Bank failures more costly than earlier wave

The current wave of Georgia bank failures is proving much more costly than the Savings & Loan crisis of the late 1980s and early 1990s, the last major banking calamity to hit the state.

Back then, the average failure cost the Federal Deposit Insurance Fund about 10 percent of an institution’s total assets. The figure now: 32 percent.

A similar trend is taking place nationwide, putting a severe strain on the FDIC’s dwindling insurance fund.

Why the huge jump in the cost of failures? Experts say today’s problem banks are less diversified, took more risks and are dealing with a worse economy compared with financial institutions a generation ago.

Most of the banks to fail over the past two years loaded up on loans to home builders and subdivision developers and took on huge losses when the housing market collapsed.

A real estate boom and bust also played a role in the S&L crisis of the late 1980s and early 1990s, experts say. But the roots of the problem were much more complicated.

For instance, many institutions fell into trouble in part because the cost of bringing in deposits soared, outpacing the interest rates they were charging on home mortgages, their bread-and-butter business, said John Douglas, a banking lawyer and former general counsel at the Federal Deposit Insurance Corp.

During the S&L crisis there “certainly were problems, but what you didn’t have was this all-of-a-sudden, immediate drop in real estate prices,” Douglas said. The plunge “was so rapid and sudden that by the time [regulators] got around to closing these banks, the losses were much larger than people expected.”

Since 2008, 26 Georgia banks have been shut down. The FDIC estimates the failures will cost its insurance fund $5 billion, or 32 percent of the banks’ combined $15.4 billion in assets.

The most expensive failure, on a percentage basis: Alpha Bank. The FDIC estimates the failure will cost $159.9 million, or 45 percent of the Alpharetta bank’s $354 million in assets.

Virtually all of Alpha’s loans were made to real estate builders and developers. At the time of failure, about half of the loans were delinquent. The bank also had $33 million worth of foreclosed property on its books.

In contrast, the 18 banks and thrifts that failed in Georgia between 1989 and 1992 cost the FDIC $444.6 million, or 10 percent of total assets.

Many of those institutions carried large pools of well-performing home mortgages on their books, which the FDIC was able to sell at favorable prices to offset losses.

This was long before the words “subprime” and “interest-only” came into play, a time when mortgages were considered among the safest kinds of investments for lenders, said Walt Moeling, an Atlanta banking attorney with Bryan Cave Powell Goldstein.

“They had real mortgages to real people, as opposed to speculative loans” to home builders and developers, he said.

Many of today’s failed banks, Moeling said, got into trouble by making loans for vacant housing lots. A glut of property on the market has caused values to plunge, and as a result the FDIC is taking huge losses when they sell a failed bank’s vacant lots.

The problem, Moeling said, has been exacerbated by the FDIC’s decision early in the crisis to dispose of failed bank property as quickly as possible, rather than wait until the real estate market has rebounded to sell.

In recent months, though, the FDIC has entered into “loss sharing” arrangements with banks that acquire failed institutions. In these deals, acquiring banks are charged with selling the failed bank’s assets, a move the FDIC hopes will yield better returns.

But the losses at Georgia banks continue to be large. The three most recent failures – Georgian, American United and United Security – are estimated to cost the FDIC about 40 percent of the banks’ assets.

Jim Verbrugge, a banking professor emeritus at The University of Georgia’s Terry College of Business, said banks will be much more conservative coming out of the current crisis, especially when it comes to real estate deals.

“It’s going to be a return to what some people say is ‘basic banking,’” he said.

That means meat-and-potatoes lending to small businesses and very “cautious lending to residential developers down the road when the market recovers.”

Bank | date of failure | assets | cost to fund | percentage

Silverton Bank (Atlanta) | 5/2009 | $4.2 billion | $1.3 billion | 31

Security Bank (Macon) | 7/2009 | $2.8 billion | $807 million | 29

Georgian Bank (Atlanta) | 9/2009 | $2.2 billion | $892 million | 40

Integrity Bank (Alpharetta) | 8/2008 | $1.1 billion | $211 million | 19

Omni National Bank (Atlanta)3/2009$980 million$290 million | 30

First Fulton Savings (Atlanta) | 1/1991 | $2 billion | $81 million | 4

Great Southern Federal Savings (Savannah) | 6/1989 | $880 million | $146 million | 17

First Federal S&L (Atlanta) | 3/1989 | $301 million | $18 million | 6

Southern FSA of Georgia (Atlanta) | 7/1992 | $160 million | $8 million | 5