Tier Trouble

Tier Trouble

BANKING by Mark Gordon | Managing Editor

One of many ratios banks are judged on is all the rage these days for those seeking to spot the next bank failure. But is it accurate?

The potential demise of some Gulf Coast community banks, as illustrated by the recent collapse of Bradenton-based First Priority Bank, is a real threat, bankers and banking industry observers say.

And as the nationwide banking industry's issues become more corrosive - the number of banks on the Federal Deposit Insurance Corp.'s secret 'problem list' grew 23% in the second quarter, from 90 in the first quarter to 117 in the second quarter - the threat of a bank failure on the Gulf Coast has taken on larger-than-life status. At every level, from customer to top bank executive, there is a distinct 'who's next?' hue to the chatter.

But while no executive or analyst is declaring an end to the bad times, many in the banking community are beginning to wonder if the failure chatter matches the financial data. By at least one look, it's conceivable that some worries, at least from a capitalization perspective, are overdone.

"I don't think the wheels are coming off every bank out there," says Bob Chassman, head of mergers and acquisitions with Allen C. Ewing & Co., a Jacksonville-based banking analysis and research firm. "There are plenty of community banks out there [on the Gulf Coast] whose capital ratios are just fine."

Adds Jed Wilkinson, a local banking veteran who is currently president and chief executive officer of Sarasota-based First State Bank: "I think the state of community banks on the Gulf Coast is really pretty sound."

Watch list

Chassman, Wilkinson and their brethren might be on to something.

For instance, the Review looked at the Tier 1 risk-based capital ratios of every Gulf Coast-based community bank as of the end of the 2008 second quarter. The ratio is telling, as it includes both the reserves a bank has and its equity capital available to pay down bad loans, minus certain intangibles. The ratio, according to the FDIC, is calculated by dividing a bank's Tier 1 capital, also known as core capital, by a bank's risk adjusted assets.

A low ratio, in conjunction with consecutive quarters of low profitability, acts as a window into a potentially troubled institution. As such, some analysts and regulators often cite Tier 1 risk-based capital ratio as a key ratio to worry about.

To be sure, one Gulf Coast bank, Bradenton-based Freedom Bank, pops off the page as a major worry. The three-year-old bank's Tier 1 risk-based capital ratio of 3.64% falls just short of the FDIC's dictum that a bank maintains a ratio of at least 4% to be considered adequately capitalized.

But the 86 other Gulf Coast-based community banks, from New Port Richey to Naples, are at least three percentage points over the 4% threshold. And of those, only three are under 8% - the ratio many banking regulators and analysts point to as the failsafe number for Tier 1 risk-based capital.

The FDIC defines a well-capitalized bank, which is a step up from an adequately capitalized bank, as an institution having a Tier 1 risk-based capital ratio of at least 6%, in conjunction with several other requirements. By that measure, 98.8% of Gulf Coast-based banks are considered well-capitalized even after two years of economic beating.

Of course, Tier 1 risk-based capital is just one of dozens of data points analysts and regulators look at when gauging a bank's overall financial health. In many cases, having issues in one area doesn't mean a bank will have issues in another area. (See related story and chart.)

Indeed, Bill Sedgeman Jr., co-founder and chairman of Lakewood Ranch-based Community Bank of Manatee, says the Tier 1 risk-based capital ratio isn't what forces him to "pull into the gas station" for a fill up of investment capital.

Instead, Sedgeman, whose $250 million bank had a Tier 1 risk based capital ratio of 8.84% at the end of the 2008 second quarter, looks more closely at his bank's total risk-based capital ratio, which adds supplemental capital, also known as Tier 2 capital, to the Tier 1 equation.

What's more, several banks have funds available through a holding company - funds that in most cases aren't counted in the Tier 1 risk-based capital ratios.

