As other banking companies ready third-quarter results, at least two are being forced by regulators to restate their second-quarter figures, with serious consequences.
TierOne Corp. in Lincoln, Neb., and Citizens First Bancorp Inc. in Port Huron, Mich., said they would revise previously reported numbers because regulators disagreed with their valuations of certain assets.
The restatements will push capital ratios at both companies below regulatory minimums.
The $3.1 billion-asset TierOne said it expects to fall just shy of the capital minimums its thrift unit is required to maintain under a January enforcement action by the Office of Thrift Supervision. Citizens First said its restatement would likely leave its $1.9 billion-asset bank subsidiary significantly undercapitalized.
Experts said such restatements could become more common as regulators crack down on banks' assessments of what loans and other assets are worth.
"In the past, a bank that had a good relationship with regulators and examiners could say, 'Here is our best guess of a loan and what it is doing now,' and that would be good enough," said Douglas Landy, a partner in the banking regulatory practice at Allen & Overy LLP. "Now it's not good enough. They are being challenged."
Citizens First said in a securities filing on Oct. 7 that the $35.3 million allowance for loan losses it reported for the second quarter had turned out to be inadequate. It said the adjustment would be material but did not give an amount.
The reassessment was in part driven by a difference of opinion with the Federal Deposit Insurance Corp., which was in the midst of examining the bank unit at the time of the filing, Citizens First said. Neither the FDIC nor Citizens First returned calls for this story.
However, Citizens First said several other reasons explain its failure to reserve appropriately, including tanking real estate values and high unemployment in Michigan, as well as the company's internal controls on credit administration.
In September, Citizens First said, the FDIC discovered what the regulator believed to be inappropriate behavior at the company, "including removing unfavorable appraisals from the loan files in an apparent attempt to obstruct the FDIC's examination and avoid the recognition of additional loan losses." Citizens First said it had hired a law firm to investigate the FDIC's claims.
The company also said regulators disagreed with its valuation of collateralized mortgage obligations, resulting in a $4 million writedown on those securities.
Citizens First's bank unit was already undercapitalized, with a total risk-based capital ratio of 6.87% at June 30. But it said the writedowns would likely reduce the bank's standing to significantly undercapitalized. Among other things, banks with that designation are not allowed to pay dividends, and the rates they pay on deposits must be the same as the prevailing market rates in their region. Citizens First did not disclose the updated capital ratios, but the FDIC generally considers an institution significantly undercapitalized if it has a total risk-based capital ratio below 6%.
"This is a bank that is already floating on thin ice," said Eliot Stark, a managing director at the Chicago investment bank Capital Insight Partners Inc. who works out of Bloomfield, Mich. "It is a $2 billion-asset bank with $60 million in capital, so any kind of adjustment is going to have a major impact."
The claims of bad credit administration practices will not help the already grim prospects for Citizens First to attract replacement capital, Stark said.
"It is already tough enough, without all these other issues going on," he said. "But something like a government investigation just made a very difficult hurdle even harder to overcome."
This will be Citizens First's second restatement in a row. In August, the company filed revised results for the first quarter, in part because of an accounting error on a $7.5 million impairment of its deferred tax valuation allowance. The company also increased its loan-loss provision by 52% from what it initially reported, to $8.1 million. The two actions together moved the bank from adequately capitalized to undercapitalized.
Stark said many community banks have failed to come to terms with the true value of their assets.
"The pressure for these banks to be realistic is growing," he said. "Truth is that in a lot of these cases that even the ones they think are good are marginal at best."
At TierOne, a difference of opinion with the OTS on the value of underlying collateral for its credits will force a 64% increase in its loan-loss provision.
This includes chargeoffs of $10.6 million, a 50% boost in the chargeoffs already reported for the quarter. The company did not update its net loss for the quarter, which was originally reported as $16.1 million.
The news of the restatement was a blow to at least one observer's perception of TierOne as a company on the mend.
"At one point I questioned the future of TierOne, but the numbers came out looking better than they had," said Theodore Kovaleff, an analyst at Horwitz & Associates and a former shareholder in the company. "Now we have this restatement, and all bets are off."
Ed Swotek, a senior vice president at TierOne, said the company tries to be as realistic as possible when calculating its results but that sometimes new information comes up. "We go through an exhaustive process in evaluating our portfolio to make sure we have sufficient provisioning. But that is based on the information that you have at the time," Swotek said. "In this case, some additional information came available that showed there was further erosion."
The writedowns will reduce TierOne Bank's leverage ratio from 8.5% to 8.11% and its total risk-based capital ratio from 11.3% to 10.85%. The January agreement with the Office of Thrift Supervision requires those ratios to be 8.5% and 11%, respectively. The OTS declined to comment.
Swotek said that, though the thrift is now considered out of compliance with the order, the deal it struck last month to sell 32 branches to Great Western Bank, a Sioux Falls, S.D., unit of National Australia Bank, will return it to well capitalized. "It is going to be a really good shot in the arm," Swotek said.
Kovaleff said the restatements demonstrate the importance of finding out when a bank was last examined. "I ask now more or less as a matter of course," he said.