When New Mexico's First Community Bank paid $72 million for Louisville-based Heritage Bank this year, it got 13 offices and a big boost in its Colorado presence.

And the bank's founder, former Republican U.S. Rep. Bob Beauprez got $16.5 million in the sale.

Something else changed hands: a portfolio that had considerably more problem loans than first disclosed.

In announcing late last month it was selling off part of the Heritage Bank portfolio, First Community Bank's parent company said $23.6 million of Heritage's loans were either to borrowers who are now 90 days or more late with payments, or are "potential problem loans."

Those numbers are way beyond what Heritage ever suggested. In the bank's final report to regulators before the acquisition, Heritage said it had $4.2 million "noncurrent" loans in a portfolio of $310 million.

The sizable discrepancy sheds light on how two banks can take different views of the credit quality of borrowers. It also underscores the flexibility banks have in reporting their "problem" loans to regulators.

It puts Beauprez back in the banking spotlight, especially because he cited his business experience in his political campaigns, most recently the 2006 race for Colorado governor.

Beauprez, now sitting on the political sidelines and running a nonprofit, says "people will say whatever they want to say" about what Heritage's performance means about his suitability for office.

He noted that he left the bank's board when he first ran for Congress in 2002.

"I hadn't put a loan on the books since '02, and, effectively, a lot longer than that."

Beauprez bought a troubled bank in 1990, renamed it Heritage and expanded aggressively. The expense of heavy branch building kept Heritage's profitability level below the Colorado average in each of the past 12 years, according to data from federal banking regulators.

By 2006, Heritage was a 13-office, $450 million-asset franchise that was an attractive target for out-of-state banks looking to expand in Colorado.

First Community, which entered Colorado in 2002 with the purchase of a six-office bank, agreed to pay $72 million for Front Range Capital, the holding company that owned Heritage. With a 23 percent ownership of the holding company, Beauprez and his wife, Claudia, the company's chairwoman, grossed about $16.5 million.

The price exceeded the typical Colorado bank deal of the prior two years by more than 30 percent, according to data from analysis firm SNL Financial.

The deal closed March 1. Since then, times have been tough in the banking industry, with the Nasdaq Bank Index down 15 percent. The stock of First State Bancorp, First Community's parent, is down 26 percent since then.

First State Bancorp said on July 27 that it struck a deal to sell off $37.9 million in loans originally made by Heritage Bank.

As part of the announcement, it said $14.8 million of the loans were "non-accrual," meaning the bank hasn't been getting payments from the borrowers. First State Bancorp labeled another $8.8 million "potential problem loans."

Christopher Spencer, chief financial officer for the bank and its parent, said those amounts already were written down from the values on Heritage's books. And the bank retains some additional "potential problem loans" from Heritage.

The numbers, coupled with Spencer's comments, suggest there were problems with more than 16 percent of the Heritage portfolio - far more than the 1.3 percent of loans that Heritage labeled as "noncurrent" on Dec. 31, 2006.

Spencer said the bank "knew most of this was there," and he believes some of the loans declined in quality between the time his bank did due diligence in the fall and this summer, when his bank struck the deal to sell the loan portfolio.

Also, First Community Bank took all loans in which the borrowers hadn't made a payment in 90 days and classified them as "non-accrual," which is First Community's policy.

But it wasn't the rule at Heritage. Spencer said there were loans on Heritage's books to borrowers three months late that weren't listed in that "non-accrual" or "non-performing" category.

With the sale, "what we're trying to do is get these issues behind us," Spencer said. "These loans take a lot of management time, and we're trying to clean the slate going forward."

Spencer says, however, the bank remains "very pleased" with the deal to buy Heritage. "It plays a very big part in our future in Colorado."

Bill Mitchell, the former CEO of Heritage, said he believes First Community Bank is "just taking a very conservative approach and making sure they don't have issues down the road."

Mitchell, now the CEO of Banker's Bank of the West, said, "When you buy a portfolio, you don't know it as well as the bank (that made the loans), so you don't have the comfort level the bank did."

Barbara Walker, executive director of the Independent Bankers of Colorado - and the former state banking regulator - says there are standards but also "a reasonable degree of discretion."

"Regulators give banks a certain amount of latitude . . . (banks) have the ability to say, 'I know my customer, and I know they'll pay within 10 more days, or 30 more days.' "

However, Walker notes, when the regulators come back for their next visit, they'd better not see that borrower having failed to make the payment.

"Ultimately, the bank cannot get away with not classifying the (nonperforming) loan."

A problem with problem loans

$4.2 million of "noncurrent" loans were on the books of Heritage Bank on Dec. 31,2006.

$23.6 million of "nonaccrual" or "potential problem" loans were received by First Community Bank when it bought Heritage on March 1. First Community Bank said it decided some of the loans belonged in the problem category, based on its standards, while others declined in quality since last year.

David Milstead is finance editor of the Rocky Mountain News. He can be reached at milstead@RockyMountainNews.com or 303-954-2648.

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