Watch Out for Georgia's Worst Banks

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 Quote)) 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 Quote), 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 Quote). 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.