GEORGIA’S BANK WOES HAVE TANGLED ROOTS
Overcrowded marketplace and heavy concentration of loans in real estate projects help put state at top of a troubling list.
By Paul Donsky
The Atlanta Journal-Constitution
Sunday, February 15, 2009
Georgia, famous for its peaches and Southern hospitality, has gained a reputation of late for a far less admirable trait: the problem bank.
Of the 38 American banks to fail in the past year, six were based in Georgia, placing the Peach State behind only California in the race for the nation’s bank failure capital. Florida is third with four failures.
And no state comes close to challenging Georgia when it comes to banks in danger of going under, according to a recent analysis that aims to gauge how likely banks are to face insolvency. Georgia has 42 banks on the list —- up from 30 three months earlier —- followed by Illinois with 15.
It’s a startlingly poor showing experts blame on a tangled web of factors, from the sheer number of banks crowding the marketplace to risky lending practices that saw many banks concentrate their loans in one area: real estate development.
None of it mattered when times were good. Profits rolled in, borrowers paid their debts on time, investors got rich. But after the economy collapsed, the business model imploded. Bad loans mounted, earnings nose-dived, deposits dried up.
“It worked for a while, and then the music stopped,” said Jon Burke, an Atlanta banking consultant. The problem, he said, “really has to do with way too much commercial banking money —- generally speaking, small banks —- chasing one little piece of the market, which is residential real estate.”
Of course, every bank is different and has its own set of variables. Some of the failed and troubled banks are only a few years old, and one has been around for a century. One failed bank gambled big on a South Florida resort, while another lent heavily to Indian-American hotel owners.
But interviews with bankers, analysts, consultants and attorneys point to five factors that helped precipitate Georgia’s banking woes.
TOTAL BANK FAILURES…
since start of 2008: 38
> California: 8
> Georgia: 6
> Florida: 4
> Illinois: 3
> Texas: 2
> Missouri: 2
> Nevada: 2
> Washington: 2
> Nine states: 1 each (Arkansas, Kansas, Maryland,Michigan, Minnesota, Nebraska, Oregon, Utah, West Virginia)
Source: FDIC
5 reasons why failures occur more frequently here
1. Banks, banks, everywhere
Georgia is overbanked, experts say, with 335 banks. That equals one for every 28,000 residents —- more than all but a handful of states.
Why is this the case? History and politics play a role.
Until the mid-1990s, state law prohibited banks from operating across the state, creating a climate in which small banks proliferated. North Carolina, similar in size to Georgia, has allowed statewide banking for more than 100 years and now has just 110 banks —- one-third as many as Georgia.
Large regional banks that formed in states such as North Carolina snapped up Georgia banks, leaving a pool of former bankers ready and able to start new companies.
Economics and demographics are driving factors, too. Few states have grown as fast as Georgia in recent years, fueled by job growth in metro Atlanta. Loan demand built up, and banks sprouted to meet the need.
Metro Atlanta became the nation’s leader in the creation of new banks, which typically are more vulnerable to economic slowdowns. Since the last recession ended in late 2001, 63 banks opened in Atlanta —- more than Phoenix and Miami combined.
Money to start banks was easy to come by, experts say, as investors lined up to chase a lucrative business model: A new bank would grow quickly by lending to residential developers and builders, and it would sell a few years later at several times the bank’s book value.
2. Too much real estate lending
Many banks threw caution to the wind in recent years and lent heavily to the booming real estate industry.
The strategy paid off handsomely when the market was hot. But when the housing bubble popped, builders were left with a stockpile of homes they couldn’t sell and developers with thousands of empty lots they couldn’t move. Loan defaults skyrocketed, punishing many banks.
The risks taken on by some banks were staggering. At the Community Bank in Loganville, which failed in November, loans to residential developers and home builders accounted for 80 percent of the bank’s total portfolio. John Fine, a former banking regulator turned consultant, said banks historically have been wary of getting above 40 percent in that category.
Georgia’s other failed banks made similar bets on real estate.
Other regions such as South Florida, Phoenix and Las Vegas saw home prices tumble even further and faster than Atlanta, but bank failures in those areas have not matched Atlanta’s.
Some experts said Atlanta’s home building industry differs from other high-growth regions in that it’s dominated by small home builders, which typically have much less of a cushion than big regional and national builders.
