After a $6.9 million fourth-quarter loss caused by a growing pile of bad loans, Security Bank Corp. in Macon, Ga., is out to replenish its capital.
The $2.8 billion-asset company, which has been hit hard by the weakness in the Atlanta residential real estate construction and development market, is going to its shareholders with a $35 million rights offering of common stock that analysts say is critical to help keep Security out of regulatory trouble.
Several analysts said that this is the first such offering they have seen from a community bank during this down cycle but that they expect many others to follow suit.
"My guess is we will see a bunch more in the next eight to 12 months as companies are put in a position where they need to raise capital," said Mark Fitzgibbon, the director of research for Sandler O'Neill & Partners LP.
Large banks already have been issuing stock at a brisk pace over the past few months, though they generally have favored preferred or convertible stock.
Samuel Caldwell, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., said Security's plan to canvas its current investors instead of the general public is its best bet, because of the poor market for bank stocks.
"People investing in bank stocks today would want a significant discount," Mr. Caldwell said. "So you go to your current shareholders with a rights offering hoping to sell for less of a discount."
Security is offering 5.3 million shares at $6.58 a share. Its stock, which was trading at $7.61 Wednesday afternoon, has lost about 60% of its value since last February.
The company has standby purchase agreements from two shareholders, who agreed to take as much as $18 million of the stock being offered.
But some observers said they are still skeptical about whether all the stock will sell, given Security's extensive loan troubles.
The company's credit quality weakened steadily last year, especially its construction and development loans in the Atlanta market. Nonperforming assets, including other real estate owned, surged to 3.58% of assets as of Dec. 31.
Mr. Caldwell said Security needs to raise the full amount to keep its capital levels high enough to stay off regulators' radar.
"We still see a risk that if this capital raise cannot be completed, regulators could put additional pressure on the company," either with a cease-and-desist order or a memorandum of understanding, Mr. Caldwell said.
Lorraine Miller, Security's senior vice president of investor relations, said that its capital ratios meet regulatory requirements but that the offering would help it stay well capitalized. She said no company executives were available to discuss the matter further.
Security said in its earnings release Jan. 24 that it expected credit difficulty to continue through the first half of this year. It said chargeoffs for the year could double from 2007, when they were 1.12% of average loans. (Its fourth-quarter chargeoffs were 2.79% of average loans.)
It was probably the anticipation of future problems that prompted the Security management team's decision to add capital, said Kevin Fitzsimmons, a managing director with Sandler O'Neill.
But whether the additional capital will be enough is not clear, he said. "They are definitely not out of the woods by any means. The question is: Is this a remedy or a Band-Aid?"
Security has six banking units, including three that have heavy exposure to construction and development loans in the Atlanta market.
At Security Bank of Gwinnett County, those loans make up 76% of the total portfolio, according to data from First Horizon National Corp.'s FTN Midwest Securities Corp. Nonperforming assets and loans 90 days past due were 10% of that bank's assets at yearend, the FTN data indicated.
Peyton Green, a senior analyst at FTN, said in a research note that if Security adds the $35 million of capital it raises to the loan-loss reserve of $32 million, it would provide 84% coverage of nonperforming assets. (The coverage ratio was about 40% as of Dec. 31.)
"The fact of the matter is any capital they can get into the bank is something they need to do," Mr. Green said in an interview. "The amount of leverage they have had in the past, coupled with the loss in the fourth quarter and worsening credit quality, mean you need to re-evaluate the capital situation, because you aren't going to have profits to bolster the capital levels. There is a decent chance they are going to lose money in the first half of this year."
Assuming there are no earnings increases from the raising of capital, Mr. Fitzsimmons said he estimates that issuing the additional shares would dilute earnings per share by 15% to 28%, depending on how much stock the company sells.
