Several Georgia banks in jeopardy

Dozens of Georgia banks are struggling with surging levels of delinquent loans, the result of a dangerous concentration on lending for metro Atlanta’s once-thriving real estate development.

The bad loans have caused one Georgia bank to fail this year and could put another dozen under by year’s end.

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One-fourth of Georgia’s 355 banks have delinquent loans that comprise 4 percent or more of their entire portfolios, according to federal data analyzed by The Atlanta Journal-Constitution. Some banking experts say a delinquency rate of even 2 percent suggests an institution faces serious financial challenges. In Georgia, 159 banks exceed that level. Twenty-five of them have seen seriously past-due loans rise into the double digits.

The statewide delinquency rate was six times higher this June than in June 2006, and now represents $6.6 billion in bad debt. In turn, the percentage of Georgia banks operating at a financial loss more than tripled during the same period. One in three banks statewide failed to turn a profit in the second quarter of 2008, according to the Federal Deposit Insurance Corp.

“Literally, the bottom is falling out,” said Byron Richardson, an Atlanta-based bank consultant. “The Atlanta economy was so driven by real estate for so many years. We’re seeing some very high rates of non-performing loans.”

The numbers illustrate how hard the national economic crisis has hit Georgia, where rapid growth in the Atlanta area once seemed like an inoculation against a downturn. The collapse of subprime lending and the decline in housing values decimated many real estate developers and homebuilders. Often, they are the biggest borrowers from Georgia banks, according to interviews with bankers, regulators and other finance experts.

Federal regulators this year have ordered nine Georgia banks to diversify their loan portfolios. The regulators said those institutions had lent too heavily to real estate developers — in some cases, three-fourths or more of all loans — and thus were unprotected from a burst in the housing bubble.

One of those banks, Alpharetta-based Integrity, failed in late August, and federal authorities sold its deposits and some of its assets to Regions Bank, based in Birmingham. Integrity had 79 percent of its portfolio tied up in real estate loans on June 30; its delinquency rate was 43 percent.

Bankers and industry analysts predict more Georgia banks could fail this year, or may be forced to sell out to competitors. One consultant, Brent Baker, said the number could be as high as 10 to 12.

Federal insurance guarantees the safety of depositors’ money. But stockholders stand to lose their entire investments.

“Generally speaking, the banks do return to health,” said Steve Bridges, president and chief executive of the Community Bankers Association of Georgia. “We do have some failures, and we will probably have some more.”

Officials have not announced how, or whether, the federal government’s $750 billion bailout of the financial system might provide relief to smaller banks like those that dominate the industry in Georgia. So-called community banks — those with $1 billion or less in assets — make up 94 percent of all Georgia financial institutions.

The next few months will be critical for those institutions as they begin clearing up their bad loans, said Baker, who also sits on several Georgia bank boards.

“When this crash hits the bottom and you’re starting back up,” Baker said, “is when the problems begin to happen.”

From boom to bust

For Chestatee State Bank in Dawsonville, the problems began long before anyone noticed.

Dawsonville boomed in the 1990s. Retirees and wealthy Atlantans wanting second homes flocked to North Georgia’s mountains, and real estate developers were happy to accommodate them. A group of Dawsonville business people decided to join the boom and applied for a state charter to establish Chestatee. The new bank opened May 15, 1998.

A decade later, bank president and chief executive Philip Hester said, Chestatee is a microcosm of the troubles facing Georgia banks.

From the start, Chestatee had a singular focus: rather than writing subprime mortgages or other home loans, it would lend much larger chunks of money to developers, fueling the local housing market.

“That’s what the business was,” Hester said in an interview. “The primary business was real estate.”

By 2008, construction and development loans made up half of Chestatee’s $238 million portfolio, according to federal data. At any time, the loans allowed those borrowers to have hundreds of home sites in various stages of development. As long as sales stayed strong, Hester said, the developers made money, and the bank did, too.

But around the middle of this decade, as subprime mortgages became available to riskier borrowers, “the market began to overheat,” Hester said. Then, last year, “it kind of blew up on us all.”

Developers who two years ago had plenty of liquid assets suddenly couldn’t make their loan payments. Loans that had been Chestatee’s lifeblood became dead weight.

In June 2007, Chestatee was carrying $2.2 million in delinquent loans. By June of this year, that number was $30.5 million, or 13 percent of all loans – almost 14 times more than a year earlier.

Such a precipitous increase was not uncommon among Georgia banks, according to federal data.

Community Bank of West Georgia, in Villa Rica, told the FDIC its bad loans increased from $22,000 in June 2007 to $10.8 million this June. Alpha Bank & Trust, based in Alpharetta, had $58.9 million in delinquencies this June; a year earlier, it had none.

Many of the largest increases came at banks that have the closest ties to real estate development. At Loganville-based Community Bank, for instance, bad loans increased by $92.9 million — 425 percent — over the past year. Of all its loans, 79 percent are for development.

Banks and builders often have long-standing relationships, consultant Baker said. “Banks like to give them the benefit of the doubt.”

Indeed, Chestatee’s president describes his bank’s delinquent borrowers as good people who hit bad times.

“All of them are under a lot of pressure,” Hester said. “People can just go so far.”

Federal regulators apparently came to the same conclusion about Chestatee itself.

In August, the FDIC ordered Chestatee to correct several practices it found to be “unsafe and unsound.” The agency said Chestatee had used “hazardous” lending policies and was operating with too many poor-quality loans.

Regulators told Chestatee to tighten lending procedures, boost cash reserves and reduce its concentration of development loans. Certain borrowers, the FDIC ordered, should no longer be eligible for new loans or extensions on past-due debts.

The FDIC and another regulatory body, the Federal Reserve Bank, have issued similar orders to eight other Georgia banks this year, including Integrity, the Alpharetta bank that failed in August.

At Chestatee, “we don’t really disagree with the things we were asked to do,” Hester said. “The [community banking] industry got a little too aggressive. Some practices, historically, might have been acceptable. In today’s environment, they might not be.”

Two months after the order, Chestatee has addressed all of the FDIC’s conditions — except one, Hester said.

The bank still hasn’t collected on the worst of its bad loans.

Losses hard to recoup

Getting out of bad loans might only add to banks’ financial troubles.

Banks may foreclose on property that was used as collateral on those delinquent loans but may be unable to sell it to recoup their losses. Or, if they can sell, they may be forced to settle for what Joe Brannen, president and chief executive of the Georgia Bankers Association, called “fire sale prices.”

Some investors hope to take advantage of the banks’ difficulties, offering no more than one-third to one-half of the real value of foreclosed property, Brannen said.

“What’s a better word for ‘vultures?’ ” Brannen said in describing those investors, before settling on the less pejorative “market participants.”

Banks with the highest delinquency rates may not be the first to fail, experts say, and other factors, such as insufficient reserves, may put an institution on regulators’ watch lists.

But “the higher that [delinquency] number gets, the greater the concern is,” said Bridges, of the community bankers’ organization.

State and federal regulators acknowledge they have watch lists of struggling banks, but keep the information secret to avoid devastating runs on deposits.

Most institutions on those lists recover either by attracting new investment or by selling their assets to competitors. Fifteen banks across the country have failed this year.

“A bank can survive,” said Wendell Brock, a McKinney, Texas-based bank consultant. “But it has to aggressively attack the problem, not sit behind a desk and hope and wish and pray it goes away.”

At Chestatee State Bank one recent afternoon, Hester pondered his own institution’s future.

“If this were the bottom, we’re positioned to get through,” he said. “It’s going to take a little time and patience and, in some cases, luck to get these problems out the door.”