Watch Out for Georgia's Worst Banks

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As we move further through this credit cycle, a constant theme for banks is the fallout from overbuilding during the real estate boom -- and some of Georgia's financial institutions appear to be in bad shape.
We recently discussed loan quality problems at the nation's largest construction lenders, following an earlier discussion of Florida's most troubled banks.

A close look at Georgia's 358 banks and thrifts shows that for many, the home construction lending bust is even worse than it is in Florida. Here's a list of the 10 Georgia banks and S&Ls with the worst asset quality, as of March 31:

The four institutions in bold were considered below well-capitalized per regulatory guidelines, with leverage ratios below 5% and/or risk-based capital ratios below 10%. These four would be termed adequately-capitalized per regulatory guidelines, but when it comes to banks with high levels of problem loans, "adequate" translates to "pretty darn scary."

Integrity Bank had the worst asset quality on the list, along with the weakest capital ratios. It's also the largest institution in our "top 10," with total assets of $1.2 billion as of March 31. The bank is held by Integrity Bancshares, Inc. (ITYC), which has been trading on the Pink Sheets since being voluntarily delisted from the Nasdaq in late March.

One of the reasons the holding company delisted was a number of resignations from its board of directors, making it impossible to meet the Nasdaq requirement that the majority of directors qualify as "independent." Also, the stock was selling below $1 per share.

On March 5, Integrity announced that it agreed to the FDIC's issuance of a cease & desist order, which addressed the bank's poor loan quality, inadequate reserves and poor board of directors oversight. The holding company has also entered an agreement with the Federal Reserve not to receive any dividends from the bank or to pay out any dividends to shareholders or any interest on trust preferred securities.

Integrity's problem was its breakneck increase in construction lending through June 2007. At that time the construction loan portfolio had grown 37% over the previous year, and comprised 63% of the bank's total assets. June 2007 is also the quarter when the bubble burst, with Integrity taking a quarterly loss of $31 million as it elevated provisions for loan loss reserves.

Integrity reported net charge-offs of $48.5 million over the past four quarters, as loan quality deteriorated. Nonperforming assets comprised a whopping 22.62% of total assets as of March 31. With loan-loss reserves covering just 16% of nonperformers and a low overall level of capital, the bank is clearly in danger of being closed down by regulators. The situation is really grim when you consider that loans delinquent 30-89 days (still considered "performing") comprised another 9.56% of total assets as of March 31.

A call to Integrity Bank for comments on raising capital or other strategic plans was not returned.
Community Bank of Loganville was also considered adequately capitalized, with a risk-based capital ratio of 9.72%. Once again, the big culprit was construction lending. Nonperforming assets, including nonperforming loans and repossessed real estate, comprised 20.12% of total assets as of March 31. Loan loss reserves covered less than 12% of nonperforming loans.

Over the past year, Community Bank's net loan charge-offs have totaled just $855,000. If a construction deal goes bad, it can take quite some time for a bank to gain possession of the property, after which it may need to hire new contractors to complete the project, before selling it. All of these steps, along with long marketing periods in a declining real estate market make it seem inevitable that the institution will bite the bullet at some point and take very large charge-offs.

Less than half of EBank's nonperforming loans were construction loans as of March 31, with the rest secured by a mix of residential and commercial real estate. The $153 million thrift (held by EBank Financial Services (EBDC) was chartered in 1998, and has reported net losses for six straight quarters, through March 31. Nonperforming assets were 12.82% of total assets, nearly doubling during the first quarter.

EBank's earnings have, of course, been hurt by the thrift's need to transfer money to loan loss reserves, but another alarming problem is its net interest spread, which was just 1.10%. The net interest spread is the difference between the aggregate rate an institution pays for its funding (deposits and borrowings) and aggregate rate it earns on loans and investments. The industry's combined spread for the first quarter was 3.24%.

The narrow spread points to EBank's reliance on large deposits gathered through its Internet services. As of March 31, deposits with balances over $100,000 comprised 49% of total deposits, and uninsured deposits were 35% of total deposits. EBank could easily wind up with a liquidity problem to go along with its weak capital position and terrible loan quality.

First Georgia Community Bank is held by First Georgia Community Corp. (FGCC), which is listed on the Pink Sheets with almost no trading volume. Like the other banks on the above list, First Georgia was considered adequately capitalized as of March 31.

Looking through recent filings, the holding company entered into subscription agreements on June 9 with three of its directors, to sell them common shares and raise $3 million in new capital, subject to regulatory approval. This is quite a significant capital raise, considering that total equity capital was under $18 million as of March 31.

The June 9 announcement followed the company's May 6 announcement of the deferral of interest payments on its trust preferred securities, another move that will boost net income and help preserve capital.

