In ‘brutal’ third quarter, 26 banks had Texas ratios over 100%
The Atlanta Journal-Constitution
Sunday, January 11, 2009
More Georgia banks faced deeper problems from souring loans and other challenges in the third quarter, based on a commonly used measure of their financial health.
The number of banks with high “Texas ratios” — a figure that attempts to gauge how likely institutions are to face insolvency — grew during the quarter ended in September. Most banks’ ratios also got worse.
“The third quarter was brutal,” said Walt Moeling, an Atlanta attorney who represents many of the state’s banks and the Georgia Bankers Association, a trade group.
Georgia once again had the largest number of troubled banks in the nation, with 26 banks with Texas ratios over 100 percent, said Brett Villaume, a research analyst at Atlanta bank consulting firm FIG Partners, which produced the quarterly update based on third-quarter data, the latest available.
“It’s just alarming,” he said. “No other state came close.” He said Florida had seven problem banks, the next largest concentration. Georgia and California tied for the biggest share of the nation’s 26 bank failures last year, with five each.
Moeling said 90 percent of local banks reported increases in problem loans or foreclosures during the quarter as the economy worsened and home sales and building activity remained virtually frozen. More home builders’ and developers’ loans went unpaid, and most local banks booked bigger charges for expected loan losses.
Previously, “there was a lot of denial” among some bankers who hoped home builders could catch up on late loan payments if the real estate market improved, said Moeling, with law firm Bryan Cave Powell Goldstein. “The third quarter ended the period of denial.”
The Texas ratio — developed during the savings and loan crisis in the 1980s, when far larger numbers of financial institutions failed — attempts to measure a financial institution’s health by comparing its total defaulted loans and foreclosed properties to total cash reserves and other funds it has available to absorb potential losses. A ratio over 100 percent suggests “you owe more than you have,” Villaume said.
Critics of the Texas ratio say it provides a one-time snapshot and doesn’t reflect the bankers’ ability to shore up cash reserves by raising capital, selling foreclosed houses, cutting expenses and generating additional revenue.
“A lot of things could have changed” since the third quarter ended in September, said David Oliver, spokesman for the Georgia Bankers Association. “We advise people to exercise caution when looking at those numbers.”
Georgia’s bumper crop of problem banks has its roots in the creation of more than 100 new banks since 2000, mostly in metro Atlanta. Those and older banks in turn bet heavily on metro Atlanta’s then-booming residential real estate market by bankrolling developers and home builders. Many of those loans imploded after the real estate market crashed.
“There was an oversupply of new banks. And needless to say, when times got tough, they were the first victims,” Villaume said. “Everyone on the street who was watching for bank failures was surprised there weren’t more [failures] in 2008,” he said.
Still, he and other industry players argue that there are glimmers of hope despite continued grim industry trends. A handful of Georgia’s banks recently have snagged federal bailout money, shoring up their capital reserves.
Outside investors also have injected money or shown interest in a few of the state’s banks. Some troubled banks said they have made some progress toward digging out of their holes by cutting expenses and selling foreclosed properties or other troubled assets.
Five Georgia banks have announced that they were getting federal bailout money from the Troubled Asset Relief Program, or TARP, including Atlanta’s SunTrust Banks and Fidelity Bank, Columbus-based Synovus, and United Community Banks in Blairsville.
None of those banks were on FIG Partners’ troubled bank list. However, industry insiders said some banks on the list have also applied for TARP money. They expect more that currently don’t qualify because of their legal structure — typically the smallest community banks — to apply as well if the U.S. Treasury Department broadens its program rules to cover them.
The parent company of Jackson-based McIntosh State Bank, which landed on the Texas ratio list for the first time in September with a ratio of 101 percent, announced late last month that it is raising up to $14 million from private investors, including Atlanta-based Redemptus Group. McIntosh also said it has applied for $10.7 million from the federal TARP program.
“We feel real good, even though we did creep onto the list,” said William “Pete” Malone, McIntosh’s chairman and CEO.
David D. Stovall, chief executive of Habersham Bancorp., said the Clarkesville bank holding company likewise is applying for roughly $11 million in TARP money after raising new capital at year-end from a private investor.
