Banks Strain as Capital Drains

The good news is that the bank has raised about $20 million in additional capital during the fourth quarter. Robert P. Cooper, senior counsel for One United Bank, said the institution is now adequately capitalized per regulatory guidelines and expects to improve to well-capitalized by year-end. "The reduction in capital was solely the result of the government conservatorship of Fannie and Freddie," he said.

One United Bank is a certified Community Development Financial Institution (CDFI), whose main business is lending to low- to moderate-income individuals and businesses in Boston, Miami and Los Angeles. The CDFI Fund is run by the Treasury Department, and allocates monetary awards and tax credits to foster development in distressed areas.

"This is actually a good story," said Cooper, who pointed out that the bank hadn't engaged in "the subprime madness," and was on pace for strong earnings before Fannie and Freddie were taken over. Indeed, One United Bank has maintained decent asset quality in the crisis environment, with a nonperforming assets ratio of 1.51% as of Sept. 30, and more importantly, an annualized net charge-off ratio of just 0.35%.

After dipping below well-capitalized during the fourth quarter of 2007 because of trading losses, State of Franklin Savings Bank of Johnson City, Tenn., improved to well-capitalized at the end of the second quarter. Securities losses totaling $16.2 million in the third quarter left the bank significantly undercapitalized, with a leverage ratio of 2.67% and a risk-based capital ratio of 4.07% as of Sept. 30. State of Franklin is another institution whose loan quality has held up well during the credit crisis, as nonperforming assets comprised 0.86% of total assets as of Sept. 30, with an annualized loan charge-off ratio of just 0.09% for the first three quarters of 2008.