service as soon as I get home. It’s solid well researched and thoughtfully written reports like this that attracted me to the RMN in the first place.
Being that I work for a Credit Union I find this really an interesting read, as the Credit Unions in general are a much more stable field of finance. I just had no idea the banking sector in the local regions were suffering such a drastic decline as well.
Kudos!
I.
Just to set the record straight, Mr. Milstead, for whatever reason, quoted what I said out of context. So allow me to add context to the remarks Mr. Milstead attributed to me:
So, how is Pueblo Bank and Trust? Well, the short answer is, we’re good.
As the Bank’s President and CEO, having been the CEO who successfully took on a problem bank in Texas during the real estate crash noted above, and with 21 years experience as a bank CEO, I can honestly tell you the answer is “good”.
PB&T currently ranks in the top 6% of banks in the nation in terms of being strongly capitalized, which is the single best indicator of survivability during times like these. We currently rank in the top 1% nationally in terms of being liquid, which is another very important indicator. Over the last ten years or so, we have ranked in the top 1% in the nation for profitability.
We don’t have any subprime loans. We don’t have any brokered deposits. We don’t have most of the problems or issues the media wants you to wring your hands over.
Do we have problem loans? We sure do. And by the way, that can be said for nearly every bank in Colorado and most of the banks in the country. Are our problems more than we normally deal with? They sure are. Have we taken losses as a result? We sure have. Not only that, there is a reasonable chance we’ll lose money in 2008 as a result.
During the first half of 2008, we put over $10 million in our loan loss reserve, because the Board and Management continue to be realistic about the loans we have, the real estate market we’re in, and the slowness of the economy. We are aggressively provisioning for loan losses both real and potential. Why? That is just the prudent thing to do, period.
The good news, even after having expensed $10.4 million in the loan loss reserve during the first half of 2008, is that we lost only $4.9 million. Said another way, if times were normal, we actually made $5.5 million for the first half of 2008, which would otherwise, once again, put us on track to be one of the top 1% most profitable banks in the United States.
If you would like to read the entire letter it is located at:
http://www.pbandt.com/letter.aspx
As a post script the Bank, after provisioning $18 million for loan losses in 2008, is making money again. In the fourth quarter of 2008 and first quarter of 2009 we made $2 million.
And to quote the Banking Commissioner for the State of Colorado in a conversation we had about four months ago, “In my 20 plus years in this job, I haven’t lost 5 minutes worth of sleep worrying about Pueblo Bank and Trust.”
Sincerely,
Bill Tandy, President CEO Pueblo Bank and Trust
In the article Mr. Milstead said “In fact, the bank lost $9.8 million in 2008, thanks to the expense of putting $18.2 million into its loan-loss reserve. That wiped out nearly all the bank’s margin on loans, without even considering the costs of running the bank.”
That is incorrect.
We lost $9.8 million in 2008 which includes ALL costs of operations.
What Mr. Milstead should have said was if the Bank hadn’t made the $18 million provision for these loans, it would have MADE nearly $9 million.
Bill Tandy, CEO Pueblo Bank and Trust
Just everyone here is clear, the problem loan ratio noted in this article is not the creation of the author, Mr. Milstead. The ratio is called the “Texas ratio” and it has been around for nearly twenty years. The ratio, to the extent it had any real predictive value in the first place, became mostly obsolete when the FDIC revised its capital standards and closing policies in the 1990’s.
For anyone to use this ratio, in any serious way, to predict whether a bank is going to fail or not is, at best, painfully naive. Yes, I know the article said this list isn’t a list of banks that will fail (wink, wink), but if not, then what’s the point of the article?
Setting aside all of the qualitative issues, the ratio itself has a number of quantitative problems, not the least of which is the absolute level of capital itself. Just as an illustration as to how unreliable this ratio is I remember when I worked for the FDIC closing a bank in Dallas with a ratio of less than 20%. And as a CEO of a California Bank, we survived a problem ratio of 608%.
No one, not even the most savvy bank analyst, can from any and all published data tell whether or not a bank will fail. To know whether or not a bank is going to fail there is a whole host of information one would need to have or know and it is not publically available. What is the Bank’s relationship with the regulators? Is the management of the bank the same management as last year or not? Does management have the background or experience to deal with an elevated level of problem loans? Has the board and management been through more than one economic cycle? What’s the Bank’s ability to raise new capital if it is needed? If a bank’s problem loans are up, is it because management is being aggressive in identifying and reserving for those problems? Or conversely, if a bank’s problem ratio is low, is it because management is reluctant to identify, or is otherwise hiding, problems? If in fact problem loans are high or are headed up, are they well or poorly secured? Or said another way, what is the real exposure to loss, and consequently risk to capital, these problem loans represent? These questions and many more go to the qualitative part of the analysis, which obviously cannot be found or answered by any combination of published financial information or ratios, let alone by a single ratio.
