Some Georgia banks’ health may be at higher risk

About two dozen Georgia banks — more than in any other state — face higher odds of running into financial trouble, according to an increasingly used measure of banks’ health.

The number of risky financial institutions in the state roughly doubled by the end of June — from 13 three months earlier — based on the measure known as the “Texas ratio” that attempts to gauge how likely they are to face insolvency.

Some experts say the spike in many Georgia banks’ risk profiles is another sign that their big bets on home builders and real estate developers — now gone sour — could bring more economic fallout for months or years. The financial strains on the mostly small institutions are likely to ripple across the economy, from Main Street businesses in small towns to the federal insurance fund that backs the nation’s banks.

Thirteen financial institutions across the nation have failed this year, including Alpharetta-based Integrity Bank.

Some bankers and other industry players criticize the risk measure and add that it doesn’t reflect steps they’re taking to shore up cash reserves, such as selling stock and foreclosed houses.

The higher the Texas ratio, according to proponents of the measure, the higher the risk that a firm could run into trouble.

A ratio above 100 percent indicates that a bank’s problem loans and foreclosed properties exceed the amount of capital and reserves that it has set aside to cover potential losses.

“Once you’ve hit 100 percent you can pretty much count on [banking regulators] camping out at your door,” said Brett Villaume, with FIG Partners, which recently calculated ratios for Georgia’s banks.

The Federal Deposit Insurance Corp., which insures most customers’ bank deposits to at least $100,000, tackled its largest failure ever on Thursday, when it helped broker the sale of Washington Mutual Bank’s assets to JPMorgan Chase & Co.

The institutions on Georgia’s problem bank list are tiny compared to the Seattle-based giant, which had combined assets of $307 billion. Georgia’s institutions with high Texas ratios range from small community banks like Chestatee State Bank, with $295 million in assets, to a unit of Macon-based Security Bank Corp., with assets of $2.9 billion.

Three banks that had high Texas ratios at the end of the second quarter have either failed or been taken over by stronger institutions.

Integrity, after being stung by the real estate crisis, was shut down in late August by the FDIC and state regulators.

In April, Atlanta-based SunTrust Banks bought GB&T Bancshares of Gainesville. The company owned two banks that had high Texas ratios in the first quarter.

Story behind the stats

Georgia banks’ higher numbers could indicate that more banks are now facing deeper problems.

Many of Georgia’s banks — particularly smaller community banks — are struggling after booking the highest concentrations of such loans in the nation. Many of those loans went sour when the housing market went bust.

Now, Georgia banks also dominate lists of the nation’s banks with high Texas ratios. Georgia banks accounted for more than one in five banks — more than any other state — on a national list of 49 financial institutions with high Texas ratios recently compiled by Foresight Analytics. The Oakland, Calif., firm used a slightly different version of the Texas ratio formula than FIG Partners’. Foresight’s has a narrower definition of problem loans, resulting in somewhat lower Texas ratios.

Banks: ‘Dealing with it’

A number of bankers and their representatives said the fact that several Georgia banks had higher Texas ratios in the second quarter doesn’t necessarily mean they are in worse shape. Instead, they counter that the higher numbers reflect many banks’ more aggressive efforts to deal with problem loans and foreclose on borrowers that were falling behind on payments.

Under accounting rules for banks, they must set aside reserves for expected losses and identify loans as “nonperforming assets” once they determine that borrowers are likely to default on the loans. Such moves, while they are a key step in fixing problems, hurt a bank’s earnings and capital and boost its Texas ratio.

That’s what happened at Habersham Bank in Clarkesville, said David D. Stovall, chief executive. “We’ve been through our complete portfolio” to identify problem loans, he said. Habersham Bank’s Texas ratio was 107 percent in the second quarter, up from 86 percent in the first quarter, according to FIG Partners.

“We’re still by definition a well-capitalized bank and we’re going to weather the storm without any problem,” Stovall said.

He and other critics of the Texas ratio said it isn’t a fair risk measure for a number of reasons. High Texas ratios don’t reflect some banks’ moves to survive until better times by raising capital, cutting costs and selling foreclosed homes and other assets, they said.

“The ones that are heavy into real estate recognize it and are dealing with it. A little break, and just about all could make it through it,” said Walt Moeling, a lawyer with Atlanta firm Powell Goldstein who represents many of the state’s banking firms. He said most of the state’s banks are in good financial shape.

Mixed forecast

Meanwhile, some bankers and other industry watchers said they’re seeing slower growth of bad loans and a shrinking pipeline of foreclosures. That could hint at a possible turnaround several months down the road, though others caution that such hopeful signs could prove illusory.

“We’ll work hard, and we will get through this,” said H.B. “Rocky” Lipham III, chief executive of First National Bank of Georgia, a Carrollton-based bank with 280 employees and $880 million in assets.

The 98-year-old bank’s Texas ratio jumped from 73 percent in the first quarter to 121 percent in the second quarter, according to FIG Partners. Also, one measure of the bank’s capital followed by regulators dropped below the so-called “well capitalized” level to “adequately” capitalized.

But Lipham said the bank has since returned to a “well capitalized” level. He said the bank raised $10 million from its existing shareholders in August and hopes to raise up to $20 million more in a public stock offering that ends next month.

The additional capital will give the bank more flexibility in deciding when to dispose of foreclosed properties or “take advantage of some opportunities,” he said.

He said the bank, which serves Douglas, Carroll and Haralson counties west of Atlanta, has also sold about half of the foreclosed homes in its portfolio. “It’s not all gloom and doom out there. We are starting to see some movement,” he said.

Kink in the system

Few banks or other players in the industry expect brighter prospects soon. Even if problems aren’t piling up as fast as a few months ago, they don’t expect banks’ financial results from the third quarter that ends this week to look much better.

Philip Hester, a third-generation banker who is president of Chestatee State Bank, said Thursday the Dawsonville-based bank hasn’t needed to raise extra capital. “We’ve got contingency plans for additional capital if we need it,” he said. The 10-year-old bank had a Texas ratio of 102 percent and total capital equal to 11.5 percent of assets in the second quarter, according to FIG Partners.

Hester said the bank or its borrowers have also sold off about half of the 200-house inventory it had late last year. Still, it could be several months before the bank begins to see improvement in another problem area — a portfolio of foreclosed lots and partially developed subdivisions it ended up with after developers were hit by the sudden downturn in the housing market last year.

“The housing inventory has moved OK, but until you get housing supply and demand in line, there’s no demand for the lots out there,” he said. “It’s that pipeline right there that’s got the industry in a knot.”

Friday, the FDIC and state regulators announced that they had issued a “cease and desist” enforcement order against Chestatee. The order cited the bank for several alleged “unsafe and unsound banking practices and violations of law” and required improvements to its operations and capital levels. Hester could not be reached immediately Friday for a follow-up interview.