“Ring of Death’ Throttles Georgia as Banks Too Small to Save” – Bloomberg

Posted on :Mar 19, 2014

Bloomberg

Georgia homebuilder Blankenship Homes lost its source of loans for new  construction after four local community banks failed since 2009.

“The economy just shut down,” said owner Johnny Blankenship, 54, a builder  for more than 30 years in Douglasville, 20 miles west of Atlanta. “We are just  starting back to do a few homes. The economy is still very, very slow.”

While the Federal Reserve and U.S. Treasury rescued major banks amid the 2008  financial crisis to avert a meltdown of the nation’s financial system, the  bailouts didn’t prevent the collapse of about 500 small lenders. Their  disappearance, part of a syndrome of economic weakness, still weighs on growth  and employment in dozens of counties across the U.S.

“It will be difficult to fill the void left by failing small banks,” said  Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester,  Pennsylvania. “Small bank failures matter a lot to the communities in which they  operate, especially in non-urban areas. Small banks are key to small  businesses.”

Counties that experienced bank failures from 2008 to 2010 saw income growth  reduced as much as 1.43 percent, job growth cut as much as 0.5 percentage point  and poverty rise as much as 1.4 percent in the following year, Fed economist  John Kandrac reported in research presented last October at a community banking  conference at the Federal Reserve Bank of St. Louis.

He concluded bank failures had “measurable effects” on economic performance.  On average, that meant a drop of as much as $700 in per capita income and a loss  of close to 600 jobs in the first year after a failure, Kandrac’s research  found.

Small Businesses

The demise of local lenders has inflicted a disproportionate blow on small  enterprises, said Mark Gertler, an economist at New York University and  co-author of research with former Fed Chairman Ben S. Bernanke on how bank  failures contributed to the severity of the Great Depression. Community banks  provide almost half of small loans, those under $1 million, to farms and  businesses, according to a 2012 Federal Deposit Insurance Corp. report.

Bank failures have been more common in four states that experienced real  estate booms and busts or had large concentrations of community lenders. Georgia  has had the most failures with 88 since September 2007, followed by Florida’s  70, Illinois’s 56 and California’s 39, according to Trepp LLC, a real estate and  financial data provider in New York.

Failures nationwide have slowed, with 24 in 2013, led by Florida, with four,  and Georgia and Arizona, with three each. Even so, the adverse effects of bank  failures, coupled with tighter lending standards, persist. In the counties  surrounding Atlanta, that’s compounded by the lingering effects of the collapse  of the real estate market.

Around Atlanta

“There’s a ring of death all around metro Atlanta,” said Brian Olasov,  managing director of law firm McKenna Long & Aldridge LLP in Atlanta, using  a phrase popularized in the real estate bust by Steve Palm, president of Smart  Numbers, a Marietta, Georgia, provider of real estate data.

Olasov, who has represented about a dozen boards of banks that failed or are  operating under agreements with regulators, said the demise of small banks,  coupled with losses that put others on life support, “has sidelined the  important mission of allocating capital to borrowers with legitimate needs. It  has had a very damaging impact on the state.”

While depositors are protected by federal insurance, lending is interrupted  after a collapse, said BB&T Corp. Chief Executive Officer Kelly King. The  Winston-Salem, North Carolina-based bank, with assets of $182 billion, has more  than a quarter of its branches in Georgia and Florida.

Whopping Big

“If you get to a small town and the local bank fails, that is a whopping big  deal,” King said. “Commerce has no way of really continuing and certainly  growing.”

“If you are sitting at the Federal Reserve in Washington, you care about the  global economy” and “you don’t necessarily care about 2,000 people in a small  town in southern Georgia. But if you happen to live in southern Georgia in that  little town, that is the economy.”

Douglas County, with a population of 134,000, had an unemployment rate of 7.6  percent in January, 1 percentage point higher than the U.S. average. The  county’s unemployment rate averaged 8.3 percent last year after three years of  more than 10 percent joblessness from 2009 to 2011.

The county’s population ballooned more than 40 percent from 2000 to 2010 as  people fled Atlanta’s crowding and traffic for a more tranquil area that offers  fishing, boating and golf as well as suburban shopping malls.

Even as homebuilding nationwide has recovered the past three years, few new  homes are being built in Douglas County. Permits for single-family homes in 2013  were 89 percent below the 2005 level, according to figures from Smart  Numbers.

