Georgia banks fall into trouble straying from business plans

AJC Exclusive: Officials saying one thing, doing 'the opposite'

American Southern’s business plan was clear: The Kennesaw bank would maintain a low-risk profile and lend primarily to small- and medium-sized companies.

But almost immediately after opening in 2005, the bank began lending heavily to real estate builders and developers – a strategy that backfired when the housing market collapsed. The tiny bank began to bleed red ink and was shut down by regulators last April, following a now-familiar storyline.

A federal audit released Wednesday blames American Southern’s demise in large part on a failure to adhere to its initial business plan. It’s an increasingly common finding as regulators search for root causes of the nation’s banking crisis, the most severe in at least two decades.

Thus far, regulators have conducted audits of nine Georgia bank failures. In four of those cases, including that of American Southern, regulators determined the banks had deviated from approved business plans and became deeply involved in high-risk real estate lending.

It's a pattern repeated at banks across the state, experts say.

"Every [Georgia] community bank that opened for the last 15 years  has said the same thing and done the opposite," said Lee Bradley, an Atlanta consultant who helps banks raise start-up capital.

While most institutions intended to build a conservative, diversified business, many became seduced by the easy money that real estate deals promised during the economic boom, said Byron Richardson, an Atlanta banking consultant.

Real estate loans, particularly those to home builders and subdivision developers, were a “narcotic” for banks, he said.

“It was a fast way to grow your earnings and your balance sheet,” Richardson said. “It became too easy for the banks.”

During the housing boom earlier this decade, builders and developers were clamoring to borrow money for new projects to keep up with a seemingly insatiable demand. While the market remained hot, borrowers paid the money back on time and the banks pocketed tidy profits.

It takes much more time, skill and effort to cultivate the relationships necessary to succeed in traditional commercial lending, experts said.

In an interview, Mickle Moye, former president and CEO of American Southern, took issue with any assertions that his bank strayed from its business plan. The bank initially set out to lend to both small companies and real estate developers and later amended its business plan to allow for more real estate lending, he said.

"Not one bank in the Atlanta market could survive by lending just to small businesses," he said. "Because, for one thing, new businesses are more risky, and the smaller retail companies and businesses just simply aren't profitable for a bank."

Regulators should have done a better job of making sure banks stuck more closely to their initial strategies instead of getting sucked in to the risky real estate game, said Stephen Johnson, an banking consultant based in Alpharetta.

“You have to question the regulators, because part of their job was to ensure these guys didn’t get into these concentrations” of real estate loans. “I don’t know where [the regulators] were.”

Federal auditors appear to agree with Johnson, at least in part. In the review of American Southern’s failure, auditors said “more supervisory attention may have been warranted, in light of the bank’s [start-up] status and material deviations from its business plan.”

American Southern was regulated by both the Federal Deposit Insurance Corp. and the Georgia Department of Banking and Finance. In a letter included in the audit, the FDIC said its regulators had warned American Southern that it was deviating from its business plan.

However, the one-page letter did not say whether the FDIC felt it had done enough to make sure the bank stuck to its original plans. A spokesman for the FDIC declined to comment, saying the letter “speaks for itself.”

Georgia's banking commissioner, Robert Braswell, did not return a call seeking comment.

American Southern’s original business plan called for providing “traditional banking services” with “no high-risk lending,” according to the audit.

But during a 2006 examination by the FDIC, the bank’s real estate acquisition and development loans amounted to 74 percent of its total loans – far above its projection of 8 percent.  Still, the bank’s overall condition was found to be “satisfactory,” the audit found.

The following year, the bank's acquisition and development lending reached 267 percent of its total capital on hand to cover losses – far above federal guidelines set in 2006, which said concentrations generally should not exceed 100 percent.

Banking officials allowed the bank to change its business plan in 2007 to allow for more real estate lending.  During that years’ review, state regulators noted the bank’s earnings continued to improve and rated the bank’s overall condition as “satisfactory.”

Richardson, the Atlanta banking consultant, said banks were allowed to gorge on real estate lending because regulators historically did not focus on that issue when reviewing institutions.

It wasn’t until the housing bubble burst that regulators stepped up their oversight, he said.

“It was not high on their radar,” he said.

The consistent profits posted by banks that later failed may have lured regulators into a false sense of security, said Johnson, the Alpharetta banking consultant.

“They were all making so much money,” he said. “Regulators figured … if [banks] were deviating from their business plan and making money, that must be OK.”