Elmer Tabor, chairman of the board of Fort Myers-based Riverside Bank of the Gulf Coast is one of several Gulf Coast banking executives who emphasized the point that Tier 1 ratios need to be taken with that context in mind. Says Tabor: "The regulators don't pay much attention to holding companies."

And finally, as in other industries and markets, Gulf Coast bankers emphatically stick to a case-by-case analysis of banks that are in potential trouble.

'Capital erosion'

Freedom Bank would have to be at the top of any case-by-case list, a fact its beleaguered executives are well aware off. Most of the top officials joined the bank in a turnaround capacity over the last five months.

"We are working on the issues that have caused the bank to have such an erosion in capital," says Frank Knautz, a Freedom Bank spokesman and consultant hired this past spring, soon after co-founder and onetime top executive Gerry Anthony retired. "We've got our arms around it now."

That includes reaching a deal recently with a private equity firm to trade shares of common stock and two board seats for $5 million in fresh capital. The deal, with Community Bank Investors of America, a Richmond, Va.-based private equity firm that specializes in community banking investments, is currently in the regulatory approval stage.

But Freedom Bank's effort to find investors such as Community Bank Investors of America has been painstaking. For starters, given the current banking environment, says Knautz, any potential investor is going to be extra-prudent and go through several due diligence stages before making a move. "Buyers are cautious," says Knautz.

David Zuern, the former top-banking regulator for the state of Pennsylvania, was hired as Freedom Bank's vice chairman and CEO in April. He considers the search for capital one of his biggest challenges.

Invisible funds

Stress levels aren't as high at some of the Gulf Coast-based banks that are hovering near the 8% threshold regarding Tier 1 risk-based capital ratios. For example, Naples-based Orion Bank, the number two Gulf Coast-based community bank in terms of assets with $2.8 billion as of June 30, reported a Tier 1 risk-based capital ratio of 7.63% for the 2008 second quarter. That's down more than two percentage points from the 9.79% it reported at the end of the second quarter last year, according to FDIC data.

But David Sweeney, Orion's chief investment officer and an executive vice president with the bank, says he's nowhere near the panic point. Neither is Jerry Williams, Orion's chairman, president and CEO. Says Sweeney: "Anything over 6% in my view is very strongly capitalized."

Still, the bank's Tier 1 risk-based capital ratio does have the bank's attention. Orion's top executives look at the ratio on a near-daily basis, Sweeney says, and executives meet almost every month to discuss where it is and where they think it should be. Those capital-planning meetings are as forward thinking as two to three years, says Sweeny, with some short-term projections thrown into the mix.

For example, Sweeny says Orion's Tier 1 risk-based capital ratio is likely on the upswing, due partially to capital investments the bank and its holding company have made as far back as 2006, as a hedge against a potential down market. He predicts the bank's Tier 1 risk-based capital ratio will be up to about 8.5% by the end of the first quarter of 2009.

Orion Bank's capital ratios, among other finical figures, have also recently caught the attention of federal and state regulators: On Aug. 20, the bank reached an agreement with both the Federal Reserve and the Florida Office of Financial Regulation regarding its financial position. (See related story on enforcement actions.)

Meanwhile, Greg Bryant, president and CEO of Tampa-based Bay Cities Bank, has recent first-hand proof of how studying Tier 1 risk-based capital ratios to check a bank's financial health can easily overlook the role played by a bank's holding company.

Bryant, whose bank raised $8.2 million in a six-week long private placement stock offering this past spring, says holding company funds like that are normally "invisible" to FDIC call reports and quarterly data. Bay Cities, which has $400 million in assets through five branches it operates in Hillsborough and Pinellas counties, is held under Florida Business BancGroup Inc.

But the funds aren't invisible to the banks under the holding company. Bryant, for instance, says about $3.2 million of the capital the holding company raised went directly to improving the Bay Cities' Tier 1 risk-based capital ratio. So while that ratio lies at 8.78% as of June 30, it's actually closer to 9% as of Aug. 1, says Bryant.

