Georgia's banking crisis spreads to rural banks


The Atlanta Journal-Constitution

ATLANTA - Georgia's banking crisis is spreading from its roots in metro Atlanta to more rural parts of the state.

Banks from the North Georgia mountains to the onion fields outside Vidalia report mounting losses and rapidly expanding pools of bad loans, just like their big city counterparts.

As if to underscore the trend, federal regulators recently slapped five Georgia banks with enforcement actions? only one of which was in metro Atlanta. The others were in north and central Georgia.

The root of the problem is common to Georgia banks of all stripes: real estate loans that soured after the housing bubble burst.

Because the boom-and-bust cycle was by far most pronounced in Atlanta, lenders in that region have borne the brunt of the troubles. Since Georgia's banking crisis arose in 2008, all but one of the 29 banks to fail have been either based in metro Atlanta or had sizable presences in the area. The only exception: tiny Tattnall bank in Reidsville, which failed last month.

But the pain has made its way to rural banks, in large part because so many small-town lenders bought pieces of loans, known as "participations," that other banks made to builders and developers working in the Atlanta suburbs, said Lee Bradley, an Atlanta financial consultant who often works with banks.

Rural banks simply wanted in on the action? and the profits? the booming Atlanta market promised, he said.

"They loaded up on participations, and it's coming back" to hurt them, he said. "It was just a matter of time."

In a typical participation, a lead bank originates a loan that is larger than it can handle alone and then partners with other banks to fully finance the deal. Such arrangements spread risk but also expose multiple lenders to losses if the borrower's project fails.

Showing up on lists of troubled institutions and being forced by regulators to shore up their finances are a growing number of small-town lenders banks headquartered in places such as Hiawassee, Ailey, Gordon and Gray.

Problems at some rural banks arose quickly. One of Bradley's clients, Piedmont Community Bank of Gray, east of Macon, saw its volume of troubled loans nearly triple in the past year to $32 million, according to Federal Deposit Insurance Corp. records.

More than half of the bank's problems can be traced to loan participations, Bradley said. Piedmont, founded in 2002, loaded up on real estate loans in the middle of last decade, growing in that category from $34 million in 2004 to $186 million in 2008, records show.

Regulators recently issued an enforcement action against Piedmont, ordering the bank to raise capital and cleanse its books of troubled loans. Piedmont officials declined to comment, saying the bank's top leaders were out of town and not available.

Meanwhile, rural banks are also suffering in general from the recession that has gripped the state for the past two years as businesses and individuals burned by the recession fail to pay their loans.

"Certainly, job losses and the downturn in the economy has left no part of the state untouched," said Byron Richardson, a banking consultant based in Alpharetta.

Participations are not the only real estate-related problem facing small-town lenders. Many banks in Georgia's coastal and mountain communities are suffering from the collapse of the vacation and retirement home markets.

Montgomery Bank & Trust, for example, is headquartered in Ailey, a tiny town just west of Vidalia, but it opened a branch in coastal St. Simons a few years ago. The bank's Web site lists 14 foreclosed properties for sale in St. Simons and Brunswick, including a home listed at $2.9 million and another at $1.25 million.

The volume of Montgomery's troubled loans nearly doubled from the second to third quarter of 2009, to $37 million.

Or consider the Bank of Hiawassee, near the North Carolina border, which survived the Great Depression and numerous recessions during its 100-year history. The bank's troubled loan portfolio has nearly doubled in the past year to $78 million, forcing the bank to try and raise cash to offset potential losses.

Without any industry to speak of in the area, Hiawassee has long depended on real estate loans to drive its business, Elois Anderson, the bank's chairman.

"That's just our one product here in the mountains; it's just real estate," she said. "We had all our eggs in one basket."

When the real estate "merry-go-round stopped, it didn't start again," Anderson said. Borrowers stopped paying on their loans.

Watching the struggles at Hiawassee has been painful for Anderson, who has spent about 50 years, her entire career, at the bank, rising from teller to president and, ultimately, chairman. When asked how she felt, her voice dropped.

"That's like asking a question of someone whose had a death in the family how they feel," she said.