These Banks Need to Raise Capital Quickly

Weakest Capital Positions

First, let's take a look at the largest 10 institutions that were below well-capitalized with risk-based capital ratios below 10%, as of March 31:

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Three institutions on the list were considered undercapitalized per regulatory guidelines as of March 31.

Even before the real estate bubble burst, First National Bank of Arizona's risk-based capital ratio hovered pretty close to the 10% threshold. Over the past three quarters, the institution's portfolio of single family construction loans and mortgages in south-west Arizona, New Mexico and Southern California has soured. Large provisions for loan loss reserves have caused losses over the past four quarters, with a whopping net loss of $131 million for the first quarter of 2008.

Chief Administrative Officer Joel Gottesman said the privately-held institution is working hard to line up investors and raise additional capital. He was unable to project when a capital injection might take place, pointing out that the process can take longer for a privately held bank.

Mr. Gottesman also stated that First National had shut down both its wholesale and retail mortgage-origination operations.

BLC Bank was formerly held by Sterling Financial, of Lancaster, Pa., which was acquired by PNCl(PNC) on April 4. PNC plans to convert the institution's branches to PNC Bank branches in the third quarter of 2008.

Fremont Investment and Loan is held by Fremont(FMT), which has been trading on the Pink Sheets since April 17. Fremont was at the forefront of the subprime saga that sparked the real estate crisis. The holding company missed a $6.6 million interest payment on its senior notes on March 17 and is in the midst of liquidating its banking unit.

Fremont General has agreed to sell Fremont Investment and Loan to CapitalSource TRS Inc., a unit of CapitalSource(CSE), and is selling the banking unit's remaining mortgage servicing rights to Litton Loan Servicing, a unit of Goldman Sachs(GS).

Fremont General also stated on May 9 that it expected to file for bankruptcy.

While the Fremont story has been widely covered in the business press over the past year, as of March 31, Fremont Investment and Loan had close to $2 billion in time deposits with balances of $100,000 or more. While we can't tell how much of these deposit balances were above FDIC insurance limits, it's pretty surprising that any uninsured deposits were still there.

Smaller Banks and S&Ls

Here are the institutions with most the dire capital positions, as of March 31, leaving out those listed in the first table:

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One institution that would have appeared on the above list was Peachtree Bank, of Duluth, Ga. Peachtree was formerly held by Alabama National Bancorp, which was acquired by RBC Centura (a subsidiary of Royal Bank of Canada(RY)) on Feb. 28. Peachtree was merged into RBC Centura on April 11.

First Integrity Bank had negative capital ratios as of March 31. While the institution had $332,000 in total equity capital, or 0.63% of its total assets, deferred tax assets of $456,000 were disallowed from the tier 1 capital figure, which pushed the ratios into the negative. The $53 million institution suffered an increasing tide of nonperforming commercial construction loans over the past year. Its charge-offs during 2007 wiped out the bank's loan loss reserves. A call to the bank's CEO seeking comment was not returned.