Why do banks keep failing?

Newport Beach banks aren’t immune to issues facing the industry, as was demonstrated over the weekend when First Heritage Bank of Newport Beach closed due to under-capitalization.

The closure underscores an economy that is seeing many troubled banks go under due to riskier loans coming back to haunt them.

This is the 10th institution to fail in the past 10 years, according to the Federal Deposit Insurance Corporation.

First Heritage Bank had $250 million in assets — a relatively small bank — and held a cross section of loans, according to a news release from the Federal Deposit Insurance Corp.

Its parent group, First National Bank Holding Company, based out of Scottsdale, Ariz., was also closed.

The banks’ deposits have been purchased by Mutual of Omaha, and clients will not lose any money and will see a smooth transition, according to the FDIC.

A combination of the downturn in the economy and the bank’s various loans played a role in the bank’s closure, said Kevin Mukri, a spokesman for the Comptroller of the Currency, the federal agency that oversees banks.

“Banks fail. They fail in bad economic times and good economic times,” Mukri said. “It depends on how a bank executes its business plan.”

The closure adds fear to an already concerned market. Stress should continue on the real estate industry, banks’ non-performing assets are increasing, consumers are still going to have trouble, and that could spell continuing difficulty for banks, said Delta Global Advisors senior strategist Michael Pento.

“We will have less foreclosures than one might think, but it still doesn’t help banking on a whole,” Pento said.

Mukri downplayed the closure in terms of the overall banking system, saying the vast majority of banks are “doing just fine.”

“Oftentimes, when there is a bank failure, there is a bank buyer right away,” Mukri said. “That is another good sign of how banking is. Even though there is bank failure, some of the bank or a lot of the bank is operating just fine.”

Newport Beach Chamber of Commerce President Richard Luehrs reiterated some of the confidence Mukri had in the system. While some banks may lose out due to their business practices, others may be winning when they take over a company and make it stronger, Luehrs said.

And while Newport Beach may have been the location of a recent bank foreclosure, Luehrs said the property values in the area haven’t been hit as hard as others.

But Kerry Vandell, a finance professor at UCI and a former board member at a bank that held $500 million in assets, said it has been an industry trend of banks to have broader lending practices that have led to problems like those seen at First Heritage and its parent company.

“Newport may be more prosperous, but it doesn’t mean they aren’t lending to people who have cash-flow problems,” he said.

For Pento, the Newport Beach bank is just another log on the fire and the government isn’t doing anything to make the future any better.

Government intervention has only served as a bailout for banks and hasn’t taught them to keep their loan practices in line, Pento said. Because of this, banks could be in for future problems when they decide to take more chances and the outcome is the same.

“I don’t think the banks have learned anything,” he said.

As for First Heritage and its new owner, Pento said there isn’t much Mutual of Omaha can do to make the bad deals First Heritage made any better, but because Mutual of Omaha has a fresh start, it can start to make the right decisions.

DANIEL TEDFORD may be reached at (714) 966-4632 or at daniel.tedford@latimes.com.