Banks remain confident in trying times

While banks across the U.S. are facing dire circumstances, sometimes facing takeover by federal regulators, banks in Montana are holding their own. But that doesn't mean there aren't "problem banks' here.

As of June 30, the Federal Deposit Insurance Corporation reported 829 problem banks in the U.S. with $403 billion in total assets. That was up from 775 banks in the previous quarter but a decrease in total assets from $431 billion.

The FDIC insures 7,932 banking institutions in the U.S. with total assets of $13.2 billion. Individual accounts are insured up to $250,000 — the limit was raised from $100,000 as the current recession worsened last year.

Problem banks in the U.S. now account for more than 10 percent of all banking institutions, the FDIC says. The number of problem banks hit a low of 47 banks in 2006 and a high of 928 in March 1993.

In general, problem banks on the FDIC list have serious deficiencies with their finances, operations or management that threaten their continued solvency.

Some problem banks just don't make it. As of Sept. 10, the FDIC handled 119 banking failures in 2010 at a cost of $19.6 billion. The reason regulators don't close more insolvent banks, some say, is because the FDIC's deposit insurance fund was a negative $15.2 billion as of June 30.

When President Obama signed the law increasing individual coverage to $250,000 on May 20, 2009, the FDIC's line of credit at the Treasury increased from $30 billion to $100 billion. Nevertheless, a number of large bank failures could deplete FDIC's insurance fund and cause a panic among depositors.

The state of Montana doesn't maintain a "problem bank" list, and none of the 119 bank failures in the U.S. were in Montana, said Annie Goodwin, Montana's Commissioner of Banking and Financial Institutions.

About half the banks chartered by the state are members of the Federal Reserve Bank. Most banks undergo an examination about every 18 months, she said, or more often if there are concerns by regulators.

Declining real estate values is a major source of concerns by regulators. In the Flathead and Gallatin valleys, rapid growth over the past decade ran head-on into the 2008 credit crisis and the current two-year long economic recession. Many homeowners, building contractors and subdivision developers have not been able to make payments, and those past-due loans are causing concerns for regulators, Goodwin said.

"Banks, like all businesses, are being challenged by current economic times," Goodwin said.

Banks and regulators agree that local financial institutions are nowhere near failing. Stepped up measures are a sign of the times, and keeping local financial institutions healthy is important for future recovery, Goodwin said.

"Our community banks will be the key to future recovery of local economies," she said. "These institutions are owned and operated by local people."

Freedom Bank, which opened in Columbia Falls in 2005, had three years to develop a clientele base before the credit crisis hammered the economy. On top of that, bank president Don Bennett said, additional federal regulations passed in the wake of the international financial debacle have hampered banking operations.

On Dec. 17, 2009, Freedom Bank entered into a consent order with the FDIC and Goodwin's office. The formal plan of action requires the bank to maintain its Tier 1 capital leverage ratio at 12 percent or greater. Freedom Bank, with $65 million in total assets and $61 million in deposits, and ranked 38th among state-chartered banks, had a leverage ratio of 6 percent as of March 2010.

Bennett said Freedom Bank is in good financial shape to weather what he characterizes a "perfect storm." The bank has reduced its loan portfolio and is addressing customers' problems, but with some properties losing half their value, there isn't a lot the bank can do.

Rick Hart, president of Mountain West Bank, knows from personal experience the impact of falling real estate values. When he left the Flathead Valley for Helena to take over the nationally-chartered bank in 2009, his $495,000 home sold for $272,000.

"Flathead real estate values have dropped 40 percent in many cases," he said.

Mountain West Bank, which has long specialized in small-business lending, has branches in Kalispell and Whitefish. With $760 million in assets and $630 million in deposits, in six branches across western Montana, the bank celebrated its 20th anniversary in February.

But its aggressive lending in good times created concerns among federal regulators as the recession deepened. In April, bank managers entered into a consent order issued by the U.S. Treasury Department's Comptroller of the Currency.

The order stipulates that Mountain West Bank must improve some benchmark capital ratios, correct deficiencies in credit underwriting and risk management, take action to protect certain loans, reduce its exposure to commercial real estate loans, find backup sources of liquidity, and other actions.

"We remain committed to lending in Montana," Hart said. "We won't change how we do business. We will continue to loan to small businesses until the economy straightens out."

Mountain West Bank's loan-to-deposit ratio was 115 percent in 2008. Hart said it's 90 percent now, which he called 'satisfactory." The bank's loan portfolio had peaked at $655 million and is now $555 million, he said.

All banks will be more careful now, Hart said, but it's natural for banks to pull back now. The loans Mountain West Bank made over the past decade were "not bad loans," he said — the problem was the "dynamic effect of the economy."

American Bank, with a branch in Whitefish and headquarters in Bozeman, knows about growth in the Flathead and Gallatin valleys and the impact of the recession on real estate values there.

"What started on Wall Street filtered out into the smaller communities and community banks," American Bank president Bryan Klein said.

Ranked ninth among state-chartered banks, with $391 million in assets, $296 million in deposits and six branches in Montana, American Bank entered into an agreement, not a consent order, with the Federal Reserve Bank of Minneapolis in August. Under the agreement, the bank shall not "extend, renew or restructure" any criticized loans without approval by the bank's board of directors.

Klein said that with more than $50 million in capital and reserves, and capital ratios that "far exceed the regulatory definition of 'well capitalized,'" the bank is well positioned to overcome the challenges that are prevalent in the industry today.

"In fact, American Bank's capital is in the top tier of our national peer group," he said.

Klein said the bank is reducing the level of problem assets and is moving forward. The agreement is less severe than some of the consent orders other banks are facing, he said, and American Bank is not required to raise additional capital.