Checking In With Community Banks

Despite the high number of Georgia bank failures, there is optimism on Main Street – if you know where to look

When Georgia’s bank closure rate began to accelerate in the fall of 2008 and the number of troubled banks began to grow, it appeared the state was destined to lead the nation in the number of failed banks, which it did, at least in one category.

As the number of failed banks began to rise, even the casual observer could note that the smaller banks were hardest hit, particularly those around Atlanta. Most of these lending institutions were community banks regulated by one or more federal or state agencies. These institutions were, as one banker put it, “not too big to fail.” And many of those failures have been linked to the boom-and-bust housing market in metro Atlanta over the last five years.

Georgia Trend contacted community bankers, regulatory officials, finance experts and the heads of banking professional groups to get their take on the state’s banking crisis and opinions on the future of the industry.

Len Dorminey is sitting at a conference table in his office with a spreadsheet before him. The document is a basic banking tool identifying just where his bank’s loans are concentrated. “Look,” he says pointing to one heading, “you can see that under acquisition, development and construction loans, only 7.6 percent of our total [loan] portfolio is in that category.”

As CEO of Albany’s HeritageBank of the South, Dorminey is the chief steward of the bank’s $574 million in assets, capping a double-digit growth rate since 2001, the year the former credit union took the regulatory steps to become a bank. Only two Georgia banks have ever made such a transition, according to information supplied by Heritage.

Last year the bank purchased a Reidsville Bank closed by the FDIC, and steps to own six branches of a Valdosta bank were completed last May (2010), all in smaller Georgia towns. HeritageBank is a community banking institution, and community banks have been hard hit by failures.

Since the fall of 2008, 37 community banks have closed, while six new such banks have opened, according to data supplied by the Community Bankers Association of Georgia (CBA). Historically, community banks have been small-town institutions, priding themselves on a neighborly association with their customers, unlike the large multi-state “big box” banks, or regional banks, where decisions are made far up the line of a banking bureaucracy, which leads back to HeritageBank’s spreadsheet and the 7.6 percent portion of loans for real estate financing.

“Last year at this time it was 12 percent, and we have typically been at 15 percent on the high end,” he says. “Where for many banks, that might comprise 40 percent or 50 percent.” Such figures led to Georgia’s high rate of bank failures, particularly in Atlanta and its suburbs, where climbing real estate values five years ago drew the attention of small-town bankers eager to participate in the boom.

“I think the banks located in the more stable markets were not participating, but they saw those banks in the high-growth markets were very profitable and they started reaching for out-market deals or buying ‘loan participations.’”

Large banks in the booming Atlanta area offered loan participations as real estate prices rose. Typically, a larger bank would keep the lion’s share of a loan and sell portions of the balance to smaller banks. “So, all of a sudden a lot of [small bank] loan portfolios were in speculative areas,” Dorminey says. And even with regulatory constraints on the percentage of their capital that can be loaned, “that number is high enough to get anybody in trouble that wants to put all their eggs in that basket.”

Survival Of The Fittest

When real estate values began to plummet in Georgia’s high-growth areas like Atlanta, banks began tumbling. Of the 40 banks closed between the fall of 2008 and May 28, 2010, 22 were in Atlanta and its suburbs, four in Alpharetta alone. Participation real estate loans cannot be blamed for all the closings in the region, say the experts. Sometimes banks can fail in a struggle for survival of the fittest.

“Certainly Georgia is one of the fastest growing states in the country, and related to that, Georgia had a lot of new banks created if you go [from] 2000 and forward, and that created a lot more competition,” says Dr. Don Sabbarese, director of the Kennesaw State University Econometric Center.

“And there is no doubt about it, housing was a major part of the Georgia economy, especially in Metro Atlanta. Community banks located in those markets where you had a lot of building going on are obviously going to be involved in lending in that sector. Some banks kept their construction loans at or under 15 percent of their loan total. That was smart, because that’s what banks are supposed to do, diversify their loan portfolio.”

Not all troubled banks in the state were closed; many agreed to sign a consent order, a legal agreement with regulators designed to force a bank to make improvements in its operations. A consent agreement often leads to the search for more capital, due at least in part to real estate loans for properties that have declined in value since the loan was originally offered.

Such lending conditions are red flags to regulators, says Joe Brannen, president and CEO of the Georgia Bankers Association. “You’ve seen almost half the banks in Georgia under some sort of agreement with their regulators,” Brannen says. “When they enter into those agreements, it makes it very difficult to operate in a way that is useful in many communities. Your lending is restricted [and] your deposit growth is restricted. Compounding that, we have a different set of rules on the books now, as we have to account for the fair value of real estate, and banks have to use their capital to account for real estate values that are at unprecedented [low] levels.”

