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 78 banks, putting us on pace for nearly 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.
Those people are wrong.
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 look for firms with high financial leverage. In particular, we screen for firms with a total assets/shareholder equity ratio of over 30. To give you some perspective, 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.
We have 4 banks on the list that reported more liabilities than assets on their Q1 balance sheets. That makes them officially insolvent, meaning that if you sold all of their assets, you would not be able to cover their debts -- and a bank's debts are your deposits!
We originally posted this article mid-day on May 14th. Within hours, one of the banks on the list, Midwest Bank, was seized by the FDIC. Two weeks later, Bank of Florida was seized, too.
Because your hard-earned savings depend on it, we are committed to updating our list regularly so that you can have the most timely and relevant information at your fingertips.
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 (Failed -- July 23, 2010)
As of the end of 2009, Crescent had leverage ratio of 1,365. You are not reading that wrong. The Georgia bank followed up that impressive performance by officially becoming insolvent in Q1 2010, reporting $1 billion in assets and -$12.8 million in owners' equity.
Crescent stock was a day trader favorite in May, trading all the way 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 per share today, it's likely that the FDIC will put this firm out of its misery sometime very soon.
2. First National Bank of the South (Failed -- July 16, 2010)
This Spartanburg, South Carolina-bank has assets of $682 million and negative shareholder equity. It has been deemed by the FDIC to be "critically undercapitalized," with a total risk-based capital ratio of only 4.06 vs. the 8% needed to be "adequately capitalized. Over 20% of its loans are nonperforming.
First National has been operating under an FDIC order to improve its capitalization ratios since April 2009. In April 2010, the FDIC closed Beach First, a comparably-sized and critically undercapitalized bank in Myrtle Beach, SC. It's only a matter of time before First National is seized as well.
3. MetroBank of Dade County (Failed -- July 16, 2010)
We decided to replace Bank of Florida with another failing institution from that neck of the woods. MetroBank's Q1 financial statements show that it is officially insolvent, with $442 million in assets and -$7.6 million in owners' equity.
Interestingly, MetroBank is the only bank on the list with detractors angry enough to start a web site, Metro Bank Watch. The site's founders seem to be especially angry that "the majority shareholders of MetroBank’s parent company were members of a family that also owns Magic City Casino in Miami – a greyhound track, cardroom, and slot parlor where more than $434 million has been played on slots since October." Unfortunately, whoever the shareholders currently are, they are owners of worthless stock.
4. Bay National Bank (Failed -- July 9, 2010)
Maryland-based Bay National is currently considered "critically undercapitalized" under FDIC standards. Furthermore, the bank admitted in a filing with the SEC that there's substantial doubt about its ability to continue as a going concern (which is an auditor's term for "this bank is insolvent").
Last week, Bay National also decided to voluntarily delist itself from trading on Nasdaq. It had previously received notice from Nasdaq that the exchange requires listed companies to have positive shareholder equity of at least $2.5 million. With its negative shareholder equity of -$3.6 million, Bay National did not meet that criterion.
5. Bank of the Cascades
Oregon-based Bank of the Cascades posted a $24.4 million loss in the first quarter of 2010. Its financial leverage ratio deteriorated dramatically, too, shoot up to 98.4 from 48.7 in the previous quarter. As of March 31, 2010, it listed $2.1 billion in assets and only $21.2 million in equity.
Cascades has been operating for some time under orders from state and federal regulators to improve its capital position. The FDIC requires banks to have a 10% total risk-based capital ratio to qualify as "well capitalized." Bank of Cascades' ratio started at 7.5 on December 31, 2009 and deteriorated to 6.35 by March 31, 2010.
Cascades did find an investor who tentatively agreed to inject $65 million into the bank, but the investment was contingent on Cascades finding an additional $85 million by May 31st. The bank has been unable to secure the additional investment, and will probably end up in receivership.
6. Michigan Commerce Bank
Michigan Commerce is currently operating under a consent order requiring it to correct "unsafe or unsound banking practices and violations of law rule or regulation." It holds assets of $1.2 billion, but with equity of only $35.7 million, it has a leverage ratio of 33.6.
Michigan Commerce was created last year out of a merger of 11 community banks in Michigan. Its parent company is Capitol Bancorp, a development company that built a nation-wide network of banks that it's now being forced to sell off as it tries to take care of its own undercapitalization.
7. Capitol Bancorp
Speaking of Capitol Bancorp, the parent of Michigan Commerce has problems of its own. 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 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.
8. Integra Bank
Integra had a rough first quarter in 2010, reporting some truly abysmal results:
- 13.3% of its loans are nonperforming
- 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.
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. They recently extended the deadline for exchanges, which indicates they did not get the desired response.
10. TIB Financial
TIB Financial, with branches throughout south Florida and the Florida Keys, currently has a leverage ratio of 30.4. TIB issued a press release in April saying that as of March 31, 2010 it was 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%. But for a bank to be considered "well-capitalized" the FDIC wants it to have a risk-weighted asset ratio of 10%.
TIB has been meeting with private equity firm, Patriot Financial Partners, in what may be its last chance to raise capital. Patriot has committed $20-25 million, but only if TIB can raise an additional $120-125 can be raised from other investors.
Watch List: Sonoma Valley Bank
We moved Sonoma Valley off the projected failure list and on to our watch list because the FDIC just gave it an extension until August 15th to improve its financial health. With capital ratios well below the FDIC's all-important "adequately capitalized threshold," Sonoma Valley needs to find someone to inject $20 million in additional capital if it has any chance of getting back into compliance.
Though the FDIC could technically still seize Sonoma Valley despite the extension, we believe that the overburdened agency will take the next few months to target banks that are in even worse shape than Sonoma Valley.
Watch List: Sterling Financial
Sterling was also moved off the potential failure list and onto the watch list. The Spokane-based bank is negotiating and making progress with private equity firms Thomas H. Lee Partners and Warburg Pincus regarding a combined $278 million investment in the bank.
If it can convince the U.S. government to convert its $303 million of preferred stock to common stock, then it will only need $139 million more to meet its goal of a $720 million capital infusion.
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. If its financing plans start to fall apart, we will place Sterling back on the list of banks likely to end up in receivership.