As weakness lingers in real estate and the economy overall, more Arizona banks are being told to get their operations in order.
Federal and state regulators are marking up banks for infractions ranging from poor management and unsound lending to low capital.
Regulators, including the Federal Deposit Insurance Corp. and U.S. Office of the Comptroller of the Currency, won't disclose the names of financial institutions on problem lists. They don't want to incite a run by depositors that could trigger a failure.
But regulators spell out their concerns in various obscure directives such as "cease-and-desist orders," the most common version.
Since mid-2007, about the time when financial problems really began to surface, regulators have publicly reprimanded 22 Arizona banks, up from just one citation in 2005 and 2006 combined.
The true number is almost certainly higher because regulators don't always make their orders public.
While some orders get terminated as banks work out their problems or merge with healthier firms, 19 of the 22 remain, fluttering like warning flags in the breeze.
"Every bank that goes under an order doesn't fail or is expected to fail," said Tanya Wheeless, head of the Arizona Bankers Association. "A lot of the orders include issues managements might already have addressed."
But there's enough of a connection to raise concerns. Of the 22 Arizona banks cited since mid-2007, eight have failed and others continue to struggle.
Many of the dozens of small financial institutions that serve metro Phoenix and outlying communities are saddled by high exposure to real estate. More than 80 percent of the small banks based here are losing money. Their debilitated status could curb lending in general and blunt the economic recovery.
And no Arizona banks have failed in the current down cycle without first having been on the receiving end of an enforcement action.
Growing problem
Nationally, enforcement activity is on the rise.
The FDIC cited 113 banks from January through March of this year. That compares with 57 in the first quarter of 2009, 19 in the first quarter of 2008, 12 in the first quarter of 2007 and five over the first three months of 2006. Of those 22 Arizona banks, nearly all have been cited since the start of 2008.
Also alarming: Banks are having a harder time clearing up problems.
In 2006 and 2007, the FDIC and OCC terminated roughly nine orders for every 10 they issued. So far in 2010, they're terminating just 1.5 for every 10 issued.
For those Arizona banks with state charters or registrations, the FDIC cooperates with local officials.
"We, like all other states, have a close working relationship" with federal regulators that includes collaboration on exams and supervision, said Lauren Kingry, superintendent of the Arizona Department of Financial Institutions. "We make every effort to agree on final supervision recommendations and guidance."
Regulators say the sharp uptick in enforcement orders reflects widespread bank problems.
The most vexing issue now for banks is the need to raise more capital, as happens when loan portfolios disintegrate.
This is critical because regulators don't want to see bank capital dropping too low relative to the value of loans on their books, as capital provides a cushion against bad loans.
Yet it isn't easy for bankers to lure new investors.
"It's difficult to raise capital under any scenario but particularly when a bank is given a period of (perhaps only) four months," Wheeless said.
James Miller, of JPM Consulting in Scottsdale and a former Valley bank executive, said investors are reluctant to ante up cash when regulators can take over a bank at any time, once a cease-and-desist order has been issued.
"That's a legal document that allows a bank to go into receivership," said Miller, who also worked as a national bank examiner.
When the FDIC issued a cease-and-desist order for Scottsdale-based Copper Star Bank earlier this year, it didn't come as a surprise to management.
"Banks need capital - we were well aware of that," said Romain Voeller, senior vice president at Copper Star. "We certainly knew our loan portfolio had issues, and we were aware of where the problem loans are."
Voeller said the bank is making progress addressing regulator concerns while also trying to work with its loan customers.
"Our intent is not to take anything back," he said, referring to collateral. "We want them to keep their businesses going."
Problem loans
Other key issues cited in enforcement orders include low levels of liquid assets and high concentrations of problem loans - especially those tied to commercial real estate.
Also, high levels of "brokered" deposits, obtained by banks through intermediaries, are worrisome because this money isn't deemed to be loyal to a bank and thus could be withdrawn suddenly.
Regulators are prodding Arizona banks to diversify their loan portfolios, but that can take years.
And there can be other issues. For example, orders for several banks owned by Phoenix-based Capitol Bancorp, including Sunrise Bank of Arizona and Central Arizona Bank in Casa Grande, require the directors of these banks to divest themselves from the parent company - an unusual stipulation.
Executives at Capitol Bancorp declined to comment publicly for this article, as did officials at many other banks cited recently by regulators.
Some progress
Some bank officials report they're making progress in complying with regulatory orders.
The OCC signed a directive known as a "formal agreement" with Heritage Bank in Phoenix nearly two years ago.
"We've been working through the problem loans and have had success getting them off the books," Troy Hutton, Heritage's president, said.
"We're not out yet, but we can see light at the end of the tunnel."
Significantly, Hutton said low capital hasn't been a problem for Heritage, which is owned by a bank-holding company in the Kansas City area. "We're actually looking (to make) new loans," he said.
Similarly, Scott Schaefer, president of Meridian Bank, said his firm has made progress reducing its exposure to commercial real-estate loans while boosting its capital positions. Meridian and the OCC last year entered into a formal agreement, which Schaefer called the "least intrusive" type of enforcement action.
"It doesn't impact our daily business," he said. "We continue to lend money and attract deposits."
More latitude?
