Healthiest of banks fall short of lending benchmarks

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Peak Aviation Center’s Allen Matthews couldn’t get a business loan, despite no debt and a 10-year track record of success at his flight school.

Peak Aviation Center’s Allen Matthews couldn’t get a business loan, despite no debt and a 10-year track record of success at his flight school.

Are banks hoarding cash and refusing to make loans? A lot of business owners think so.

So does the Obama administration, which claims banks are slowing the economic recovery by not lending as much as they could.

Talk to the bankers themselves, however, and they’ll say the borrowers they’re seeing don’t qualify, that loan demand is down and that banking regulators are pressuring them not to lend.

Frustrated business owners don’t want to hear it. They just want to find a banker who will lend to them.

They may have a point.

A Business Journal review of bank records shows that seven of the 10 locally based banks decreased their lending year-over-year between March 2009 and this March.

Weaker banks — those with declining deposits and low capital-to-asset ratios — cannot make loans without incurring the wrath of regulators. So six of the 10 get a pass on this one.

But none of the four that remain healthy are hitting ideal lending benchmarks.

Those banks are: FirstBank of El Paso County and its sister institution, FirstBank of Colorado Springs, The Bank at Broadmoor and 5 Star Bank.

To get an idea of a bank’s health — and thus its ability to lend — the Business Journal examined a number of liquidity measures at each institution, based on Federal Deposit Insurance Corp. records as of March 31.

Among them: nonperforming loan-to-capital ratios, which reflect bad loans as a percentage of total equity; loan-to-asset ratios, or loans as a percentage of cash and other assets; and loan-to-deposit ratios, or loans as a percentage of deposits.

The healthiest banks have nonperforming loan-to-capital ratios between 1.6 percent, as seen at FirstBank of El Paso County, and 8.7 percent at The Bank at Broadmoor.

FirstBank of Colorado Springs and 5 Star Bank also have low nonperforming loan-to-capital ratios.

Based on that measure, all four could be lending more.

Using another metric, the loan-to-deposit ratios of the four healthiest banks ranged from 53.4 percent at FirstBank of Colorado Springs to 66.5 at The Bank at Broadmoor.

The higher the loan-to-deposit ratio, the more deposits a bank is lending out, rather than, say, buying CDs, Treasury bills or locking up their money in places other than loans. Healthy banks should have loan-to-deposit ratios ranging between 70 and 80 percent.

So, in this regard, the four best-performing banks still fall short.

Another measure of lending is loans-to-assets; that ideal ratio for healthy community banks is also 70 to 80 percent.

Here, again, even the strongest banks fall short, including the three that increased their loan portfolios year-over-year.

In short, business owners and others who complain that banks aren’t lending as much as they could or should appear to have a case.

A fear of making mistakes

Because of the downturn, banks say it has been difficult for them to maintain ideal ratios.

Once banks fall below the benchmarks, however, they aren’t generating an adequate return for their shareholders, said Steve Strunk, who has been in the banking industry for 34 years and is Colorado’s banking commissioner.

Strunk doesn’t think the banks are guilty of holding onto their cash.

“Entrepreneurs in this country are intentionally de-leveraging, paying off loans, because of future tax policy,” Strunk said, referring to concerns that Bush-era tax cuts will be repealed this year.

“Economically, it’s irrational to conjecture that banks are sitting on cash intentionally, rather than making loans.”

Intentional or not, rather than lending, banks are investing heavily in short-term securities, lending money overnight to the Federal Reserve and buying Treasury bills.

“The fear of making mistakes is pretty high right now,” said David Cox, assistant dean of MBA programs at the University of Denver’s Daniels College of Business. “Bankers realize they are under a microscope, some justifiably and some not. So they’re nervous about making mistakes; (they’re) just holding back money.”

Academics say that, in doing so, financial institutions are making money safely, while the bankers argue they would rather earn more money making loans. They make about a 4 percent return on loans, vs. 2 percent for Treasurys or 0.15 for lending money overnight to the Federal Reserve.

Their strategy has earned them plenty of criticism.

“They’re holding onto cash because they’re borrowing funds from the feds at a low cost and earning a rate of return on Treasurys at no risk,” said Tom Zwirlein, director of the Southern Colorado Economic Forum and professor of finance at UCCS’ College of Business.

“Banks are holding onto cash, and it can slow down or stop any economic recovery.”

Looking for good loans

Nearly every banker will say they are still lending but that demand has decreased sharply because of high unemployment and the drop in residential and commercial real estate values.

Brian Larson, president of FirstBank of Colorado Springs and FirstBank of El Paso County, said that a 70 to 80 percent loan-to-asset ratio is a “sweet spot” for community banks, an ideal range, but not always achievable.

“We’re always looking for good loans, but I’m not managing to that 70 to 80 percent. We’ve taken the approach that it’s OK to buy securities,” Larson said.

Larson’s banks have, in fact, increased their loan totals in practically every year since 2001. The loan-to-deposit ratio at FirstBank Colorado Springs has more than doubled over those years, rising from 26 percent to 53.4 percent.

“Although we’re not at the benchmark, we are making progress,” he said.

At another healthy institution, The Bank at Broadmoor, the overall loan portfolio declined nearly $10 million from last year, though that statistic doesn’t provide the entire picture.

Recently, the bank made $3 million in loans in one week.

