On the mend: Springs banks on road to recovery

The worst appears to be over for banks based in the Colorado Springs area.

Problem loans began to decline last year, and most institutions either reduced their losses or returned to profitability, according to recently released 2010 data from the Federal Deposit Insurance Corp.

Losses and loan delinquencies peaked at record levels at midyear for the eight banks based in the Springs area, but half of them are still operating under agreements with regulators that require them to take steps to reduce problem loans, restrict lending and prohibit paying dividends to owners. The decline in problem loans is the first since the recession began three years ago and comes after delinquencies reached record levels in the quarter ended Sept. 30 at nearly 10 percent of all loans held by the area’s banks.

“The banks in Colorado Springs are making progress on improving their asset quality and having to set aside less in loan-loss reserves as a result. That is a good sign and means that they are turning the corner and are on the mend,” said Larry Martin of Banking Strategies LLC, a Denver-based bank consulting firm. “For these banks, the worst appears to be over unless economic conditions worsen significantly. Some are likely in a position to resume lending right now, but loan demand remains weak due to high unemployment.”

Delinquent loans held by Springs-area banks at the end of 2010 fell 12.7 percent from a year earlier to $61.3 million, or 8.6 percent of their combined loan portfolios. That was down from a peak of $74.6 million, or 9.9 percent of the banks’ combined loan portfolios at midyear.

In another sign that loan problems are on the mend, the area’s banks last year cut the amount they pumped into reserves against potential loan losses by 83.3 percent to just $5.12 million, one-sixth of the more than $30 million set aside during 2009.

That helped the banks earn a combined $10.6 million profit last year, compared with an $829,000 loss for the same banks during the previous year. Nearly half of the profit came from a one-time $4.8 million gain reported by 5 Star Bank from the sale of its $66 million credit card portfolio to UMB Financial Corp.

All but two of the area banks reduced their losses, returned to profitability after a loss or increased profits last year compared with 2009.

Five of the eight banks performed better in the second half than the first.

“We are definitely moving in the right direction as an industry in Colorado Springs,” said Ed Sauer, president of The Bank at Broadmoor and chairman of the Colorado Bankers Association.

“While the industry is recovering, it can’t fully recover until there is more demand for loans. We have millions to loan and nobody wants it. Our pipeline of new loan requests is nonexistent. Businesses are staying on the sidelines.”

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, Chase Bank and FirstBank, which merged its two Springs-area banks into its Lakewood bank during the final quarter of the year. The banks based outside the area hold more than 80 percent of the deposits in the Springs area; many are owned by holding companies that publicly report earnings.

The four banks under agreements with regulators — Academy Bank, Park State Bank, Peoples National Bank and Pikes Peak National Bank — all are pursuing similar strategies to comply with regulators’ orders by encouraging borrowers to refinance or pay off loans so they can shrink the size of the bank and thereby increase their capital reserve ratios.

The four banks reduced the combined size of their loan portfolios by $82.5 million, or 19.1 percent, including a reduction of nearly one third by Academy Bank.

CEOs of several local banks said their banks foreclosed on property that was collateral for defaulted loans and have since sold several of those properties to recover at least part of what the bank had loaned on the real estate. CEOs also acknowledged they still have plenty more to do to dig out of their loan problems.

Pikes Peak National President Robin Roberts said many of the bank’s borrowers are still making payments on loans that regulators have classified as problem loans, mostly as a result of the collateral being worth significantly less than the amount due on the loan.

The west-side bank earned a $273,000 profit last year, compared with a $635,000 loss during the previous year. Its delinquent loans increased slightly from a year ago to $9.83 million and now make up 21.5 percent of the bank’s loan portfolio.

“We loan to small businesses, and it hasn’t been an easy time for them. However, we are seeing some improvement in the business climate in general, and are seeing some activity in terms of businesses being sold and transactions happening that have helped our loan portfolio,” Roberts said.

Park State CEO Tony Perry said the bank last year foreclosed on several properties that were collateral for defaulted loans, and sold $1.5 million in foreclosed real estate in the final quarter of last year.

He predicted Park State would return to profitability this year for the first time in four years.

The Woodland Park bank cut its losses last year to $1.56 million from $2.17 million in 2009 and reduced its delinquent loans at the end of 2010 by more than 60 percent from a year earlier to $3.31 million, or 6.1 percent of its loan portfolio.

“I am becoming more confident that we are nearing the end of this cycle for this bank,” Perry said.

“We still remain under pressure from falling real estate values, but I believe we are making progress because we have continued to work with and communicate with our customers.”

Peoples National President Brendan Zahl said the bank’s profits were boosted by a strong year from its Peoples Mortgage Corp. subsidiary, and he attributed the reduction in the bank’s delinquent loans to a new executive hired in July to focus on problem loans and foreclosed real estate.

Officials from Academy did not return calls seeking comment.

Academy more than doubled its profits last year to $6.47 million, mostly by reducing the amount it set aside for potential loan losses by $12.3 million, or 75 percent. Academy’s problem loans grew by 20.6 percent to $29.8 million, but were down 18.6 percent from the previous quarter. Peoples National cut its losses in 2010 by more than two thirds from 2009 to $772,000 and reduced its problem loans by 41.6 percent during the same period to $8.14 million.

Another bank with ties to the Colorado Springs area that is operating under an agreement with regulators also is making progress recovering from its loan problems. Rocky Mountain Bank and Trust made a $503,000 profit last year, a turnaround from a $9.2 million loss in 2009.

The bank reduced its delinquent loans by 12.9 percent during the same period to $10.2 million, but they still account for 22.6 percent of its loan portfolio because Rocky Mountain reduced the size of the portfolio last year faster than its problem loans.

Rocky Mountain CEO Everett Covington said he expects the bank will increase profits this year and will meet capital-reserve requirements in its agreement with regulators by year’s end.

He added that the bank already has transferred deposits in the bank by an Oklahoma company totaling more than $100 million to another bank to comply with another part of the agreement designed to reduce the bank’s dependence on a single depositor for a major part of its deposit base.

Although Rocky Mountain is chartered in Florence, most of its officers are based in Colorado Springs, and most of its deposits and lending are in the Springs area.

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CREDIT UNIONS ALSO RECOVERING

Colorado Springs-area credit unions also reported fewer problem loans than a year ago, but increased assessments for a bailout of the nation’s credit union system reduced their income last year compared with 2009, according to recently released reports from the National Credit Union Administration.

Loans 60 days or more delinquent at the area’s seven credit unions fell 8 percent from a year ago to $17.6 million, but made up less than 1 percent of the credit unions’ combined $2.25 billion loan portfolios. No local credit union reported more than 1.52 percent of its loans delinquent at the end of 2010.

That improvement didn’t make it to the bottom line, however, with income at the seven credit unions last year declining 15.8 percent from a year earlier to $40.8 million, mostly as a result of the increased assessments. Even before the assessments, income for the seven credit unions was down 6.7 percent.

Ent Federal Credit Union, southern Colorado’s largest financial institution, reported that its income for 2010 before the assessments was down 1.5 percent from 2009 to $46.8 million.