A common plea by bankers is for regulators to give them more time to solve problems, especially since so many loans and the assets backing them are long-term in nature.
Yet regulators also have been feeling the heat from critics who charge they were late to foresee problems. As such, they're reluctant to appear soft.
"The swiftness and depth of the financial crisis caught everyone off guard, and it was not surprising that bank regulators are under strong pressure to enhance their oversight actions," said James Lundy, president and CEO of Alliance Bank of Arizona, during a Phoenix meeting on bank lending hosted by a congressional oversight panel.
"Recently, compliance exams have an increasingly hard edge to them."
Among various suggestions, Lundy called on regulators to phase in higher capital requirements gradually and to differentiate between real-estate loans extended shortly before the bubble burst from less-risky loans made later.
Necessary oversight
Regulators say these and other concerns aren't falling on deaf ears, but they also need to protect depositors when banks start to teeter.
Analysts see regulators staying tough in two ways - by pursuing more enforcement actions and by holding off on the formation of new banks.
Miller said, "Regulators don't want to be opening new bank charters while closing so many others."
Kingry said he knows of no policy against starting new banks but notes the "probability of success is uncertain" in this environment.
Meanwhile, bankers will keep working to comply with regulatory orders while hoping for help from investors and better economic conditions.
"Maricopa County is our business, the place where we originate 95 percent of our loans," said Voeller at Copper Star.
"Looking at our (enforcement) order and those of other banks, they're largely driven by the state of the economy."
Bank regulators have been issuing a lot more enforcement directives, including "cease-and-desist orders" and somewhat less-severe "formal agreements" over the past year or so, directing banks to raise more capital, revise operating practices, hire new management or take other actions. In some cases, these orders have come prior to an eventual bank failure. Here are the Arizona-based banks affected over the past five years. Three orders have been terminated.
| Bank | Location | Regulatory actions | Status |
| Arrowhead Community Bank* | Glendale | FDIC order November 2009; order terminated February 2010 | Operating |
| Bank USA | Phoenix | OCC order September 2009 | Failed October 2009 |
| BNC National Bank | Phoenix | OCC agreement January 2010 | Operating |
| Central Arizona Bank | Casa Grande | FDIC order February 2010 | Operating |
| Community Bank of Arizona | Phoenix | FDIC order July 2009 | Failed August 2009 |
| Copper Star Bank | Scottsdale | FDIC order January 2010 | Operating |
| CrediCard National Bank | Tucson | OCC agreement April 2009 | Operating |
| Desert Hills Bank | Phoenix | FDIC orders December 2006, July 2009, March 2010 | Failed March 2010 |
| First National Bank of Arizona | Scottsdale | OCC order June 2008 | Failed July 2008 |
| First National Bank of Scottsdale | Scottsdale | OCC agreement January 2010 | Operating |
| First State Bank | Flagstaff | FDIC order May 2009 | Failed September 2009 |
| Heritage Bank | Phoenix | OCC agreement September 2008 | Operating |
| Legacy Bank | Scottsdale | FDIC order November 2009 | Operating |
| Meridian Bank | Wickenburg | OCC agreement June 2009 | Operating |
| Mesa Bank* | Mesa | FDIC order July 2009; order terminated February 2010 | Operating |
| Mission Bank | Kingman | FDIC order August 2007; order terminated June 2008 | Operating |
| Mohave State Bank | L. Havasu City | FDIC order February 2010 | Operating |
| Sunrise Bank of Arizona | Phoenix | FDIC order January 2010 | Operating |
| Towne Bank of Arizona | Mesa | FDIC orders March 2008, February 2010 | Failed May 2010 |
| Union Bank | Gilbert | OCC order August 2008 | Failed August 2009 |
| Valley Capital Bank | Mesa | OCC order October 2008 | Failed December 2009 |
| Western National Bank | Phoenix | OCC agreement July 2009 | Operating |
Note: Arrowhead Community Bank and Mesa Bank now operate as part of Sunrise Bank of Arizona within the Capitol Bancorp network.
More on this topicRegulators' most common orders
It's not uncommon for regulators to order banks to change 15 to 20 aspects about their operations. Here are a dozen fairly prominent issues.
New management. Regulators might ask the board of directors to hire a new CEO or other officers.
Raise capital. This is a common one when a bank's loan portfolio declines in value.
Capital ratios. Regulators may order banks to raise their capital-to-asset ratios to specific targets.
Sale or merger. Sometimes, regulators want to see the board find a white knight to rescue the bank.
Prohibited lending. Regulators might direct a bank to make no further loans to certain customers.
Liquidity. A bank might be ordered to convert more of its assets into cash equivalents.
Dividend restrictions. Regulators often prohibit banks from paying dividends or bonuses during times of stress.
Plans and budgets. A bank might be ordered to draw up new plans for returning to profitability.
Credit concentration. Regulators now worry about Arizona banks with high loan stakes in commercial real estate.
Allowance for losses. Banks might be ordered to provide more of a cushion to offset possible loan and lease losses.
Growth controls. Sometimes banks get into trouble when they grow too quickly, so regulators watch for signs of stress.
Brokered deposits. When a high proportion of a bank's deposits comes through intermediaries, that's a red flag because the money could be prone to quick withdrawals.
Regulators more aggressive about enforcement orders for banks
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