WASHINGTON — Georgia's implosion of small banks sent aftershocks throughout the middle part of the state in places such as Macon and Columbus, as several community banks waded into Atlanta's tempestuous housing market and collapsed under the burden of portfolios that were disproportionately weighted down with real estate loans.
In these areas, as in much of the state, small community banks provided capital to the residential construction sector to build and build and build. The Atlanta metro area mushroomed and banks across the state with a stake in that region's market reveled in the largesse.
However that growth, and its ultimate collapse, came at a high cost.
For example, Macon-based Security Bank Corp.'s six bank subsidiaries, half of them in the Atlanta metro area, were shut down by the government in July of last year after the bank's failure to meet adequate regulatory capital levels. An examination of the company's final report to the Federal Financial Institutions Examination Council shows that more than a third — the largest single portion — of the Macon bank's loans were real estate and construction-based.
The same holds true for the failed Community Bank &Trust, which had several offices in Columbus and operated many banking centers in grocery stores and Wal-Marts. The bank, like many other small Georgia lending institutions, suffocated under the weight of too many real estate loans gone bad.
Community banks enjoyed huge profits during Atlanta's decade-long housing boom, but like the large banks, they had too many eggs in one basket.
"To some degree, if you look at the banks that have problems around the state, a good number of them had some exposure to the Atlanta market — either a loan office there or purchasing loan participations," said Ed Loomis, who as the new president and CEO of the Macon-based Atlantic Southern Financial Group is charged with helping the company's bank comply with a cease and desist order from the Federal Deposit Insurance Corp. (FDIC).
"Security is a good example. Here's a bank headquartered in Macon. They go to Atlanta and buy three banks heavily into real estate construction. The market collapses and it essentially led to Security's demise," Loomis said.
With 38 shuttered banks, Georgia leads the nation in bank failures. All of the closures were small banks, and many were undone by bad loans to builders.
Georgia has about four times as many banks as California thanks in part to a law that until 1996 restricted banks to operating only in the county where they were chartered. Georgia has 159 counties. When that law was repealed 122 new community banks were formed, all fighting for a piece of the then ever-expanding real estate pie.
"The banking laws in Georgia have been extremely generous toward starting community banks for a long time," said Dave Erickson, a Columbus area builder. "A lot of them got started in late '90s and early 2000s. When they went out to get customers, the big guys — the SunTrusts of the world — they had the retailers, manufacturers, and auto dealers. There wasn't a lot of oxygen."
But there was plenty of room in the real estate loan market — until there wasn't.
Beginning in 2007, each of the Security Banks allowed borrowers to continue using interest reserves, despite problems with projects being delayed or completed. The banks also allowed extended repayment terms for troubled projects.
The banks failed to obtain updated appraisals on properties that reflected current market conditions. Prior appraisals were found to be weak and contained stale comparable information, and the banks' lending program didn't adequately ensure that loan disbursements and inspections were appropriately monitored or documented.
"The failures of the Security Banks can be attributed to the strategy promoted by SBC (the holding company) and followed by each of the bank's boards and management, which centered on growing their ADC (acquisition, development and construction) loan portfolios," according to an Office of Inspector General audit required by the FDIC. "Further, SBC's expansion into the Atlanta metropolitan market was ill-timed, as it occurred at the peak of that market."
Last year, the Macon-based Security Bank Corp, reported a net operating income loss of $88.4 million for 2008.
"The experience in Georgia shows that banks were not innocent bystanders. While there were some small banks that were not at the root of the problem ... in many cases in Georgia they were," said Mark Vitner, a senior economist in Charlotte, N.C., for the national bank Wells Fargo.
The FDIC, Office of the Comptroller of the Currency, and the Federal Reserve System's board of governors issued joint guidance in December of 2006 expressing concerns that "rising (Commercial Real Estate) concentrations may expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in the general commercial real estate market."
But by then, for many smaller institutions such as Community Bank &Trust, which had several offices in Columbus, the financial house of cards was already toppling.
The FDIC and state department of banking issued a cease and desist order to Community Bank & Trust last May after regulators sounded alarms about a number of management issues, including the institution's high number of bad loans and shaky underwriting standards.
"There were certainly some poor management decisions made on a case by case basis," Sen. Saxby Chambliss said of Georgia's community bank failures. "Some of them took more risks than they should have taken. There were those banks that were too highly leveraged in the real estate market."
However, by and large, Chambliss, many members of the Georgia congressional delegation and the community banking community feel that small banks were the victims of big banks' risky behavior and lax oversight.
"All these charters were approved by the government. They were not wildcat banks that were started up," said Sen. Johnny Isakson, a former real estate executive who sits on the Senate's Committee on Small Business and Entrepreneurship. "To the people who made the comment that Georgia had too many banks, we had a lot of banks, and those banks were chartered by a government entity that said they were property chartered and capitalized. The blames goes to where the regulators were not doing their job in overseeing those interests. The public expects the regulators of the banking system to protect the public interests."
The FDIC acknowledges that while it encouraged banks to be more prudent, the language of such guidance wasn't strict. However, while the agency also thinks that small banks were overextended, they also put the blame on the larger national banks that drove mortgage lending.
"Were mistakes made? Everyone would agree mistakes were made in community banks," said Doreen Eberley, Regional Director of the FDIC's New York Region, who served as the interim regional director of the FDIC's Atlanta Region for the past year.
Meantime, local builders have found the market greatly tightened.
"I have two national scale banks that, if they used to feed us money though a six inch hose, it's now a 1/2 inch hose," Erickson said. "It's real slow and real expensive. Now the banks want an appraisal on every single house even if you built it three months ago. The fees you're paying are easily 100 percent over what they used to be. It's not so much that there are new rules, but now regulators are saying you will follow these rules where two years ago they were kind of loose about it."
(Kevin G. Hall of McClatchy's Washington bureau and Linda Morris of the Macon Telegraph contributed to this report.)