WASHINGTON - Battling to avoid becoming the first bank to fail in more than two years, a community bank in Commerce, Ga., has sold branches and quit the mortgage business.
NBank lost $19 million in the 12 months through Sept. 30, and it became insolvent even after shrinking its assets by more than half, to $166 million.
The Federal Deposit Insurance Corp. lists just one bank as "critically undercapitalized," and with all of its capital ratios negative at the end of the third quarter, analysts said they suspected nBank to be that one bank. (The government merely notes how many banks are in each capital category; it does not name them.)
Executives said nBank's branch sales and mortgage business departure occurred after the third quarter closed; the bank now is "adequately capitalized," they said.
In October, nBank sold three branches and $33 million of loans to Hamilton State Bank in Braselton, Ga. - a move executives say produced a $9 million gain. It also closed its mortgage unit.
The bank has slashed its staff of 500 by 85%, said Charles Blair, the chairman and chief executive officer.
"We believe" the capital ratios "will be more than sufficient to meet the regulatory minimums," Mr. Blair said last week in an interview joined by two other executives. "The events that unfolded here at the bank have had a tremendous negative impact not only on the financial condition but on the lives of the dedicated people who worked here and who we had to terminate to shut the mortgage operation down."
But analysts disagree whether nBank is in the clear.
"They might be out of the woods, and they might not," said Bert Ely, an analyst in Alexandria, Va., who gained fame in the early 1980s by predicting the savings and loan crisis. "They obviously have shrunk their balance sheet, which helps their numbers a lot, in terms of capital ratios."
But Mr. Ely said the bank would have to stave off future operating losses and come up with at least another $2 million in loss reserves. At Sept. 30, it had $1.7 million in reserves and $8.6 million in nonperforming assets.
"They certainly exhibited a very high probability of failure," said Mr. Ely, who predicted the failure of Superior Bank in 2001.
But Barron Putnam, a former Federal Reserve Board official and the president of Lace Financial Corp., which listed nBank among four "institutions of concern" in a July 31 report, said he thinks "the crisis is probably passed."
"It looked pretty serious there," Mr. Putnam said. "The feds will generally close a bank when its capital" ratios "get below 2%. They can by law. They're recapitalized, and they have about $7 million in capital, so it looks like they'll remain as an institution."
NBank's problems were due largely to fraud. An investigation into a local mortgage broker accused of defrauding the bank of $3.7 million turned up an even bigger problem - a "large, internal fraud" tied to the bank's mortgage business, Mr. Blair said.
Though he declined to offer details, it is on the record that Ronald Walton, a former senior vice president at the bank, pleaded guilty late last week to one count of bank fraud. Court documents said that Mr. Walton had helped certain brokers obtain bank funding for loans sold to investors without repaying nBank.
The documents said Mr. Walton also let brokers submit loan packages for funding by nBank that did not meet its underwriting criteria. On Feb. 27, nBank uncovered Mr. Walton's scheme, and he was fired, the documents said. In total, the bank concluded it had lost $11 million from Mr. Walton's actions.
The fraud forced the bank to trim its loan portfolio by 66%, to $93 million, in this year's first nine months. In the earnings restatement prompted by the fraud's discovery, the bank realized it had lost $12.5 million in the fourth quarter of 2005 alone. A downsizing had to occur "on short notice," Mr. Blair said.
"We had to get out of the mortgage business and reduce the size of the bank," he said. "We basically went from 400 people and a $2 billion-a-year mortgage origination platform last year to … 50-something employees now," he said.
But Mr. Blair said he is not worried the bank might fail.
"That was never a concern from our standpoint," he said. "We worked very hard to make sure that wasn't a concern. Certainly, we had to work very closely with the regulators through this process. Our board made the decision that this was the best course of action for us, and that's what we did."
NBank's troubles, and the efforts to save it, exemplify the struggles of a few institutions just to survive during the FDIC's unprecedented 900-day-plus streak without a bank failure. All but a handful of banks have remained at least adequately capitalized in the past few years, but the FDIC has identified at least one critically undercapitalized institution in five separate quarters since the $46.4 million-asset Bank of Ephraim failed in Utah in June 2004. The agency identified three critically undercapitalized banks in the fourth quarter of 2004. To date, however, none has failed.
"The feds are bending over backward not to let banks fail," Mr. Putnam said. "We look at some of these banks, and they're in pretty bad shape. The feds are doing everything they can to work out some kind of deal."
The "prompt corrective action" standard requires the regulator to act swiftly if a bank's capital ratios fall below 2%, making it "critically undercapitalized." Regulators typically give a bank 90 days to show it can recover, and they have the option to give an institution up to a 270-day reprieve.
"Essentially, a bank has up to 270 days to get above the 2% level," an FDIC spokesman said. "The regulators leave it up to the bank as to how they're going to raise capital. Instead of tying their hands, the regulators just tell them to raise the capital."
If a bank does not correct its problems during the grace period, regulators are required to shut it down.
But the failure-free streak raises its own problems, Mr. Putnam said. He said he has wondered whether regulators are allowing too much leeway for banks to correct their situations.
"You want to protect the FDIC's insurance fund, but at the same time you want to put a little due diligence into the market," Mr. Putnam said. "Let the market beware a little bit. Let some uninsured depositors maybe take a hit once in awhile."
