Two Bozeman-based banks have been put on watch by government regulators, but the presidents of the banks say they are on the path to meeting regulators' requirements.

Officials at Bank of Bozeman and American Bank have agreed with regulators to take steps to bolster capital and reduce the number of iffy loans on their books.

The banks and state regulators say the financial institutions are nowhere near failing and that the measures are simply a sign of the times.

Though there have been 118 bank closures since the beginning of the year nationwide, none of those banks were in Montana, said Annie Goodwin, Montana's commissioner of banking.

"I want to emphasize that the customers' deposits in our banks are safe and secure," she said. "They are insured by the FDIC up to $250,000 per account."

There are 80 banks doing business in Montana, according to the Federal Deposit Insurance Corporation, 64 of which are regulated by Goodwin's agency.

Though several banks, including Mountain West Bank and Sterling Savings Bank, which have branches in Bozeman but are not based here, are currently under regulatory oversight, "not all of our banks are being challenged," Goodwin said. "It's just a handful."

A drive around the Gallatin Valley with its abundance of "for sale" signs illustrates the problem.

In the early to mid-2000s, there was an economic boom, particularly in real estate in the Gallatin Valley, Goodwin said. Banks were lending to developers building commercial space, mini-malls, subdivisions and condominiums.

"But in mid-2008, we started to see economic stresses with our real estate market (and) unemployment, and our borrowers during that time were affected the most," she said.

When borrowers were unable to sell newly built properties, sell lots on subdivisions or find tenants for commercial properties, she said, payments stopped being made.

"Past-due loans are what causes concern," she said.

"When real estate values declined significantly, it created a disparity, in some cases, that eroded the equity resulting in the property being worth less than what is owed on it," American Bank president Bryan Klein said Wednesday. "What started on Wall Street filtered out into the smaller communities and community banks."

Klein also said tribulations in the market that resulted in a federal bailout of major investment firms like Goldman Sachs in 2008 created "political pressure to increase regulatory oversight and enforcement in the industry."

Regulators like the state banking commission, the FDIC and the Federal Reserve Bank are making greater efforts to examine financial institutions. Most banks undergo an examination about every 18 months -- more if there are concerns, Goodwin said.

In June, Bank of Bozeman and the state banking commission entered into an agreement that prohibits the bank from paying dividends to shareholders without regulators' consent and requires the bank to add two independent directors to its board. The bank must also take steps to raise more capital reserves and reduce the number of loans classified as "substandard" and "doubtful," according to the agreement.

"The concerns are because of non-performing loans, which are all tied to real estate, and we all know the status of the real estate market here and nationwide," Bank of Bozeman president Phillip D. Bratton said Tuesday. "The crux of the agreement is that we have to improve our loan portfolio. We've been working very diligently to collect on those loans, but when you're a community bank like us, you just have to work with the customers. It's a process. We can't go out and ask for borrowers to pay off loans or raise rates.

"We strongly emphasize that deposits are safe and secure."

American Bank entered into an agreement in August with the Federal Reserve Bank of Minneapolis that states the institution shall not "extend, renew, or restructure any credit ... whose loans ... are criticized" in an examiner's report.

American Bank's Klein said despite the regulatory measures, the bank is not in dire straits.

"American Bank has over $50 million in capital and reserves and our capital ratios far exceed the regulatory definition of ‘well-capitalized,'" he said. "In fact, American Bank's capital is in the top tier of our national peer group."

"Every bank has things they can improve on with a written agreement or not," Klein continued. "Nearly 1,200 banks nationwide are under public enforcement action."

Quoting an August article in American Banker magazine, Klein said that the number of banks under such action is expected to rise to more than 2,000 by the end of the year, more than 25 percent of banks nationwide.

"Our banks are not unlike any other businesses that are facing challenges in these economic times," Goodwin said. "It's just a matter of getting through this time. It's going to take time but I'm confident these banks will be profitable again."

Jodi Hausen can be reached at jhausen@dailychronicle.com or 582-2630. Read her blog at jhausen.wordpress.com or follow her on Twitter @bozemancrime.

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