Pre-Crisis Acquisition Playing Role in Colorado Governor's Race

A pre-crisis bank acquisition has worked its way to the center of Colorado's gubernatorial race.

Bob Beauprez, a former Republican congressman, is challenging incumbent John Hickenlooper, a Democrat. The race is tight, with realclearpolitics.com calling it a toss-up. Heading into the home stretch, Beauprez has a 1.8-point advantage based on an averaging of several polls, the site reports, though his lead is well within the polls' margins of error.

Beauprez was a community banker prior to entering politics and, earlier this month, a pro-Hickenlooper group called Making Colorado Great began releasing ads that attack Beauprez and his industry involvement, both as a legislator and as the seller of a bank.

"In Colorado he owned a bank, then Beauprez went to Congress and supported a law to loosen regulations on banks like his," one spot said. "Then Beauprez sold his bank, but the bank failed to disclose almost $20 million in bad loans. Beauprez walked away with $16 million, but the new bank failed and the government had to rescue it."

In many ways, the ad seeks to undermine the basis of how Beauprez portrays himself. The challenger often touts the story of how he and his wife, Claudia, saved the struggling Lafayette Bank VII by buying a controlling stake in 1990, growing it from $4 million to $450 million. He resigned from the bank and its board in 2002 when he was elected to Congress. His wife was elected chairman of the bank, which had been renamed Heritage Bank.

First State Bancorp in Albuquerque beat out another bank in 2006 to buy Front Range Capital, Heritage's holding company, for $72 million in cash.

The deal closed in March 2007, but a few months later First State disclosed that it would sell 50 Heritage loans "with potential credit concerns," with a face value of $47 million, for nearly $37 million in proceeds. The sale included $15 million of nonaccrual loans and $9 million in potential problem loans. That compares to roughly $6 million in past due or nonaccrual loans that Heritage reported to the Federal Deposit Insurance Corp. at the end of the 2006.

By 2008, First State's First Community Bank unit began feeling the sting of the sharp turn in the economy and watched it capital evaporate as problems began stacking up. In 2009, First State agreed to sell its 20 Colorado branches, including roughly a dozen it gained from Heritage, to Great Western Bank, a unit of National Australia Bank. Great Western agreed to take $444 million of loans, but First State had to keep $210 million in loans that were associated with construction or were nonperforming.

The sale of branches and other side businesses was commonplace during the downturn as capital-strapped banks turned their franchises into garage sales in pursuit of fresh capital. Such maneuvers were often short-term solutions and, in several cases, regulators denied such attempts because the sales diminished the value of the franchise.

First State's bank failed in early 2011, with U.S. Bancorp buying its bank's assets and deposits from the FDIC.

Beauprez and his campaign team have tried to disconnect the challenger from First Community's failure in a blog post on his website. In the post, the team calls the connection "purposefully deceptive," mentioning that the political hopeful was not involved in the sale because he was no longer on the board. The post states that First Community had disgorged itself of Heritage's assets and loans more than a year before its failure. That claim seems disingenuous since First Community had to retain problem loans and construction-related loans. (A third of Heritage's $309 million in loans at the end of 2006 were in construction.)

The post also notes that First Community "did their due diligence, after having complete access to the books at Heritage Bank, and decided the bank was a great investment."

Observers say the fundamental problem with connecting Beauprez to First State's failure, is the responsibility of buyers to do due diligence. In the lead-up to the financial crisis, some banks were so hungry to boost earnings that thorough examination was an afterthought.

"It was a problem across the board, bankers were so anxious to put on volume, and a lot of the due diligence was sloppy and continued to be sloppy during the downturn even," said Bob Browne, a director at accounting firm Wipfli. "Buyer beware."

Others said that, even if the seller was aware of potential problems, the onus remains on the buyer to understand what it is acquiring. The only exception would involve fraud.

"It sounds to me like a combination of a state of careless due diligence at that time and then the unforeseeable downturn, but it's the buyer's problem," said Stephen Klein, a partner at Graham & Dunn who was not involved in the deal. "All the representations and warrants don't survive post-merger except for cases of fraud."

The ad for Making Colorado Great ends by saying Beauprez is "out for the big banks and himself, not you." The ad references the Communities First Act, a 2005 bill that had bipartisan support — 19 Democrats and 69 Republicans co-sponsored it — and included things like repealing restrictions on interstate branch startups, simplifying dividend calculations and allowing interest on business checking accounts.

The Independent Community Bankers of America was the driving force of the measure, which never made it out of committee.

"This was a bill that had support from Democrats and Republicans and was about community bank relief and credit unions would have benefitted, too and they are spinning it as something more nefarious," said Paul Merski, ICBA's executive vice president for congressional relations and chief economist.

Merski, who said that he and Beauprez are friends, added that the politician "has a classic American success story and this is an attempt to trash a viable candidate."

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