Saturday, April 10, 2010

Utah banks enter 2010 in better shape

Utah banks enter 2010 in better shape
Recession ยป State supervisor says it's too soon to tell if the industry has touched bottom.


By Paul Beebe, Salt Lake Tribune
Updated:04/10/2010 06:45:27 PM MDT


Several community banks in Utah struggling with bad loans tied to real estate appeared to turn a corner for the better at the end of 2009.

But with two failures already this year and other banks still carrying overdue or defaulted real estate loans on their books, it's hard to know with certainty that lenders are firmly in recovery mode.

Lenders say their banks have raised new capital, written off toxic real estate loans and boosted reserves for future loan losses. And despite ongoing weakness at many banks, depositors' money -- insured up to $250,000 per account by the Federal Deposit Insurance Corp. -- isn't at risk, they say.

Still, many admit the danger isn't over. While a slow recovery is taking hold, they think home prices will continue to sink this year, leaving banks with little margin for error.

Meanwhile, bank lending remains weak, threatening the ability of businesses to finance expansion and new hiring that could drive Utah's 7.1 percent unemployment rate down from its highest level since 1984.

"We believe that we won't make a lot of progress in the economy until the last quarter, and then in the last quarter things hopefully will start to rebuild," said Paul Mathews, president of Holladay Bank and Trust.

"If I were guessing, we are probably at least a year away from the bottom," said Ron Spratling, the bank's chairman.

Holladay was one of an assortment of community banks with precarious levels of real estate loans to enter 2010 in better shape than just three months earlier.

Prime Alliance Bank of Woods Cross, SunFirst Bank and Village Bank in St. George, Capital Community Bank of Provo and First Utah Bank in Salt Lake City also stabilized or reduced the proportion of their troubled loans to their capital and loss reserves.

The six lenders also fattened their capital cushions to levels exceeding the FDIC's standards for well-capitalized banks. Shareholders of First Utah Bank, for example, added $1.5 million in December, President David Brown said.

And while First Utah's "troubled asset ratio" of capital to bad loans still exceeded 100 percent at the end of the fourth quarter, much of the real estate it took back when borrowers didn't repay the bank is under contract to be sold, Brown said.

"Things are perhaps better than you see," he said.

Community banks are probably holding their own, said Tom Bay, supervisor of banks for the Utah Department of Financial Institutions. But, he went on to say, it's too soon to tell if the banking industry has touched bottom and is recovering.

"They are tied to the economy like everyone else. They are just hoping, like everyone else is, that things will start to fall into place, as far as the economy is concerned," Bay said.

Some lenders weren't able to weather the Great Recession. In January, Bay's department seized Barnes Bank after its troubled asset ratio to capital climbed to 320 percent, bringing the Kaysville bank to its knees. Rumors the bank was in trouble caused a huge run on its deposits, depleting its capital.

Last month, the department closed Ogden's Centennial Bank. Its ratio had ballooned to 829 percent. Both banks had lent heavily to land developers who defaulted when real estate values plunged.

Two banks heavy into real estate lending -- Gunnison Valley Bank in Gunnison and Orem's Western Community Bank -- saw their troubled loan ratios climb during the final three months of 2009. Neither has failed, but both face different futures.

Western has reached a deal to sell 51 percent of the bank to a Utah County group calling itself Rock Canyon in Organization. The investors intend to expand into retail, manufacturing and agricultural lending.

Gunnison, in Sanpete County, is profitable, and President Paul Andersen believes the bank "is looking a lot better."

Gunnison has lined up $4 million in new capital. It has stopped making real estate construction loans and is focusing instead on agriculture and consumer lending. And the bank has cut the value of most of its real estate loans because they are no longer worth the amount shown on its books.

"Things have stabilized. We've still got some [real estate loans] out there, but they've been written down. So our losses are going to be nowhere near what they were," Andersen said.

In February, the FDIC ordered Village Bank in St. George to develop a plan within 60 days for boosting its already hefty capital reserves. The agency also told Village Bank to purge its worst loans within 10 days.

President Douglas Bringhurst said Village Bank has raised additional capital and is foreclosing and writing off loans in order to bring the size of its portfolio into line with its capital.

But while Bringhurst says the bank is doing better, he won't say it's healthy.

"I don't have an answer to that," he said. "We have signed an agreement with the FDIC to work through the problems they have identified, and we are in the process of fulfilling their wishes and doing what they want us to do."

Some bankers think regulators are too pushy. Howard Headlee, who directs the Utah Bankers Association, said Bringhurst may have been unwilling to make a stronger case for Village Bank because of his contact with FDIC examiners.

"I know he's tired," Headlee said. "Dealing with the regulators is an exhausting process. But when you take a step back and take a look at their numbers, [Village Bank] has a lot to be proud of.

"They are a long way from what most people would consider an unhealthy bank," Headlee said.

Spratling, chairman of Holladay Bank, said Barnes and Centennial banks could have survived if the FDIC had given them more time to work out their problems.

That view is gaining some traction in Congress. Two weeks ago, Rep. Walt Minnick, D-Idaho, and Rep. Barney Frank, D-Mass., asked the Government Accounting Office to assess whether federal and state banking regulators are being unreasonable in their examinations of community banks.

Overzealous field examiners are also provoking banks to curtail their lending, which exacerbates the economic downturn, Minnick and Frank said last month in a letter to the acting comptroller general, whose agency supervises national banks.

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