Bank CEO Ed Sauer said his bank has money to lend and excess deposits, but until loan demand increases, the bank has “nowhere” to invest money safely, other than Treasurys earning about 1.5 percent.

“I’d rather lend it out,” he said.

Sauer would like the bank to hit a 72- to 75-percent loan-to-asset ratio.

That’s not easy, because people making monthly payments on their loans alone causes Broadmoor’s loan portfolio to decline $500,000 per month, or $6 million per year, Sauer said.

In addition, the decline in the bank’s loans from 2009 was caused after three large real estate loans were paid off. Traditionally, commercial real estate loans have made up the bulk of business loans in the Pikes Peak region, and that market at the moment is under water.

“Right now, in Colorado, CRE loans are a black eye,” said Mike League, president of 5 Star Bank, one of the healthiest local banks.

In April, 5 Star sold a $67-million portfolio of credit-card loans, dropping its loan-to-deposit ratio to 43 percent, far below the ideal. The bank is sitting on a mountain of cash — which League said he intends to do something about.

To that end, the bank is expanding its marketing and branding.

“We’re awash in liquidity, which allows us to make those loans — if we can find them,” League said.

Lack of credit-worthy borrowers

A common lament among bankers is that they would prefer to increase their lending but the potential clients who walk through their doors have poor credit and don’t qualify.

Because of the down economy, a small-business owner, for instance, who qualified for a loan in 2007 may now have an unemployed spouse, in addition to seeing the value drop of his or her home or office building.

A few bankers will admit that lending standards are more stringent since the recession. Most bankers, however, are adamant that traditional credit standards haven’t changed, only that fewer people qualify because of the wobbly economy.

Academics and many economists, on the other hand, insist that banks have changed their lending criteria.

“The standards banks are trying to apply make it hard for business owners to get loans (now) that several years ago they could. Until banks get healthier, and make loans, the economy won’t recover,” Cox said.

Of course, as long as people are defaulting on their loans or don’t qualify for new ones, banks in general aren’t likely to get much healthier.

“It’s not the case that if you build, it they will come,” Larson said. These days, getting a loan requires more money down and being more creative.

Among bankers, the consensus is that business owners are sitting back and waiting for the economy to recover first.

“They’re not lined up at the door to add inventory, expand or buy trucks,” Sauer said. “No one wants to be the first one to say they restarted the economy.”

Small-business owners

Some small-business owners, however, have lined up at the door, to no avail.

Armed with a solid credit score, Angie McKearin marched into banks and started applying for loans. She needed start-up capital for her business, Colorado Springs-based Crafty Laine, which sells modern fabrics and patterns, and offers sewing lessons.

She need not have bothered.

Three banks turned her down in short order, even though her collateral, several single-family home rental properties, was worth nearly 10 times what she wanted to borrow. One bank wanted to take possession of her stocks and mutual funds as collateral, she said.

Finally, out of frustration, she decided to self-finance. She was able to sell stocks and mutual funds to fund her new business.

Not everyone can do that, but self-financing has become commonplace these days.

Recently, Allen Mathews and Pat Carlile, co-owners of flight school Peak Aviation Center in Colorado Springs, needed to buy a $140,000 light-sport aircraft.

Although Peak Aviation has been a successful company for 10 years, and the owners have collateral and don’t have personal or company debt, they both had to use home equity loans to finance the purchase.

Matthews said the four banks that turned them down primarily blamed the economy as the reason.

“It can be quite frustrating for a business person to get refused by the bank,” Zwirlein said. “The money’s there to lend, but they’re not lending it.”

The numbers

The question of whether a bank has the capacity to lend can, in part, be answered by examining several performance ratios: nonperforming loans-to-capital, loans-to-deposits and loans-to-assets. The numbers for the Springs’ 10 locally chartered banks.

Definitions

Loans-to-assets ratio. Loans as a percentage of a bank’s assets, including cash and real estate. Ideally, this percentage should range from 70 percent to 80 percent.

Loans-to-deposits ratio. Loans as a percentage of deposits. This percentage also should range from 70 percent to 80 percent.

Nonperforming loans-to-capital ratio. Noncurrent loans as a percentage of a bank’s total equity capital. For healthy banks, this percentage should be below 20 percent.

Bank Nonperforming loans to capital Loans to deposits Loans to assets
2009 2010 2009 2010 2009 2010
FirstBank of El Paso County 3.4% 1.6% 51.5% 55.7% 44.1% 50.1%
FirstBank of Colorado Springs 5.1% 6.2% 51.6% 53.4% 47.6% 49.1
5Star Bank 2.5% 7.9% 89.5% 82.3% 68.7% 66.5%
The Bank at Broadmoor 9.2% 8.7% 72.87% 66.5% 66.5% 60.4%
Peoples National Bank 37% 62.2% 75.6% 66.4% 68.3% 58.5%
Integrity Bank & Trust 33.7% 65.5% 98.6% 87.6% 80.8% 73.3%
Academy Bank 27.9% 67.1% 70.6% 45.9% 62.4% 41%
Park State Bank & Trust, Woodland Park, Colo. 114.1% 102% 71.3% 68.8% 65.7% 62.8%
Pikes Peak National Bank 45.8% 122.9% 68.5% 64.5% 61.6% 58.4%
Rocky Mountain Bank & Trust, Florence, Colo. 219.3% 267.1% 37.4% 38.9% 33% 34.2%