Bill Tandy, CEO Pueblo Bank and Trust
You’d think that with so much comment from Bill Tandy, I’d find so much to disagree with, but I don’t.
First, let me thank him for linking to his entire letter on the Pueblo Bank & Trust Web site, which I should have done. In writing an article about problem loans, I chose the portion of his letter that spoke directly to problem loans. I don’t think I quoted the letter “out of context,” unless you mean I failed to quote seven consecutive paragraphs of his letter, as he apparently feels I should have done. I think that would have been overkill. Instead, I should have provided the link so readers could see the full context.
His second comment is fair, although I disagree that my statement is incorrect. It could have been more clear.
Let me be more explicit: The bank’s net loss was $9.8 million in 2008. We agree on that. The bank made a provision for loan losses of $18.2 million, which I think we agree on.
That provision of $18.2 million was nearly has large as the bank’s “net interest margin,” which is the difference between interest charged on loans and interest paid on deposits. It’s essentially a bank’s gross margin, which doesn’t consider the costs of employee salaries, rent on its offices, or any other costs of operations.
My point was that the provision was so large, it wiped out the gross margin that usually can be expected to pay for the rest of the operating costs – and then provide profits.
The bank, as we noted, posted a net loss as a result. Of course, it would have made $9 million if we ignore the bad-loan provision. And the bank could have 100% profitability if we ignore all of its costs!
Finally, the measure I’m using is similar to, but actually tougher than, the Texas Ratio, which was indeed developed more than 20 years ago.
Bill Tandy’s list of questions that help determine whether a bank will ultimately fail is an excellent one – I can’t dispute any of them. The entire picture is indeed more complex than a single ratio. That ratio, however, is a beginning yardstick to ask further questions.
I conclude my comments with just one question: If we can’t look at this measure of problem loans and become aware that some banks have greater challenges than others, what’s the point of having the data available at all? We might as well be completely caught off guard when a bank fails.
The point of having the data is it gives us information. The danger with information is drawing erroneous conclusions from that data. It is no different than say, unemployment numbers or national housing data. Better to have it than not because we can draw some conclusions from the data. But, it is important to recognize the limits of that data.
As to your point about bank failures, who really cares anyway? There is next to nothing anyone outside the bank can do. If your deposits are insured, you’re safe. If not, get them below the insured limits and be safe. Having done that, you’re done. If the bank fails, 99% chance says it reopens Monday under a new name anyway and no one misses a beat.
Finally, lets go over our numbers one more time. In 2008, the Bank’s total interest income $24.4 million
total interest expense -$4.0 million
net interest income $20.4 million
Salaries Occup and Other -$12.0 million (not including Provision)
Net income $8.4 million (actual operational net inc.)
Provision -$18.2 million
Reported final loss -$9.8 million
As an aside, that level of net income (the $8.4 million) is nearly three times larger than the average bank our size.
Now theoretically, having hopefully discovered and recognized and properly provisioned for those bad loans we should have no provision this year and as such we should make $8.4 million in net income in 2009. The reality is we will probably provision another $2 or $3 million in 2009, which is certainly less than the $18 million in 2008, which also means we should make money this year. In fact, we made a little over a $1 million in Q4 2008 (with no provision) and a little under $1 million (with a $600K provision) in Q1 2009.
I was a victim of Premier Bank about 2 years ago when the Feds started shaking their house of cards. We were simply told one day that our LOC was no longer going to be valid because of “The Feds”. In every meeting we had with them in 2007, they kept talkin about “The Feds”. We didn’t have a clue and didn’t see their sucker punch coming. We had never been late, were using it properly (according to the bank managers) and we were considered one of their better customers. It just meant that they had so many bad loans (liquor stores, Asian restaraunts, dry cleaning stores, etc.)that they needed to close out some good ones to gain more captal. I know of another good company in the Springs that they did this too. This COS company eventually went out of business. Eric Wang, Ken So and the rest of this clan are in my opinion horrible bankers. When they ask the good loans to pay off before the due dates in order to cover for the bad loans, that means they are not good at bamking. I RAN from this bad bank as fast as I could. You should all consider yourselves warned. STAY AWAY FROM PREMIER BANK!!!
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Cindy House, INDenverTimes