[dropcap]I[/dropcap]n 2006, the owners of Louisville’s Heritage Bank, including founder Bob Beauprez, were ready to sell. And First Community Bank, an aggressive company in Albuquerque, New Mexico, was looking for a way to expand in Colorado.
The resulting deal, if you’ll pardon the cliché, looked like a win-win. Beauprez and his family grossed $16.5 million from the $72 million sale. And First Community nearly tripled its number of Colorado offices.
The end result, however, was unexpected losses, both for the bank and for Beauprez’ political future.
Within months of buying Beauprez’ bank, First Community disclosed that the amount of problem loans — loans for which the borrower had fallen seriously behind on payments — was much higher than Heritage Bank said in its final reports to regulators, seven months earlier.
Heritage Bank listed $4.2 million in “noncurrent” loans at Dec. 31, 2006, in its report to the Federal Deposit Insurance Corp. In August of 2007, First Community said $23.6 million of Heritage Bank’s loans were then 90 days or more late with payments, or were otherwise “potential problem loans.” Later that month, in a previously unreported regulatory filing, First Community pegged the amount of loans with “potential credit concerns” at $47.4 million, or roughly 15 percent of the loans on Heritage Bank’s books at the time of the sale.
Those numbers suggest the bank Beauprez frequently touts on the campaign trail as a success story was on the path to serious trouble and may have ultimately required its own bailout.
Heritage’s loan problem blemishes Beauprez’ image as a successful banker and businessman, an essential part of the personal narrative he conveys in his campaign to unseat Governor John Hickenlooper. And the bad-loan problem provides ammunition to his political opponents, all too eager to link him, fairly or not, to lax banking regulation, the financial crisis, and the resulting wave of bank bailouts.
‘Out for the Big Banks’
The latest attack along these lines launched Wednesday from Making Colorado Great, a 527 organization run by liberal political operative Michael Huttner. The television advertisement cited Heritage Bank’s problem loans, legislation Beauprez supported in Congress, and the ultimate collapse of First Community Bank in concluding Beauprez “is out for the big banks and himself. Not you.”
The Beauprez campaign hit back quickly Thursday, calling the advertisement “outrageously false” for the connections that it made and for the claim that Heritage Bank “failed to disclose” its problems. Campaign manager Dustin Olson likened it to “blaming JFK for Watergate because it started in the house he once lived in.”
Peter Hanson, an assistant professor in the department of political science at the University of Denver, says the ad is part of Democrats’ recent efforts to convince voters that Republicans can’t be trusted with the nation’s finances, a turnabout from traditional views.
“Consider the way Democrats went after Mitt Romney for his work at Bain Capital. There is an opportunity for Democrats to seize on what otherwise be a strength for Republicans and turn it against them. Beauprez might want to claim that his experience in banking is exactly what Colorado needs because the state will benefit from a governor who really understand finances … if the Democrats can tie him back to mismanagement at the bank, that calls the whole narrative into question.”
Beauprez’ self-described evolution from folksy farmer to shrewd businessman, accomplished largely through his leadership at Heritage Bank, is a large part of his resume. A “Throwback Thursday” post on his campaign website’s blog earlier this month reprints an aged newspaper ad for the bank that pictures Beauprez, his daughter Melanie and his then-cow Mary under the headline “Maverick.”
“24 years ago, Bob and [wife] Claudia invested in a tiny community bank on the verge of failure,” the blog reads. “Bank regulators had actually told them the bank was projected to fail within 18 months. But they had other plans. They rolled up their sleeves and got to work.”
The blog says that Beauprez was motivated by his father’s experience getting a loan that “saved the family farm… Through hard work and that commitment to their community, Heritage Bank started to grow quickly. In 12 years, they grew from seven employees to 165. Managing $4 million in assets to $450 million. And one office to 13 branches. Bob and Claudia are enormously proud of saving their hometown bank, but they’re even more proud of their investment in the community.”
The Beauprez’ exit from the banking business is not mentioned. In 2006, Beauprez was running for governor against Bill Ritter after having served four years in Congress. While he’d stepped off Heritage’s board in 2002, and his family owned just 23 percent of the company, his banking background had already become a political issue. Ritter’s campaign accused him of having a conflict of interest in voting for a bill that allowed banks to accept a matricula consular card, used by many undocumented immigrants, as a form of identification. (Heritage Bank engaged in this practice.)
He also co-sponsored a bill that would have eased regulations on community banks. That legislation was highlighted in this week’s attack ad. (The Beauprez campaign said Thursday that “the bill in question, H.R. 2061, did not ‘loosen’ regulations but brought regulations for community banks in line with credit unions.”)
The sale of Heritage Bank allowed Beauprez “to be completely removed from any perception of conflict of interest,” his 2006 campaign spokesman told The Rocky Mountain News. (Author’s disclosure: I wrote the Rocky Mountain News article on the bank’s sale, as well as the 2007 “Bad loans surprise Heritage Bank buyer” article cited in the Making Colorado Great ad.)
The more pertinent reason for selling, however, was the sheer economics of it. The price First Community Bank paid was 30 percent higher than the average price paid for Colorado banks from the start of 2005 to the fall of 2006, according to the Rocky Mountain News’s analysis. It was “an excellent price,” one Denver banking consultant told the paper.
Heritage Bank CEO Bill Mitchell told the News that the company’s directors — who, by 2006, included Claudia Beauprez but not Bob, who had resigned in 2002 — knew that banks were increasingly valuable to bigger acquirers. There were three bidders in the final stages, he said.
Those, however, were halcyon days in Colorado banking. The state had finally moved out of the deep, long recession of 2001 to 2003, and the Front Range was bursting with construction activity. Heritage Bank was in the game, and plenty of banks wanted a bigger piece of the market.