Dipping into a holding company's cash reserves like that, says Bryant, gives him a cushion against the bank's Tier 1 risk-based capital ratio. It also allows the bank to continue on some sort of a growth track, albeit one slower than it was on a few years ago.

"Our stated goal is to grow," Bryant says. "Not at a torrid pace, but at a moderate pace."

REVIEW SUMMARY

Industry. Banking

Issue. A bank's Tier 1 risk-based capital ratio.

Key. Banks up and down the Gulf Coast are spending more time monitoring their credit and capitalization ratios.

Enforcement Action

Two Gulf Coast-based banks that are in or near trouble spots in an analysis of capitalization and credit ratios have heard from federal regulators recently.

First, in March, the federal Office of the Comptroller of the Currency found "unsafe and unsound" lending practices at Venice-based Community National Bank of Sarasota County, a $103 million bank with four branches.

Community National had a so-called Texas ratio of 112.48% at the end of the second quarter, according to an analysis of Federal Deposit Insurance Corp. data. A Texas ratio greater than 100%, which is found by dividing nonperforming assets plus loans past 90 days due over the sum of tangible equity plus loan loss reserves, is considered by some banking analysts as one mark of an institution in financial distress.

On March 17, the bank executives reached an agreement with the federal regulators to make several changes, including boosting its Tier 1 capital to at least 11% of risk-weighted assets and 8% of adjusted total assets by June 30.

The bank's board and senior executives were also ordered to write new lending and banking practices, focusing on risk issues. And it was told to hire a new senior loan officer within three months.

Community National President Charles Graham declined to comment on the bank's progress on the federal agreement. But according to FDIC data, the bank reached some of its goals: As of June 30, Community National had a Tier 1 risk-based capital ratio of 10.25% and a total risk based capital ratio of 11.51%.

Meanwhile, on Aug. 20 Naples-based Orion Bank and its holding company, Orion Bancorp Inc., reached an agreement with both the Federal Reserve and the Florida office of Financial Regulation regarding its financial position.

The agreement contains a litany of directives for Orion, the second biggest Gulf Coast-based bank in terms of assets.

In addition to improving its risk and loan polices and procedures, the agreement specifically requires the bank, within the next two months, to come up with a new written plan to improve its "total risk-based capital, Tier 1 risk-based capital and leverage ratios."

Orion's Tier 1 risk-based capital ratio was 7.63% as of June 30; regulators normally consider anything under 8% to be a potential trouble spot in terms of adequate capitalization.

Texas Time

Texas is known for more than Longhorns, oil and Cowboys.

Thanks to its high concentration of failed savings and loans institutions in the 1980s, the state's name has spawned a computation of looking at a bank's level of financial distress in regard to credit and capitalization issues. The formula for the "Texas ratio", according to banking and investing analysts who have used it, is to divide nonperforming assets plus loans past 90 days due by the sum of tangible equity plus loan loss reserves.

The general rule of thumb in the Texas ratio is that a bank with a ratio topping 100% is considered to be in potential trouble. Federal or state regulators don't officially sanction the ratio, but some in the banking industry use it as one approach to looking into a bank's complete financial health.

But other bankers and industry experts look at the Texas ratio as flawed as the state itself is big. This camp contends the ratio doesn't take normal loan changes into account, which is problematic because non-performing assets can be moved off a bank's book anytime the payment terms change. A bank can also sell off non-performing loans or assets, another data nugget that might not show up on a quarterly Texas ratio computation.

Locally, Bradenton-based Freedom Bank spokesman and consultant Frank Knautz says the ratio is flawed because it doesn't give any value to the underlying collateral of any loan. And Charles Graham, president and chief executive of Venice-based National Community Bank of Sarasota County, says the Texas ratio "is a ratio that we don't really use." Graham declined to elaborate.