A call to First Georgia to ask if the $3 million capital raise was unreturned.

Larger Banks
The largest bank headquartered in Georgia is SunTrust, held by SunTrust Banks (STI). The holding company has been recently rumored to be a takeover target, and saw its stock plunge 15.60% last week, after a bearish report on the financial sector from Goldman Sachs.

SunTrust later issued a press release standing by its previous estimates of charge-offs for the second quarter and stating it had no plans to cut its dividend or raise additional capital.

SunTrust Bank's nonperforming assets comprised 1.51% of total assets as of March 31, increasing from 1.04% the previous quarter. Loan-loss reserves covered 56% of nonperforming loans. Quarterly earnings have suffered with increasing provisions for loan losses over the past four quarters, but earnings have remained positive.

It will be interesting to see how SunTrust fares over the next few quarters. Its leverage ratio was 7.45% and its risk-based capital ratio was 10.66% as of March 31, both slightly higher than a year earlier. A 5.5% decrease in total assets over the past year helped in maintaining those capital ratios.

If the rapid increase in nonperforming loans continues, that second capital ratio could well drop closer to 10%. SunTrust will then need to keep shrinking its balance sheet or take the plunge and cut its dividend and/or raise capital to maintain its well-capitalized status. That being said, SunTrust has fared better through the crisis than several other large regional players.

Here are the five Georgia banks (Integrity Bank is listed again) with over $1 billion assets with the worst loan quality as of March 31:

Security Bank of Bibb County (held by Security Bank Corp. (SBKC)) had the highest net loan charge-offs on the list, with an annualized 7.28% for the first quarter. Even after charging off $18.6 million during the quarter (mostly residential construction loans), nonperforming assets comprised 6.48% of total assets as of March 31. Loan-loss reserves covered 32% of nonperforming loans.

The holding company is still paying a quarterly dividend of 4.375 cents per share, which translates to an annual yield of 3.10%. Since the stock tanked in early June, it has been slowly climbing, with some insider buying. If the bank follows last quarter's $16 million loss with another, Security Bank's risk-based capital ratio could drop sufficiently to threaten the dividend.

Bank of North Georgia is a unit of Synovus Financial (SNV), which held 37 separately-chartered institutions at last count. While Bank of North Georgia's risk-based capital ratio was on the low side, at 10.19% as of March 31, the $33 billion holding company was strongly-capitalized as of March 31, with a leverage ratio of 8.96% and a risk-based capital ratio of 12.46%.

Synovus Financial has been holding up pretty well. For the first quarter, the holding company's net income was $81 million, or a return on average assets of 0.97% and a return on equity of 9.29%. Those are respectable earnings in this market.

The news is not all bad.

To end on a cheerful note, here are the five Georgia banks with over $1 billion in assets, with the best loan quality as of March 31:

Columbus Bank and Trust Company is also held by Synovus Financial. The institution has strong asset quality, with nonperforming assets of just 0.37% of total assets as of March 31. Capital levels are also quite strong.
Georgia B&TC of Augusta is a unit of Southeastern Bank Financial (SBFC), which also holds the $86 million Southern Bank & Trust, of Aiken, S.C.

Georgia B&TC has seen its earnings decline over the past year like most institutions, but reported first-quarter net income of $2.9 million, with respectable returns on average assets and equity of 1.02% and 12.95%. Nonperforming assets comprised 0.68% of total assets as of March 31. Loan loss reserves covered a very strong 152% of nonperforming loans. The bank is maintaining strong reserves which could anticipate a bit of trouble ahead, since loans past due 30-89 days comprised 1.16% of total assets as of March 31.

Wachovia Card Services, held by Wachovia (WB), is in the news every day because of its continuing problems with its huge portfolio of option-payment adjustable-rate mortgages acquired from the former Golden West Financial.

As its name implies, Wachovia Card Services is a credit card bank, formed in March 2007. While most of the institution's assets are credit card receivables, the holding company has not yet put it to much use, as total assets were only $2.2 billion as of March 31, and its leverage ratio was over 52%. With so much capital committed here, we expect very significant expansion of this charter at some point.

United Community Bank (held by United Community Banks, Inc. (UCBI)) had total assets of $8.4 billion as of March 31. After a bad fourth quarter where earnings were nearly wiped-out as the bank beefed-up loan loss reserves, earnings recovered in the first quarter, with net income of $16.6 million, or a return on average assets of 0.79% and a return on average equity of 7.84%.

The bank paid dividends totaling $50 million up to the holding company during the first quarter. This was more than three times net income, and had the effect of pushing down capital ratios quite a bit. However, this is not of major concern over the short term, since loan loss reserves covered 133% of nonperforming loans as of March 31.

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