Cracks Begin to Show
Looking back on the financial crisis with fuzzy memories, we think of the collapse of Bear Stearns in March of 2008 as the first big event. We forget the cracks were showing some time before that, however — not long after Heritage Bank was sold. Many of the bank stocks that traded on the New York Stock Exchange or the Nasdaq were falling in mid-2007. A number of Colorado developers began to slow their operations or even fail.
And, as a result, regulators sharpened their pencils. Banks previously treated regulations on how much of a concentration of commercial-real-estate loans they could have on their books as mere guidelines, not hard-and-fast rules. “There was a pretty dramatic sea change, and you saw the regulators, state and federal, starting to push back on that, saying ‘it’s not just guidelines,’” says Barbara Walker, the head of industry lobbying group Independent Bankers of Colorado, who agreed to speak generally about the conditions at the time, but — like many people interviewed for this story — not about Beauprez or Heritage Bank specifically.
“The bankers and their attorneys didn’t believe them … but overnight, you had banks that had been [highly] rated downgraded,” Walker said. “That was the regulators looking at this marketplace, the weaknesses, the concentrations, the overbuilding. The regulators started pushing back in the summer of 2007.”
By early August, First Community Bank dropped the bombshell that dented the Heritage Bank success story. In contrast to the $4.2 million in “noncurrent” loans Heritage Bank listed in its regulatory reports at Dec. 31, 2006, First Community said $23.6 million of Heritage Bank’s loans were then 90 days or more late with payments, or were otherwise “potential problem loans.”
That number was the market value First Community had decided to place on the Heritage Bank loans in August 2007, given the current market conditions. In its quarterly report, filed with the U.S. Securities and Exchange Commission later in August, First Community’s parent company gave even more detail: The face value of the Heritage Bank loans that it decided were “potential problems,” was $47.4 million, or roughly 15 percent of the loans and leases on Heritage Bank’s books at the end of 2006.
In August 2007, Christopher Spencer, chief financial officer for the bank and its parent, said his bank “knew most of this was there,” and he believed some of the loans declined in quality between the time his bank looked at Heritage Bank’s books in the fall of 2006 and late July 2007, when his bank struck the deal to sell off a portfolio of Heritage Bank loans.
Mitchell, the Heritage bank CEO, told the Rocky Mountain News in 2007 that First Community Bank was “taking a very conservative approach and making sure they don’t have issues down the road.” Mitchell, a former the Colorado State Banking Board member and now the CEO of Banker’s Bank of the West, did not return a phone call Wednesday afternoon.
The ad from Making Colorado Great, however, says “the bank failed to disclose almost $20 million in bad loans” – flat out accusing Heritage Bank of knowing the loans were bad at the end of 2006. In an email to The Colorado Independent, Huttner says the difference between $4.2 million and $23.6 million “is almost six fold. This raises a reasonable questions (sic) — at a minimum why was there such a huge —over 19 million dollar — discrepancy, and second was there any gross negligence, risky business or foul-play by Beauprez’s bank in making or defining their amount of bad loans so low as they were preparing their books to sale (sic) his bank.”
‘Considering Legal Options’
Those familiar with the process of banks identifying and writing off problem loans, however, say the discrepancy can be a product of both a worsening economy and the ultimate judgment by a new set of bankers who didn’t make the loans in the first place.
“I don’t think the growth in a bad-loan number, in of itself, proves anything,” says Michael O’Neil, an attorney with Taft Stettinius & Hollister LLP in Indianapolis and a co-author of a paper on bank failures. “The people at the incumbent bank were making their own judgments based on their familiarity with the loans and the people who acquired the bank and its loans are coming in without the same information, and probably a more conservative mindset, because they’re the ones who have to take care of the loans in the coming months and years. So it’d be fairly typical they’d have a more conservative view.”
Beauprez campaign spokesman Allen Fuller told The Colorado Independent in an email that the “failed to disclose” allegation “is patently false and we are considering our legal options in light of the claim.”
What is more speculative — but supportable — is the idea that Heritage Bank sold at a perfect time, because that level of “potential problem loans” in August 2007 would ultimately have sunk the bank as the economy continued its decline into the financial crisis.
Regulators look at a bank’s “capital,” loosely defined as the money that shareholders have put into the bank to support its lending. When problem loans creep up to and over the bank’s level of capital, regulators question whether the bank can survive.
On Dec. 31, 2006, Heritage Bank had $34.3 million in equity capital, according to its report to regulators. The $47.4 million in “potential problem loans” cited by First Community was 138 percent of that total. If those loans were ultimately uncollectible, they would have more than wiped out Heritage bank’s capital.
“Each time you have to take a reserve for a problem loan, that basically comes out of your equity capital,” says O’Neil.
The $47.4 million in “potential problem loans” represented 15 percent of Heritage Bank’s loans and leases as of Dec. 31. A number in excess of 10 percent, O’Neil says, “would be deemed a problem under just about any regulatory scenario.”
Taking a Hit
Ultimately, nine Colorado banks failed during the financial crisis; five of the nine, in their final financial reports, listed problem loans that ranged from 7 percent to 17 percent of their loans and leases, a proportion similar to or lower than the 15 percent number that the $47.4 million Heritage Bank “potential problem loans” represented.
First Community’s problems continued after revelations about inheriting Heritage Bank’s bad loans. Regulators seized First Community in January 2011, nearly four years after the Heritage Bank deal. It was a series of lending missteps from its own operations that led to the company’s demise. In January of this year, the Federal Deposit Insurance Corporation sued Pat Dee, the bank’s former president who oversaw the Heritage Bank deal in 2007, as well as seven other First Community Bank officers.
No one from Heritage Bank ever faced a similar action. Beauprez and his family kept their $16.5 million from the sale. It’s only his story about his successful career in banking that took a hit.