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Banking & Finance

Blue Christmas for Struggling Georgia Banks

SBJ Staff

12/07/2009 - Community Bankers Association of Georgia legislative director Steve Bridges should make the most of the upcoming holiday break.

Come January, he’ll be carrying a full briefcase of issues to Atlanta and Washington as representative of more than 300 of Georgia’s community banks, many of which have struggled to meet regulatory rules while taking blows from a nasty recession.

As he answered questions in a phone interview Friday, the Federal Deposit Insurance Corp. busied itself shutting down three more Georgia banks, including Buckhead Community Bank, an institution founded in 1998 to meet the needs of residents and businesses in Atlanta’s high-end Buckhead community.

The failure of Buckhead Community, Norcross’ First Security National Bank and Reidsville’s Tattnall Bank brought the number of Georgia bank failures since 2008 to 29. No other state has had as many.

As the newest shutdowns show, Bridges and the banks he represents face trouble on several fronts.

More immediately, community banks - including a number in Savannah - are struggling to meet “bad debt set-aside” regulations. It’s the reason many banks in Georgia are showing losses, he said, referring to the practice of forcing banks to set aside money to cover the value of residential and commercial loans that declined greatly in value as the recession deepened and land prices plummeted.

In many instances, regulators are pressuring community banks to act against commercial developers and other borrowers who are repaying on time and in full.

As an example, a developer may have borrowed $10 million for a project but market declines could have dropped the value to half that amount. So, under fair-value accounting rules, the bank is forced to set aside money to cover the gap, because regulators are viewing it as a $5 million loss, Bridges said. The bank “ may not know how much the loss is (ultimately) going to be, but they have to set aside the money,” he explained.

What Bridges is looking for are regulatory changes that would give banks more time to amortize or rework the loans that have dropped significantly in value. “We need time to get back to a more normal situation,” he said, citing five years for amortization as a suitable period.

Community banks need regulatory reform that occupies more of a middle ground, Bridges said, something “between what we had before (the trouble) and what we have now.”

Previous regulations “were just too loose,” and banks have since been forced “to face reality.”

Meanwhile, fair-value accounting has brought a lot of skittishness to lending. And that’s likely to remain until changes are made, according to Bridges.

His lament is that “banks no longer have any incentive to work with the borrower” because they are making less off the loan than the cost of the charge off on the loan.

More time to amortize the loan would soften the blow to borrowers and give banks a greater incentive to work with them, Bridges said.

Regulatory concerns could be addressed by requiring banks to get new appraisals on the land and buildings for which they have made loans. This would give banks an idea where they stand on the loan and what avenues to take in working with the borrower, Bridges said.

Community banks simply can’t return to sustainable lending levels without more time to amortize loans that have had declining values, according to Bridges. Nor can they continue to set aside huge amounts of their capital assets to cover declining loan values, he said.

Without change, it’s hard to see how they can participate in the kind of lending that leads to job creation and contributes to a strong local economy, Bridges noted. “With community banks, regulatory pressure is so great that they are just not making loans,” unless the lending opportunity is “absolutely golden.”

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