Construction Jobs

Blankenship, which has four employees and contracts work out, built three  homes in Douglas County last year, down from about 100 in 2006. A new house can  involve the work of 80 to 100 people at various stages of construction, he  said.

“I don’t have a relationship with a big bank,” he said. “With a small bank,  it is just a different deal. They know who you are” and know borrowers’  character.

Few local employers are looking for full-time skilled workers, said Brian  Rountree, 37, a Douglasville office manager who has a finance degree and was let  go in 2008 and again last month. Jobs advertised are “menial” and low-paying,  such as waiters and dishwashers, he said.

“I just need to get some income going at this point,” he said. “Jobs are hard  to get. There aren’t the opportunities out there.”

Cutting Expenses

Rountree, whose wife is a teacher, said he’ll have to cut spending for his  family, including two children. That means eliminating expensive meals at  restaurants including one of their favorites, a local Japanese steakhouse.

“If you don’t have the money you don’t go out to eat,” he said. “We have to  tighten the screws down. There is no extra money.”

Georgia had a 7.3 percent unemployment rate in January, weighed down by  counties that have been choked by bank failures and a slow recovery in housing,  including northern Georgia’s Gilmer County, with 7.5 percent, and two counties  south of Atlanta, Henry, with 7.5 percent, and Lamar, with 9.1 percent. The U.S.  rate dropped to 6.6 percent that month, the lowest in more than five years.

In Douglasville, two banks that failed held the bulk of the county’s $680  million in deposits in 2010, according to an analysis by SNL Financial, a bank  research firm in Charlottesville, Virginia.

Failed Banks

First Commerce Community Bank, with $243 million in deposits, was closed by  the Federal Deposit Insurance Corp. in September 2010 and Community &  Southern Bank, about 30 miles to the west in Carrollton, acquired the deposits.  Douglas County Bank, with $314 million in deposits, was acquired last April by  Hamilton State Bank of Hoschton, about 70 miles northeast of Douglasville.

Blankenship said he had relied for loans on First Commerce Community Bank and  two other nearby lenders, First Choice Community Bank of Dallas, Georgia, which  failed in 2011, and Georgian Bank of Atlanta, which closed in 2009.

“We have lost the local banker who knew us and our business,” said Clate  Wall, president of Double Eagle Land Development Co. in McDonough, 30 miles  south of Atlanta. “These people not only worked in the community but lived here  as well. That has made it very difficult to find help in financing our  operations.”

Acquiring banks have sold foreclosed homes at “steeply discounted prices” to  investors who may not retain the properties, Wall said. “If the investors choose  to put all of these homes on the market at the same time we could be in for  another bust,” he said.

Corporate Buyers

Corporate buyers such as Blackstone Group LP have descended upon the area to  buy foreclosed homes and turn them into rentals. Institutional investors  accounted for a quarter of home purchases in the Atlanta metropolitan area in  January, the biggest share in the country after Jacksonville, Florida, according  to data firm RealtyTrac.

Borrowing difficulties have been compounded by a tightening of bank standards  by regulators since the financial crisis, said David Ellis, executive vice  president of the Greater Atlanta Home Builders Association.

“It has been very difficult for smaller companies to have access to the  capital that they need to get building again,” he said. “We are seeing greater  interest from banks to lend again, but they are still very limited in what they  can do.”

That has had a ripple effect on jobs and incomes. Douglas County’s median  household income dropped 7 percent to $51,540 in 2012 from five years earlier,  U.S. Census Bureau figures show.

Tile Demand

“I have never seen a recession this deep and it is not improving much,” said  Wayne Wilkes, president of Tile and Stone Express in Douglasville, which sells  to consumers and builders. His annual sales have dropped 20 percent since 2007.  “When people can’t get credit to build houses or expand businesses, they don’t  need tile.”

While taxpayer-funded bailouts following the rescues of insurer American  International Group Inc. and Citigroup Inc. stoked public anger, the Treasury  Department provided funds to large and small banks as part of the $700 billion  authorized by Congress for the Troubled Asset Relief Program. Some banks in  shaky condition didn’t qualify for TARP funds. As of Feb. 28, $422.8 billion was  disbursed under the program, and the Treasury received $435.9 billion.

“Many banks were too small to save,” said James Barth, an Auburn University  finance professor in Auburn, Alabama, and Milken Institute senior finance fellow  who formerly was chief economist at the Office of Thrift Supervision. “Other  banks were too big to allow to fail. There is an inequity there. They were  important even if they collectively didn’t cause a systemic crisis.”

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