Real estate market threatening Georgia banks

Real estate market threatening Georgia banks

Georgia's banks have built up the nation's heaviest concentration of loans to now-struggling home builders and real estate developers.

That is putting several banks in the state — and perhaps significantly more if economic conditions deteriorate — at greater risk of failing or being pushed into takeovers by healthier banks, some people in the industry say.

Nearly $1 out of every $5 on Georgia banks' loan books bankrolled homebuilders and real estate developers — by far the highest proportion in the state in at least 30 years, according to federal regulators' data.

Even during the savings-and-loan crisis of the 1980s and 1990s, when thousands of banks and thrifts across the nation failed, Georgia banks were far less exposed to these higher-risk loans. Today, the banks have double the concentration of those loans, according to federal data on banks.

Such loans are considered higher-risk than mortgages or conventional business loans because of the boom-and-bust nature of the real estate development business and the uncertain value of assets such as raw land and unfinished projects.

Banks are in crisis nationwide. Their market values have plunged in recent weeks amid growing concerns on Wall Street that they aren't close to fixing their bad-debt problems, which started last year with waves of defaults on subprime mortgages. Those problems also are indirectly hitting many small Georgia banks that didn't make subprime loans.

As the easy terms of subprime loans fueled the housing boom, Georgia's community banks loaded up on loans to home builders and developers who have since gone bust. Those banks now account for most of the problem institutions. Most are in metro Atlanta's outlying areas — where cheaper land drew developers — such as Conyers, Covington, Newnan and parts of Henry and Jackson counties.

Industry veterans predict several metro Atlanta banks may ultimately fail. Others may be pushed into mergers with stronger banks, or have to raise capital through deals with private equity funds or other investors.

"There will be consolidation," said Robert Braswell, Georgia's chief banking watchdog. He said some banks are being "aggressive and proactive" in dealing with problems, but "a few outliers ... have yet to come to grips with the situation." He said many people expect a shake-out later this year.

"In Atlanta, this is the worst market we've had, ever," said Walt Moeling, a lawyer with Atlanta firm Powell Goldstein who has been representing local banking firms since 1968. "Everything went splat."

Christopher Marinac, a banking analyst with Atlanta-based FIG Partners, said it's too soon to tell when the industry will hit bottom or how long recovery will take.

"I think there are going to be a lot of shotgun weddings [to rescue banks] that you're never going to read about," he said.

Many developers and homebuilders have gone under since the real estate market peaked a year and a half ago. But Marinac suspects that some banks' reports of problem loans and loan losses don't yet reflect the full picture. He expects more banks to report "serious losses" later this year.

No local banks have failed this year, but there are signs of stress.

In April, Atlanta-based SunTrust Banks bought GB&T Bancshares after the Gainesville bank holding company lost $12.5 million in 2007. The Federal Deposit Insurance Corp. had hit one of GB&T's subsidiaries, HomeTown Bank of Villa Rica, with a cease-and-desist order related to problem loans and operations.

Also in April, private equity firm FSI Group LLC invested $40 million in Security Bancorp, allowing the Macon-based banking company to shore up its reserves, after it reported a $24.2 million first-quarter loss.

Georgia's banks top other worry lists as well.

Nine Georgia banks were among the top 25 banks on a list research firm SNL Financial published earlier this month based on their high "Texas ratios" — a measure used during the savings-and-loan meltdown in the 1980s to gauge increased risk of insolvency.

At the top of the list: Integrity Bancshares of Alpharetta, which is trying to turn itself around under a cease-and-desist order from the FDIC, the U.S. agency that guarantees bank deposits.

Another misery measure: Industry insiders say there are now almost four dozen banks on Georgia's watch list for problem banks. Braswell, Georgia's banking commissioner, said the figure is in the "right ballpark," and has been rising.

Still, he and other industry veterans say that while metro Atlanta has become a hot spot for problem banks, they do not expect the wholesale bank failures that swept through Texas and several other states during the savings-and-loan debacle. They say the number of problem banks today pales in comparison, partly because banks are better-capitalized.

During that earlier era, about 200 banks and thrifts were failing across the nation each year, said Mark Schmidt, head of bank supervision at the FDIC's regional office in Atlanta. Nationwide, only four banks have failed this year, and only seven since 2005.

"It doesn't feel to me that it's going to be the same," said Schmidt, who was at the FDIC during the earlier crisis. "It's not national." Within the seven Southeastern states where his office supervises 1,100 banks and thrifts, most problem banks are in Georgia and Florida.

The FDIC currently has 90 banks on its national watch list (which uses narrower criteria than Georgia's) and it will get longer. "The trend is obvious," said Schmidt.

But Schmidt doesn't expect it to come close to matching those earlier days, when 1,500 banks were on the watch list at times.

Typically, less than a fifth of institutions on the FDIC's list fail; most banks exit the list by improving operations or merging with a stronger company.

Most depositors shouldn't be affected if a bank does fail because the FDIC insures their accounts up to $100,000. "That is what the FDIC is all about," Schmidt said.

Moeling, who represents the Georgia Bankers Association, said the "vast majority" of banks in metro Atlanta are healthy, but a "double handful" are struggling with loan losses that may force them to seek more capital, find new owners, or fail. In some areas, recovery will take a long time, he added.

Still, he remains optimistic about the local banking industry's long-term prospects because metro Atlanta still is growing rapidly. "People are still moving here. We're not the Rust Belt," he said.

Industry veterans blame the combination of lots of cash plus strong housing demand for fueling a boom that lulled home buyers, developers and bankers into building a pile of development loans of historic proportions. By 2007, construction and real estate development loans on Georgia banks' books had mushroomed to more than $41 billion, from $7.4 billion in 2000, according to figures from the FDIC. Such loans equal 19.5 percent of Georgia banks' total loans.

But what got things rolling first was a flood of money into the Atlanta market that helped launch a wave of new banks. According to the Georgia Bankers Association, 109 start-up community banks have been launched in the state since 2000. By one estimate, they have raised $1.3 billion in new capital since 2003, much of which was lent to developers and homebuilders.

Meanwhile, subprime loans made it easy for investors to snap up homes that they hoped to flip later for a quick profit.

"The huge proportion of sales in 2005 and 2006 were financed by subprime mortgages," said Moeling. Developers were "selling every house they [could] build," he said, which encouraged them to borrow more money to expand. Community banks liked making the loans because they generated higher interest and fee income than commercial loans to small businesses.

Worried about the growing concentration of development loans, the FDIC warned bank managers in late 2006 to "kick [monitoring] up a notch" if they were heavily invested in such loans, said Schmidt, with the FDIC. The guidance didn't trigger extra FDIC inspections but "we do look at that area closely," he said.

Banks resisted the regulators' pressure, arguing loans were being repaid on time.

"As long as the loans were getting paid, it was hard for the banking regulators or the accountants or any of us to be overly critical," Moeling said.

But now many of the developers who got those loans are out of business. They've saddled the banks with assets worth much less than the loans, including unsold new houses and subdivisions that are growing weeds rather than bungalows.

Some insiders call the unfinished subdivisions "PVC farms" for the forests of plastic pipes installed for houses that were never built.

Braswell, the state banking commissioner, says the situation sometimes keeps him awake.

"This one occurred almost overnight," Braswell said of the abrupt deterioration of developers' ability to repay their loans. Many banks "have placed lots of eggs in the construction and development basket," he said.

"You can warn someone about the pitfalls of over-reliance on one market segment, but some of the guidance may have fallen on deaf ears due to the amount of profits that were being made," Braswell said. Still, he said, in hindsight "state regulators could have sounded the bell more loudly."