“We’ve already injected $3 million of private money. … That should bode well in our favor,” said Stovall, whose bank had a 115 percent Texas ratio in September. He said the bank has been “fairly aggressive about addressing issues” by also selling about three foreclosed homes per month.
“We have plenty of capital and plenty of liquidity to ride it out,” he said.
Dan Baker, president of First Security National Bank, with a Texas ratio of 273 percent, said the Norcross-based bank has been able to sell most of its foreclosed homes with modest losses. But the pace is slow because “the public wants to buy them for nothing,” he said.
The 25-employee bank has cut four employees and foreclosed on more than a dozen home builders in recent months.
“It’s a shame, because they’re good people,” he said.
The bank’s federal regulators, who want the institution to raise additional capital, “have been working very closely with us,” Baker said. “I think we’re probably in for a slow 2009. I think we’ve got a ways to go to work through this real estate.”
State banking regulators “obviously want us to raise capital,” said Vincent Cater, chief executive of Freedom Bank of Georgia. The state Department of Banking and Finance hit the Commerce-based bank with a cease-and-desist order last month requiring several improvements. Cater said the bank, which had a Texas ratio of 175 percent, is “talking to several potential investors.” Meanwhile, it has been able to sell foreclosed homes relatively quickly and deposits “remain very stable,” he said.
“I think we’re seeing some leveling off. The problems don’t seem to be getting worse. They’re not getting any better,” he added. “I think we would obviously not like to be on the next [Texas ratio] list.”
Stephen Klein, chief executive of Omni National Bank, said its recent Texas ratio, 219 percent, “doesn’t do justice” to the Atlanta bank.
“We do not have a liquidity problem,” he said, noting that the bank has “$105 million of cash in the bank” and rent coming in from about 70 percent of the roughly 500 foreclosed homes in its portfolio.
Unlike most banks, he said, Omni isn’t rushing to sell those homes because prices fell too far. Following an unusual strategy, the bank made most loans to home builders who were rehabilitating homes in inner-city Atlanta neighborhoods populated primarily by low-income black families.
But those neighborhoods were especially hard-hit, he said, after the market for subprime home loans froze up, sidelining many would-be buyers.
Omni foreclosed on the builders and now rents the houses out until it can work through its problems, Klein said.
“If something happens to the bank, there’s going to be a … void in inner-city Atlanta,” he said.
PROBLEMS GROWING FOR GEORGIA BANKS
More Georgia banks have landed on a list of troubled institutions, as measured by a statistic known as the “Texas ratio.” The formula, used with some modifications by Atlanta-based FIG Partners, attempts to gauge risk levels at banks — the higher the number, the bigger the potential problems.
Bankers want to avoid a score above 100 percent, which indicates that a bank’s problem loans exceed the capital it has to absorb losses.
Integrity Bank, Alpharetta
Failed, Aug. 29
FirstCity Bank, Stockbridge
Alpha Bank & Trust, Alpharetta
Failed, Oct. 24
FirstBank Financial Services, McDonough
First Security National Bank, Norcross
First Georgia Community Bank, Jackson
Failed, Dec. 5
Security Bank of Gwinnett County, Suwanee
Community Bank, Loganville
Failed, Nov. 21
Omni National Bank, Atlanta
Southern Community Bank, Fayetteville
First Piedmont Bank, Winder
Neighborhood Community Bank, Newnan
Security Bank of North Metro, Woodstock
Freedom Bank of Georgia, Commerce
Gordon Bank Gordon
McIntosh Commercial Bank, Carrollton
American Southern Bank, Roswell
First National Bank of Georgia, Carrollton
Peoples Bank Lithonia
First Cherokee State Bank, Woodstock
First National Bank of Griffin, Griffin
Chestatee State Bank, Dawsonville
United Security Bank, Sparta
Haven Trust Bank, Duluth
Failed, Dec. 12
Community Bank of West Georgia, Villa Rica
Habersham Bank, Clarkesville
Community Capital Bank, Jonesboro
First Covenant Bank, Norcross 111%
Farmers & Merchants Bank, Lakeland
Tattnall Bank, Reidsville
McIntosh State Bank, Jackson