Tuesday, July 19, 2011

FirsTier Bank's Last Tier

2011 Structured Sales

In the late spring Commercial Real Estate Direct reported that the FDIC was planning to market $1.5 billion of assets under their structured sales program. No new FDIC sales have been announced this year. The last structured sale from 2010 (RADC/CADC 2010-2 Venture, LLC) closed in January 2011.

In particular, among the assets to be offered, were loans fresh from the January 28 closure of FirsTier Bank. The FDIC sale “involves $300 million of ADC loans on commercial properties in Colorado. They were on the books of FirsTier Bank, a $781.5 million-asset bank in Louisville, Colo.”

Commercial Real Estate Direct also indicated that at the time the FDIC planned to create “two pools, with balances of $160 million and $140 million, and expects to take offers on July 12. Its goal is to make the assets as attractive as possible for small investors. “

Portrait of a Bank Failure, How FirsTier Bank Imploded

As Heather Draper in the Denver Business Journal (February 4th, 2011) very skillfully chronicles:

Not all bank failures are the same, but the stories of troubled Colorado banks this year share a common theme.

Draper’s FirsTier timeline tells the story (we have heard before):

FirsTier, founded in 2003 by banker Joel Wiens and his son, local entrepreneur Tim Wiens, grew to seven branches and more than $900 million in assets in its first six years.

Its growth was concentrated in commercial real estate loans, particularly land and development deals.

The severity of FirsTier’s financial situation first captured regulators’ attention in July 2009. The Federal Deposit Insurance Corp. found that operating losses were rapidly depleting capital and the bank was struggling to maintain adequate reserves for loan losses, according to the findings of an emergency meeting on Jan. 27 held by the state banking board.

At that time, the FDIC concluded that the bank’s regulatory capital was overstated by $10.8 million, its allowance for loan and lease losses “was grossly deficient,” and an additional $8.5 million was required to get loan-loss reserves to adequate levels, the bank board reported.

On Jan. 22, 2010, FirsTier Bank entered into a consent order with the FDIC that required the bank to submit a plan to maintain a Tier 1 risk-based capital ratio of 10 percent of average total assets and a total risk-based capital ratio of 13 percent; to recognize losses on a timely basis; to reduce its concentration of construction and development loans; and to improve its loan underwriting and loan administration procedures.

FirsTier founder Tim Wiens was personally involved in real estate development and seemed to have a high tolerance for risk, maintaining a large concentration of commercial real estate loans long after the FDIC had advised banks in 2006 to lower those concentrations, said local banking analyst Larry Martin, CEO of Denver-based Bank Strategies LLC.

By Sept. 30, 2010, the bank had slipped to “critically undercapitalized” with total risk-based capital of 2.9 percent and Tier 1 risk-based capital of 1.59 percent. (The FDIC considers a bank “well capitalized” when it has a total risk-based capital ratio of 10 percent or more and a Tier 1 risk-based capital ratio of 6 percent or more.)

Officials from the FDIC and the state banking division conducted a special visit to FirsTier early in January, and determined that the bank needed another $10.5 million to cover loan losses, and once those losses were recognized, the bank’s Tier 1 capital would fall to a negative $2.36 million and the bank would be insolvent.

As of Jan. 27, recapitalization hadn’t occurred. The Colorado Banking Board held an emergency meeting and determined “that an emergency exists that may result in serious losses to depositors.”

At the meeting, the board approved the seizure of the bank after the close of business on Jan. 28 and the appointment of the FDIC as receiver/liquidator.

Tier 1 Capital

A bank’s Tier 1 Capital Ratio is an indicator of its strength and ability to absorb potential losses. The Tier 1 capital ratio is a measure of a bank’s core equity capital relative total risk-weighted assets. Risk weighted assets are the assets such as cash, loans, investments and other assets that the bank has invested its capital in.

As residential and commercial values dropped in 2008 and 2009, FirsTier’s risky commercial real estate loan portfolio performance quickly eroded any protective layers or tiers of capital the bank had in reserve.

The FirsTier Assets Structured Sale: A Little Good News

Sale of assets so soon after the bank failure provides an opportunity for the new investors to quickly pick up where the bank and FDIC left off, perhaps resolving credits more effectively that will not have languished nearly as long in a sometimes crippling institutional limbo.

The FDIC should be announcing the winning bidder(s) and pricing soon.