Banks' bad loans hit level of S&L Crisis

Jan 25, 2008

Atlanta's residential bust is rapidly becoming a financial disaster on a par with the Savings and Loan Crisis of the 1980s.

Local banks' ratio of nonperforming assets-to-loans (a way to easily compare banks' credit health across eras and business models) averaged 2.2 percent at the end of third-quarter 2007, according to a new analysis by local bank advisory and research firm FIG Partners LLC.

That figure has tripled since 2003, when Atlanta banks reported a 0.70 percent ratio and Atlanta's residential real estate boom hit its stride.

It also exceeds the level in 1989, when local banks' nonperforming assets-to-loans averaged 2 percent. That was the year President George H.W. Bush unveiled a savings and loan bailout plan and the Resolution Trust Corp. was created to liquidate insolvent S&Ls.

"I think when this is all said and done with, we'll look back and view this as having been much worse than the last one," said Martin Fahsel, a two-decade industry veteran and BB&T Corp.'s senior vice president who manages the bank's local residential construction portfolio.

"This is all back in our living rooms again, two decades later," said Chris Marinac, bank analyst at FIG Partners. "It looks like we're repeating the same mistakes all over again."

Local banks' third-quarter 2007 nonperforming assets-to-loans figures aren't as bad as the peak figures for the late 1980s/early 1990s S&L Crisis. That collapse peaked in 1991 with Atlanta banks averaging 4.4 percent of the loans as nonperforming assets.

However, many bankers and industry analysts are projecting that fourth-quarter 2007 numbers will be even bleaker, and are increasingly concerned that available data only show a small portion of the full extent of local banks' loan problems.

SunTrust Banks Inc. (NYSE: STI), Atlanta's biggest bank, may have fueled these concerns Jan. 23 when it reported fourth-quarter earnings plunged 99 percent, along with a 178 percent increase in its nonperforming assets to $1.6 billion. The bank's ratio of nonperforming assets-to-loans ratio is 1.19 percent, more than double from a year before.

Another of Atlanta's large banks, Fidelity Southern Corp. (Nasdaq: LION) reported Jan. 17 that its ratio of nonperforming assets-to-loans hit 1.64 percent, four times what it was a year before.

Marinac said it is too early to tell if the national residential real estate collapse will surpass the S&L Crisis.

"It's tough to say one's bigger than the other when we can't even call the bottom of this yet," he said. "You can't call the end of the storm if it's still going on."

He, and several local attorneys and bankers, said they do expect an increase in bank failures over the next year.

The rapid deterioration in Atlanta's residential market has brought an end to what some bankers are already calling Atlanta's "Golden Age": a 14-year run of continuous, seemingly unstoppable growth, particularly in home building.

FIG Partners' study focused on two periods: 1988-1993 -- the primary period of Atlanta's last major real estate downturn -- and from 2003 through third-quarter 2007, the most recent industry data available.

The root causes of the latest collapse are tied to how banks loaned for building and land acquisition by developers, and how quickly the market soured.

Demand for new homes dried up rapidly, in lockstep with the subprime mortgage meltdown throughout the second half of 2006 and in 2007.

That sharp decrease in home demand left builders and developers holding thousands of excess lots in neighborhoods and subdivisions across the city.

They, in turn, defaulted in waves on these projects throughout the second half of 2007, primarily with new banks that heavily concentrated their loans into residential projects.

"Banks that were started recently were basically mono-line real estate lenders" who had their main business collapse almost overnight, said Jon Burke, managing principal of bank consultant Burke Capital Group.

In fact, bankers and industry executives said the industry's rapid expansion and influx of capital to Atlanta's banks, combined with the long-running local real estate market's success, loose lending standards, and the industry's over-reliance on residential real estate dulled perceptions the end was near.

"In Atlanta, real estate is king, always has been, always will be," said banking attorney Walt Moeling of Powell Goldstein LLP. "The signs were there something was wrong leading up to this. But nobody wanted to say the king wasn't wearing any clothes."

Bankers and industry consultants repeatedly point to the collective belief that the market's continued growth over the last 15 years would run unabated.

"The questions that I see that got pushed to the back all surround, 'What could go wrong? What if demand disappears?' " said John Poelker, founder of Atlanta-based The Poelker Consultancy Inc., a bank advisory firm, and a four-decade industry veteran.

"The questions that I see that got pushed to the back all surround, 'What could go wrong? What if demand disappears?' " said John Poelker, founder of Atlanta-based The Poelker Consultancy Inc., a bank advisory firm, and a four-decade industry veteran.

Poelker said that approach, and many of those forces are the same as the late 1980s/early 1990s, when bankers assumed their projects would be immune from larger economic forces, after a rapid expansion of local banks.

But even though the end of the residential boom came in a matter of months, local bankers said the industry recovery could take years.

After the S&L Crisis, local real estate development received both a short- and long-term boost from the 1996 Summer Olympics.

"I've never seen anything do as much for the city's development as that event," said Moeling.

The Olympics kick-started an already recovering real estate market.

But now, no major transformational event looms for future development.

Atlanta's growth, bankers said, depends on the continued movement of new residents to the city looking for new jobs that must continue to be created.

Renewed national fears of a recession could change that outlook.

"I hope the bankers who are generals today, and were lieutenants back then," says Tom Powell, a Troutman Sanders LLP banking attorney, "remember that period and how to handle these problems, and hunker down."


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