State bank failures exceed expectations when measured by assets
August 29, 2011
Although Colorado avoided the worst of the housing bubble, banks in the state are failing at five times the expected pace.
Colorado has seen eight banks holding $6.7 billion in assets fail in the current downturn.
Based on the state's share of U.S. bank assets, something closer to $1.3 billion would have been expected, according to a Denver Post analysis of 382 bank failures since 2008 began.
"The economies that were doing the best before the bubble are the ones that got hit the worst," said Don Coker, a banking analyst based in Atlanta.
That's the normal logic of bank failures. Booms create busts, and banks that are overexposed get squeezed.
Reflecting the wild run up and then down in home values that overheated their economies, California and Florida alone account for about 40 percent of failed bank assets.
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Colorado, however, leads a group of about six states hard hit with bank failures even though they avoided the excesses of the housing boom.
In short, Colorado got little of the upside and is getting smacked hard on the way down.
Colorado ranked 37th among states for the volatility of its home prices since 2000, putting it in a different league than states like Arizona, California and Florida, where bank failures followed a housing bubble.
One reason home prices were restrained in Colorado was the heavy job losses suffered in the tech and telecom downturn. Those losses drove up foreclosures and kept a cap on home prices.
Colorado's economy, measured on an inflation-adjusted per capita basis, grew just 3.7 percent last decade, compared with a 6.7 percent gain nationally, according to the U.S. Bureau of Economic Analysis.
Neither rate is particularly robust. But the gap does raise the question of why an underperforming economy is now seeing so many loan failures.
A possible explanation is that many of the failed banks were caught up in a "stealth" development bubble in fast-growing counties, such as Weld and Douglas.
Bankers failed to see the risk ahead, and regulators in turn failed to contain those dangers.
"There were certainly issues with regulators that could have been better," said Larry Martin, a Denver banking consultant.
A chief fault is the rapid rate at which regulators allowed some new banks to grow in an otherwise sluggish economy, Martin said. Another is the heavy concentration of risky loans some banks piled on.
But he also concedes forces were at play that even more robust banking regulation couldn't restrain.
"Would we have had less failures? Probably," he said. "Would we have had no failures? Probably not."
Who got hit
Bank failures weren't unexpected given the severity of the economic crisis, and, taking an optimistic view, fewer than 5 percent of the nation's banks have failed despite the worst economic downturn since the 1930s.
Eleven states have suffered no bank failures, and seven more have had only a single failure from 2008 to Aug. 12.
"I don't equate a bank failure with a regulatory failure," said Michael Stevens, senior vice president for regulatory policy at the Conference of State Bank Supervisors. "The economy shifted too much."
But the lack of failures in some states puts an edge on the question of why other states have seen so many failures.
Colorado ranks fifth among 18 states that had a disproportionate share of failed bank assets.
Using bank assets instead of the number of institutions that failed gives a better sense of the banking capacity lost in a state.
But there is a caveat. The approach puts states like Minnesota and North Carolina, which host big banks, in a better light because they have more assets.
Based on institutions, Colorado had eight failures, exactly what would be expected. But those failures have been primarily among larger rather than smaller players, something that wasn't necessarily expected.
Home to failure
The worst bank failures are concentrated in states with volatile home prices. And housing problems created a ripple effect that spread throughout the entire economy.
"There was a housing problem, which served as the genesis of many other industry problems, thereby doing great damage to the economy as a whole," Stevens said.
But Colorado leads a group of nine states with high failures where home prices didn't get as frothy.
Three of those states saw the failure of a large institution exposed to mortgages made in overheated states.
The collapse of Colonial Bank in Alabama, Irwin Union Bank and Trust in Indiana and Guaranty Bank in Texas single-handedly pushed those states into the high-failure category.
Two other states — Nebraska and Arkansas — each had a single large failure whose assets pushed them into the high- failure category. Given that there have been only two failures in each state, it's too early to tell whether a trend was forming.
By contrast, Georgia has suffered more bank failures — 68 — than any other state, even though, like neighbor South Carolina, it didn't have extreme home-price shifts.
Both states appear to have suffered from the spillover of the Florida housing bubble, said Matt Anderson, managing director of Foresight Analytics, a firm that tracks commercial land values and bank health.
Home prices in Atlanta proper may not have risen as much as in nearby Florida, but they fell hard when the market turned. They are now below 2000 levels, according to the Federal Home Finance Agency's Home Price Index.
"The slowdown happens and the demand goes away," Coker said. Because of their small size, many of Georgia's failed banks couldn't weather the downturn.
That leaves Colorado and Kansas as the two states of the nine with high failure but no frothy housing prices where failures are more difficult to explain.
Although bank failures nationally are down sharply this year from the previous two years, Colorado has had five failures this year that will cost the nation's deposit insurance fund an estimated $1 billion.
That comes on top of another $1 billion hit to the fund from three Colorado bank failures in 2009.
Even though Colorado banks accounted for 0.4 percent of the nation's banking assets at the end of 2007, they have drawn 2.5 percent of the losses in the nation's deposit insurance fund.
Don Childears, president and chief executive of the Colorado Bankers Association, said that ratio and others need to be put in perspective.
About half of the state's banking assets are held by large out-of-state players such as Wells Fargo, JP Morgan Chase and U.S. Bank.
That's different from such states as California and Florida, which are served primarily by banks in their own states, he said.
Add back in the out-of-state assets, and Colorado has a failure ratio about 2.5 times what would be expected rather than 5.1.
Another explanation is that pockets of the state did get overextended in real estate, even if the whole state didn't.
Douglas and Weld counties in particular had some of the fastest population growth rates in the country a decade ago. Larimer, Broomfield and Mesa counties also enjoyed rapid growth.
"There was robust development, especially up north," said Fred Joseph, the state's acting bank commissioner. "Things are moving, and no one ever thinks it will end."
Supporting that argument is the fact that three of the eight Colorado failures have come in Weld County.
Banks based in Louisville and Castle Rock also failed.
And United Western Bank, one of the larger Colorado failures, was of a casualty of heavy exposure to mortgage-backed securities.
Joseph didn't oversee state banks when the bad loans were made but has been tasked with cleaning up the failures.
While a "stealth" housing bubble might explain why certain Colorado banks failed, it doesn't necessarily justify the loose lending that went on.
Martin said easy lending appears to have created an illusion of prosperity that might have blinded some regulators and managers to the dangers that lurked ahead.
To understand why banks are failing this cycle, there appears to be one ratio that matters more than home-price swings, unemployment or number of bank formations.
In Colorado as a whole, banks were concentrated in construction, land and development loans at three times the U.S. average.
Two of the Colorado banks that failed this year had concentrations as high as half of all loans — in a state with subpar economic growth.
No state with disproportionately high bank failures had below-average concentrations in construction and land loans.
Most of the states without bank failures do.