United Western Bank of Denver was closed by the FDIC last week, representing the first Colorado bank to be closed since three were closed in 2009. Overall, Colorado has fared relatively better than the nation since 2007, in terms of bank closures with about one percent of the closures and two percent of the banks. However, Colorado has 31 problem banks (23% of all banks in the State) as compared to 14% of all FDIC insured institutions nationally being problem banks and 17% of banks overseen by the Comptroller of the Currency. The problem banks are being watched especially closely by regulators and have been issued decrees of one sort of another for corrective action that must be taken. (For a list of the problem banks go to calclatedriskblog.com.)
According to the FDIC only about 5% of problem banks eventually fail and the vast majority that do fail are merged into other institutions with the FDIC covering shortfalls between the assets and liabilities of any failed institution. In Colorado, 75% of the cases of problem banks result from those banks relatively high share of commercial real estate and development loans.
The problem banking list has grown by about 12% nationwide in the last year to 937 institutions. On a per capita, constant dollar basis, FDIC insured banks had the worst year of net income in the last 40 years (see graph). The Colorado banking industry barely broke even with earnings of $5 per person in the state. The U.S. did a little better at just over $35 per person. In the third quarter of 2010, banking earnings had improved dramatically from 2009 – growing from $2 billion among all FDIC institutions nationally to $14.5 billion. Still, 20% of all institutions had a loss in the third quarter.
In Colorado loans decreased 6% from 67% to 61% of assets in 2009. There was a corresponding shift to cash and securities. Anecdotally, this trend continued in 2010. Real estate lending and leases grew from 80% to 84% of all loans during the recession in Colorado as business loans are easier to get off the books by non-renewal on an annual basis. Within the real estate category, land and development loans dropped 8% in relative share while longer term loans grew in share.
The Federal Reserve’s 3rd quarter, 2010, survey of senior loan officers shows slight easing loan requirements. Despite this very slight easing of credit, demand for loans dropped significantly — especially among small borrowers. This is to be expected as small borrowers often put up the real estate equity for collateral and that equity has taken a serious hit. Besides, everyone is still looking for commercial investment opportunities in a risk adverse world.
While much of the focus in the last two years was on residential real estate, the next two years will focus in commercial real estate and even some select new development opportunities. The key element to watch is whether or not the regulators put pressure on banks to continue to reduce their commercial and development real estate exposure by not renewing loans when the balloons come due at terms investor borrowers can afford. If too much commercial real estate ends up in the banks’ real estate owned portfolio and the banks are required to liquidate quickly, a higher percentage of the problem banks will become bank failures and commercial real estate values will face significant downward pressure. The good news is that there will be plenty of investors waiting to buy — if they can get a great deal.