Examiners swamped by growing number of bad banks

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A rising tide of struggling banks in Colorado has short-handed state regulators straining to stay ahead.

The budget at the state’s Division of Banking is down just a smidgen from last year, but the number of bank exams the division must do this year has jumped sharply — 45 percent.

Unhealthy banks are a risk not only to their shareholders but leave a void in the credit market for businesses and consumers hoping to borrow money. The result: another hurdle to economic recovery.

It’s a problem that won’t go away any time soon.

Historically, it takes about nine years after a deep recession for the banking industry to fully recover. If that holds true, the industry has another six years to go.

That’s a long time for a banking division that’s already understaffed and pulling long hours.

In addition to regulating Colorado’s 105 state-chartered banks, the division also conducts exams of banks in Colorado that hold public deposits.

The division examines nine public trust companies and 41 money-transmitting companies.

Last year, it conducted 153 exams. This year, as more banks join the troubled ranks, it must do 223.

The banking division plans to ask the legislature next year to approve a 10-percent examiner staff increase. Currently, the division has 27 examiners.

For its fiscal year, which ended June 30, the division came in nearly $600,000 under its budget of $4.8 million. It doesn’t anticipate having any money remaining this year.

“We’re in an ongoing recruiting mode,” said Colorado Banking Commissioner Steve Strunk.

The division of banking has experienced examiners who, Strunk said, have worked “extraordinary hours the last three years, without salary increases,” to complete the exams.

“I feel quite blessed with the staff I inherited and their level of dedication. The state would not have been served as well without them,” said Strunk, who was appointed commissioner in April.

Some Colorado banks have made substantial improvement in their situations — most notably those that realistically looked at their problems and took action in 2008, he said.

“It’s not a one-size-fits-all story about Colorado banks,” he said.

The healthiest banks are examined every 18 months.

The frequency of regulatory oversight increases according to a bank’s troubles. Banks that are having difficulties are examined annually, and some must submit documents every quarter.

Many smaller banks are continuing to have trouble. Strunk attributes their difficulties to poor management and greed.

“The fundamental reason for success or lack of success in any business has to do with quality of management,” he said. “A lot of banks have strong teams and will manage their way through this — even if they have less than desirable levels of profitability for now.”

The most troubled banks, he said, made too many risky loans and failed to develop a loyal and local customer base.

“They didn’t really develop a local constituency of customers or create franchise value,” Strunk said.

Banks that have come under regulatory scrutiny must boost their capital reserves and clean up their balance sheets by going after past-due loans and changing the way they manage their assets and portfolios.

Some in the industry say that regulatory agencies have overreacted and that the scrutiny they’re under will further deter banks from lending, which in turn aggravates the credit crunch.

“If banks are on the defense, there won’t be a lot of offense,” said Jack Kerr, market president for First Commercial Bank.

“Banks will be spending an awful lot of time trying to clean up their problems and won’t have as much time to lend — and they’ll be more fearful of it. They’re not going to lend as much, if they’re (busy) minding the ranch.”

Not everyone agrees that more bank examinations constrain lending.

“The fact that regulators are meeting with the banking community and (have) increased the level of exams should not have an impact on their ability to lend to small business,” said Greg Lopez, Colorado district director for the Small Business Administration.

Although the banking industry has seen better days, it has certainly also seen worse.

In 1990, for instance, more than 10 banks failed each week nationwide. And that wasn’t just one anomalous year. The prior year saw 470 failures, and there were 332 the following year.

By comparison, about 300 banks have failed across the U.S. in the past couple of years.

Furthermore, 87 percent of the banks on the troubled list historically have revived themselves, said Don Childears, president of the Colorado Bankers Association.

So far this year, no banks have failed in Colorado. Last year, three did.

As of June, the number of unprofitable banks in Colorado declined, year-over-year, from 29.05 to 27.27 percent. Capital ratios also improved from last year.

“We are at or above pre-crisis levels,” Childears said.

“We’ve held our own and are improving over the last couple of years — despite loan losses, lower income levels, and lower fee and interest income. In light of the economy we’re in, these things are pretty encouraging,” Childears said.

Meanwhile, the division of banking will continue to work long hours — especially until it gains approval to bolster its staff of examiners.

“We’ll see more exams because a lot of things the (banking) industry was predicating growth on didn’t happen after 2005. So the regulators have to do their due diligence to make sure banks are operating safely,” Kerr said.

“Is it going to strain the assets of the examiners? Absolutely.”