Tuesday, March 2, 2010

When Georgia Banks Fail, Small Businesses Suffer


March 2, 2010

President Obama was in Savannah, Ga., on Tuesday, as part of his Main Street tour to encourage economic growth. Georgia has been hit hard during the recession, as bank failures have skyrocketed.

More than 30 banks in Georgia have shut down since 2008 — that's higher than in any other state. As a result, many small businesses are struggling because they can't get loans. Some people in Georgia, and in Congress, say it's time to help these smaller banks and the communities where they are located.

When Real Estate Growth Plummets

Henry County, about 35 miles south of Atlanta, was a booming place. It was one of the fastest growing counties in the country. Its population nearly doubled in the past decade to about 200,000.

"Property values were at their highest, and everyone was in a frenzy to build and to develop," says Hans Broder, CEO of Enterprise Banking Co. in McDonough.

Broder had retired from banking, but in 2005, he decided to buy a community bank. When credit got tight and loans dried up, houses here stopped selling, leaving empty subdivisions and tons of foreclosures.

In Georgia, a lot of new banks made development loans because of the growth. When both the residential and commercial real estate markets plummeted, banks all over began failing — including two in this county.

"I think as we all look back, there was a greed factor in some of the decisions that were made, and we were all caught up in it. I don't think regulators saw it coming either," Broder says. "But after so many years of success, we sort of let our guard down. And there's a price to pay for that, and we're paying it."

In the Atlanta metropolitan area, which is Georgia's economic engine, nearly half of the banks are now under federal or state regulatory orders to raise more capital. Broder needs to come up with $5 million — a difficult proposition.

As a result of the pressure, most troubled banks are not making new loans, but are restructuring their old ones and trying to build reserves. That makes it tough on smaller communities.

Local Impact

Downtown Locust Grove is a quaint couple of blocks next to a railroad track that runs along Georgia Highway 42. Among the shops here is Heather Bledsoe's store, Heather's Flowers, which stocks flowers and consignment wedding dresses.

Locust Grove got several hundred thousand dollars of federal stimulus money for streetlights, brick walkways and building facades. But, Bledsoe says, businesses here are not getting loans. She started her store with her own savings last spring, renting space downtown. When the building came up for sale, Bledsoe wanted to get a loan to buy it, but her bank had failed and others offered no help.

"We tried a couple other banks, even our own personal banks, and they were like, 'Yeah, don't even — there's no way to even apply because you're not going to get it,' pretty much is what they told us when we went in there," Bledsoe says.

She was turned down, in part, because her business was so new. But she says it's new businesses that need the loans.

"Sometimes it just kind of slams a door in your face when you are trying to make something happen," Bledsoe says.

Banking Regulations To Blame?

The list of troubled banks here and across the country continues to grow. The Federal Deposit Insurance Corp. recently announced that the number of problem banks nearly tripled at the end of 2009 to just over 700. Smaller lenders, in particular, are struggling.

Some blame the high number of failures on strict federal accounting regulations for troubled banks. In part, they require banks to reappraise the real estate underlying their loan at current, depressed prices and take a loss on those loans. That reduces banks' capital and their ability to make new loans.

"Part of the drying up of credit in the marketplace is directly because of the regulators and the pressure they're putting on banks actually not to loan. That becomes a self-fulfilling prophecy and protracts the recession," the Republican says.Georgia Sen. Johnny Isakson is lobbying for changes.

Some accounting rules were suspended during the savings and loan crisis in the 1980s, and Isakson says they could be suspended again.

Republican Rep. Lynn Westmoreland would like community banks to get additional time and federal financial help to recover.

"And then if they need a cash infusion of, let's say, $10 million, let the government say, 'OK, if you raise half of it, we'll loan you half of it and give you an opportunity, give you 18 months to turn your bank around,' " Westmoreland says.

Loosening Restrictions May Not Be The Answer

But some industry analysts say this is not the time to loosen restrictions.

White says banks can't just hope that their bad loans will suddenly turn into good loans."It's the basic mission of federal and state bank regulators to make sure banks are sound — and every failing bank has always complained if they just gave them a little more time, things would turn around," says Alan White, a law professor at Valparaiso University in Indiana and an expert in banking regulation.

"Whether they're bad subprime loans or bad construction loans, bad loans are bad loans. And if those bad loans are what is backing ordinary people's savings, the regulators have to act," he says.

Community banks are vital to small towns — they make the loans that create many new jobs. But given the current conditions, economic experts say it's likely two dozen more community banks will fail in Georgia this year.