Crescent Banking Co. in Jasper, Ga., is in danger of failing since a deal to get $27.2 million of capital from its management and directors fell through.
But some observers said the willingness of insiders to invest at all and the possibility that the deal could be revived weigh in favor of the $1 billion-asset company.
In an annual report filed Monday with the Securities and Exchange Commission, Crescent's auditors said its heavy losses, rising nonperforming assets and deteriorating capital raise "substantial doubt" about the company's ability to continue.
Crescent has hired an investment bank to help it find capital, Don Boggus, the company's president and chief executive, said in a press release issued late Monday.
Given the earnings pressure on the company, "a sound capital level is critical," he said.
Nonperforming assets spiked to 7.72% of its total last year, and Crescent swung to a $31.7 million loss, from a $6.4 million profit a year earlier, according to the filing.
At yearend the total risk-based capital ratio at its Crescent Bank and Trust Co. dipped to 8.31%, which is considered merely adequate capitalization. Regulators require 10% for a bank to be viewed as well capitalized.
In late January, the company announced that an investor group led by its management and directors would buy $27.2 million of preferred stock, contingent on its acceptance into the Treasury Department's Troubled Asset Relief Program. On March 3, the company said it was withdrawing its Tarp application, and on March 31 the investor group called off the deal.
The company said in its filing that it still could restructure the deal, and several investment bankers said this possibility raises hope for Crescent.
Wesley A. Brown, a managing director at St. Charles Capital, a Denver investment bank, said the initial deal with company insiders demonstrated confidence, even though it failed. The investment group might simply have realized that its money would not have been enough, without Tarp, to shore up Crescent against its expected losses, Brown said. Though the company has not disclosed how much it sought in Tarp funds, it could have asked for up to roughly $27 million.
"To me, that says they think $54 million is what is needed to plug the hole," Brown said. "It is entirely logical and reasonable for them to call off their end of the deal if their investment was not going to be enough to resolve the problem."
Craig Mancinotti, a managing director and principal at Austin Associates LLC in Toledo, said that if the insiders renew the deal, Crescent would have an easier time attracting additional private capital, particularly given the auditors' "going concern" notice.
"Certainly, a 'going concern' qualification would require a different level of due diligence for an investor, but I think having insiders with an ability to put that much up would be an enticement," Mancinotti said. "There are a lot of companies that are looking to raise capital like this, and not all can put up a matching investment."
Karen Dorway, the president of BauerFinancial Inc. in Coral Gables, Fla, said that, based on the bank's Dec. 31 data, the $27.2 million the insiders had pledged would have at least restored it to well capitalized status, with an 11% total risk-based capital ratio. She said $54 million of new capital would have boosted this capital ratio to 13.65%.
The company's 2008 loss left the bank with about $60 million in capital, Dorway said, which might not last very long if asset quality continues to deteriorate. "Their nonperforming assets are headed in the wrong direction."
Crescent attributed its loss last year primarily to loan-loss provisioning of $25.8 million, up nearly 900% from a year earlier. Construction and development loans make up 45% of Crescent's loan portfolio. At 93%, nearly the entire portfolio is secured by real estate.
With heavy residential exposure in one of the country's hardest hit markets, Crescent's credit quality has taken a nose dive in the past year. Its ratio of chargeoffs to average commercial banking loans outstanding was 1.64% last year, up from 0.11% for 2007.
Boggus did not return a phone call Tuesday. He said in the press release that the company continues to slash expenses under a plan developed in October. It cut senior managers' pay by 10%, eliminated bonuses and reduced staff, among other things.