Taking aim at troubled banks

The Texas ratio, a measure of risky business, draws a bead on some in this state. But it’s not always a straight-shooter.
By Frank Maley


When a company nicknames itself the YES! Bank, people could infer it’s a soft touch for loans. But Asheboro-based CommunityONE Bank never has been a pushover, says Larry Campbell, interim CEO of its parent FNB United Corp. “I had a lot of people telling me, ‘But you said you were the YES! Bank,’ when we turned them down.”

Though the YES! Bank can say no, it clearly hasn’t done it enough. Many of the loans it made the past few years have soured. Largely because of that, FNB United, the state’s seventh-largest financial institution, is one of the sickest. It lost more money last year — $87.6 million — than any of the other 100 largest financial institutions with headquarters in the state, and its ratio of nonperforming loans to total loans was the second-highest. Its Texas ratio, seen by some as predictor of bank failure, is more than twice the level considered cause for concern. Even $51.5 million from the federal Troubled Asset Relief Program hasn’t been enough to correct the problems.

While the state’s behemoth, Charlotte-based Bank of America Corp., grabs most of the headlines and is doing better than a year ago — largely because of its much-vilified purchase of Merrill Lynch — too many smaller banks, with their old-fashioned dependence on spread lending, are faring worse. At the end of 2008, only two banks on BUSINESS NORTH CAROLINA’s Financial 100 list (page 76) had Texas ratios above 100%, at which banks are at severe risk of failing. One of those, Wilmington-based Cooperative Bankshares Inc., was shut down by regulators last June.

By the end of 2009, the list of banks above 100% had grown to four, with three more above 90%. The ratio, developed by analysts scrutinizing Texas banks in the recession of the early 1980s, weighs nonperforming assets and loans 90 days past due against tangible equity and loan-loss reserves. “If you have to pick a number that shows how the stress of a recession affects the credit quality of a bank and the survivability — the continuing operating capability — of a bank, the Texas ratio does a pretty good job,” says Tony Plath, associate professor of finance at UNC Charlotte.

It’s not foolproof. Some banks with respectable Texas ratios still end up failing. Regulators shut down Wilmington-based Cape Fear Bank in April 2009 despite a Texas ratio of 44.9% at the end of the previous year. For some banks, even a high Texas ratio doesn’t mean certain death. Investors who have the means and will to bail out a bank can keep it afloat. The perceived ability of management to right the ship also can keep regulators at bay. Survival sometimes hinges on maintaining customer confidence despite bad numbers. “You see very high Texas ratios that languish out there for a very, very long time because the communities have not pulled their money out,” N.C. Deputy Commissioner of Banks Ray Grace says.

Exhibit A is Asheville-based Blue Ridge Savings Bank Inc., 95% owned by Charles Taylor, who was one of the richest members of Congress before his defeat by Democrat Heath Shuler in 2006. A few years ago, Blue Ridge was one of North Carolina’s best performers, but it has been under a Federal Deposit Insurance Corp. cease-and-desist order — sometimes, but not always, a prelude to failure — since November 2008. Its Texas ratio stood at more than 100% at the end of that year. Within 12 months, it had ballooned to 215.9%. Among the state’s 100 largest financial institutions, Blue Ridge posted the worst return on assets, return on equity and efficiency ratio in 2009. Yet it stubbornly clings to life. Through mid-May, North Carolina had avoided a bank failure in 2010, but Grace couldn’t promise that would continue. “I don’t see a wholesale wave of failures, but there are some institutions that are clearly seriously challenged, and the economy does not appear to be turning around rapidly.” Some struggling banks might be nudged into mergers with stronger banks. Over the past two years, N.C. Commissioner of Banks Joseph Smith has been trying to bring more capital into the state’s banking system, Grace says. “We have a number of groups that are very close to bringing in significant capital that will help with consolidation of some banks that are a little bit tired right now and probably need to go away but are not apt to fail right away.”

In 2005, when FNB United announced its purchase of Hickory-based Integrity Financial Corp., then-CEO Michael Miller hailed it as a way to carry out FNB’s growth strategy. “Integrity’s significant presence along the I-77 interstate corridor and the Charlotte metro, foothills and mountain locations positions our resulting bank holding company for service, growth and expansion in some of the best markets in North Carolina.” The deal closed the following year and did increase the bank’s opportunities in those markets, especially Charlotte — right before the recession hit. “Charlotte was doing real well, and all of the sudden, boom, the market dried up,” Campbell says.

But not before FNB United had made substantial loans to residential developers. “It was a different economy, and we made different business decisions at that time, based on the economy,” Campbell says. “Who knew we were going into the worst recession in 80 years? Of course, that has caused a lot of the red ink on our balance sheet.” TARP has given FNB United extra capital to make loans and to work out forbearance agreements and repayment modification plans to get viable projects over the hump during a tough time, Campbell says, but it’s not exactly free money. Through the first quarter, the company had paid $2.6 million in dividends on senior preferred stock to the U.S. Treasury Department.

Campbell says the Integrity deal will eventually benefit the company, but in the mean time FNB United is cutting costs. By some measures, it is showing improvement. Deposits grew about 14% last year. Earnings before taxes and loan-loss provisions were $5.8 million for the first quarter — a 26% increase over the fourth quarter and 41% increase over the first quarter of 2009, he says. Like many other struggling banks, FNB United has been reducing its assets to conserve capital. Asset growth among state-chartered banks in 2008 was a little over 12%, Grace says. Last year, it was 4%, but only because Winston-Salem-based BB&T Corp. and Raleigh-based First Citizens BancShares Inc. bought failed out-of-state banks. “If you were to take that acquisition growth out, which is close to $30 billion, then you’d actually see that North Carolina bank assets shrunk about 8% during 2009.”

Blue Ridge also has been reducing assets, and it, too, was caught in the construction downturn. In a written statement, Taylor says the bank has been heavily dependent on construction loans throughout its nearly 32-year history. It began cutting back in 2006 but still suffered when construction started going south in the first quarter of 2008.

In the last two years, it has tried to turn things around by reducing total loans 50%, construction loans 90%, troubled assets 70% and total assets almost 40%. Taylor says the bank will soon achieve a net operating profit but has a long way to go to reach its previous high standards. “It will take a new model, more conservative than the past and formed after some clarity has been realized concerning the overall economy, the bank reform act and other regulatory reform.”

While Blue Ridge, FNB United and a handful of others are in the worst shape, more than a few Tar Heel banks not yet in the danger zone above 100% have seen a significant increase in their Texas ratios since 2007 and might take a while to work their way back to better health — if they live long enough. “[Net interest] margins are gradually improving,” Grace says. “That’s good news. But asset-quality deterioration continues in the aggregate, and that will more than offset upticks in margins.”

For a PDF of the Texas Ratio charts clisk here.