Thirteen Massachusetts community banks are hovering uncomfortably low on their equity capital ratios. They are posting the kind of numbers that typically draw sharp attention from regulators – the results, they say, of either marked-down bonds or a hit to their stocks.
Seven of that baker’s dozen have Tier 1 leverage capital that dips below 6 percent, which bankers and analysts say is usually enough to trigger regulator scrutiny, and possibly action. Another half dozen banks are still squeezed, sitting between 6 percent and 8 percent, according to FDIC filings.
Peter Ostrowski, head of New Jersey-based consultancy Ostrowski & Co., wouldn’t call the low ratios red flags – “more like yellow flags,” he said.
Those low numbers certainly trigger close watches from regulators, but regulators won’t make a move against the bank unless other factors look rotten, too, such as a bank’s trends and earnings. In some cases, for instance, banks have intangible assets that make them healthier than that ratio would have them appear, he said.
Warning Signs
Still, it’s an indication of potential trouble, as was the case with Lowell Co-operative Bank, which had a ratio of 4.85 last quarter. Early this year, the Division of Banks converted Lowell Co-operative from a mutual to a stock company, and a group of investors had to bail the bank out by agreeing to buy $5 million of the bank’s stock.
Lowell still has company in the six-and-under club, but on the bright side, that group’s ranks appear to be thinning. Last quarter represented a major improvement over third-quarter results from 2008, when a full 10 Massachusetts banks were below 6 percent on their equity capital ratios, and 72 more were below 8 percent.
The trend looks promising, but Ostrowski cautioned this market leaves no room for breathing easy. The market is still working through the impacts of last year’s turmoil, particularly in the form of high unemployment, he said, and that’s going to have an unknown, longer-term impact on loan assets.
“As that stuff works its way through parts of the economy … it impacts locally,” Ostrowski said.
Division of Banks Commissioner Steven Antonakes wasn’t available for comment, but called the state-chartered banking industry “healthy and well capitalized and well positioned” in a statement sent to Banker & Tradesman.
David O’Brien’s Braintree Cooperative Bank has equity capital of 7.21 percent, down from 7.58 in the third-quarter, which he attributes to marked-down values of bonds on the bank’s portfolio. He says those bonds, in the form of mortgage-backed securities, are performing well and bringing in principal and interest – but because the bond market has dried up, the bank is forced to mark down the value.
Holding On For Dear Life
In time, the market will recover and those values will rise again, but it’s a matter of holding on until that happens. Lowell Co-operative bank, for example, was a well-run bank that was probably just too small to weather the current economic storm, O’Brien said.
O’Brien says he has plenty of company in this particular problem: “Everybody has good quality bonds on their portfolio that they’ve had to mark down.”
But many other banks still point to September for the source of their woes. That’s when the federal government devalued the preferred stock of Fannie Mae and Freddie Mac, and anyone who owned such stock “took it on the chin” said John Meserve of Merrimac Savings Bank, which had 5.48 percent equity capital last quarter.
Regulators question any bank that has a ratio below 6 percent, Meserve said, but “they fully recognize that this was an extraordinary singular event, that affected us and other banks,” and that Merrimac’s other fundamentals were sound.
In cases like these, the only options banks have are to either shrink the bank or retain earnings, Meserve said, even if it does leave ratios looking sour.
“Obviously I’m not happy at that level. I want some more breathing room, too,” he said.
