Covenant Bank & Trust, Rock Spring, Georgia, in business since only 2006, was closed today by the Georgia Department of Banking and Finance. The FDIC, appointed as receiver, sold the failed bank to Stearns Bank, N.A., St. Cloud, Minnesota, which will assume all deposits of failed Covenant Bank.
Covenant Bank & Trust was established as a community bank in 2006 at a time when it was widely believed that real estate values could never decline. Little did the exuberant founders of the Bank know that within a short few years, real estate values would be plunging nationwide.
The new Bank expanded rapidly and by the end of its first year of operations had over $64 million in assets and two branch offices. Covenant Bank continued to escalate lending activities and on the eve of the financial crash of 2008 had grown to almost $120 million in assets.
As real estate values began to collapse in 2008, Covenant’s customers started to default en masse and by the end of 2011, the Bank had a massive troubled asset ratio of 656%. The troubled asset ratio compares total defaulted loans to total Tier 1 capital and loan loss reserves. Once a bank’s troubled asset ratio exceeds 100%, failure becomes almost inevitable.
Both branches of Covenant Bank & Trust will reopen on Monday as branches of Stearns Bank and all depositors of Covenant will automatically become depositors of Stearns Bank. Over the weekend, customers of Covenant will have access to their money through the use of checking, debit cards and ATMs.
At December 31, 2011, Covenant Bank & Trust had total assets of $95.7 million and total deposits of $90.6 million.
Stearns agreed to purchase all of Covenant’s assets subject to a loss-share agreement with the FDIC covering $71.6 million of the asset pool acquired. The loss-share agreement limits future losses to Stearns on the purchased assets. According to the FDIC, loss-share transactions act as a sales incentive in selling failed banks and result in maximizing returns on failed bank assets as well as minimizing disruptions to loan customers.
Including Covenant Bank & Trust, Stearns Bank has now acquired a total of 7 failed banks since October 2008. In addition, Stearns Bank purchased a $730 million failed bank loan portfolio from the FDIC in February 2009. Commenting on the loan portfolio purchase, Stearns Chairman and CEO Norman C. Skalicky said, “We have been preparing for opportunities, such as this, since late 2006. We began to curtail lending and increase our capital ratios and really focused on this beginning in August 2007. One of our main strategies during that time was to be prepared to capitalize on opportunities prior to the end of this banking cycle.”
Stearns Bank is a well capitalized institution based in St Cloud, Minnesota. The Bank was founded in 1912 and has over $1.3 billion in assets. In a press release on the acquisition of Covenant Bank & Trust, CEO Skalicky said:
With this acquisition, Stearns Bank now has 10 offices in four states – Minnesota, Georgia, Arizona, and Florida. Stearns Bank has approximately $1.3 billion in total assets and $234 million of Tier One Capital. With a Tier One Leverage Capital ratio of over 19%, Stearns is among the highest capitalized banks in the Nation. Stearns Bank is a high-performing bank with specialty lending niches in Small Business Administration loans, affordable housing loans, and construction lending. In addition, we have a leasing department that serves leasing clients across the United States.
The estimated loss to the FDIC Deposit Insurance Fund for the failure of Covenant Bank & Trust is $31.5 million or 32.9% of total assets. Covenant Bank & Trust becomes the 14th banking failure of 2012 and the fourth in Georgia. Last year Georgia was in first place with 23 banking failures that accounted for 25% of all 92 banking failures that occurred in the U.S. during 2011.