The News-Gazette.com: Strategic Capital rated 'troubled'; two others downgraded

Strategic Capital rated 'troubled'; two others downgraded

By Don Dodson

Sunday, October 5, 2008 8:58 AM CDT

CHAMPAIGN – A bank rating service has sharply lowered its evaluation of Strategic Capital Bank and downgraded the ratings of two other area banks.

BauerFinancial Inc. dropped its rating of Champaign-based Strategic Capital Bank from "3 stars" to "1 star" in a report issued last month. The "3 star" rating is described as "adequate," while "1 star" is deemed as "troubled."

In August, state and federal regulators issued a "cease-and-desist order" against Strategic Capital Bank, demanding it increase its capital and barring it from increasing total assets or accepting or renewing brokered deposits.

BauerFinancial lowered the rating on two other area banks, based on financial information the banks filed for the quarter that ended June 30, 2008. Fisher National Bank's rating was lowered from "5 stars" (superior) to "3 1/2 stars" (good). The rating for the John Warner Bank in Clinton slid from "3 1/2 stars" (good) to "3 stars" (adequate).

Two banks saw their ratings improve. The rating for Citizens National Bank, Paris, rose from "4 stars" to "5 stars," and United Commercial Bank, Oakwood, improved from "3 1/2 stars" to "4 stars."

Of 75 banks with a presence in East Central Illinois, 37 received 5-star ratings; 24 received 4-star ratings; 10 received "3 1/2 stars," three received "3 stars" and one received "1 star."

BauerFinancial Inc. lowered its rating of Champaign-based Strategic Capital from '3 stars' to '1 star.' By John Dixon

Strategic Capital was the lone bank to receive the "1 star" rating, while the "3 star" ratings went to Cleveland-based National City Bank, Champaign-based Central Illinois Bank and John Warner Bank.

Here's a look at the situation with those four banks, along with downgraded Fisher National Bank:

– Strategic Capital Bank's total risk-based capital ratio, as reported by BauerFinancial, fell below the Federal Deposit Insurance Corp.'s requirements for being "adequately capitalized" for the quarter that ended June 30.

The rating service said Strategic Capital had a ratio of 7.376 per- cent, which is below the 8 percent regulators require for "adequately capitalized" banks and the 10 percent they require for "well-capitalized" banks.

Bank President Stephen Wills said Strategic's ratios were actually slightly lower than those reported by BauerFinancial because the bank had to restate its first- and second-quarter reports to the FDIC. Those restatements listed the total risk-based capital ratio at 7.08 percent.

Wills said when the bank's third-quarter report is issued, the bank will be "adequately capitalized" in all areas. To comply with the FDIC's cease-and-desist order, the bank has increased its capital ratios by reducing assets, he said.

"With the projections we've provided to the FDIC, we're showing increased capital, strong profitability and strong liquidity," Wills said.

So far, the bank has had a profitable year. It reported $3,464,000 in net income for the second quarter and year-to-date income of $5,559,000.

– Central Illinois Bank reported a net loss of $1,417,000 for the second quarter. The bank had a profitable first quarter, but the second-quarter performance resulted in a $529,000 year-to-date loss.

Bank officials had no immediate response to the latest BauerFinancial report, but the bank has said it is discussing a possible merger or business combination.

In August, John P. Hickey Jr., president and chief executive officer of the bank's holding company, CIB Marine Bancshares, said all the company's subsidiary banks are well- capitalized, but the holding company is facing large interest payments on "trust preferred securities" early next year.

Hickey called these "difficult times for CIB Marine and the financial services industry in general."

– John Warner Bank had a net loss of $321,000 in the second quarter, for a total year-to-date loss of $223,000.

Bank President and Chief Executive Officer Andrew Robinson said the bank's loss stemmed from investments, not from loans.

"Our capital ratio remains above the minimal 'well-capitalized' level, and it will be that way for the end of this quarter," he said, referring to the one that ended Tuesday.

"We've had some losses – that's common – this isn't the first difficult cycle we've managed through," he said. "I feel good about the safety and security of customer funds here, and I feel good about the future."

Nevertheless, he said, "We expect this to be a tough year."

– National City Bank reported a loss of $1,882,121 in the second quarter, for a year-to-date loss of $1,951,723. The bank, which signed a memorandum of understanding with federal regulators in June, has been hard-hit by the mortgage market and the sour economies in Michigan and Ohio. National City has been the subject of renewed talk about being ripe for takeover.

As of June 30, it had a risk-based capital ratio of 13.991 percent, exceeding the 10 percent requirement for "well-capitalized" banks.

