As federal regulators examined financial institutions throughout the nation this past year, their mantra to every bank, healthy or not, was the same.

Improve regulatory capital ratios.

In other words, banks were told to increase the amount of financial capital they set aside to support and safeguard their loan portfolios.

But in this economic environment, raising cash is a tough task.

Many banks are left to approach the directive from the opposite end of the equation. If they can't increase their regulatory capital, they have to decrease their lending portfolios.

As many borrowers can testify, it has forced banks to reduce and restrict lending. Naturally, that reduces lending portfolios, but it's not the best of deals for banks - less business, means less profits.

To speed up the process and recovery, banks aren't just curtailing new loans, they're also selling off existing loans to investors. The goal is not only to improve regulatory capital ratios, but also make room for new more profitable loans.

While this sounds similar to the real estate heyday strategy of banks selling loans to the mortgage-backed security market, there are significant differences.

For one, the demand from these investors is much more subdued - to the point that banks are forced to sell many of their unwanted loans at a loss. It wasn't until the latter part of 2009, when Broomfield-based FirsTier found the demand suitable enough to begin selling some of its loans.

"Until now, the bid/ask was too wide," FirsTier Bank Chairman and Chief Executive Officer Tim Wiens said. "But now it's narrowing," meaning banks and investors are finding more common ground on sale prices.

There isn't a set discount rate, Wiens said. It varies by product type and location, a performing loan versus a nonperforming loan, and the overall future outlook for the asset backing the loan. Loans sold directly by operating banks are also much less discounted than those sold by the Federal Deposit Insurance Corp. from failed banks.

"We've sold some loans and property at discount and some at par," Wiens said.

In 2009, Wiens said FirsTier sold about $5 million in loans and foreclosed real estate to investors. In 2010, the bank is looking to sell $20 million to $30 million.

"We're getting contacted regularly by these investors," Wiens said. "Certainly, we wouldn't be selling if there wasn't demand in the market."

FirsTier and many other banks also probably wouldn't be selling if there wasn't pressure from regulators.

"We're not without resources to work these loans out ourselves," Wiens said. "But the quicker you can clean up your balance sheet, the quicker you can get back to lending."

The investors who buy the loans off the banks take the responsibility to work them out. In most cases, the loans sold are nonperforming, meaning the borrower is struggling to pay his or her mortgage.

Because the investors usually obtain the loans at a discount from the banks, they're able to modify the loan terms, giving a break to the borrower and still come out on top if the new lower payments are made. In other cases, the investor might choose to foreclose on the loan and take the collateral, usually real estate, as an investment.

Colorado Financial Holdings Investments LLC is one of those investors looking for discounted loans from banks or other loan holders.

The Boulder-based firm, which has both private individual and institutional financial backing, recently spent about $27.5 million to purchase several pools of nonperforming business operating loans with a book value of $88.2 million.

The 18 loans purchased by CFH were among many others originated by Greeley-based New Frontier Bank, which was taken over by the FDIC in April 2009, after a previous deal by CFH to invest in the bank and save it fell through.

The FDIC is in charge of selling off the former New Frontier loans to investors. So far, the federal agency has sold 2,213 New Frontier loans with a book value of $663.7 million for $184.6 million - an average of 28 cents on the dollar. About 25 different investment groups from around the nation have bought the New Frontier loan pools

CFH made a bid in the first round of New Frontier FDIC loan sales last year, but didn't win that bid, said CFH Managing Partner Gary Jacobs. It was successful this time around. Unlike many of the failed loans that are tied to real estate, Jacobs said the 18 loans that CFH acquired are operating loans for agricultural businesses mostly outside Colorado.

"Our plan is to restructure these loans and help the businesses become profitable again," Jacobs said. "We're willing to work with convoluted and complex loans."

Jacobs said he sees the commercial market one-third through its cycle, meaning it hasn't hit bottom yet, but is getting close.

In 2010, CFH intends to invest an additional $100 million in buying loans and real estate from banks," Jacobs said. The company is seeking agricultural processing and production loans throughout the United States, any operating business or real estate loans in Colorado, and some manufacturing business loans.

"That's our intention," Jacobs said. "Whether we find that amount, or maybe even invest more, remains to be seen."