The seizure and forced sale of Colorado National Bank in Colorado Springs by federal regulators Friday is the state’s first in more than a decade.
But a banking expert warns that it probably won’t be the last.
“The banks that are most at risk are those who had the most aggressive growth in the past five, six or seven years where it was not balanced with appropriate underwriting on the loans,” said Larry Martin, president of Bank Strategies LLC in Denver.
Loans that allowed developers to convert raw land into housing developments, office buildings, strip malls and other commercial uses are a common theme in many of the 20 bank failures seen nationally this year, said David Barr, spokesman for the Federal Deposit Insurance Corp.
“Those loans tend to be the most risky,” Barr said.
That’s because of how long it takes from when the loans are made to when projects are completed.
The FDIC took over the Colorado Springs bank Friday evening and sold it to Herring Bank of Amarillo, Texas, which reopened the four branches Saturday.
Although he hasn’t seen Colorado National’s books, Martin said much of his consulting business the past 12 months has shifted to helping banks deal with bad loans, and he knows the pattern well.
Banks are taking back more land development loans after customers fall behind. But when they go to sell the collateral, they can’t recoup the loan amount, even accounting for the down payments developers made.
Raw land prices, in particular, are down by 30 percent to 50 percent in some local markets, Martin said.
As banks write off those losses, regulators are requiring them to raise more capital.
Unable to do that, the banks reduce the size of their loan portfolios by not renewing credit lines or raising interest rates.
What that ends up doing, however, is pushing the more creditworthy borrowers elsewhere, while leaving the borrowers most likely to default behind, Martin said.
Martin thinks the closure of Colorado National isn’t so much a reflection on the Colorado Springs real estate market as on the management philosophy of Team Financial Inc., the bank’s Kansas-based parent company.
“Its objective corporately was to generate loans, but it didn’t do it in a prudent manner,” he said.
Aldo Svaldi: 303-954-1410 or asvaldi@denverpost.com
