Area banks strained as loan delinquencies rise
Record-setting loan delinquencies at local banks worsened during the first half of the year, even as problem loans leveled off in the rest of the state and began declining nationwide, according to recently released reports from the Federal Deposit Insurance Corp.
The reports show that nearly half of the area’s banks are still mired in a banking crisis that has produced the highest number of bank failures nationally in nearly 20 years.
Troubled banks are less likely to make loans because they are focusing on getting rid of their bad loans. Even healthy banks might be reluctant to make loans, especially those backed by real estate that is likely still declining in value.
Delinquent loans held by banks in the Colorado Springs area continued to climb at midyear, jumping 25.5 percent from a year earlier to the highest level since at least 1987 and well above the state and national averages, the latest reports show. Although profits nearly tripled during the same period, most of the improvement came from a one-time gain when 5 Star Bank sold its credit card portfolio.
More than 8 percent of the $906.2 million in loans held by the 10 banks based in the area June 30 were delinquent at least 90 days. That was up from 7.1 percent at the end of last year and 5.4 percent from a year earlier. Delinquencies averaged 5.2 percent of loans at midyear nationwide, down from 5.4 percent three months earlier but up from 4.4 percent a year earlier. In Colorado, delinquencies remained unchanged from three months ago at 4.7 percent.
“We are still seeing deteriorating asset quality, especially in commercial real estate, and that is being reflected in the numbers of some of the county’s banks,” said Larry Martin of Banking Strategies, a Denver-based bank-industry consulting firm. “Some banks are getting their arms around their loan problems, while others are still identifying issues, so the crisis is not over yet.”
The profit, loan, delinquency and reserve data were compiled by The Gazette from reports the banks file quarterly with the FDIC. The analysis didn’t include banks based outside the area, such as Wells Fargo, U.S. Bank and Chase Bank., which account for more than three-fourths of the deposits in the Springs area.
A similar analysis of data from the National Credit Union Administration showed that loan problems at local credit unions were growing, but much more slowly than at banks. Income at local credit unions for the first half of the year fell 61 percent from a year earlier, mostly because of changes in the way Ent Federal Credit Union accounts for assessments resulting from a $1 billion bailout of the nation’s credit union system.
The area’s 10 banks earned $8.88 million in the first six months of the year, nearly triple the $3.02 million they made during the same period a year ago. More than half of that profit resulted from 5 Star Bank making $4.8 million when it sold its $66 million credit card portfolio to UMB Financial. The rest was the result of the banks reducing the amount they set aside for future loan losses by 73.1 percent, or nearly $12 million, from a year ago.
When banks face problem loans, they typically set aside money to cover those losses. But in El Paso County, only three of the 10 banks did so, while six others reduced that amount. Five Star transferred money out of its loan-loss reserves after selling the credit card portfolio. Two banks under orders from regulators to reduce their problem loans, Academy Bank and Pikes Peak National Bank, both cut what they set aside for loan losses even as their problem loans surged by 59.5 percent and 49 percent, respectively.
Officials from Academy and Pikes Peak National did not respond to calls seeking comment.
Peoples National Bank and Park State Bank & Trust also are operating under similar orders from regulators. Delinquencies were down 31 percent at Peoples National and 6.5 percent at Park State. The percentage of delinquent loans was at double-digit levels at midyear for all four banks under orders from regulators to reduce problem loans.
Colorado Banking Commissioner Steve Strunk declined to comment on individual banks, but said banks generally should increase the amount set aside for potential loan losses if delinquencies are rising.
All four banks are pursuing similar strategies to comply with regulators’ orders — encouraging borrowers to refinance or pay off loans so they can shrink the size of the bank, which increases their capital-reserve ratios. The four banks reduced the size of their loan portfolios at midyear by $107.7 million, or 21.4 percent, from a year earlier, which accounted for most of the 15.8 percent reduction in the combined loan portfolios of the 10 banks.
“They ask customers to take their loans elsewhere. They begin to foreclose and charge off bad loans and become much tougher on underwriting new credit, if they do any at all,” Martin said.
“Banks in general, not just troubled banks, don’t want to make a loan to a business with declining sales or one where the owner’s net worth has declined. Until we see an improvement in the economy, it will be very difficult for banks to lend again.”
Even banks that want to lend aren’t finding many takers, at least among creditworthy borrowers. Mike League, 5 Star’s president and CEO, said his bank is looking for borrowers with good credit because the bank is flush with cash after selling its credit card portfolio, but has found that many local businesses are “sitting on cash because there is so much (economic) uncertainty. No one is buying equipment or hiring many people right now.”
Both statewide and nationwide, the banking industry is beginning to recover. Profits earned by the state’s 143 banks for the first half of the year more than quadrupled to $44 million, and nationwide bank profits jumped to nearly 20 times as much during the same period to $40.1 billion.
Local credit unions are faring far better than the area’s banks. Loans 60 days or more delinquent at local credit unions on June 30 rose 9.8 percent from a year ago, but accounted for less than 1 percent of their $2.25 billion in loans. No local credit union reported more than 1.7 percent of its loans delinquent at midyear, although three of the seven institutions lost money in the first half of the year, compared with only one in the red a year ago.
Local credit union income fell 61 percent to $13.4 million, mostly as a result of Ent, the state’s largest credit union, receiving a $14 million refund last year of an assessment paid to rebuild the industry’s deposit-insurance fund and paying a $3.28 million assessment this year. Cathy Grossman, an Ent spokeswoman, said the credit union’s income also fell from weak loan demand and declining investment income.
Aventa Credit Union lost $2.01 million in the first half of the year because it “accelerated the write-off of some of the loan portfolio that was affected by the economic downturn,” said Greg Mills, the institution’s CEO. The credit union has been profitable for three consecutive months since the write-off, which mostly were auto loans.
Credit unions nationwide reported that their percentage of delinquent loans fell to 1.7 percent at midyear and income levels for the first half of the year jumped 59.1 percent from a year ago to $1.83 billion.
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