Both of those banks have Texas ratios greater than 100%, according to an analysis of the ratios for every Gulf Coast-based community bank computed for the Review by Allen C. Ewing & Co., a Jacksonville-based banking research and analysis firm. The firm's data also shows that Fort Myers-based Riverside Bank of the Gulf Coast is the market leader in having the highest Texas ratio - 221.56% as of June 30.

Riverside chairman Elmer Tabor says the ratio is "not representative of the true conditions of the bank." He referred specific questions on why that's the case to Riverside's CEO, Randy Gerber, who couldn't be reached for comment.

Overall, at the end of the second quarter of 2008, there were five community Gulf Coast-based community banks with Texas ratios surpassing 100%. Two of those banks, Freedom and Sarasota-based Century Bank, also held Tier 1 risk-based capital ratios under 8% - another possible indicator that a bank could be in financial trouble.

Freedom's Texas ratio as of the end of the 2008 second quarter was 127.09%, while Century's ratio for the same time frame was 162.54%.

Below is glimpse at the data that put the five Gulf Coast-based banks over 100% on the Texas ratio readings.

GULF COAST BANKS AND THRIFTS

Tier 1 risk-based capital ratio *Subchapter S Corporations

Institution Name City Assets Tier 1 6/30/07 Tier 1 6/30/08

Freedom Bank Bradenton 284,145 12.22% 3.64%

Century Bank* Sarasota 920,968 8.54% 7.36%

Commerce Bank of SW FL Fort Myers 81,191 11.30% 7.36%

Orion Bank Naples 2,889,461 9.79% 7.63%

The Bank of Commerce Sarasota 360,826 9.60% 8.48%

LandMark Bank of Florida Sarasota 335,658 9.44% 8.58%

Bay Cities Bank Tampa 396,508 9.93% 8.78%

Community Bank of Manatee Lakewood Ranch 251,389 8.84% 8.84%

Riverside Bank of the Gulf Coast* Cape Coral 620,537 11.30% 8.84%

TIB Bank Naples 1,489,527 10.92% 8.89%

Raymond James Bank St. Petersburg 8,340,971 10.65% 8.91%

Platinum Bank* Brandon 352,445 9.31% 9.07%

Horizon Bank Bradenton 202,980 9.63% 9.07%

Florida Gulf Bank Fort Myers 340,779 8.00% 9.07%

Synovus Bank St. Petersburg 1,738,561 9.22% 9.11%

Bank of Florida - Southwest Naples 702,235 8.83% 9.16%

The Bank of Tampa Tampa 870,301 9.59% 9.37%

Cornerstone Community Bank St. Petersburg 316,797 10.26% 9.65%

Bank of Florida - Tampa Bay Tampa 226,317 10.10% 9.68%

First Community Bank of America Pinellas Park 482,261 10.07% 9.78%

Bank of St. Petersburg Tampa 553,161 9.70% 9.81%

Flagship National Bank* Bradenton 225,692 10.46% 9.83%

Liberty Bank* Naples 159,859 11.81% 9.91%

Peninsula Bank Englewood 589,454 10.63% 10.03%

Community Bank of Cape Coral Cape Coral 89,460 11.10% 10.14%

Community National Bank

of Sarasota County* Venice 103,255 11.63% 10.25%

Pilot Bank Tampa 243,883 12.42% 10.32%

Old Harbor Bank Clearwater 241,560 13.73% 10.45%

Manatee River Community Bank* Palmetto 162,659 11.94% 10.55%

The Royal Palm Bank of Florida Naples 175,567 12.57% 10.62%

First Commercial Bank of Tampa Bay Tampa 151,660 9.54% 10.82%

