Sometimes it's all in the delivery.
Security Bank Corp.'s problem loans soared in the first quarter, and its $24.2 million loss was four times worse than analysts expected.
But along with those grim results, the Macon, Ga., company announced Tuesday that it has received a $40 million cash infusion from the Cincinnati private-equity firm FSI Group LLC.
As part of the deal, Security plans to add a board member with turnaround expertise.
John Stein, the president and chief operating officer of FSI, said it expects its stake in Security to pay off when the Atlanta area begins to recover from a downward spiral in real estate values.
"We think it's a high-quality management team that's up to handling the challenges that they face and has what seems like a good plan," Mr. Stein said.
He expects FSI to announce more deals like the one with the $2.8 billion-asset Security shortly.
"There are a lot of companies looking for this kind of capital now, and we continue to speak to many of them," he said. "I think you're going to see a lot more transactions like this in the months to come."
FSI, which has invested more than $350 million in community banks and thrifts over the past dozen years, announced last spring that it planned to scout the country for turnaround opportunities. It also hired Gerald R. Francis as a managing director to help with the search and to advise the companies in which it invests.
Mr. Francis, whose 35 years of experience includes fixing up several troubled community banks, will join Security's board at its next meeting.
"This is the first significant investment that Jerry's taking a lead role in," Mr. Stein said.
In a conference call Tuesday with analysts, Rett Walker, Security's president and chief executive officer, said he is "excited" to have Mr. Francis as a director.
A former CEO at several banking companies, Mr. Francis most recently led a turnaround of First National Bank and Trust of Kokomo, Ind., which Bank of Montreal's Harris Bankcorp Inc. of Chicago acquired for $290 million last year. He was named American Banker's Community Banker of the Year in 2002 for his role in rescuing City Holding Co. of Charleston, W.Va., from the brink of failure.
"He's been at four other banks of our size or larger that have had issues like ours," Mr. Walker said. "He's a very knowledgeable individual."
But he also said Mr. Francis is expected to be more of a strategic adviser than a daily tactical one. "He will not be serving in any management role."
Security's struggles with rapidly mounting bad loans surfaced in mid-summer. It managed to turn a profit in the second and third quarters, but it lost $6.9 million in the fourth.
Still, while credit quality had clearly been deteriorating, the troubles in the first quarter were far worse than expected, analysts said.
Its provision for loan losses more than doubled from the fourth quarter and increased 33-fold from a year earlier, to $42.2 million, and chargeoffs totaled $24 million for the quarter, versus $23 million for all of last year.
The first-quarter net chargeoff rate climbed 161 basis points from the fourth quarter, to 4.4% of average loans.
Mr. Stein said FSI would be a patient investor as Security works through its issues. He noted that the $40 million of subordinated notes his firm bought, which carry an interest rate of 9.5%, will mature in 10 years.
"This is a long process, and there is a lot of work to be done," he said. "Success is not going to be achieved overnight."
FSI acquired its stake at what Mr. Stein called an attractive price: $6.58 a share, or roughly $1 below the trading price before Tuesday's announcement.
The stock has held steady since the earnings announcement — it was trading at $7.60 late Wednesday — and Samuel Caldwell, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc. said there is "no question" that news of the FSI's investment helped prevent shares that are trading 65% below their 52-week high from falling further.
Mr. Stein said FSI's warrants would amount to a stake of 9% to 10% in Security. He did not say how much larger the stake would be with its stock appreciation rights. But Mr. Caldwell said the 6.1 million shares going to FSI works out to a 20% stake.
The $40 million infusion was on top of the $28 million Security raised in a stock offering in March. In an e-mail, Mr. Walker wrote that Security now has $68 million of fresh capital that would allow it to absorb chargeoffs of two or three times the current level.
As part of its plan to preserve capital, Security intends to reduce its quarterly dividend and noninterest expenses, he said. Specifically, it is lowering its budget for marketing and conference travel, forgoing management bonuses, and cutting pay for some executives.
In addition, it walked away from two sites it had selected for new branches.
"We've gone to bare-bones Basics of Banking 101," Mr. Walker said.
Mr. Caldwell, though, questioned whether it might need even more capital.
Nonperforming assets jumped to $222 million in the first quarter. As a percentage of total loans plus other real estate owned, they nearly tripled from the previous quarter, to 10%.
"With the increase being so large, it's clear that … [Security] took a fine-tooth comb to the loan portfolio," Mr. Caldwell said. Still, he added, "it's hard to get a handle with a number that big on the potential losses on those loans. That's my concern."
Real estate values have fallen throughout the Atlanta region and Richard Collinsworth, Security's chief operating officer and executive credit officer, said the magnitude of the price drop varies according to the type of property.He said recent appraisals on other real estate owned are at 10% to 20% below the original values, but the decline is much more dramatic for raw land.
"We have plenty of appraisals coming in at 50% to 60% of prior amounts, and sometimes even much lower than that," Mr. Collinsworth said.
