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Retired banker H. Lynn Horak says tough economic times like these remind him of the winning strategy employed by legendary UCLA basketball coach John Wooden.

“One of the things I always admired about (Wooden) and his philosophy was that he always practiced the fundamentals,” said Horak, former chief executive officer of Wells Fargo Bank Iowa, who retired last year after a 35-year career. “Even in a national championship year, the next fall at practice he went back to the fundamentals.”

Similarly, the banking industry is swinging back toward more fundamental lending practices, Horak said. “I think most people are now looking back and saying, ‘Gee, I wish some of the things we had done, we hadn’t done.’

“I was talking with one of my former competitors a couple of weeks ago, and we were both sort of lamenting that a lot of banks and mortgage lenders are now going to 80 percent loans. And we were just sort of saying, ‘Gee, isn’t that a novel, new idea?’ That’s the way we always used to do business.”

Many Iowa banks’ earnings took a beating in the first quarter, and banks recently wrapped up a second quarter that some national analysts say could foreshadow a “day of reckoning” for smaller banks across the country.

Analysts with RBC Capital Markets predict that at least 150 U.S. banks will fail over the next two to three years. That number could swell to as many as 300, RBC estimates, if the current economic slowdown deteriorates into a full-blown recession similar to that of the early 1990s.

Banks that are well capitalized will thrive in a tough market, say Iowa banking experts, who also say it’s possible that a few institutions in the state could be acquired by larger banks within the next 12 months.

In Greater Des Moines, net income declined at 15 of 28 locally based banks in the first quarter of 2008, the most recent quarter for which data was available for all banks, compared with first-quarter 2007 earnings. Four banks posted losses for the quarter. Other local banks’ earnings, however, have moved just as sharply in a positive direction. (see chart)

Those 28 banks collectively increased their loan-loss reserves to more than $101 million, a 22 percent increase from first-quarter 2007. During the same period, the dollar amount of noncurrent real estate loans held by Greater Des Moines banks increased by 57 percent compared to a year ago, to more than $96 million. That figure includes all real estate loans delinquent more than 30 days. In comparison, the amount of past-due real estate loans for all Iowa banks increased by just 9 percent, to $346 million.

“Those numbers certainly lay out the picture that it’s a more difficult time,” Horak said. “They certainly make it clear that the way it was three or four or five years ago isn’t the way it is today, that people are going to have to make tough decisions. … But those are small percentages compared with the rest of the country.”

Horak said he believes there will be isolated cases of bank failures in Iowa, but that those failures will not be widespread.

“While it’s painful and difficult, I don’t think those numbers say it’s out of control or there’s some long-term collapse of any of the financial institutions,” he said. “It just says you’ve got to work harder; you’ve got to be smarter.”

Overall, Iowa’s banks are doing “reasonably well,” said Tom Gronstal, Iowa’s banking superintendent.

“I don’t think that we’ve seen anything that we really didn’t anticipate,” he said. “Banks are dealing with a few more issues than they were six months or a year ago, but I think by and large they were prepared for those issues. We came through a period when things were really, really good, so they were well-capitalized and had reserves. So as problems started to arise, they were pretty much ready for them.”

The Iowa Banking Division ranks the 335 state-chartered banks using the CAMELS rating system, which assesses a bank’s financial strength based on capital, assets, management, earnings, liquidity and sensitivity to market risk, on a scale from 1 to 5. Of the state-chartered banks, 132 currently have the best rating of 1, and 183 have a 2 rating. Nine banks, about the same number as six months ago, have a rating of 3, which means corrective action is needed on the bank’s part, Gronstal said. One bank has a 4 rating.

“But we don’t think it’s anything they can’t work their way out of,” he said, acknowledging that the options could include being purchased by another bank. The division does not disclose individual banks’ ratings.

The vast majority of Iowa banks are “very well-capitalized,” Gronstal said. For those few that are undercapitalized, “most of our criticisms revolve around loan quality issues, and most of that is correctable.”

Statewide, the ratio of past-due and nonaccrual loans held by Iowa banks has increased to 1.8 percent of total loans, up from 1.54 percent a year ago. Gronstal said that ratio doesn’t become overly worrisome until it reaches the 2 to 2.25 percent range.

In many instances across the country, banks became too heavily weighted in construction and development loans as a portion of their total loan portfolios. According to an analysis earlier this month by The Wall Street Journal, $45.4 billion, or 7.2 percent, of the $631 billion in U.S. banks’ construction loans outstanding were delinquent in the first quarter, and banks are expected to report sharp increases in delinquent loans in the second quarter.

The Journal analyzed call reports of more than 6,900 banks that make construction loans, and found that nearly one-third of those banks had construction loan portfolios that exceeded 100 percent of their total risk-based capital, the cushion that banks can tap into to cover losses. Also, 73 of those banks had construction loan delinquency rates of more than 25 percent.

Total construction and development loans by the 28 Greater Des Moines banks were $1.33 billion in the first quarter, or 16.8 percent of their total real estate loans. A review of the call reports for those institutions indicated that 15 of those banks had construction loan totals that exceeded 100 percent of their risk-based capital.

However, those banks aren’t likely to be hurt by that, Gronstal said, in part because housing values aren’t falling in Iowa as dramatically as in other parts of the country. Additionally, “most of our banks have a much more diversified loan portfolio than that, so they have other things that are working,” he said. “And our unemployment statistics in Iowa are still very strong. People are still performing on their debt. … Those that can, do.”

Wells Fargo & Co, which last week reported it had increased its net charge-offs for housing loans by $1.8 billion in the second quarter, said the mortgage crisis has created earnings opportunities for the company. Wells Fargo reported second-quarter net income of $1.8 billion, largely driven by increases in net interest income.

Wells Fargo Home Mortgage, based in West Des Moines, has fared very well throughout the housing loan crisis, said Cara Heiden, co-president of the division. “And the reason we’ve fared well is that we’ve always adhered to our responsible lending principles – constantly ensuring that the customer has the ability to repay that loan,” she said. The company has a portfolio of 8 million mortgage loans, but sells about 95 percent of the loans it originates on the secondary market.

Wells Fargo is also leading a national effort known as Hope Now, a collaboration of 27 institutions that collectively represent approximately 70 percent of all mortgage loans serviced. And as a company, “we’re in contact with 94 percent of borrowers who are two payments down,” she said.

Similarly, “for banks in Des Moines that do mortgages, it’s just absolutely critical that we get to those borrowers that are struggling, to communicate with what we can do to help them,” she said.

Horak said financial numbers too often become the sole focus of the mortgage lending crisis.

“The sad part about it is that you’re talking about people who were trying to improve the quality of life for themselves, their kids, their family, and then it’s all taken away from them,” he said. “It’s a very sad situation. I think all of us have to be very careful about how we do business in the future, because you don’t want to repeat. On the other hand, you don’t want to be so stringent and tight that no one can borrow any money.”