Friday, May 28, 2010

Who is Sara Glakas? It Is Early but She is 2 for 10 on 10 Banks She Thinks Could Fail In 2010



By Sara Glakas Friday, May 14, 2010

Bank failures were all the rage in 2009, with the Federal Deposit Insurance Corporation (FDIC) seizing 140 financial institutions that year. But make no mistake…bank failures are still happening at an alarming rate. The FDIC has already shut down 68 banks, putting us on pace for over 200 failures this year.

Even though the U.S. government has decided there will be no more bank failures as large as Lehman Brothers, the smaller local and regional banks are being allowed to slip under the surface without much of a ripple in the headlines.

The list of troubled banks maintained by the FDIC still has over 700 names on it (though the list is confidential). The FDIC has more banks on its trouble list than it has manpower to deal with, slowing down the whole process of closing failing institutions. And because the process is slower and the banks are smaller, the public has been lulled into a state of complacency, with many believing that there's nothing to worry about.

Those people are wrong.

To get you up to speed on the situation, we've put together a list of what we believe may be the next institutions to be seized by the FDIC.

There are plenty of ways to measure a bank's strength. But when it comes down to it, banks that have too little equity compared to their assets are exactly like the homeowner who has too little equity compared to the price of his home. Remember that a bank's assets are the loans it makes to customers. If too many loans go bad for too long, eventually the equity cushion disappears and the bank finds itself underwater.

To find the most vulnerable banks, we looked for firms with high financial leverage. In particular, we screened for firms with a total assets/shareholder equity ratio of over 30. The average leverage ratio for all FDIC-insured institutions was 9.1 as of the end of 2009. When Lehman failed in 2007, it had a leverage ratio of 30.7.

If you're a depositor, you may want to stop reading this report and hightail it to the teller's window to withdraw your deposits from these walking dead. For planning purposes, note that the FDIC generally shuts down banks after the close of business on Friday in what has become known in the industry as "Bank Failure Friday."

If you insist on remaining a loyal customer of one of these banks, double-check and triple-check that your accounts have less than the $250,000 FDIC-insured limit.






1. Crescent Bank & Trust
As of the end of 2009, Crescent had leverage ratio of 1,365. You are not reading that wrong. The Georgia bank had $993,855,000 of assets teetering on top of $728,000 in shareholder equity.

Recently, Crescent stock traded up to $1.95 from $0.82 in a single day on a message board rumor that its liquidation value was north of $20 per share. With a book value of less than $0.15 per share today, it's unlikely that rumor is true.

2. Midwest Bank (note to readers: the FDIC placed Midwest in receivership after close of business on Friday, May 14th)
With a leverage ratio north of 60, Midwest Bank has already been identified as one of the next banks in line for "Bank Failure Friday." The FDIC has said that it will accept bids from investors who are interested in acquiring Midwest, but it's unlikely that anyone will step forward. After all, an acquirer can get FDIC guarantees on 80% of Midwest's assets if it waits for the failing bank to go into receivership.

3. Integra Bank
Integra had a rough first quarter in 2010, reporting some truly abysmal results:
- 13.3% of its loans are non-performing
- net loss to common shareholders of $54 million
- return on common equity of -1,418.4%

Integra runs about 69 banking centers in Indiana, Kentucky, Illinois and Ohio and it's been busy raising money by selling some of the branches that it acquired during the good times. But shareholder equity continues to erode, falling from $102 million at the end of December 2009 to $52.6 million at the end of March 2010. Its leverage ratio currently stands at 55.4.

4. Bank of Florida (FDIC placed in receivership on Friday, May 28th)
Earlier this year, the FDIC put each of the three subsidiaries that comprise the Bank of Florida on notice and told them to be adequately capitalized by April 17th. Zero of three met the deadline. In fact, each bank's capital ratio got worse. Now they are not only short on capital, they are "critically short" on capital.
5. Sonoma Valley Bank
The FDIC is pressuring Sonoma Valley to find investors, and quick. With capital ratios well below the FDIC's all-important "adequately capitalized threshold," Sonoma Valley needs to find someone to inject additional capital if it has any chance of getting back into compliance.

Earlier this year, federal regulators forced the bank to restate third-quarter 2009 results after regulators noted that the bank was not setting aside enough reserves for anticipated troubled loans. After marking up their third-quarter loan-loss provision to about $24.5 million from just $2.6 million, Sonoma Valley revised its originally reported $495,000 loss to a $19 million loss.

6. Bank of the Cascades
Oregon-based Bank of the Cascades is currently working to improve its capital levels after receiving an FDIC notice that the bank is considered to be undercapitalized. As of the end of 2009, it had $2.2 billion in assets and $45 million in equity, giving it a leverage ratio of 48.7.

Recently, Cascades reached a tentative agreement with investors to inject $65 million, but the investment is contingent on Cascades finding an additional $85 million from other sources.

7. Sterling Financial
Sterling is in negotiations with private equity firm Thomas H. Lee Partners regarding a $170 million investment in the bank. The capital injection is contingent on the Spokane-based bank raising an additional $555 million in preferred and common stock from other investors. All this dilution has pushed Sterling's price per share to around $0.85.

As of the end of 2009, Sterling's leverage ratio was hovering around 32.8. It posted a Q1 2010 net loss of almost $79 million when it was forced to set aside $85 million for potentially bad loans. Unless the stars align and the financing plan comes together as proposed, Sterling will likely end up in receivership.

8. Capitol Bancorp
Capitol has implemented "capital preservation and balance sheet deleveraging strategies" to help it repair its balance sheet. This means that the bank has been frantically selling subsidiary banks and branches to raise money. It's also attempting a debt for equity swap, which would also help bring down its lofty leverage ratio of 43.2.

Capitol is "undercapitalized" according to 1 of the 3 capitalization ratios the FDIC uses to assess bank strength. Unfortunately for Capitol, it continues to lose money as fast as it can replace it with asset sales. In Q1 2010, Capitol reported a net loss of almost $50 million.

9. Independent Bank Corp
Upon reporting first quarter earnings, CEO Michael Magee said, "Our results for the first quarter of 2010 continue to reflect the difficult market conditions we face in Michigan."

Independent reported a net loss of almost $15 million for Q1 2010, which was better than the almost $20 million loss for the quarter ending December 31, 2009. Independent Bank was a recipient of TARP funds in 2008, but failed to pay the dividend on the government-owned preferred shares due on November 2009. Now, with a leverage ratio of almost 30, Independent is trying to convince investors to exchange preferred shares for common shares.

10. TIB Financial
TIB Financial, with branches throughout south Florida and the Florida Keys, currently has a leverage ratio of 30.4. It's been meeting with private equity firm, Patriot Financial Partners, in what may be its last chance to raise capital.

On April 27th, TIB issued a press release saying that as of March 31, 2010 it remained adequately capitalized for regulatory purposes. Technically, it's true. For example, TIB's total capital to risk-weighted assets ratio is 8.1%, and the FDIC's standard for "adequate capitalization" is 8%. For a bank to be considered "well-capitalized" the FDIC wants it to have a risk-weighted asset ratio of 10%.