Banks Strain as Capital Drains

For the remaining three (surviving) banks on the list, there were no securities losses in the third quarter. The problem is loan quality. Citizens Community Bank of Ridgewood, N.J., fell below well-capitalized in the fourth quarter of 2007 and has continued to drop as losses from the institution's construction and residential loan portfolios threaten to overwhelm its capital. The $45 million bank's annualized ratio of net charge-offs to average loans year-to-date was 11.10%, while loan loss reserves covered just 2.53% of total loans as of Sept. 30. It's hard to see how Citizens Community can survive without raising additional capital.

Corn Belt Bank & Trust Co. of Pittsfield, Ill., has also reported a very high level of charge-offs during 2008. Year-to-date net charge-offs (mostly commercial loans) totaled $13 million, or an annualized 19.69% of average loans. The ratio of nonperforming assets to total assets was 2.25% as of Sept. 30. Corn Belt B&TC hasn't been carrying high levels of nonperforming loans over the past year, meaning the institution quickly charges off bad loans. So there's no way to know if its reserve coverage will be adequate in the future. The bank's leverage ratio was 2.73% and its risk-based capital ratio was 5.09% as of Sept. 30.

Community Bank of Loganville, Ga., reported nonperforming assets of 37.83% of total assets as of Sept. 30. Like so many banks in and around Atlanta, Community Bank had an overconcentration in residential construction loans, which comprised 64% of the $635 million bank's assets as of Sept. 30. After losing $8.7 million in the second quarter, the bank posted a net loss of $18.2 million, as it continued to beef up its loan-loss reserves, which covered 9.11% of total loans as of Sept. 30.

This level of reserve coverage is way ahead of the annualized pace of net charge-offs, which was 2.23% of average loans for the first three quarters. However, with losses on nonperforming construction loans often "approaching 50%," according to one veteran loss mitigation specialist, it's possible that Community Bank's $46 million in loan-loss reserves won't cover losses from the bank's $171 million in nonperforming construction loans.