Bank Failure Friday Stops In Acworth This Week

Another Friday, another Georgia Bank is closed:

Acworth-based NorthWest was acquired by State Bank & Trust under a loss-share agreement with the Federal Deposit Insurance Corp. NorthWest’s branch in Acworth will reopen Saturday under the State Bank flag. A Marietta branch reopens Monday.

State Bank, based in Macon, will assume essentially all of NorthWest’s $167.7 million in assets and $159.4 million in deposits. The FDIC estimates the failure will cost its insurance fund $39.8 million

34 comments

  1. polisavvy says:

    Why are these banks still failing? Does anyone know what keeps causing this and is there something to prevent it? Just curious. I don’t know that much about this problem and would like to be enlightened if anyone knows the answer. Thanks in advance.

    • Baker says:

      Anyone esle feel free to chime in, but I’ll at least say that the biggest thing is the real estate markets still haven’t recovered. A boatload of these banks were way overleveraged on speculative real estate and when the bottom of that fell out, the banks had nothing to fall back on. As the recession, excuse me, recovery drags on banks hope that they can hold out and make it until the real estate starts coming back. However, it’s still struggling so much, the banks can’t unload these properties, and then they end up kicking the bucket as their reserves are depleted to a point where the FDIC has to come in.

      • Baker says:

        Georgia’s real estate is particularly bad and that, combined with the amazing number of community banks we had, is leading to the number of failures. People were starting banks solely so they could cash in on the real estate boom, any other bank investments were an afterthought.

  2. Lady Thinker says:

    On John King, U.S.A., one of the people said three million people have lost their jobs under the Obama administration. I wonder if his administration can be tied to the large number of bank failures.

  3. Icarus says:

    I’ll attempt to give Polisavvy an oversimplified yet probably still too long answer. And I’ll add my usual disclaimer on this topic: I’ve been on both sides of the lender’s desk, and the wrong side of the collection action.

    Banking laws have been systematically changed over the past 3 decades. NC changed theirs first, allowing for statewide banking charters. That allowed NCNB (Then Nationsbank, now Bank of America), First Union, and Wachovia (Who was bought by the 5x larger FU but had a reputation of FU, so they changed their name to the smaller bank) to become the “super-regionals” of the Southern Banks, and thus move the Southeastern banking center from Atlanta to Charlotte.

    The 90’s brought the systematic breakup of the depression era glass-stegal acts, which allowed banks to compete in other areas, such as investment banking and insurance.

    Legislation allowed Credit Unions to essentially enroll anyone who lives near one to be a customer. Thus, these “non-profit co-ops” began to compete with local banks for consumer customers. Because they don’t have to please shareholders with a return on investment, they generally can pay higher for deposits and loan money for consumers loans (cars, personal loans) than traditional banks can.

    Meanwhile, the large and getting larger Super-regional and national banks are too big to understand how to get to know and underwrite small businesses, so they focus mostly on larger corporate clients, and their employees.

    Georgia’s banking market, faced with the above market realities, is made up of a few large banks, several prominent credit unions, and a bunch of smaller community banks.

    Given the large corporate customers and average consumers are banked by either large banks or credit unions, the community banks are left to service the small businesses within the community they serve.

    In Georgia, and especially in Metro Atlanta, the growth business for over three decades has been growth itself.

    Thus, many if not most of the small businesses that needed capital were in the industry of growth. Specifically, builders, developers, and their suppliers and subcontractors.

    This worked fairly well from the early 90’s until the mid-oo’s. Underwriting standards after the last bailouts (remember the S&L bust and the Resolution Trust Corporation? We’ve been here before, recently) kept banks from doing much that was stupid, and the economy in the 90’s and OO’s was generally conducive to economic growth with only a few minor hiccups.

    The OO’s brought us further bank consolidation and possibly the worst yet rarely cited culprit in this debacle: Credit score based loan approvals.

    Just as I was leaving banking in 96, we were starting to approve loans based only on our internal credit score and FICO or Beacon scores. Income verification was not required on many loans, and as long as we could get our computer to say “approved” on an app, we made a loan – and got paid our bonus on closed loans.

    As a branch manager and commercial lender, my last comp plan was based on closed loans. I had zero responsibility for bad loans, because I wasn’t approving them. The computer was. (We all learned that any customer at my last bank just needed to open a savings account if he was 10 points short of approval, because that would be enough to change decline to approve).

    All the underwriting training I was forced to take between 90-92 was forgotten by 1997. Meanwhile, to avoid the S&L crisis (where banks and S&L’s made 30 year mortgages based on 5 year CD deposits, thus their cost of funds could be significanlty more than the interest they earned on their loans for 25 years of that loan), mortages were bundled and sold to the bond market using that same type of system. Everyone got paid on approved and closed loans, but no one got dinged on bad loans – except, eventually, the bond holders and the taxpayers.

    So, back to Georgia.

    These community banks were mostly based on real estate. It was a “sound” model. The banks failing today probably did most everything “right”. But they are now competing against TARP recipients on the large end, who the government bailed out their losses to keep in business, and Credit unions on the consumer end, who can make car loans at rates lower than their cost of funds because the government have given these entities tax exempt status.