– Fisher National Bank, with offices in Fisher and Mahomet, has been profitable so far this year. It had net income of $174,000 in the second quarter, for a year-to-date gain of $406,000. But the bank saw its nonperforming assets increase to 3.93 percent of average assets – a very high percentage.

"We've had an increase in the loan loss reserve in case of loan problems," said bank President Mike Estes. He said the potential problems involve "a few loans" to small businesses.

"I feel the losses will be fairly minimal, but you don't know that until everything's done," Estes said. He said this year's earnings won't be good, but said he believes "it's a one-year temporary thing."

Estes said the bank's capital is considerably above regulatory requirements – its risk-based capital ratio is 14.725 percent – and added the bank continues to be highly capitalized.

In addition to Central Illinois Bank, John Warner Bank and National City Bank, three other banks reported net losses for the second quarter. Those included:

– State Farm Bank in Bloomington, which had a $25.5 million loss, leaving it with a year-to-date loss of $22.1 million. BauerFinancial gave the bank a 4-star ("excellent") rating.

– Arcola Homestead Savings Bank, which had a $68,000 loss in the second quarter, for a year-to-date loss of $109,000. It got a 3 1/2-star ("good") rating from BauerFinancial.

– First National Bank of Catlin, which had a $14,000 loss in the second quarter, leaving it with $12,000 in net income for the year to date. It, too, received a 3 1/2-star rating.

Charleston Federal Savings and Loan had net income of $7,000 in the second quarter, leaving it with a $1,000 net loss for the year to date.

Besides Fisher National Bank, only a few area banks had nonperforming assets that amounted to 2 percent or more of average tangible assets. Nonperforming assets usually refer to loans or leases on which principal and interest payments are not being met – often, commercial loans that are more than 90 days overdue and consumer loans more than 180 days overdue. High percentages are significant because they could spell problems in months ahead.

Fisher National Bank had the highest percentage, 3.93 percent, followed by Scott State Bank in Bethany at 2.63 percent and First National Bank of Catlin at 2.56 percent.

How East Central Illinois banks rated with BauerFinancial

BauerFinancial bases its ratings on capital ratios, profitability trends, levels of delinquent loans, charge-offs and repossessed assets, liquidity, historical data and supervisory actions by regulatory agencies.

5-star ("superior") ratings

37 banks

Bank of Gibson City; Buckley State Bank; Cissna Park State Bank; Citizens National Bank, Paris; DeWitt Savings Bank, Clinton; Farmer City State Bank; Farmers State Bank, Danforth; Farmers-Merchants National Bank, Paxton; Federated Bank, Onarga; First Federal Savings Bank of Champaign-Urbana; First Federal Savings & Loan, Mattoon; First Mid-Illinois Bank & Trust; First National Bank & Trust, Clinton; First National Bank in Georgetown; First National Bank in Paxton; First National Bank of Arcola; First National Bank of Chrisman; First National Bank of Ivesdale; First Savings Bank, Danville; First State Bank, Monticello; First Trust and Savings Bank, Watseka; Gifford State Bank; Hickory Point Bank & Trust; Iroquois Farmers State Bank; Iroquois Federal Savings and Loan; Kenney Bank & Trust; Philo Exchange Bank; Prairie State Bank & Trust; Sidell State Bank; State Bank of Arthur; State Bank of Bement; State Bank of Cerro Gordo; Sumner National Bank, Sheldon; Tuscola National Bank; Vermilion Valley Bank, Piper City; Villa Grove State Bank; Woodforest National Bank.

4-star ("excellent") ratings

24 banks

Bank of Rantoul; BankChampaign; Busey Bank; Central Bank, Ashkum; Centrue Bank; Charleston Federal Savings and Loan; Citizens State Bank, Milford; Commerce Bank, N.A.; Edgar County Bank & Trust; First Bank & Trust Savings Bank, Paris; First Midwest Bank; First National Bank of Ogden; First National Bank of Sullivan; Freestar Bank; Hardware State Bank, Lovington; Heartland Bank & Trust, Bloomington; Longview State Bank, Sidney; MainSource Bank of Illinois; Milford Building and Loan; Old National Bank; Regions Bank; State Bank of Chrisman; State Farm Bank; United Community Bank, Oakwood.

3 1/2 star ("good") ratings

10 banks

Arcola Homestead Savings Bank; Community Bank of Hoopeston; Dewey State Bank; First National Bank, Danville; First National Bank of Catlin; First National Bank of Gilman; Fisher National Bank; JPMorganChase Bank; Marine Bank, Springfield; Scott State Bank, Bethany.

3-star ("adequate") ratings

Three banks

Central Illinois Bank, John Warner Bank, National City Bank.

1-star ("troubled") rating

One bank

Strategic Capital Bank.