Capital Markets

The Tellers Tell: How Big and Small Banks Are Coping

As Citi ponders a reverse stock split, regional banks tally impairments in their financial reports.
Roy Harris and Stephen TaubMarch 19, 2009

As Citigroup announced plans to file for a possible reverse split to expand the number of shares of its depressed common stock, financial institutions at the other end of the spectrum weighed problems of their own in the balance.

Embattled Citi did not provide much detail in a regulatory filing on Thursday. But it did say that it is considering “effecting a reverse stock split” at some time prior to June 30, 2010, at one of seven reverse split ratios: 1-for-2, 1-for-5, 1-for-10, 1-for-15, 1-for-20, 1-for 25, or 1-for-30. Investors who have bid up shares of Citi and other financial stocks in the recent stock market rally liked the announcement, driving up its stock more than 3 percent in premarket trading. It closed at $3.08 on Wednesday.

Among the advantages of a reverse split in such a situation are that it heads off a possible delisting from the New York Stock Exchange, which recently suspended its minimum stock price requirement to allow trading to continue. More shares also could be used for compensation purposes. Further, a reverse split also could enable institutions to buy the shares, since many can’t own stocks selling below $5. And, of course, a higher stock price could provide psychological support for investors, who are not accustomed to seeing such a large bank trade for the equivalent of an ATM user fee.

For these reasons, Citi is probably not the only company considering a reverse split, or at least increasing authorized shares while plans for further issuance are developed. One other financial services institution being mentioned in that regard: Morgan Stanley.

In other banking news, small banks FNB United Corp., NewBridge Bancorp, Bancorp Inc., and First Busey Corp. announced taking goodwill impairment charges.

FNB, the holding company for Asheboro, N.C.-based CommunityONE Bank N.A., reported taking a noncash, goodwill impairment charge for the quarter ended December 31, of $56 million of goodwill. “This current difficult economic environment has led to a great deal of uncertainty with respect to the valuation of certain assets, including goodwill,” said Michael C. Miller, president and CEO. “As a result of the significant decline in the stock market and recessionary environment, many banks’ common stock prices have followed this decline, including FNB United’s. With the SEC’s increased emphasis on mark-to-market accounting, we believe that use of the company’s current stock market valuation to determine fair value and the related goodwill impairment charge is the most conservative course of action for management to take at this time.”

Greensboro, N.C.-based NewBridge Bancorp, parent of NewBridge Bank, recorded a noncash charge of about $50.4 million for impairment of goodwill, which will result in revision of 2008’s fourth quarter and full year earnings, as well as certain balance sheet items. The writeoff has no effect on liquidity, cash flows, operations, or regulatory capital ratios, it said, an all ratios remain in excess of the minimum levels to qualify for “well capitalized” status.

 “After carefully considering numerous factors, including a valuation by an independent third party and similar action by other banks, we concluded that there were several advantages to proactively taking the step to write off the goodwill arising primarily from our 2007 merger,” said Pressley A. Ridgill, president and CEO. “First, the weakness in NewBridge’s stock price and resulting market valuation is indicative of goodwill impairment. Second, this non-cash charge will better align professional investors’ perspective of book value with what is reflected on our financial statements. Specifically, many sophisticated market participants focus on tangible book value, which excludes goodwill, as opposed to stated book value. This action essentially eliminates the difference between stated book value and tangible book value, and more conservatively portrays the Company’s strength from a financial standpoint. We also believe the expectation of a future write-off of goodwill was a likely subject of uncertainty to the investment community. Taking this step removes a potential impediment to a higher long-term market valuation for our stock.”

Wilmington, Del.-based financial holding company Bancorp Inc. reported a revised 2008 fourth quarter net loss of $41.4 million driven primarily by a $35.6-million goodwill impairment charge during the 2008 fourth quarter, reflecting a decline in enterprise value caused by its lower stock price. The company said that after completing year-end valuations, the values of two investment securities were impaired, resulting in an aftertax charge of $5.7 million.

Last week, First Busey, based in Urbana, Ill.,  reported a revised 2008 loss of $37.9 million as the result of a fourth-quarter, noncash $22.6 million adjustment for impairment of goodwill.