    Meanwhile, they have portfolios mostly made up of real estate loans. And not just any real estate loans, but what 5 years ago were some of the safest, now the worst type: raw land and partially built houses.

    Home prices were going up 10% or more per year during the first half of the 00’s. Loaning a known builder 75% of the value of a home to build it was about as low risk as you could get.

    Meanwhile, raw land and developed lot values were going up at a much higher rate. I developed a small subdivision based on a lot price of $50/lot that the lots sold for $125K/lot by the time I could get it approved, platted, and developed. There was a lot of stupid money being made, and we – the developers, builders, and bankers – were all fat dumb and happy.

    But we all got lazy in our success.

    Lots that I could only borrow 80% Loan to Value to buy became 90%, then 100%. Banks didn’t require borrowers to play the risk game with any of their own money. Thus, the borrowers had none of their own skin in the game. Underwriting became non-existent at many banks. And the “good banks” felt the pressure to meet these terms for their good customers.

    When the bubble burst, these GA banks suddenly found politicians who just gave $1 Trillion of our money (and I still support TARP 1, BTW) to the big banks, start to demand “regulation” on all banks.

    For Community Banks, the first step meant the elimination of “high powered money” from their capital ratios.

    Georgia banks, anxious to keep up with the growth in real estate loans, yet competing with big banks for deposits (where the big banks were really offering non-FDIC insured money market funds from their newly acquired Wall Street subsideraires) used brokered deposits to meet their capital requirements. This meant that they paid a bit over market rates for CD’s from brokers to have enough on deposit to meet their lending demands.

    When regulators said these brokered deposits couldn’t be counted as capital, many GA Banks knew they were doomed. The rules were changed for everyone. Big banks got saved, small banks got killed.

    Those that were exposed for having insufficient organic capital were publicly listed as having too high a “Texas Ratio”. This signaled everyone which banks were most likely to fail, and they’ve been failing for two years almost in order of their ranking on that list from two years ago.

    Meanwhile, the banks that failed early have allowed customers to settle for $.50 on the dollar for their loans, courtesy of the FDIC and our tax dollars. Commercial customers at banks with high Texas ratios learn pretty quickly that they’re better off to quit paying their note. When enough of them do, the bank will fail, and then they can settle for half of what they owe.

    We’ve created a system where customers have an incentive not to pay community banks.

    There are a lot of good people who run these banks. By all training, they did everything right. But the rules changed dramatically on them during the middle of this game. While some tried to cheat the system, more than likely, the ones that are failing today and beyond are just good people who got caught in the wrong industry at the wrong time.

    When the government picked the winners of the bailouts, Georgia bankers weren’t on the list.

    • John Konop says:

      Let my simplify his excellent and informative comment, the banks stop looking at if a person could afford the payment. And credits swaps let then do this irrational lending concept on steroids with nothing more than air backing up the loans!

      • Icarus says:

        No, actually, that’s not it John.

        That’s the national problem. It was the first domino to fall, yes.

        But that’s not why so many of the dominos in GA fell.

        (and yes, I realize my answer was already too long, yet, not long enough)

        The problem in Georgia, in a nutshell, is “loan concentration” of community banks. Most of these banks had 75% of their loans or more backed by real estate.

        When consumer mortgages were given out without looking to see who could pay them back, the GA Community banks had no part in that.

        And in 2005, if any bank regulator had seen that 75% or more of a banks loans were in properly margined real estate, it would have been a short audit. Just 5 years ago, that was considered low risk.

        Because real estate doesn’t go down in value.

        Until it does.

        And when it does,

        Boom.

    • polisavvy says:

      In 2005, we inherited my mother’s home. We had two sons in college. We decided to get a loan on the home. We were actually offered 125% of the value of the home for the loan. I told the person I speaking with at the mortgage company that that was insane and, of course, we weren’t interested. We ended up getting a loan for 65% the value.

      If I could turn back time, that never would have happened. With my husband’s health issues and the fact that I have not worked in 20 years, I am concerned about what the future holds for us. Had we not done that at least we would have had the security of a home.

    • BoogDoc7 says:

      I’m on the loan-buying side of the equation, and I concur with everything stated here.

      A few other comments:

      1. The settling on the loans isn’t a bad thing – it DOES put money back into the market and probably comes closer to the real value of the loan if it’s real-estate backed or not. There’s actually some problems with the banks that are acquiring the closed banks that they can’t sell some of those loans off for quick cash. There’s also an interesting issue that banks like State Bank have a SWEET deal with the FDIC on loan losses.

      2. Mark-to-market rules were out of whack until recently. Banks weren’t allowed to give a more reasonable value on some of their loans, particularly when foreclosures were ramping up – most of which sell at undervalued rates.

      3. Up until a few years ago, it was VERY easy to get a bank charter in Georgia. If you could get together a few million dollars, you could get a bank and start lending.

    • Icarus says:

      Another not so short answer.

