Denver (AP) — The downturn in real estate at a time of high unemployment, foreclosures and bankruptcies led to five Colorado bank failures this year that could cost the nation's deposit insurance fund about $1 billion, or about one-fifth of the fund's overall losses in 2011.
At least half a dozen more Colorado-based banks are under consent orders from the Federal Deposit Insurance Corp. to keep their capital up, but they are being allowed to stay open.
In all, eight banks have failed in Colorado since 2008 — a number that pales in comparison to the dozens that California, Florida, Georgia and Illinois each have had. Banks in those states have dealt with a cascade of bad loans as the real estate market suffered. Georgia has had 67 failures, far more than any other state.
Banking consultant Bert Ely suspects the problems in Colorado were slower to emerge. The state had no failures in 2010.
"One of the things that makes it difficult to predict when banks are going to fail is how quickly regulators act to close a troubled bank, in terms of detecting problems in the first place," he said. "That may be part of problem."
The $1 billion FDIC estimate represents losses through July 29 for the fund that protects depositors' balances, up to $250,000 per account.
In each failure, the FDIC had ordered the bank to raise more capital. It also ordered several to evaluate their management, and some, the FDIC warned, had too many loans concentrated in a particular area like construction and development, which struggled after 2008.
Colorado's unemployment rate tops 8 percent, while its foreclosure rate consistently ranks among the top 10 states.
The failed banks had a higher proportion of assets tied up in commercial real estate, said Fred Joseph, state securities and banking commissioner. That sector was hit hard by the economic downturn, and banks that had lent heavily to developers struggled along with developers who had trouble paying back loans.
United Western Bank of Denver and Louisville-based FirsTier Bank closed in January. Both had been among the largest Colorado-based commercial banks, with combined assets of almost $2.8 billion.
The others were Colorado Capital Bank of Castle Rock, which had branches in the greater Denver area, in Edwards outside Vail, and in Colorado Springs; Signature Bank of Windsor; and Bank of Choice in Greeley.
FirsTier, which opened in November 2003, closed with no one taking over. Its failure came after a rapid expansion in which it opened branches and added to its loan portfolio far faster than it had outlined in an FDIC-reviewed business plan, according to an August report by the FDIC's Office of Inspector General.
FirsTier focused on loans for residential development concentrated in areas north of Denver, the report said. That left it vulnerable to sharp downturns in Colorado's real estate market. In fact, more than half of the bank's loan portfolio was in residential acquisition, development or construction loans by the end of 2006.
The report said bank managers failed to effectively manage risks. But it also said a more proactive supervisory approach by bank examiners could have encouraged FirsTier to reduce its risk.
Similarly, the FDIC's Office of Inspector General found United Western had high concentrations in riskier mortgage-backed securities; certain construction, land, commercial real estate and nonmortgage commercial loans; and institutional deposits.
It said federal regulators didn't adequately address United Western's issues and could've acted sooner.
Like the banks that failed, the six ordered by the FDIC to keep capital up are spread around the state.
They are The Pueblo Bank and Trust Co., Front Range Bank of Lakewood, Mile High Banks based in Longmont, Champion Bank in Parker, First Southwest Bank in Alamosa, and Pine River Valley Bank in Bayfield.
The consent orders haven't been terminated yet, according to online records, and the FDIC doesn't comment on banks' progress in meeting them. However the banks remain open.
Colorado Bankers Association President and CEO Don Childears said he doesn't think Colorado will have more failures this year.
As of Friday, regulators have closed 74 U.S. banks in 2011.
Colorado banks have 50 percent more capital than is traditionally required by regulators, Childears said. By regulators' own calculations, 85 percent of banks in Colorado are considered well-capitalized or adequately capitalized, he said.
"They may not be making good profits right now, but who is in this economy," Childears said. "But they're good and stable."
Boston-based NBH Holdings Corp. bought 16 Community banks of Colorado branches from Greenwood Village-based Community Bankshares Inc. as well as assets of Bank of Choice in Greeley. Its CEO, Tim Laney, said this summer that Colorado's growing population and level of residents with higher education make it an appealing state in which to do business.
The latest census figures show Colorado had about 5 million residents in 2010, up from about 4.3 million in 2000. Census data from 2000 show about one-fifth of those age 25 and older had bachelor's degrees.
"We think Colorado is going to prove to be one of the more attractive states to be in. We want to be part of it," he said.
Bank managers are expected to take calculated risks in deciding loans, said Sanjai Bhagat, a provost professor of finance at the University of Colorado's Leeds School of Business. To encourage them to take a closer look at which loans to make, he suggested that top bank managers be required to have a significant equity stake in the bank that they would hold until at least two to three years after they retire.
"Once the CEO or CFO is holding a lot of bank equity, now if the equity starts going down, they will see their own net worth go down. They will think long and hard about undertaking unwise business risks," Bhagat said.
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