And that, he says, brings a new player into the equation – the appraiser. “When you get [the property] appraised and all of a sudden it comes in at 50 percent of what you made a loan for and the borrower says, ‘Oh, shoot,’ and the bank says, ‘Oh, shoot,’ well, you’ve got to figure out what to do. If you can’t get that loan back in sync, the regulators require you to take action.”

The bank then must put the difference in values into reserves, or the borrower must come up with the difference or foreclosure must begin, even if the borrower has paid on time and his loan is current, says Brannen. “If there is one thing that has created more pain for the industry, more pain for our customers and, frankly, more pain for the regulators, it is that one issue.”

Local Focus

Brett Bowden is a folksy community banker who has strictly adhered to his institution’s three-word lending philosophy: “Keep it local.” That practice, he says, helped his bank weather the recession.

“The bank as a whole has not been really affected by it,” says Bowden, president of the Farmers State Bank in Dublin, where he has worked for 19 years. “The reason being mostly that we did not get into buying participations outside our area or with borrowers we did not know.” Farmers State Bank assets have grown steadily, even in these difficult times, rising from $115 million in 2005 to its present level of $125 million. “Consumer business has slowed down a good bit, and that is certainly due to the total economic condition,” Bowden says, appraising current conditions in Dublin.

“We’ve had people lose their jobs – we’ve had two industries close – so unemployment has hit here.” And there was a time when the bank had its version of the real estate adventure. “About four or five years ago, we did some speculative homebuilding with some of the local builders that we were already doing business with, and continue to do business with,” he says. “They just don’t do speculative building now. We made the decision back then to stop doing speculative building because we just didn’t see where all the people were going to come from to move into those homes.” And he adds, with no touch of irony, “We quit. Which was probably a good decision at the time.”

Today, despite its name, Farmers State Bank does little lending to farmers, but has found another market Bowden calls “the lifeblood of the bank,” small businesses. “Farming lending at most community banks ended many, many years ago,” he says. “And car companies do financing; boat companies do financing; motorcycle companies do financing; so there is very little opportunity anymore for banks to do a large number of that kind of consumer purchases. We do have a good bit of our customers that will buy vehicles, boats, those kinds of things, but they like to tie it into their mortgage or a second mortgage so they can get the tax advantage if they are eligible.”

Bowden sees second and third generations of customers at his bank, and at Little League games, grocery stores and community events. That closeness to his depositors and borrowers plays into Farmers’ banking strategy.

“I’ve got many customers whose parents I did business with, and now they’re doing business with me,” he says. “That’s where some of your growth comes from, and it’s a good way to grow. We never really changed our business model. We’re not a show horse. We’re a plodder, I guess.”

Different Perspective

While the media were headlining stories of Georgia’s rise to the top of the list of states with bank failures, banking officials here were putting a different spin on the industry’s condition.

“I think it is … important to put the number of bank closures in Georgia in the proper perspective,” says Rob Braswell, commissioner of the Georgia Department of Banking and Finance (GDBF), in an email response to questions from Georgia Trend. “Regarding any metric other than number of charters, Georgia is not No.1. For example, regarding percentage of bank failures, Georgia is fourth. Regarding total assets and deposits of failed banks, Georgia is sixth. Regarding the average size of a failed bank, Georgia is 14th. Banks are going through difficult times on a national and international basis, not just here in Georgia.”

Braswell and the state’s economy watchers were heartened by news that 57 percent of Georgia’s banks were profitable in the first quarter of 2010, a big improvement over the same period the year before and in the last quarter of 2009. Data supplied by Braswell’s office point out that Georgia banks made more than $26 billion in new loans in 2009. Braswell says Georgia’s smaller banks suffered more than their larger competitors who received federal government assistance.

“Unfortunately, many of the smaller community banks do not have the same level of accessibility to certain options to help them in the difficult times as many of the larger banks,” Braswell says. “The ability to sell additional capital quickly on the open market or the Treasury’s willingness to invest via the TARP program are two examples of disparities.”

Braswell believes the bank customer fared well in the recent economic turmoil. “The good news is that banks are still very willing to make loans to credit-worthy borrowers, that stronger, healthier banks acquired the assets and deposits of almost all of the banks that failed, that no depositor has lost a single penny of their insured deposits through this whole ordeal,” he adds.

There remains an air of optimism in most community banks, a condition generated more by what bankers are seeing in their downtowns than by what is coming from the nation’s capital.

“I think the well-being of community banks is more driven by local economies than national conditions,” says Carolyn Brown, president and CEO of the Community Bankers Association of Georgia. “And I think you will see community banks make more small business loans. But I think the banking industry is waiting to see what kind of regulatory reforms will be coming out of Washington before they invest in things like new technology.”