Veteran Georgia banking attorney Walt Moeling said Atlanta’s building frenzy went beyond that seen in other markets. The Atlanta region now has a staggering 150,000 vacant developed lots —- a 12-year supply at the current low rate of absorption.
3. A shaky deposit base
Banks traditionally grow by building a stable base of deposits from local residents and businesses, largely through bread-and-butter products such as checking and savings accounts. These customers often keep money in the same bank for years, if not decades.
But the sheer number of banks created during the real estate boom created so much competition that some banks were unable —- or were too impatient —- to build up a large base of these “core” deposits.
Instead, they turned to so-called brokered deposits, in which a broker raises money from investors across the nation and shops for the best interest rates. These deposits often demand higher interest rates and are much more volatile —- that is, it’s easy for a broker to simply move the pool of money from bank to bank for the best returns.
Most of Georgia’s failed banks relied heavily on brokered deposits. At FirstBank Financial Services, a Henry County bank that failed this month, more than half of the bank’s $298 million in deposits were brokered, according to the Federal Deposit Insurance Corp. As a rule of thumb, brokered deposits shouldn’t top more than 20 percent, said John Kline, a Decatur banking consultant.
Brokered deposits are seen as so fickle that regulators frown on their use by banks that are having financial difficulties, sometimes cutting them off altogether. Integrity Bank, which failed in August, saw its pool of brokered deposits fall by more than $100 million after the FDIC ordered the bank to reduce its reliance on the money source.
John Burke, an Atlanta banking consultant, said the difficulty of raising core deposits usually helps limit the number of new banks. But the increased use of brokered deposits shattered this natural limit, he said, helping lead to the flood of banks.
4. Regulatory actions questioned
As bank losses mount and the number of failures grows, obvious questions arise: Were regulators asleep at the wheel? Should the banking watchdogs have approved so many new banks and allowed them to bet so heavily on real estate?
It’s a complicated issue with no easy answers, bank experts say.
Until the housing market turned in mid-2007, loans were being paid on time and banks were reporting huge profits.
“It was very hard for regulators to say there was no support for a new bank,” said Walt Moeling, a banking attorney with Bryan Cave Powell Goldstein in Atlanta. “We saw virtually no past-due” loans.
State regulators did caution Georgia banks three years ago about potentially crippling losses if the housing bubble burst, but the warning was merely an advisory. Many banks brushed it aside.
John Kline, a former regulator turned consultant based in Decatur, said in some cases regulators ordered banks to diversify their loan portfolios. But often, that simply meant banks had to make sure their real estate loans weren’t all in a single county or at a single price point. They were still left overexposed in the housing market, he said.
Still, Kline is reluctant to place too much blame on regulators.
“It’s hard for them to prohibit a bank from violating these rules of concentration until the bank shows losses,” he said. “You may have had all this money out to builders in Carroll County, but the homes were selling.”
Kline says federal and state regulators should beef up their staffing so they can visit banks more often. Inspections now occur once every 18 months, he said, compared with the old standard of once a year.
5. Risks rose in efforts to keep up
The huge profits earned by some banks during the go-go years of the housing boom put tremendous pressure on their peers to keep up. Investors and board members saw how much money their competitors were earning and demanded similar returns from their own banks.
Integrity, the Alpharetta bank that failed in August, posted such eye-popping profits that it became something of a local benchmark. Some bankers felt forced to bet even more heavily on real estate to boost performance.
“If your bank is growing at 6 percent and you look over at Integrity and it’s growing at 20 percent to 30 percent, directors and managers look around and say, ‘Are we doing everything we can to maximize growth for our shareholders?’ ” Atlanta banking attorney Walt Moeling said.
“If you didn’t do the loans, someone else was going to. [Atlanta] is the most competitive market in the country, in terms of banks per capita,” he added. “So there was tremendous pressure to lend, and there was tremendous pressure to grow.”
Judy Turner, CEO of Decatur First Bank, a small community bank based in downtown Decatur, said her 12-year-old bank has a conservative culture and was careful not to get too exposed to the real estate market.
But after regulators criticized the bank for not earning as much as its peers, Turner said she felt pressure to take more risks. Many of the banks held up as high earners are no longer in business, she said.
“It became obvious which ones were stars,” Turner said. “They had built their entire business on [real estate] acquisition and development and construction lending. So when that went away, they obviously had some very serious problems.”
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