First Citrus Bank Tampa 222,484 10.86% 11.12%

First State Bank Sarasota 471,236 12.00% 11.20%

Heritage Bank of Florida Lutz 221,337 11.72% 11.21%

Englewood Bank* Englewood 171,579 10.31% 11.22%

First Home Bank* Seminole 98,223 10.84% 11.27%

IronStone Bank Fort Myers 2,651,340 12.27% 11.30%

Edison National Bank* Fort Myers 174,577 10.45% 11.33%

Bank of Naples* Naples 155,947 10.64% 11.33%

Sanibel Captiva Community Bank Sanibel 187,448 11.36% 11.36%

Southern Commerce Bank Tampa 214,144 18.96% 11.38%

Charlotte State Bank* Port Charlotte 233,697 11.47% 11.55%

First National Bank of Pasco Dade City 141,752 12.27% 11.56%

Centerstate Bank NA Zephyrhills 366,080 10.62% 12.04%

Institution Name City Assets Tier 1 6/30/07 Tier 1 6/30/08

The Palm Bank* Tampa 167,134 9.20% 12.12%

The Bank of Venice Venice 85,986 15.75% 12.42%

Busey Bank Fort Myers 460,288 12.63% 12.88%

Hillcrest Bank Florida Naples 107,520 19.90% 13.06%

Freedom Bank of America* St. Petersburg 96,494 15.63% 13.08%

Patriot Bank Trinity 107,943 22.73% 13.17%

First Community Bank SW FL Fort Myers 203,619 15.37% 13.25%

USAmeriBank Largo 315,770 64.00% 13.52%

Marco Community Bank Marco Island 142,740 12.05% 13.79%

Florida Community Bank Immokalee 989,526 13.37% 13.95%

Century Bank of Florida* Tampa 93,538 12.78% 14.15%

Partners Bank Naples 63,734 25.23% 14.94%

CNLBank, Southwest Florida Bonita Springs 119,217 N/A 15.25%

Valrico State Bank Valrico 179,721 12.60% 15.30%

Southshore Community Bank Apollo Beach 47,306 33.58% 15.42%

Flagship Community Bank Clearwater 75,706 29.68% 16.53%

TCM Bank, National Association Tampa 136,948 16.11% 16.64%

Hillsboro Bank Plant City 87,021 19.99% 19.08%

Liberty Bank* Clearwater 78,126 19.36% 19.22%

Sunshine State Federal S&L Plant City 195,399 17.89% 19.40%

First America Bank Osprey 125,514 24.88% 21.57%

Progress Bank of Florida Tampa 82,161 51.09% 21.85%

Southwest Capital Bank Fort Myers 76,368 57.48% 23.91%

Republic Bank Port Richey 83,828 27.70% 24.71%

Reliance Bank, FSB Fort Myers 95,665 36.20% 24.97%

Central Bank* Tampa 31,425 72.11% 28.01%

Insignia Bank Sarasota 77,223 66.40% 29.56%

Sabal Palm Bank Sarasota 53,123 69.06% 32.51%

Florida Traditions Bank Dade City 60,120 38.09% 38.09%

FineMark National Bank & Trust Fort Myers 88,769 170.84% 42.17%

Calusa National Bank Punta Gorda 42,535 143.56% 43.36%

Florida Shores Bank - Southwest Venice 47,246 N/A 46.58%

Preferred Community Bank Fort Myers 26,395 360.05% 48.20%

Shamrock Bank of Florida* Naples 52,215 N/A 53.88%

1st Manatee Bank Parrish 28,477 N/A 55.16%

NorthStar Bank Tampa 38,438 N/A 58.14%

National Bank of SW FL Port Charlotte 23,433 236.75% 64.24%

Panther Community Bank Lehigh Acres 28,616 N/A 74.02%

American Momentum Bank Tampa 206,462 153.95% 76.38%

Jefferson Bank of Florida Oldsmar 37,375 N/A 87.25%

Gulfshore Bank* Tampa 22,280 N/A 92.29%

Florida Bank of Sarasota Sarasota 29,299 53.46% 99.68%

Anderen Bank Palm Harbor 48,431 N/A 100.18%

Members Trust Co. Tampa 28,699 279.87% 287.97%