One Georgia bank hired inexperienced relatives of the bank’s president for lending positions.
Another, already near collapse, loaned $2 million to four students -- all children of one of the bank’s owners -- who had no ability to repay the money.
These findings are from new federal audits that provide a glimpse into what went wrong at failed banks in Georgia, where more have gone bust than in any other state. The audits, or “material loss reviews,” are essentially postmortems on each failure.
In the past few days, the Federal Deposit Insurance Corp.’s Office of Inspector General has released audits for two suburban Atlanta banks that failed late last year, The Community Bank of Loganville and Haven Trust Bank of Duluth. Audits of other failed banks are coming.
Experts said the reports confirm what they’ve been saying are the root causes of Georgia’s 16 bank failures in the past year -- far too much real estate construction lending, funded largely by a volatile deposit base dependent on national investors shopping for the best rates.
But the audits also faulted regulators for not stepping in early enough to stop dangerous behavior at the banks that could have prevented failure.
And in sometimes juicy detail, they cite questionable practices by the two lenders, which rode Georgia’s housing bubble to profits earlier this decade, only to crash to Earth when the real estate market collapsed.
Auditors found that Loganville’s Community Bank repeatedly ignored regulatory advice and hired relatives of the bank’s chief executive for what the report described as “senior lending positions” even though they had no prior banking or lending experience.
The report said the bank executive “showed contempt for the regulatory process and would not implement any examiner suggestions or recommendations unless the actions were required by regulation.”
The chief executive, Stanley Kelley, 69, is the patriarch of the family that founded the bank in 1946. In an interview, Kelley took responsibility for some of the bank’s problems but defended hiring two relatives for lending positions.
“I was the man in charge and failed to see what was coming,” Kelley said, referring to the real estate collapse. “We did grow too fast, looking back. But you know, in business growth is considered a good thing.”
He said he hired one of his daughters as a credit analyst, not a senior lending position. He also brought on his wife’s brother-in-law for a similar mid-level position, promoting him after he performed well.
In any event, “no bank examiner ever criticized either one of them to me,” he said. “I think they’re seeing something as a problem after the fact that they didn’t see as a problem going in.”
On at least three separate occasions between 2002 and 2006, regulators urged Community to diversify its loan portfolio, which was heavily invested in real estate construction and development. But the bank refused, arguing the company was earning money and had few loan losses.
Community Bank was taken over by Virginia-based Essex Bank. The failure cost the FDIC insurance fund between $200 and $240 million.
The other recently released audit involved Haven Trust, launched in 2000 by a group led by Atlanta hotel magnates Mike and R.C. Patel, with an eye to serving the region’s Indian and Asian populations. The bank doubled in size between 2005 and 2008, primarily by backing commercial real estate projects.
The audit of Haven Trust’s failure paints a portrait of a deeply troubled bank that pursued an aggressive lending strategy without adequate risk controls.
For example, the majority of bank’s commercial real estate loans required little or no borrower equity, the audit found, leaving the bank to shoulder most of the risk. To fuel its growth, the bank turned to wholesale deposits brokered by national dealers -- funds that are more expensive to generate than other sources such as checking accounts, which can be hard to attract in competitive markets like Atlanta.
The higher interest rates Haven Trust had to pay for deposits, the audit said, forced the bank to take greater risks to maintain profits.
Haven Trust founders Mike Patel, the bank’s former chairman, and his brother, R.C. Patel, were traveling Tuesday and could not be reached for comment.
The audit also criticized regulators, who examined Haven Trust annually during the bank’s 8-year life span, giving relatively good marks until 2008 when the bank was already headed for a fall.
Auditors said regulators were lulled into complacency by the bank’s “apparent” high earnings and capital levels along with an “overreliance” on bank ownership’s ability to inject money into the company if needed.
“The findings in our review underscore one of the more difficult challenges facing regulators today — limiting risk by banks when their profits and capital ratios make them appear financially strong,” the audit said.
Auditors reviewed 10 of the bank’s loans and found a pattern of lax lending practices:
• In 2004, Haven Trust made a $5.8 million loan for a retail shopping center with terms that included a $600,000 payment from the borrower and a requirement that half the strip be pre-leased before construction.
But the borrower, who was not identified, paid only $369,000 and was allowed to begin construction after only 24 percent of retail space was pre-leased.
• In June 2007, the bank financed a 238-unit townhome development with a $5.6 million loan, apparently without requiring the borrower to put up any equity.
The bank also did not properly check to see that work was performed before loan disbursements were made, the audit said. Records showed that no construction had taken place on the site yet about 75 percent of the loan had been disbursed.
• In May 2008, the bank loaned $500,000 each to the children of one of the bank’s owners, who was not identified. The children were all students and had inadequate income to pay back the money.
The one-year loans, made on generous, interest-only terms, were purportedly to buy investment property, but auditors said no purchase took place. Stock of a sister bank used as collateral was likely worthless.
“It sounds like something obviously went very wrong if children who have no demonstrable source of repayment of a loan are loaned large sums of money,” said Bobby Schwartz, a banking attorney at Smith, Gambrell & Russell in Atlanta.
Haven Trust was acquired by BB&T. The failure cost the FDIC’s insurance fund $200 million.