      But I’ll try harder on the “short” part.

      First, the forclosures on the “national” part of the problem have to slow/stop.

      We’re beyond the sloppy underwriting loans going bad. Today’s foreclosures are from 10% unemployement and/or people realizing that they owe 20-40% more on their house than it’s worth, and they’re better off walking away and taking the credit hit than paying off $100K or more of negative equity on a home that won’t appreciate for 5-10 years minimum.

      So, step 1 is people have to have confidence in real estate values and feel like paying their mortgage is a good personal financial move.

      Step 2 is having an economy that can support those who have mortgages with the ability to repay them.

      We’re pretty close on step 1. Step 2? Who knows.

      We’re actually in a low rate environment right now, which helps. The reverse “wealth effect” is actually causing a deflationary effect on the economy, which is keeping mortgage rates at all time lows despite the ridiculous deficit speding for the forseeable future.

      Inflation will eventually come. With it will be the rescue of home prices, but also cause other economic hardships.

      I can make the case that now is the time to buy a home and lock in low rates.

      I can make a case that real estate is still significantly over valued.

      And that brings it back to politics. Who is in the White House, and their ACTUAL policies (not their party rhetoric) can make or break each case above.

      We are cursed to live in interesting times.

      • Lady Thinker says:

        What do you recommend for people who have lost nearly everything to do to get back on track once they get a job?

        • Icarus says:

          I’m guessing if I answer three more questions I’m going to get “what is the meaning of life?”.

          These aren’t short answer questions.

          I lost everything 4 years ago save a small storage building of furniture that now fills a 2 BR/2.5 Bath condo. It’s a big change from my last home, but the condo is a big improvement of being homeless for a year and a half living off the good graces of some of the best friends a guy can ever have.

          As I have told a small group of my friends, if there is an upside to losing everything, it can make you understand and, more importantly appreciate, what you really and actually have.

          So, first I recommend that those who are about to lose or have lost everything to take a look around. If they’re breathing, they haven’t lost everything. If they have friends that still talk to them and may be willing to help, then they may in fact still be rich.

          Once I got all the money out of the way I was able to realize what I rich man I actually was. I, unfortunately, spent the first 3 decades of my life keeping score wrong.

          From a practical standpoint, they need to develop a plan to work through their heirarchy of needs. Get a job, any job. Provide food/clothing/shelter first. Once they can survive day to day, use the opportunity to assess what got them where they are, resolve to never make the same mistakes again, and then- most importantly – ask themselves who do they really want to be when they come out the other side.

          When you chase money for the sake of chasing money, you will never be a happy person. Ever. Because money isn’t really “worth” anything. It’s a store of value. Nothing more, nothing less.

          Time. Family. Friends.

          Personal fulfillment. Making a difference.

          Happiness. Love.

          These are the things that have value. And I’m sure there are others.

          The rest is just stuff.

          I learned I can live without the stuff (and a lot of it was nice stuff). I couldn’t have made it without my friends and family.

          But unless I was willing to change everything I did, why I did it, who I did it with, etc, then I would just be doing the same thing again and expecting a different result.

          So, with that in mind, your question:

          1) Get income
          2) Resolve any credit issues.
          3) Re-establish credit: secured credit cards/loans as soon as possible.
          4) Tithe, or if not religous, figure out a way to systmatically give something back. There are others that will come behind you that will be walking in the shoes you wear today.
          5) Save for yourself: Retirement is now sooner than it was before you lost everything, and you lost everything. Be aggressive in putting it back, even if (and it probably does) mean a lower standard of living than what you had. (That standard of living was probably a large part of the problem).
          6) Pay it forward. Chances are, you got some gifts you didn’t deserve from folks you didn’t expect it from. And you can’t really ever pay them back. So find someone in need, and give them what they need to the best of your ability. Sometimes it will work, and likely, sometimes it won’t. But give selflessly. It will make you appreciate life for what it is much more than when you were trying to figure out how to pay for your 4th car or 3rd home.

          • Lady Thinker says:

            Thanks! Good sense advice. I am glad you are no longer homeless and came to a better place for yourself.

          • analogkid says:

            “I’m guessing if I answer three more questions I’m going to get “what is the meaning of life?”.”

            No worries, Ick. I’ve got this one:

            42

          • polisavvy says:

            You have no idea how much I appreciate all of your lengthy posts on this matter. It explained everything to me and now I understand. I also appreciate your candor and honesty. I’m sure that many of us garnered insight into Icarus, the man, and Icarus, the businessman. For that, I thank you.

    • analogkid says:

      If “Fusion” is some new beer I’ve never heard of, then yes: “Can I have a cold Fusion, Icarus?”

    • AubieTurtle says:

      Ok then, why do so many Adobe products, including Cold Fusion, suck so badly?

      And what ever happened to those chaps in Utah who told everyone they figured out the lesser known usage of the words cold fusion?

    • AubieTurtle says:

      And if you’re handing out answers to the questions people want to know, how about passing along the winning lottery numbers for next week? But not to too many of us… no use splitting a jackpot more ways than required.

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