How Local Bank Failures Crippled Georgia Economy

March 19, 2014

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 of 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.

–With assistance from Ian Katz in Washington.

 

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