Huge losses and outright failures at U.S. banks have put depositors on edge in recent weeks.
But at many banks, loan defaults have not become a problem. And a few banks are actually increasing their earnings as a global credit crisis enters its second year.
“We think we will be looking at record profits this year,” said John Ikard, president and chief executive of FirstBank Holding Co. in Lakewood.
The Denver Post examined banks in the state with the smallest percentage of delinquent loans and the fattest cushion of capital on hand to absorb future losses.
Banks topping that list include UMB Financial Group of Kansas City, Mo.; the FirstBank group; Colorado State Bank & Trust; Liberty Savings Bank of Wilmington, Ohio; and Yuma-based Colorado Community Bank.
The survey excluded private trust banks and small banks with less than $200 million in assets. Banks with nonperforming assets of 2 percent or more were also excluded.
“You can have great loan growth and build a solid business without taking undue risk,” said UMB Financial CEO and chairman Mariner Kemper, who lives in Denver.
Banks in contrast
For the second quarter, UMB earnings grew 18.2 percent and revenues rose 12.2 percent from the same period a year earlier. Nonperforming loans remained a low 0.15 percent of assets at UMB Bank Colorado.
Contrast that with Wachovia, which reported a second-quarter loss of $8.9 billion and Washington Mutual, which lost $3.3 billion as their mortgage holdings continued to deteriorate.
FirstBank of Colorado did even better than UMB, boosting its net income by 41 percent in the first half of the year and holding nonperforming assets to 0.15 percent.
“We have a very conservative model that relies on core deposit growth and a conservative lending culture,” Ikard said. “We didn’t go to Las Vegas and we didn’t go to Florida.”
Las Vegas and Florida were areas with overheated real estate markets.
The banks’ employee-ownership and low turnover contribute to a culture that keeps a longer- range view than the typical bank.
“Our net worth is tied up in this,” Ikard said. “Any loans that go bad, I will have to collect on them.”
Colorado State Bank & Trust is another highly capitalized bank, at least based on first- quarter numbers from the Federal Deposit Insurance Corp., the most recent available.
“We have been through a lot of ups and downs, the vagaries of cyclical economies,” CEO and chairman Gregory Symons said. “We know how to underwrite loans and how to protect ourselves.”
The bank was strong enough that it bought struggling First United Bank, which got into trouble making loans to homebuilders. Not counting that, its nonperforming assets are at 0.28 percent.
But Friday, in a sign of how volatile financial markets remain, the bank’s parent, Tulsa, Okla.-based BOK Financial Corp., obtained a $188 million credit line from its chairman, George Kaiser. BOK expects to take an $87 million hit after Tulsa energy trader SemGroup filed for bankruptcy protection after losing $3.2 billion.
A high level of nonperforming loans is one early indicator of a bank facing trouble. A bank’s capital ratio is an important measure of how well it can survive that trouble.
Capital represents a bank’s net worth, its assets minus its liabilities. Capital is the cushion that can absorb loan losses before deposits are put at risk.
Regulators consider a bank with capital representing 10 percent of risk-based assets, primarily loans, as well-capitalized and a bank in the 9 percent range as adequately capitalized.
UMB Bank Colorado reported a risk-based capital ratio of 16.5 in the first quarter. At FirstBank, the ratio companywide was 16.2 in the second quarter, and Colorado State Bank & Trust was at 14.5 percent in the first quarter.
Most Colorado banks have risk-based capital ratios in the 10 percent to 12 percent range.
Colorado Federal Savings Bank had a ratio of only 2.66 when regulators forced the mortgage-focused thrift to find a buyer in late March.
Banks must set aside reserves to cover losses on bad loans, which reduces income. Severe loan losses can force a bank to either raise more capital or sell off assets to stay solvent.
The current market favors neither scenario.
Sink or swim on capital
Banks globally have suffered losses and write-offs of nearly $400 billion in the past 18 months, requiring them to raise $304 billion of outside capital, according to Bloomberg.
If defaults continue to rise, outside investors may not be as forthcoming, leaving banks to sink or swim on their own capital.
Although residential real estate loans are at the heart of the current crisis, other types of consumer debt and commercial real estate loans are expected to go bad at higher rates, Bart Narter, senior analyst with Celent, a Boston-based financial research and consulting firm.
“The same customers who are having mortgage pressures are having car payment pressures, credit card pressures,” Narter said.
Reduced consumer spending in turn will hurt retailers, as well as the developers on the line for new commercial projects.
At Colorado banks, commercial real estate loans represented 303 percent of capital in the first quarter, compared with residential real estate at 136 percent, according to the FDIC.
While not a firm rule, banks with high capital levels tend not to lend as much as they can and tend to be more careful about the loans they make.
Banks seeking the highest return possible for their investors can be tempted in good times to lend against as much of their capital as they can.
If a lot of banks do that at the same time, then lending standards can deteriorate and loans that shouldn’t be made get made.
Those excesses often don’t get exposed until the economy contracts.
Aldo Svaldi: 303-954-1410 or asvaldi@denverpost.com
