At a time when calculated retreats are becoming more common — and more accepted — Tidelands Bancshares Inc. is a new kind of leader.
In the second quarter, Tidelands had the biggest percentage decline in total assets among 500 publicly traded bank companies, according to Sandler O'Neill & Partners LP and SNL Financial LC. The Mount Pleasant, S.C., company reduced assets by 23%, to $584.5 million, after selling most of its investment portfolio bonds and reducing noncore funding, which included selling brokered deposits and paying off borrowings.
It belongs to a growing fraternity. Assets at more than 3,400 community banks fell in the second quarter — the largest number of banks reporting such declines in a year. The sour economy was a key factor, as loan demand shrunk and loan payments accelerated at many institutions. Yet more banks are actively reducing assets in order to improve capital ratios, instead of putting investors through dilutive capital-raising efforts.
"Rather than go out and raise highly dilutive capital, … we chose to downsize the bank to raise capital," Tidelands President and Chief Executive Robert "Chip" Coffee said in an interview last week.
Tidelands called off a $35 million capital-raising effort in May, and in one month, it reduced assets by about $175 million by selling securities and loan portfolios. The gain generated largely by bond portfolio sales probably will produce a profitable third quarter, Coffee said.
"No investor wants a bank that's wounded," said Dory Wiley, the president and chief executive of Commerce Street Capital LLC in Dallas. Banks are "getting rid of wholesale funding and selling their investment portfolios" rather than diluting their shares, he said.
More than 44%, or 3,416, of the nation's community banks, with assets of less than $10 billion, reported a second-quarter decline in total assets, according to SNL.
Of publicly traded bank companies, 245, or 49%, reduced assets in the second quarter, mostly through sales of securities portfolios and as a result of declining loan growth, according to Sandler O'Neill and SNL.
"There are not a lot of attractive lending opportunities, so banks have been parking excess liquidity in lower-yielding securities so their balance sheet is shrinking," said Mark Fitzgibbon, an analyst at Sandler O'Neill. "Until the economy gets going, it's hard to see growth in the balance sheet."
Such was the case at Anchor BanCorp Wisconsin Inc. in Madison, which in late July announced that it would reduce assets by more than $291 million by selling 15 branches of its AnchorBank subsidiary. Its goal was simple: to improve capital ratios. Anchor reported a 9.4% drop in second-quarter assets, to nearly $4 billion, compared to the previous quarter.
Chris Bauer, the company's chief executive, said in a release that this sale was "an important part of our strategy to reduce the bank's capital needs." As of June 30, it was undercapitalized, with a 7.63% total risk-based capital ratio. The company said in its second-quarter report that capital ratios improved slightly and would increase in coming quarters. Anchor did not return a phone call seeking comment.
Typically, institutions with fewer assets have less potential to generate earnings. Yet in this environment, maintaining adequate capital has replaced earnings growth as a priority for many community banks, analysts said.
"Shedding good loans can have an implication on earnings and for future earnings," said Paula Johannsen, a managing director at Carson Medlin Co.'s Florida operations in Tampa. "But when capital is the goal right now, they have to do that."
Johannsen predicted that the asset reduction trend will continue as banks face enhanced compliance pressure in the wake of the regulatory overhaul.
Coffee said such issues figured into Tidelands' decision to shed assets. Though its Tidelands Bank unit is well-capitalized, with a 10.30% total risk-based capital ratio, Coffee said executives "wanted to prepare for the worst in this economic environment."
So with nearly half the nation's community banks reducing assets, an obvious question arises: Who is buying these assets?
Nonperforming assets are being purchased largely by private-equity groups, hedge funds and insurance companies, and the asset sellers' competitors are snapping up quality loan portfolios and deposits, analysts said.
In AnchorBank's case, four of its Green Bay-area branches were bought by Nicolet National Bank in Green Bay and 11 branches went to Royal Credit Union in Eau Claire, Wis.
In the end, asset sales may turn out to be a mixed blessing for banks, analysts said, because a reduced asset base will leave them vulnerable to consolidation.
"The lack of loan demand and increased regulation has to force a wave of consolidation," Fitzgibbon said. "Consolidation is going to spread throughout the country, and it's going to be profound."